Internet Fixes

Internet Theft and Scams: Crime Sometimes Pays

Of all the activities people love to do on the Net, shopping ranks among the highest. Of all the activities some other people love to do on the Net, scamming online shoppers ranks among the highest. A new online con that targets people who use Internet auctions threatens to separate you from your hard-earned cash by exploiting escrow services, a payment method that was previously considered safe.

Some 77 million adult Americans shop online, according to analyst firm GartnerG2. Fraudsters follow the money, and Internet fraud is on a proportionately steep rise. The National Consumers League reports that Web shoppers lost over $7 million to Internet fraud in the first six months of 2002. That's up from $6 million in all of 2001 and $3 million in 2000. And those are just the consumer victims. Of 500 businesses that responded to an FBI survey, more than 80 percent reported that they were victims of cybercrime. The 223 companies that gave financial details claimed, in 2002 alone, an average of $2 million in losses.

Online auction fraud outpaces other forms of cyberfraud against individuals by a huge margin. In November 2002, serial scammer Teresa Smith admitted to selling nonexistent computers to 300 customers on EBay and Auction Works for a total sum of $800,000. The big auction sites claim they aggressively fight abuse like this, in part by promoting the use of escrow services. EBay spokesperson Kevin Pursglove says that allegations of fraud arise in fewer than 1 in 10,000 auctions.

Escrow services are supposed to act as honest middlemen in an online transaction: They hold a buyer's money until goods arrive, and then they transfer the funds to the seller. In some cases, they transfer the product from the seller to the buyer. But fake escrow sites cheat auction buyers and sellers (though not in the same transaction), and make off with both money and goods.

The scam starts with stolen credit card numbers: Con artists use them to buy Web hosting services that can't be traced back to themselves. Then they upload professional-looking Web pages to their freshly minted escrow sites, which are designed to convince a visitor that the escrow company is legitimate.

Next, the cons list items for sale at auction sites like EBay--only they don't actually have the items they purport to be selling. When a buyer takes the bait and wins the auction, the seller instructs the buyer to register with and use the fake escrow service to complete the purchase. Once the buyer wires the money to the fake service, the site disappears, along with the buyer's money and credit card information.

The same scam works just as well in reverse: A fraudulent buyer requests that the seller use a particular escrow service; then the phony service notifies the seller by e-mail that the money has arrived. When the seller ships the goods to the escrow service (most often to an overseas address), the merchandise disappears.

More than a hundred scam escrow sites have popped up in the last year, many of them chronicled at www.sos4auctions.com; the site offers clues for spotting the fakes and tips on how to get the most out of a good, established service. One service that we can recommend is www.escrow.com, which was the first online escrow business certified under California's escrow laws, the nation's most stringent. Those laws require all escrow company employees to be bonded and to have criminal background checks.

EBay recommends using an escrow service on any auction with a value of more than $500, but it makes sense to use one whenever what's at risk is worth more than you can stand to lose.

In addition to relying on a legitimate escrow service, you might try a service like Transrow, which helps sellers (mostly for high-end transactions) verify bidders by requiring them to deposit funds or submit a driver's license and credit reference. It always pays to check the background of an escrow site you're not familiar with at Sos4auctions.com or the Better Business Bureau before you commit to any purchase. If the escrow service lists a mailing address and telephone number, ask the BBB to consult its records to see whether anyone has filed complaints against the company.

No Signs Fraud Is Abating

Widely touted as the safest way to pay online, credit cards are becoming the target of organized wire-fraud rings. In the latest scams, savvy cyberthieves convince people to update their personal information on a fake Web page that sends the information to the scammer. (For more on this scam, see March 2003's Consumer Watch column.)

Even Western Union, the venerable money-by-wire service, is being abused by shady auction scammers, who convince gullible buyers to divulge the wire transfer control number--a secret code that, once given at a Western Union office, authorizes disbursement of funds--before the buyer has the product.

The cons convince buyers to send them the control number before they receive the product, assuring victims that the con artist can't get the money until the victim provides an additional piece of information, such as a secret password or name. This is a lie. With the control number, they can walk down to the nearest branch and collect the dough anytime.

Don't use a wire transfer to complete any auction, especially if the other person is overseas, advises Rosalinda Baldwin, who runs Theauctionguild.com, an auction scam information site. Baldwin writes that Western Union informed her that "none of the [auction] buyers are receiving their merchandise when the item was paid for using a wire transfer."

Shop Defensively Online

Always do your homework before you click that Buy button, says Susan Grant, director of Internet Fraud Watch. She suggests a number of tips for shoppers on IFW's Web site. "The fact that the Internet offers this wonderful convenience doesn't obviate the need to know who you're dealing with," she says. And if the other party is trying to rush you into completing the transaction before you can finish your research, that should raise a red flag.

If you think that you (or someone you know) may already have fallen victim to an online fraud, the FBI's Internet Fraud Complaint Center serves as a first point of contact with law enforcement agencies that specialize in investigating these kinds of cases. You can file a report right on their Web site.

If an auction or an online purchase doesn't feel right, don't pull the trigger--no matter what the effect might be on your rating as a buyer or seller. That's what victims of online auction fraud tell us most frequently. And that is perhaps the best advice for anyone who is considering making an online purchase: If the deal worries you, trust your gut.