Local companies victimized by toll-fraud bandits.

Epidemic spurs growth of fraud-prevention industry

Businesses nationwide are getting clipped for between $1 billion and $1.5 billion a year by "toll fraud bandits" who illegally obtain companies' long-distance access codes and then sell the codes to unscrupulous customers, especially Latin American drug dealers and Middle Eastern weapons dealers, telecommunications experts said.

As a result, consultants who monitor business phones and teach businesses to guard against toll fraud have become plentiful in Los Angeles County. Also, several companies are marketing sophisticated fraud-prevention systems to local businesses.

"Companies that have their own telephone systems are particularly vulnerable to toll fraud because long distance carriers such as AT&T, Sprint and MCI do not accept responsibility for fraud that takes place on a customer's PBX," said Susan Saldibar, a spokeswoman for Pasadena-based AAC Corp., a company that helps businesses discover and eliminate toll fraud.

PBXs, or private branch exchanges, let businesses route calls from many extensions into a few outside lines. Bandits who tap into such exchanges can have a field day, at the company's expense.

The proliferation of toll fraud has caused a rift in relations between long-distance carriers and some of their business clients that have their own exchanges. Since the long distance carriers only transport phone signals from the PBX to the dialed number, they say they are not responsible for any of the fraud. But a growing number of businesses victimized by toll fraud are insisting that, if long-distance companies can take businesses' money for placing the calls, then the long distance companies should help monitor toll fraud.

The cost of monitoring toll fraud, while usually far less than the amount being lost to toll-fraud bandits, is not inexpensive. Businesses with PBXs typically pay several hundred dollars a month for access to accounts of long distance records made from each extension in their PBX. And such businesses pay up to thousands of dollars per month if they desire a full-time PBX monitor.

But the savings derived from installing such monitoring mechanisms often makes monitoring well worth the cost. A single long-distance bandit armed with a speed dialer can access a PBX as soon as he is transferred into voice mail. Once in voice mail, the bandit can put his speed dialer to work, feeding different codes to the PBX until he finds the one that works. Some speed dialers can break a four-digit authorization code in as little as two hours, said experts.

Once the bandits crack the long distance authorization codes, they sell those codes for hundreds, even thousands of dollars to customers who either are conducting illegal sales over the phone or who just do not like paying full price for long-distance service, said telecommunications experts.

Bandits, besides using speed dialers, have also been known to rip off authorization codes by rummaging through trash dumpsters for notes on which the codes might have been written and spying on individuals using their calling cards at public telephones to get telephone numbers and their four-digit personal identification numbers, said telecommunications experts.

Businesses that have 800 numbers are particularly vulnerable to such bandits, who are also known as "hackers," said Ken Barbero, supervisor of telephone services for the Southern California business unit of KPMG Peat Marwick, a Big Six accounting firm.

Once a hacker breaks the access code for the 800 number, he can illegally charge thousands of dollars in calls in one day without being noticed because the numbers get such a high rate of use anyway, said telecommunications experts. But the people tying up the line will be the hacker's customers, not customers of the business that pays for the 800 line.

Barbero's responsibility is to prevent toll fraud at Peat Marwick, which he said has been victimized by the long distance bandits. Barbero, for security reasons, would not discuss Peat Marwick's system in detail.

But he did say that the system, no matter how good, always seems to come up short. "No matter how quickly new hardware and software is developed to safeguard against unauthorized use of the number, the hackers will find a way to bypass it," Barbero lamented.

Besides speed dialers and other types of "hackers," the other major type of toll-fraud bandit that Barbero and his fellow phone security personnel must ferret out is the "hot house" operator.

This is a person who moves into an apartment or house, and sets up an actual account with the phone company, often under an assumed name.

The hot house operator then contracts with "clients," who make long-distance calls, and the hot house operator charges those clients less that the typical long-distance service charges. Then, when the bill comes, the 'hot house' operator packs up and disappears.

In some cases, hot house operators, before closing up shop and moving on, sell the numbers to legitimate customers who are duped into thinking that the "hot house" operation is legitimate.

The question of who is responsible for covering the costs of toll fraud remains open to debate, and several cases addressing this question will likely hit the courts in the months to come, experts said.

One such case involves Newport Beach-based Pacific Mutual Life Insurance Co., which has been fighting New York City-based ITT Corp. in court for three years over who should pay $130,000 for 8,500 unauthorized calls placed on one of the insurer's telephone lines over a 16-day period in December 1989. That case is scheduled to be settled some time this month, said Pacific Mutual attorney Steve Brown.

"The hackers hooked into a Pacific Mutual 800 number in New York City," he said.

Ironically, one of the largest victims of toll fraud in California is San Francisco-based Pacific Bell, which provides local calls for 11.2 million customers in California, said Patsy Ramos, a San Ramon-based spokeswoman for Pacific Bell's centralized fraud bureau.

"We had 2,000 cases of fraud by subscribers in the last six months; 1,500 of them were in Los Angeles County," Ramos said.

Subscription fraud, another name for "hot house" operations, alone costs Pacific Bell $1 million per month, Ramos estimated.

At the heart of the most-effective fraud monitoring systems is a daily review of long distance telephone calls, said AAC's Saldibar. Some companies have a staffer who continuously monitors long distance call activity on a computer, she added.

By conducting such reviews, abnormal use patterns can be quickly identified and action taken to block access to the number, Saldibar said.

So serious is the potential liability for unauthorized use of large organizations' telephone systems that AAC is engineering a nationwide toll fraud early warning system for the Blue Cross & Blue Shield Association in cooperation with AT&T and MCI, the health care insurance company's two long-distance carriers.

AAC's telephone fraud system monitors calls made from all 100,000 telephone numbers in the Blue Cross/Blue Shield network, said Warren Luebking, a Blue Cross/Blue Shield telecommunications consultant.

Luebking thinks long distance fraud is more widespread than most businesses realize; that "Any major company who tells you they do not have a toll fraud problem is ignoring it."

Representatives from AAC and its competitors, such as West Los Angeles-based Ear Communications, offer auditing services to quickly spot fraudulent use of clients' telephone lines.

But the long-distance fraud busters have become so numerous that in some cases, in order to win coveted corporate accounts, they under-bid the jobs by excluding important software needed to effectively monitor long-distance calls, said Steve Blurton, a senior technician with Ear Communications.

Instituting specific phone procedures, in addition to buying anti-fraud hardware and software, seems to be one of the best ways to prevent unauthorized use of long distance telephone accounts, said Linda Bonniksen, a Los Angeles-based spokeswoman for Pacific Bell. Bonniksen said Pacific Bell can install a feature into business phone systems that automatically shut down a telephone number if there is an abnormally heavy amount of long distance use.

Consultants also suggested that long distance customers use authorization codes of more than four digits. Longer codes are much harder for bandit spies to remember and, as a result, harder for bandits to swipe.