Impeding Scalability In Fraud

Back in September of 2010 I was turned onto the idea of “Impeding Scalability In Fraud” by Michael Webster. It’s not really a “new” idea – just a much better EXPRESSED, umbrella term for the idea of disrupting any sort of potential distribution channel for a fraudulent scheme.

So, while I’ve put up information about how to file consumer complaints, it’s not because I believe that law enforcement is the answer to fighting fraud, it’s simply another means of impeding scalability in fraud. I won’t go into how I believe regulation can sometimes actually facilitate fraud – that’s a matter for another post.

How To Impede Scalability In Fraud

The following is a list of ways to impede the scalability of fraud along with the advantages and disadvantages of each method.

Impeding the scalability of fraud through Local, State, and Federal law enforcement

Most people probably think of law enforcement when it comes to fighting fraud. And while that can be part of the solution, it’s probably a very small part overall. Here are some of the problems with relying on law enforcement to fight fraud:

  • Law enforcement doesn’t have enough resources.
  • In many instances consumers must file complaints in order to get fraud onto the radar of law enforcement – however, consumers often don’t have a very good understanding of how and where to file complaints.
  • Often law enforcement doesn’t have the authority to impose criminal penalties. For example, as you can see in Appendix B (Synopsis Of Consumer Protection Enforcement Authority Under The Federal Trade Commission Act) below the FTC must refer cases to the Department Of Justice when it comes to matters of criminal prosecution.
Synopsis Of Consumer Protection Enforcement Authority Under The Federal Trade Commission Act

Synopsis Of Consumer Protection Enforcement Authority Under The Federal Trade Commission Act

  • Sometimes law enforcement is potentially facilitating the fraud that their supposed to be stopping (I’ll just say “potentially at this point although my actual suspicions run deeper than that). For example, in the comments of this October 11, 2009 WorkAtHomeTruth blog post, I learned from the owner of about a CityWeekly Article regarding Attorney General Mark Shurtleff.  The Salty Droid has taken up this issue with full force in his recent posts about Mark Shurtleff who has now been robotically crowned the Attorney General Of MLM.
  • Often law enforcement actions have no impact on fraud at all, since criminals simple move on to their next cons.  You can see how easy it is for criminals to move on from scam to scam in this post which goes into how easy it is to set up anonymous corporations tied to secret bank accounts – and how con artists are able to keep rolling them over into new corp/bank combinations so they never have to file any sort of financial reporting.  Of particular note from that post is Professor Jason Sharman’s study “Onshore Secrecy – Offshore Transparency” in which he concludes, “”The United States, Great Britain and other OECD states have chosen not to comply with the international standards which they have been largely responsible for putting in place.”

Impeding Scalability Of Fraud Through Channel Distribution Disruption

Impeding fraud at it’s origination point is necessary, but as noted previously, often not very effective. A more effective way to impede fraud would seem to be to disrupt the distribution channels that facilitate the scalability of fraudulent schemes.

That’s probably obvious, but it’s not something law enforcement has traditionally done. If it’s not obvious you can see why it’s a much better approach just by looking at the diagram below:

Fraud Distribution

Fraud Distribution

However, Law Enforcement now seems to be starting to pay some attention to the GateKeepers within the fraud distribution system. Here are a few examples:

