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Hidden faces: combating telemarketing fraud.

How many times does the phone ring at dinnertime with claims like this from overzealous telemarketers trying to lure a purchase in exchange for promised riches and award winnings? Worse, how many people do you know who have been taken in by these schemes?

"Telemarketing" was a term coined by telephone companies in the mid-1970s indicating a way to promote sales through phone solicitation. Con artists quickly learned that selling and promoting over the phone offered a new wrinkle on age-old customer swindle schemes. By promising cash, cars, jewelry, and other prizes, unscrupulous telemarketers have fleeced millions of people out of their hard-earned savings. Many victims are the elderly folks who normally close deals on a handshake, but have been conned out of their retirement nest eggs in exchange for cheap trinkets.

Illegal telemarketing schemes have one common element. Whether the products offered for sale are pens, vitamins, water purifiers, lottery winnings, or investments, illegal telemarketers prosper by promising customers an array of valuable prizes - big rewards that never come.

Over time, illegal telemarketing has become an international problem, with new and varied operations springing up throughout the United States, Canada, and Europe. To put today's problem into perspective, one must examine how illegal telemarketing operations, called "boiler rooms," operate and how they developed.

INSIDE THE BOILER ROOM BUSINESS

To trace the inner workings of an illegal telemarketing operation, one must understand the language, as well as exactly how and why business is conducted the way it is. Most boiler rooms operate in six stages - solicitation, sales, verification, collection, shipping, and customer service. Each stage depends on the others for success.

Solicitation

No boiler room can prosper without a core base of victims and continuous new prospects. Telemarketers solicit potential customers in two ways - either inbound or outbound. Inbound systems usually involve a bulk mailer of some sort, often a card or certificate, notifying prospects that they have won a prize or business opportunity and requesting that they call the company within the next 24 or 48 hours. This deadline creates a sense of urgency that a big award might be missed if the offer is not acted upon immediately. Mailers result in about a 5 to 7 percent response rate for most boiler rooms. Outbound systems use the cold-calling approach - telemarketers get on the phone and pitch their promotions through unsolicited initial contact.

Regardless of which system is used, all telemarketers rely on leads. These phone professionals do not pick names out of the phone book; they operate from lead lists - hundreds of names and telephone numbers that boiler room owners purchase from lead brokers, usually on a weekly basis. Lead lists identify likely prospects, often those who have been victimized recently by other telemarketers. A boiler room owner might pay anywhere from 5 cents to 5 dollars per name, depending on the likelihood of a sale. Most boiler rooms exclusively solicit out-of-state victims in order to avoid the risk of personal confrontation in the future.

Sales

As the heart and soul of any boiler room, sales personnel do not all do the same job. They are located in various rooms inside the company depending on their function. Many salespeople at all levels operate using a written pitch, usually drafted by the owner or room manager. However, most phone representatives are given wide latitude in price negotiations and what they can say and promise a victim.

Front Room

The front room is where the new, less experienced salespeople, sometimes called "fronters," work. They generally contact new prospects from their lead lists and offer the customers products and awards with relatively low prices, usually between $299 and $599. They are managed separately and segregated from the more advanced operators.

No Sale Room

This room houses salespeople who refuse to take no for an answer. Once the fronter has failed in a sale, the lead is forwarded to the No Sale Room, where a more experienced telemarketer takes a second crack at it. This telemarketer feigns misunderstanding and incredulity that the customer is not taking advantage of the opportunity being offered and usually says something like this:

"Frankly Mr. Jones, my associates and I are completely confused, and we're not sure what to do about it. What you're telling us is that you don't want your prize - that we should just forget about it and send it off to some other lucky customer? I don't think you realize what you have coming to you."

Sometimes these salespeople, or "no salers," try to explain away the cost of an award or product by claiming that the fee simply covers the costs associated with the prize, such as shipping, insurance, and taxes.

Reload Room

A boiler room lives or dies through the success of its reload room, the established phone professional's turf. These salespeople, called "reloaders," use high-pressure tactics and an assortment of bogus promises to convince past victims that they should buy again. Ironically, these victims are the easiest to pitch because they tend to spend more and more money in hopes of eventually winning that big prize or at least breaking even. Reloaders fuel those hopes with lies and unkept promises about grander promotions and newfound riches if the victim will just play along one more time.

Reload orders often total thousands of dollars apiece and represent the bulk of the company's illicit income. Seasoned reloaders commonly earn well over $100,000 in commissions annually.

Verification

Verifiers recontact customers shortly after a sale has been completed. They review the promotion, awards, and price with the customers. More important, they attempt to diffuse the misrepresentations made by the sales representatives. Verifiers also secure arrangements for the victims to pay for the bogus products.

