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 StrangelyPerfect.tv 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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Residual income business opportunity myths debunked

For many people a residual income business opportunity seems like the holy grail of income streams. They believe that once they find that ONE magic residual income business opportunity that all of their money problems will be solved…forever.

But if you look at some of the popular passive income opportunities all may not be as rosy at it seems. Let’s take a look at a few:

1. Affiliate commissions on recurring membership sites

Generating affiliate commissions on recurring membership sites is often touted as the holy grail of affiliate income streams. But what almost NOBODY seems to consider is the average retention rate of those sites.

Personally, all other things being equal (especially conversion rates) I’d rather make a one-time commission of $50 on a product with a % refund rate than a recurring 50% commission of a $30/month membership site with an average retention rate of 3 months – especially if I am BUYING traffic. i.e…

  • ($50 x 100 units) x .95 = $4,750
  • ($15.00 x 100 units x 3 months) = $4,500

It’s business math 101, but it is strangely not talked about much.

2. The Multi Level Marketing (Network Marketing) home based business opportunity

Of course many network marketing (MLM) companies have touted themselves as the ultimate passive income home based business opportunity.  And time and time again that has been proven to NOT be true (note, I am NOT anti-MLM, but I AM against many of the ways network marketing companies are promoted as residual income business opportunities).

Why?

  • Lack of focus on retail sales – The most common problem is a huge lack of focus on retail sales. Without an emphasis on product sales any MLM organization will naturally implode from the bottom up. This is one of the reasons for what’s commonly known as “the 70 percent rule” which requires that distributors are not reordering until they have sold or personally used at least 70 percent of previously purchased products (see Jeffrey A. Babener’s article here on the 70 percent rule)
  • The focus on “leveraging time” by “leveraging the time of other people”. Conceptually this sounds great, but as anyone who has ever managed people knows managing people is HARD work. So what do you have typically in network marketing? You have a lot of people with little or no management experience attempting to manage people with little or no business experience. Sounds like a recipe for disaster, doesn’t it?
  • You do not truly own a network marketing business in the traditional sense of “owning a business”. While, obviously any business can fail or go out of business, there are two things unique to the network marketing residual income business opportunity – you have little or no control over how the entire company does AND most network marketing companies have distributor termination clauses (when’s the last time you heard of a business owner firing him or herself?)

3. Generating Passive Residual Income Through Real-Estate

One of the big sales techniques of the Real Estate seminars of the 70s and 80s would be for the presenter to ask the following 2 questions in a room full of people:

  1. “How many of you know a traditional business owner who lost their shirt in business”? (a lot of people would raise their hand)
  2. “How many of you know a real estate investor/owner who has lost their shirt”? (almost nobody would raise their hand)

Of course it’s possible that less people know real estate investors/owners than business owners. But even if that isn’t true, I think it’s fair to say that there have been many examples (especially recently) of people losing a lot of money in real estate.

And despite slick real-estate seminar “gurus” trying to convince you that finding and managing tenants isn’t a big deal…for most people it WILL be.

4. Earning Residual Income Through High Yield Investment Programs or HYIPs

As Lynndel Edgington of Eagle Research Associates pointed out in this discussion of the recent PTVPartner HYIP:

“THERE ARE HIGH YIELD INVESTMENTS, BUT THERE ARE NO HIGH YIELD INVESTMENT PROGRAMS THAT ARE LEGAL. Every one is a scam or Ponzi. It just depends on how it is set up that determines if it is a scam or Ponzi.

Real investments don’t use payment processors so they can stay below the radar of government agencies. That statement alone is proof this is a scam. No legal investment has to stay below the radar of any goernment agency, anywhere in the world. The moment you hear those words, alarm bells should be going off warning you this is a scam or Ponzi.”

5. Generating Residual Income Via Royalties

It seems to be the dream of many aspiring authors and musicians to get signed on with a big publisher and generate residual income from the sales of their books or music.

Best-selling author David Copeland explodes that myth in this great video presentation on how to publish a book.

6. Residual Income Business Opportunity Systems Based On Buying Traffic

There have been many affiliate marketing training programs that promise that the holy grail of residual income is to BUY traffic through Pay Per Click marketing, Pay Per View marketing, Banner Advertising or other types of media buys.

This was a favorite promise of many questionable PPC training products.

What almost ALL of them fail to mention are the following aspects of buying traffic:

  • Managing bids (this is why bid management software exists)
  • Managing campaign creation (this is why so many campaign creation tools exist)
  • Managing offers (this is why products like OpenX exist)
  • Managing email lists (remember an email list is a list of PEOPLE)
  • Building landing pages (this is why expensive automated landing page builders exist)
  • Analyzing conversion statistics (this is why tools like Amish Shah’s Magic Bullet, StatsJunky, etc. exist)

All of the tools mentioned above AUTOMATE tasks that take a lot of time. And why do those tools exist? Because generating residual income through Pay Per Click marketing and other means of buying traffic is NOT “hands-off”.

That’s not to say there isn’t a lot of money to be made by buying traffic. There is. But most people decide to take the plunge into buying traffic for all the wrong reasons and are surprised when they lose all their money or it isn’t as easy as they were led to believe.

7. Residual Income Opportunities Based On Search Engine Optimization

I think systems like Niche Blitzkrieg do get a bit closer to what some might consider passive income. However, there are still downsides to a system like Niche Blitzkrieg:

  • Unless you learn to outsource and automate you’re income is typically capped at a much lower level than systems that focus on buying traffic.
  • You have to be organized enough to monitor your site’s rankings and income and tweak the sites from time to time.
  • It can be fairly easy at times for someone to figure out what all your niche sites are and use that information to attack the same markets (this is surprisingly rarer than you might expect, but it is a real concern).

8. The Hard Truth About “The 4-Hour Work Week”

Tim Ferris’ popular book does drive home a lot of important and interesting points. But as many people have pointed out he seems to have the attitude of “it worked for me so it will work for you”. And when it comes to the skill of outsourcing and even automation this is definitely NOT true. There is a ton of money spent by both large and small companies to learn how to effectively outsource, so the idea that it is the holy grail of passive income seems patently absurd.

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Has anyone heard of Vemma Builder?

Q: Has anyone heard of Vemma Builder?  Something about entering email info and being put into their system to recieve emails which will generate residual income?

A:

This info may be a bit old as I did the research back in 8/06:

Vemma Builders is a subsidiary of New Vision and runs as
an MLM model. New Vision had a problem with the FTC
back in 1998, which was resolved:

http://www.ftc.gov/opa/1998/12/nvi2.htm

Xango sued New Vision for Patent Infringement:
http://www.mlmwatchdog.com/New_Vision_Xango.html

If Xango is able to successfully get the patent and successfully
sue New Vision I would think this would impact New Vision
substantially, but the Patent process is quite lengthy.

Xango’s patent application is here: http://snipurl.com/xangopatent

Xango’s patent was originally rejected, but is now going through
appeals as you can see here: http://snipurl.com/xangoappeal

They are currently in the bottom half of this diagram as far
as the patent process:

http://www.uspto.gov/web/offices/pac/mpep/documents/2200_2201.htm

Xango made some claims that New Vision was suffering
financially. I was unable to validate or discredit that accusation.

As far as nutritional claims, since I’m not an expert in nutrition, that’s
not something I feel qualified to go into.

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