  • Federal Trade Commission, Plaintiff, v. MoneyGram International, Inc. about which Attorney Michael Webster noted, “This is an important change in emphasis by the FTC. In seeking to stop those who enable fraud from profiting, the FTC has signaled its willingness to go beyond simply getting unenforceable default judgments against con criminals who have skipped on to the next con project.”
  • Federal Trade Commission, Plaintiff v. Media Innovations, LLC – of which Attorney Brian Kindsvater stated, “This is extremely important – the FTC lawsuit claims a violation of federal law because the affiliate did not substantiate the merchant’s claims – regardless of whether the claim was actually true or false.”
  • I also noted in my Mass Money Makers review of it’s sales tactics the fact that the FTC’s Advertising and Marketing on the Internet: Rules of the Road states, “”Sellers are responsible for claims they make about their products and services. Third parties – such as advertising agencies or website designers and catalog marketers – also may be liable for making or disseminating deceptive representations if they participate in the preparation or distribution of the advertising, or know about the deceptive claims.” That’s particularly interesting to me, because when I talked to a senior litigator at the FTC in 2009 about pursuing Affiliate Networks (a main distribution channel of fraudulent bizops) she didn’t seem all that interested – in fact I got the sense that she couldn’t see how they could be pursued at all.
  • Lynndel Edgington who works with an Assigned Federal Agent and 3 U.S. Postal Inspectors has noted that Federal Law Enforcement is becoming more interested in prosecuting the crime of misprision of a felony in certain cases.
    Misprision of a felony is a crime the government can use to prosecute underlings who engage in willful blindness and participate in an enterprise even when they know it is a fraud. Patrick Pretty described such a case here involving a Ponzi scheme in which a woman was prosecuted for misprision of a felony in which “Kathleen Fuoco, 60, of West Seneca, N.Y., pleaded guilty today to misprision of a felony and willful failure to file tax returns while she was helping Richard Piccoli, 83, pull off the scheme.”

Channel Distribution Disruption Through “Poison Pills”

“Poison Pills” are messages that are constructed in such a way that when a target audience is exposed to “Message A” (the problem message) that target audience automatically thinks of “Message B” (the poison pill message).

An example of this, as discussed in Michael Webster’s, “When Is Viral Marketing Very Very Bad” article is an anti-tobacco advertisement which has ‘one Marlboro Man-type saying to another, “Bob, I’ve got emphysema.”  The next time individuals see a real life ad for Marlboros, they are more likely to automatically conjure up the counterargument and therefore become more resistant to the cigarette ad’s message.’

Channel Distribution Disruption Through SEO

Since so many scams are perpetrated online these days, it’s useful to outrank the scams on their own names. That’s helpful for the people who actually search online before getting suckered into a scam. While doing this is useful, it obviously doesn’t disrupt many other forms of online distribution – such as email, video (YouTube, etc.), Twitter, and many forms of paid advertising such as PPV.

Channel Distribution Disruption Through Anti-Fraud Call Centers

In 2006 AARP teamed up with Washington State Attorney General Rob McKenna to launch the “AARP Fraud Fighter Call Center.

“Trained volunteer Fraud Fighters are turning the tables on con artists, ironically using a favorite tactic of the criminals they are determined to stop. Using calling lists seized during law enforcement raids of fraudulent telemarketing boiler rooms, AARP is warning consumers that they’ve been targeted. These same lists, commonly referred to by criminals as “sucker lists,” are typically sold and resold among various con artists looking for their next victim.

Now instead of hearing a smooth sales pitch from a crook, consumers are receiving important information and protection tips about the latest scams.”

Impeding The Scalability Of Fraud Through Education

While Education can be helpful, it’s clearly not the ultimate answer to impeding the Scalability of Fraud. However, the type of Education can be key to it’s effectiveness, and as noted in Karla Pak and Doug Shadel’s “The Psychology Of Consumer Fraud.”

“Despite the overwhelming presence of clearly-identifiable influence tactics in fraud schemes as evidenced by our analysis of hundreds of undercover audiotapes, very few fraud prevention or financial literacy programs in the United States teach the science of social influence and how to resist it (Vitt et al., 2000; Pratkanis & Shadel, 2005). Our recommendation is that a major research initiative be launched that seeks to study the possible role persuasion education might have in deterring fraud. The following research questions should be considered as part of such an agenda.”

The study also proposes some methods for testing the effectiveness of various types of education.

Impeding The Scalability Of Fraud Through Social Network Analysis

This is an idea I touched on in my post “Social Network Analysis, “Trusted Hubs”, and Timelines“.  A better – and much simpler to follow explanation – for using Social Network Analysis to disrupt fraud distribution channels can be found in Fern Halpers article, “Social Network Analysis: What Is It And Why Should We Care“. Halpers explains how SAS uses Social Network Analysis for “discovering banking or insurance fraud rings, identifying tax evasion, social services fraud, and health care fraud (to name a few).”

No doubt that there are many more ways to disrupt distribution channels of fraud, but one thing seems clear. Tackling fraud at only the point of origination is not the best way to minimize fraud.

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