Internet Fraud

THE INTERNET OFFERS a global marketplace for consumers and businesses. Internet fraud refers generally to any type of scheme that uses one or more components of the internet—such as chat rooms, e-mail, message boards, or websites—to present fraudulent solicitations to prospective victims, to conduct fraudulent transactions, or to transmit the proceeds of fraud to financial institutions or to others connected with the scheme. Opportunists have begun to recognize the potentials of cyberspace.

The same scams that have been conducted by mail and phone can now be found on the World Wide Web and via e-mail. Many times, it is hard to tell the difference between reputable online sellers and criminals who use the internet to rob people. With the explosive growth of the internet, and e-commerce in particular, online criminals try to present schemes in ways that look, as much as possible, like the goods and services that many legitimate e-commerce merchants offer. In the process, they not only harm consumers and investors, but also undermine consumer confidence in legitimate e-commerce and purchasing products using the internet.

The types of internet fraud are limitless. The most common (in alphabetical order) include: advance fee loans; bogus credit card offers; business opportunities; buyers clubs; charity scams; computer equipment and software; credit card loss protection; credit repair; online escrow tips; general merchandise sales; information/adult services; internet access services; investment scams; job scams, magazine sales, Nigerian money offers, online auctions; prizes and sweepstakes; pyramid and multi-level marketing; scholarship scams; travel fraud; and work-at-home scams.

According to Fraud Watch, in 2002, online auction fraud skyrocketed, making up 90 percent of all reported internet crimes. These schemes, and similar schemes for online retail goods, typically purport to offer high-value items—ranging from Cartier watches to computers to collectibles such as Beanie Babies—that are likely to attract many consumers. These schemes induce their victims to send money for the promised items, but then deliver nothing or only an item far less valuable than what was promised (for example, counterfeit or altered goods).

General merchandise and Nigerian money offers accounted for 10 percent of the internet frauds reported. Computer equipment/software and internet access services, work-at-home plans, information and adult services, travel and vacation scams, advance-fee loan schemes, and prizes and sweep-stakes scams rounded out the top 10, each accounting for .1 percent to .5 percent of the most reported internet crimes. Victims were of all age ranges, with 78 percent of the fraud victims between the ages of 20 to 49. California had the most victims, with New York, Texas, Florida, and Pennsylvania all in the top five.

Investment frauds usually fit into one of the following categories: the pump and dump, the pyramid, the “risk-free” fraud, and off-shore frauds. The pump-and-dump scam uses messages posted online that urge readers to buy a stock quickly, or to sell before the price goes down. Often the person will claim to have “inside” information or to use a “foolproof” combination of economic and stock market data to pick stocks.

In reality, they are fraudsters (many of them teenagers) who stand to gain by selling their shares after the stock price is pumped up by gullible investors. Once these fraudsters sell their shares and stop publicizing the stock, the price typically falls and investors lose their money. Fraudsters frequently use this ploy with small, thinly traded companies or penny stocks that are not listed on NASDAQ or Dow Jones, because it is easier to manipulate a stock when there is little or no information available about the company.

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