Report: Net Fraud Costs Mounting

The amount of money that American consumers are losing to fraudulent Internet schemes is growing, according to a report released Thursday by the National Consumers League (NCL).

The average loss per person rose from US$310 in 1999 to $412 during the first nine months of 2000, the study found.

"We're seeing some positive trends, but there are also alarming signs of trouble, especially concerning the use of debits from consumers' bank accounts in payments related to certain categories of fraud," said NFIC/IFW director Susan Grant.

Going, Going, Gone

The Washington, D.C.-based watchdog group compiles its statistics from reports filed from January through September with its National Fraud Information Center/Internet Fraud Watch (NFIC/IFW) programs.

Its report provides a snapshot of scams that are flourishing on the Web.

The Net auction industry, for example, has created its own breed of e-con artist, looking to capitalize on the millions of transactions that occur each day. Net auction fraud continues to spark the largest number of complaints, the report found.

Ups and Downs

On a positive note, the NCL said that incidents of fraud in online auctions may be decreasing. Seventy-nine percent of complaints filed this year were related to auction fraud, an eight-point decline from last year's numbers.

Even so, a study released earlier this year by Jupiter Communications (now Jupiter Research) predicted that consumer-to-consumer online auction sales will spike from $3 billion in 1999 to $15.1 billion in 2004, opening the door for a concurrent increase in fraud cases.

The NCL findings on auction fraud dovetail with federal statistics. Last month, the U.S. Federal Trade Commission also cited auction fraud as the No. 1 online scam, with the number of reported cases ballooning from 100 in 1997 to a whopping 10,000 in 1999.

Garden Variety Dot-Cons

The NCL said that other categories of Internet fraud are on the rise, including work-at-home scams, general merchandise sales , Internet access services and advance fee loans.

Although Web sites are the most common channel for Internet fraud offers to be peddled to consumers, the NCL report found a dramatic 700 percent increase in the number of initial contacts made by con artists in newsgroups, from just 0.5 percent in 1999 to four percent through September.

Handing Over the Money

Three-quarters of Internet fraud victims are paying offline by check or money order, the report found.

However, the number of fraudulent transactions conducted with credit cards is increasing, nearly tripling from 5 percent in 1999 to 14 percent during the first nine months of this year. Researchers attributed the growth in credit card use to the inroads made among Web users by Internet auction sites, which make it easier for buyers to immediately pay for goods and services online with a credit card.

Lenders Left Holding the Bag?

To avoid being conned out of merchandise, the NCL advises consumers that credit cards should be their primary method of payment to safeguard their right to dispute charges in instances of fraud.

Such legal protections may begin to rankle financial institutions -- which must swallow losses incurred through fraudulent schemes -- if the number of disputed charges climbs, the report said.

Tapping Bank Accounts

According to the NCL, withdrawals from consumers' bank accounts are by far the most common methods of payment in phony online offers for credit cards, with 64 percent of victims allowing their account to be debited.

In other categories that top the Internet fraud list, such as work-at-home scams and advance fee loans, the payment methods are fairly similar and generally involve checks and money orders, the report said.

In contrast, the NCL found that an "astounding" 22 percent of online fee loan offers involve payment of cash, stripping the consumer of most legal protection.

Crossing the Line

The global nature of the Web has also made it easier for tech-savvy criminals to evade the controlling legal authority in regions where they conduct their illicit businesses.

"Because the Internet has no geographic boundaries, cross-border fraud has the potential to explode," said the report.

The report also predicted that this explosion could be fueled by an increase in the number of consumers who make online payments instead of sending checks or money orders.