FTC crams a major crammer as phone fraud goes global

It’s as much fun to be on the receiving end of a “cramming” as the name suggests. Dodgy companies have long slapped monthly charges on people’s local phone bills thanks to a practice called “LEC billing,” and few phone users notice the charges for months. When they do, it can be difficult to have them removed—and good luck getting a refund.

For the operators of these scams, it can be a lucrative game. How lucrative? The Federal Trade Commission (FTC) has just obtained a court order (PDF) against two brothers whose various enterprises pulled in $19 million over five years, nearly all of it from companies and individuals who had no idea they were paying for such “useful services” as search engine marketing and Internet yellow pages.

This isn’t your garden-variety cramming operation, however; brothers John and Ray Lin showed up to court and fought the FTC’s case every step of the way, alleging that theirs was an honest business and that they in fact were the parties being abused here. The judge, whose final opinion borders on the sarcastic, slammed the Lins for (among other things) signing their dead mother’s name to their own legal documents after she had passed, setting in motion “an army of telemarketers who committed fraud,” and being a part of the “vulnerable underbelly of a widespread and under-regulated practice called LEC billing.”

A little history

Cramming was made possible by the breakup of the telecom monopoly AT&T in the US back in the 1980s. As part of the bust-up, the local phone companies (the “Baby Bells”) continued to offer users a single bill that showed both local and long-distance charges, even though these came from different companies. This created the infrastructure for accepting charges from third parties and billing users on their phone bills, a practice called Local Exchange Carrier billing.

This became easy to abuse. Create a scam company, convince the various LECs that you ran a legitimate operation, and then start sending them bills. Customers would pay, usually because they didn’t check every charge on a bill each month. If the fees were kept low enough, they might continue for years before being discovered.

The FCC mandated that monthly phone bills be clearer, so it would be easier to spot bogus charges. But as the judge in the current case noted, “the approach taken by the FCC was (and remains today) premised on the dubious assumption that consumers scrutinize their phone bills every month before paying them, and that local phone companies are vigilant about allowing only authorized third-party charges to appears on their phone bills.”

The scam became common enough that the FTC also started cracking down, so most crammers today have to go to the extra effort to make their services look legitimate. That means third-party verification, recorded phone calls, detailed records—all in an effort to sell $14.95/month voicemail service and other overpriced or worthless goodies.

The issue hit home in 2008 when I was hit with multiple recurring monthly charges on my local phone bill, all for services I had never heard of, signed up for, or wanted.

A global effort

Today’s operation are now globalized efforts, relying on call centers and third-party verifiers around the world, and the best ones now feature strong efforts at plausible deniability. That was the case with the Lins, who ran a company out of San Francisco called Inc21. (And they’re hiring!)

Inc21 pitched products called MetroYP, GlobalYP, NetOpus, and JumPage, and it allegedly did so in total compliance with the law. The company used call centers in the Philippines, India, and Canada, contracting with them to turn in verified customers. Third-party verification was used to make sure that the call centers didn’t just make up their sales, and the verification was recorded, and no one on the Do Not Call list was contacted. The call centers would cold call businesses and try to sell them $12.95-39.95/month products, all billed to the company’s phone service rather than via a standard invoice.

This was “Inc21’s version of the facts,” though the judge said that the reality was far different. In truth, “the vast majority of ‘customers’ never authorized any charges or bought any services,” he wrote.

The judge was so dubious about Inc21 that, after an earlier hearing, he ordered the company to mail a letter to every customer. The letter asked customers if they wished to be billed for an Inc21 service; if they did not respond, their billing would be stopped.

The Lins complied, sending out 10,924 letters. Twenty-seven customers replied that they did in fact want the services in question—a mere 0.25 percent. Many respondents claimed they were being billed fraudulently, and those responses shed more light on exactly what happened.

In many cases, the calls appear to have been deceptive. Companies were told that the call was about “updating” a Yellow Pages listing; many of those who responded seemed to believe they were correcting typos, updating business hours, etc.—not buying any new service. But, when the third party verifier joined the call and the person said “yes,” they were verified as a sale and billing began.

Some people “reported that Inc21 telemarketers tried to badger them into accepting the service or saying the answer ‘yes’ to a question even if the true answer was ‘no.’”

Some people said that, after listening to their recorded “verification” conversation, that it “appeared falsified.”

Numerous people said that the person listed as having authorized the service had not lived or worked at the home or business in question for the last five years and so could not have authorized the charges.

Things were so bad that even companies like Verizon booted Inc21 companies from their LEC billing program—Inc21 was even signing up public schools.