Internet frauds:

A basic typology

The internet has helped lower the transaction costs of fraudsters, increased their anonymity and widened the pool of potential victims on which they may prey. Although commercial crime investigations are a key step in dealing with some of these frauds, a well equipped consumer protection agency is also important.

The internet is a vastly disruptive and invasive technology with which the end of the twentieth century will always be associated. It has irrevocably transformed the way in which business, leisure and communication are conducted, creating both new types of commerce and entertainment, as well as new ways of engaging in age-old amusement and trading activities. As has been the case with the spread of all previous disruptive technologies — the ‘invention’ of paper money, the development and diffusion of motorcars, the widespread accessibility of cheap electronic goods — the new technologies also create new forms of crime and new channels for the commission of old ones.

In very general terms, internet-related criminality can be divided between those which seek to steal, modify or destroy data and those which use the internet as a vehicle for parting the greedy and the gullible from their money or goods. The former are quintessentially modern, information-age forms of crime, while the latter is a type of criminality which dates back at least to Jacob’s conning of Isaac into passing his brother’s birthright to himself by misrepresenting himself as the hirsute Esau.

Essentially, there appear to be three types of internet related fraud: fraudulent purchasers buying goods from legitimate commercial entities; fraudulent ‘commercial entities’ offering to sell goods and services to innocent would-be buyers; and standard, if sometimes modified, confidence tricks.

The fraudulent misrepresentation made when seeking to purchase a product over the internet is, in all likelihood, the most common and pervasive form of internet crime. In the typical case, a criminally-minded individual with access to a stolen credit card number makes a purchase of goods or services and offers that number for payment. Here, as in all other forms of credit card fraud, it is the capacity to overcome the standard array of security counter-measures put in place by the credit card companies and ordinary merchants which determines the possibility of success.

However, because e-commerce transactions, for obvious reasons, do not involve the physical presentation of a credit card, the checking of the authenticity of the purchaser’s signature is impossible. More importantly, the absence of the need physically to present a card means that the criminal need never actually have it in his possession, and, for that reason, there is an increased likelihood that the card will not have been physically stolen and that its owner will not, therefore, have reported its being missing and have had it cancelled. This opens a very wide window of opportunity to the criminal who can avoid this, the most effective of credit card fraud prevention strategies.

This natural advantage possessed by the fraudster is accentuated by his being able to launch his attacks from outside the jurisdiction of the law enforcement agencies to whom the defrauded merchant or card-holder might turn. Thus, even when goods purchased using a stolen card number are physically delivered to the fraudster, it is often impossible to secure an investigation.

The anonymity of internet-based credit card transactions means that there has been a reapportioning of the risk associated with these transactions. Merchants who accept credit cards as payment essentially accept that any queried transactions by the legitimate card-holder will be for their account, and, as such, these frauds have become a standard operating expense for e-commerce ventures, particularly in the retail sector.

The establishment of ‘businesses’, the main objectives of which are to make sales of products which they have no intention of honouring, is the second major form of internet-based fraud. Here, the fraudster sets up a company offering legitimate goods and services which are available elsewhere but which are being offered at a cheap price. An alternative to this which shades into the confidence trick, is the offering of goods which either do not exist at all, or which do not do what the seller claims they can do. This, it appears, is often associated with medical products which might claim to be miracle cures for anything from balding to backache, from impotence to obesity.

Once again, the advantage that the internet confers on these latter-day snake-oil salespeople is anonymity combined, this time, with the capacity to reach a very wide audience, including many millions who live in foreign jurisdictions, increasing the costs of policing these crimes.

Although commercial crime investigations are a key step in dealing with these sorts of frauds, a well equipped, flexible and powerful consumer protection agency, such as the Federal Trade Commission (FTC) in the USA, is also key. The powers, functions and approach of the FTC allows it to respond quickly to consumer complaints and to put people out of business. Indeed, in a recent landmark decision, the FTC banned a fraudster from ever being involved in e-commerce after having been found to have fraudulently offered goods for sale, the purchase of which he had no intention of fulfilling.

The last broad category of frauds perpetrated over the internet are confidence tricks. These consist of tried and tested schemes making use of new opportunities the technology of the internet provides.

Apart from snake-oil salespeople, the basic confidence tricks perpetrated are the same as those committed through more conventional channels: advance-fee frauds, misrepresentations and illegal pyramid schemes.

It is the latter which appears to be the most common form of confidence trick on the internet, though it comes in far too many guises to even attempt to describe. What is common to all, however, is that a ‘get-rich-quick’ scheme requires an investor to make a payment, with his return being a function not of the amount of work he is able to do or income from legitimate investments made with his money, but on the number of people he is able to recruit into the scheme after joining.

Although the internet has created a very wide pool of potential ‘investors’, it has not overthrown the basic mathematics of a pyramid scheme: at some point it must collapse, leaving the majority of ‘investors’ with somewhat lighter wallets.

Antony Altbeker
WITS Graduate School of Public and Development Management