Collection

To circumvent the problem of buyers' remorse, telemarketers need to ensure that customers pay them as quickly as possible. The two most common methods of payment are checks sent via overnight delivery and demand draft authorizations. The verifier secures the customer's address and arranges for the overnight courier to pick up the check as soon as possible, with all charges to be paid by the boiler room. By using check debits or demand drafts, telemarketers also can arrange for the direct electronic transfer of funds from a victim's bank account.

Because of the instability and illegality of most boiler room operations, telemarketers generally cannot obtain bank merchant accounts for credit card sales. Some owners misrepresent the nature of their businesses to secure such accounts, but once banks determine that the companies' profits are generated exclusively through phone sales, they quickly shut down the accounts.

Shipping

Also known as the "back end," most telemarketers initially get into trouble at this point. It is one thing to lie over the phone to induce a sale; it is another thing to lie over the phone and then not ship the customer anything, not even the least valuable award. Many financially strapped owners, to their detriment, resort to nonshipment when business gets hectic. Reliable shipping minimizes customer complaints, which, in turn, reduces the threat of law enforcement intervention.

Incidentally, most illegal prize rooms operate on a 10 to 1 principle; that is, they award a prize costing one-tenth of the amount paid. There even have been cases in which boiler rooms awarded victims vacation packages that consisted of nothing more than travel certificates the boiler room bought in bulk for pennies apiece.(1)

Customer Service

This task requires a special talent and also might be called customer harassment or customer intimidation. Once victims realize they have been duped, the customer service representative (CSR) must eliminate the problem using any tactics necessary. The CSR usually is an old-time telemarketer who either belittles and berates customers into submission or, through an endless series of delay tactics and empty promises, wears the complainants down until they eventually give up. Only the most persistent customers or the threat of law enforcement action actually elicits a refund.

HISTORY OF TELEMARKETING

The first major illegal telemarketing company was Fifty States Distributors. This company began operations in 1975 in Las Vegas and eventually spread out across the west. Fifty States sold advertising specialty products or "ad specs" usually pens, key-chains, or refrigerator magnets with a company's embossed name and logo - to businesses throughout the country. The owner of Fifty States, Barry Schrader, soon learned that his phone representatives could sell more products by offering customers a watch or other jewelry trinket along with their orders.(2) This simple gesture eventually evolved into the 1-in-5 scheme, which has become a staple of illegal prize room operations.

In the 1-in-5 scam, telemarketers guarantee that customers will receive one of five prizes - with the top award being an automobile or other lucrative item, all the way down to the least valuable prize, often represented to be a television, VCR, or stereo. In fact, the least valuable award is buried somewhere in the middle, and, though represented to be valuable, it usually consists of worthless jewelry, artwork, or costly and restricted vacation packages. Everyone gets this award - except for the few customers who have spent thousands and thousands of dollars chasing dreams concocted through crafty salesmanship. Of course, before becoming eligible for an award, the victim must purchase something, often a product with a true value difficult for amateurs to determine. The first rule of illegal telemarketing is that no one gets more than they pay for.

Fifty States, which employed more than 300 salespeople at its peak, eventually was raided and shut down in 1979. Unfortunately, former managers and salespeople spread across the country to start their own scam operations, such as Cypress Creek Promotions in Fort Lauderdale, Florida, Nationwide Marketing in San Diego, California, and Pioneer Enterprises in Las Vegas, Nevada, which at one time was the largest boiler room in the United States.

EARLY LAW ENFORCEMENT EFFORTS

Secrecy is the key to illegal telemarketing success. Telemarketers, by nature, shun outsiders. They feel secure in defrauding people throughout the country with the comfortable detachment of never having to meet their victims face to face. Telemarketing companies are equally wary of law enforcement, and their operations are primed for quick relocation, as required. A boiler room owner easily can set up an office without any overhead concerns, needing only office space, desks, and phones, all under the cover of an innocuous name, often with the words "marketing" or "promotions" in the title.

Further complicating law enforcement's efforts at investigating boiler room operators, most employees, from the owner to the lowest level salespeople, use aliases, or "phone names," to insulate themselves from suspicion. Tracing an alias involves extensive police surveillance and cumbersome records review, often without success.

Prior to 1990, most law enforcement investigations were historical in nature. Federal agents and local detectives were challenged to pore over thousands of documents, including sales orders, payroll records, shipping receipts, purchase orders, telephone toll records, and bank account information, to reconstruct company operations. Additionally, cases only could be solved by contacting and interviewing hundreds of victims across the country, making successful telemarketing investigations at all levels of law enforcement very rare.

Boiler room operators simply can pack up and move to another county or town, leaving pursuers perplexed. Part of the problem is that the boiler room community has its own language and way of doing business. Investigators attempting to thwart boiler room operators quickly learned that without thorough knowledge of boiler room lingo and behavior, their limited understanding of such operations immediately would compromise their proactive investigative efforts. Many of these barriers ultimately toppled in the early 1990s with the FBI's Operation Disconnect, which gave law enforcement one of its first real glimpses inside the boiler rooms of America.

