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The devil is in the data

Weak banking safeguards and unscrupulous information brokers play a part in phone fraud scams.

June 04, 2007

HAVE YOU ever entered a sweepstakes or subscribed to a magazine over the phone? How about dropping your business card into a bowl for a free prize drawing? If so, your name could wind up on a "sucker list" canvassed by telemarketers -- and crooks.

The creation of the National Do Not Call Registry in 2003 helped consumers reduce their exposure to telemarketers, but it hasn't made much of a dent in phone fraud. In fact, the pain inflicted by fraudsters by phone or online has grown more severe, exacerbated in part by vulnerable banking systems and a worrisome lack of scrutiny by financial institutions and middlemen.

Although the schemes have varied over the years, one constant has been the existence of so-called sucker lists -- directories of people who've shown themselves more willing than most to accept an unsolicited sales pitch and reveal Social Security and checking account numbers, among other personal details. Such information often is compiled by black-market operations, but nowadays even legitimate data brokers are contributing names to the lists. The New York Times recently reported on one data brokerage that assembled lists of elderly and supposedly "gullible" people, then sold the information to suspected scammers.

The law already has remedies for fraud victims, who can obtain refunds from banks and credit card companies if they submit claims promptly. But many don't, possibly because they don't notice the problems in time. That's why the Federal Trade Commission has a critical role to play, starting with enforcing the law against facilitating fraud. Data brokers that compile lists of "gullible" consumers are doing just that, and they shouldn't be allowed to feed scammers' appetites for victims.

The vulnerabilities in the banking system that scammers are exploiting should be shored up as well. In particular, bank regulators need to prohibit "demand drafts," which let scammers draw money from victims' accounts using unsigned checks. The drafts should be replaced by the widely used automated electronic-payment system, which provides the same amount of convenience with more protection for consumers.

Finally, banks need to do a better job of monitoring the financial middlemen who submit checks and demand drafts on behalf of third parties. Scammers often rely on these payment processors for access to the banking system. If a processor's transactions generate an unusual percentage of complaints about fraud, that should be enough to trigger a response that protects customers. The number of rip-offs may be low in comparison to the mountain of transactions processed by banks every day, but with consumers reporting nearly $1.2 billion in fraud last year, the stakes are high enough to warrant the added oversight.

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