OPERATION DISCONNECT

After the FBI, state attorneys general throughout the country, and innumerable police departments suffered years of investigative frustration, the FBI solicited the services of a former boiler room manager, who guided agents through this intricate and secretive world. With this intelligence, the FBI's Salt Lake City office initiated undercover operation Bo Deal, which subsequently evolved into national Operation Disconnect. In Disconnect, undercover agents posed as distributors of a computerized lead service, promising con artists profits far beyond what they were raking in already. This technique enabled agents to gain first-person admissions of illicit sales tactics and to understand boiler room machinations fully. During this undercover operation, investigators developed so-called hot tests in which agents, posing as customers, purchased products and recorded the fraudulent pitches and unkept promises of telemarketers throughout the country.

Many federal and local law enforcement agencies, along with 18 FBI field offices, participated in the March 1993 takedown, resulting in raids of 79 boiler rooms and the arrest of 300 subjects nationwide.(3) Although Disconnect was a one-time operation, the methodology used in this investigation established a solid foundation for law enforcement to combat illegal boiler rooms in an effective, proactive manner.

PROACTIVE TELEMARKETING ENFORCEMENT

In the wake of Disconnect, many telemarketers became even more secretive and suspicious in their business dealings. Law enforcement quickly learned, however, that the bonds of secrecy and distance, so implicitly cherished by boiler room operators, could be effectively used against them. While phone professionals depend on deception and trickery for success, they never can be completely sure to whom they are speaking on the other end of the line. The challenge for law enforcement is to exploit this vulnerability and put investigators into the position of customers without arousing suspicion.

Operation Disconnect's success led the FBI's Miami division and the Fort Lauderdale Police Department to combine forces in 1994 in Operation Sunstroke. Together, they developed a strategy to place agents and detectives consistently in the role of victims, allowing for direct evidence of illegal sales tactics. Over time, a twofold system involving cooperating witnesses (CWs) and fictitious leads has developed.

First, cooperating witnesses with previous boiler room experience are sent into suspected illegal telemarketing companies to seek employment. The CWs typically are trained by boiler room personnel in all phases of the operation and usually sit in on calls made by other employees. All activity in the boiler room is recorded, and the law enforcement agency reimburses victims upon takedown for any actual sales made by the CW. The evidence associated with this part of the investigation can be obtained in a matter of days.

Second, fictitious leads are created and inserted into the boiler room. Telemarketers maintain an unquenchable thirst for new leads or "fresh paids," victims who have purchased from other telemarketers and likely will buy again. Leads, take many forms, often consisting of index cards, computer sheets, and previous sale orders. By creating their own leads, usually in the form of supposedly old sale orders, law enforcement officials can place themselves in the victim's hot seat. Standard sale order forms can be purchased from a business supply store or duplicated from previous searches and seizures. Once the form is completed with the fictitious information and submitted to the boiler room, investigators can expect a call in a matter of days.

The next investigative step is to overcome the interstate aspects of telemarketing and create the illusion that the law enforcement victim actually is located in a faraway state. One way to set the stage is to work in tandem with another law enforcement agency out of state. For a relatively low cost, each agency can establish one or more telephones in its office space with calls forwarded permanently to the other agency. For instance, in Miami, the FBI and the Fort Lauderdale Police Department set up five telephones with recording equipment. Through cooperative efforts with other FBI and law enforcement offices, the phones in Florida were connected to phones in Atlanta, Dallas, Los Angeles, New York, and Chicago. Those phones were placed in permanent call forward status so that if, say, a telemarketer in Miami called a lead in Atlanta, the call automatically bounced to the phone bank in Fort Lauderdale. By replicating this strategy, law enforcement agencies can make phone solicitors believe they are conducting interstate sales when the investigators might be literally right next door.

To complete the scenario successfully, all law enforcement personnel involved in the investigation need to be briefed on case objectives, phone personas, how to elicit incriminating information, and the mechanics of arranging for the purchase and receipt of products and prizes - usually through a mail-drop arrangement. Once law enforcement personnel make a purchase, the phone typically continues to ring with reloaders soliciting more money and, eventually, with other boiler rooms that have purchased the leads from the initial target.

Following Miami's success, the FBI in San Diego coordinated national Operation Senior Sentinel. In addition to investigators from multiple agencies, this initiative also solicited the services of retired law enforcement personnel and members of the American Association of Retired Persons (AARP) to pose as victims. To date, Senior Sentinel efforts have led to the arrests of over 1,000 boiler room subjects nationwide.(4)

CRIMINAL INNOVATIONS

Even with the successes of Disconnect, Senior Sentinel, and hundreds of similar local law enforcement operations, telemarketing continues to thrive. Canadian authorities, in particular, have witnessed explosive growth in illegal telemarketing during the past 3 years.(5) In addition, new variations on these schemes continue to arise. Some of the most popular include recovery schemes, so-called rip-and-tear operations, and investment schemes.(6)

Since operation Disconnect, telemarketers have discovered a more insidious way of defrauding customers. Phone professionals, posing as recovery and liquidation specialists, promise customers a return of their lost monies in exchange for an additional fee that supposedly covers court costs and other legal expenses. These con artists often claim to be working hand-in-hand with law enforcement authorities and prey on the victims' ultimate desire to recoup the losses they incurred, perhaps from the very telemarketers now promising to help.

To help avoid detection, another set of telemarketers, known as rip-and-tear operators, often work out of a basement or office facility with a month-to-month lease arrangement. Their goal is to defraud as many customers in as short a time as possible with no intention of fulfilling customer orders or awarding prizes. They just take the money and run.

A new wave of sophisticated telemarketing has emerged in the fraud arena. These phone professionals claim to be investment specialists, often referring to themselves as brokers or investors and their businesses as independent sales offices, or ISOs, rather than boiler rooms. They offer highpriced investments in stocks, bonds, and new business opportunities and might go so far as to furnish prospective victims with phony registration and prospectus papers. Despite their air of professionalism, their schemes are no more legitimate than the rip-and-tear operators' ploys.

CONCLUSION

The key to combating telemarketing crimes is communication - both among law enforcement agencies and within communities. By sharing investigative and intelligence information, law enforcement at all levels can defy the interstate aspects of these crimes. For example, the Boiler Room Task Force in San Diego maintains a comprehensive tape library consisting of thousands of recorded telemarketing conversations that are available for law enforcement use. Nearly 200 recorded victim conversations are added to this collection weekly. Additionally, Federal Express, headquartered in Memphis, Tennessee, has established its own initiative against boiler rooms that use their delivery services. The cooperation and testimony of Federal Express officials in these matters has proven invaluable in bringing many of these criminals to justice.

Finally, the public, particularly the elderly population, depends on law enforcement to educate them about the pitfalls of dealing with boiler rooms and the common schemes to which they might become susceptible. Most of America's elderly population grew up in an era when trustworthiness was the norm and a person's word was his bond. They find it hard to comprehend that salespeople could lie in such a straightforward and outrageous fashion, and they are so embarrassed by their losses they find it difficult to report these crimes.

With the impact of proactive boiler room investigations and other intensified law enforcement efforts, former telemarketing hotbeds like Las Vegas, Texas, south Florida, and southern California, have seen significantly reduced illegal telemarketing activity. With cooperative efforts and a commitment to addressing the problem, law enforcement can continue to expose the hidden faces of illegal telemarketers around the world.

Endnotes

1 Operation Sunstroke, FBI, Miami Division, 1994.

2 Warren Rupp, former manager, Fifty States Distributors, interview by author.

3 Economic Crimes Unit, Financial Crimes Section, FBI Headquarters, Washington, DC.

4 Ibid.

5 National Fraud Information Center, A Project of the National Consumer's League, Washington, DC, 1996.

6 Supra note 3.

RELATED ARTICLE: Common Terms Used in the Telemarketing Trade

Dropping Mail: The process of bulkmailing promotional materials (usually award notification letters or cards), enticing potential customers to call the boiler room to claim their prize.

Lay Down: An easy sale. A customer who is so excited about the promotion, he/she is an easy target for the salesperson.

Catalog Rebuttal: A phony catalog. Many telemarketers instruct customers to send in photographs of themselves with their awards. Customers are told the pictures will be published in the telemarketing company's catalog. This rebuttal lends an air of legitimacy to the deal even though no such catalog is ever published.

In the Ether: When a salesperson is able to excite a potential customer about the awards or prizes they may have won, the customer is said to be "in the ether." The customer is then brought "out of the ether" upon hearing the actual terms and conditions associated with the winnings.

Gimme Gift: The trinket or low-value prize that all customers receive, regardless of the extravagant prizes that were promised. Typical "gimme gifts" include cheap jewelry, travel certificates, and phony artwork.

Misreps: Misrepresentations, lies, and exaggerated statements made by the salesperson to close the sale.

Mooch: A sucker. In short, the ideal customer.

Spiff: An incentive or bonus given by the company to a salesperson who has had an especially successful day on the phone.

Takeover (TO): When one salesperson passes a customer on to another sales representative to try to wear the buyer down and close the deal. The second seller is usually fresher and often will try a different tact to elicit a sale.
COPYRIGHT 1998 Federal Bureau of Investigation
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1998, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Slotter, Keith
Publication:The FBI Law Enforcement Bulletin
Date:Mar 1, 1998
Words:3691
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