Fraud
Fraud is intentional misrepresentation and has long been a major problem both for businesses and consumers. In 17th-century England, a law on oral contracts prohibited parties to a lawsuit from testifying on their own behalf. This frequently led to third parties offering false testimony about the existence of an oral CONTRACT. To reduce this problem, in 1677 Parliament enacted the Statute of Frauds, requiring written evidence before certain types of contracts would be enforced. American legislatures adopted similar rules, and today statutes of frauds vary from state to state. Most contracts covered by statutes of fraud require written evidence. Contracts for sale of real estate are the most common written agreement Americans encounter. Fraud statutes also cover executor or administrator contracts, contracts associated with marriage, and collateral contracts (in which a person promises to perform another person’s obligation). Today fraud against businesses includes a variety of misrepresentations with the intent to deceive. Employee EMBEZZLEMENT is a constant problem for businesses. Sham transactions, by which a company executive sells a PRODUCT, division, or other ASSET in order to record a PROFIT while agreeing to purchase the asset back in some future time period, is another type of fraud. Early evidence in the Enron fiasco of 2001 indicated significant use of sham transactions to boost reported earnings in order to bolster the firm’s stock price while executives were selling their shares. Bogus invoices are another serious type of fraud against businesses. Large companies are often fooled into paying what appear to be legitimate business expenses. Bogus checks, counterfeit currency, and devious contract agreements all challenge business managers. Misrepresentation in EMPLOYMENT is another problem. One sales representative courted a young woman, offering her a fantastic job with his company. Fortunately the woman was shrewd enough to contact the company’s HUMAN RESOURCES department in the company and find out that the sales rep had no authority to hire anyone. While businesses contend with a variety of frauds, criminals posing as businesses confront American consumers with numerous fraudulent representations. The FEDERAL TRADE COMMISSION has identified what they call their “Dirty Dozen” of fraudulent solicitations likely to be received by consumers by bulk mail or e-mail, including
• business-opportunity scams offering financial success with little or no effort. Often these are pyramid schemes, requiring the individual to find and sell the business opportunity to others in order to create a “downline” and profit from sales to others.
• making money by sending bulk e-mail—that is, offers to sell the consumer bulk e-mail distribution lists and products, services, or software to promote through e-mail.
• chain letters, a classic fraud received through the mail or e-mail, asking people to send money to the person on the top of the list. The recipient adds his or her name to the bottom of the list, and supposedly, when that name rises to the top, he or she will receive huge sums of money. Sometimes these solicitations include some type of information package designed to suggest that something of value is being exchanged and therefore it is not fraud.
• work-at-home schemes, which usually involve stuffing envelopes with promises of earning hundreds and even thousands of dollars per month. These are often advertised in classified ads and on signs tacked onto telephone poles. Like the old saying, “If it sounds too good to be true, it probably is too good to be true,” these solicitations prey upon the least sophisticated and usually poorest people in society.
• health and diet scams—miracle cures for every ailment that have been around for centuries. In the 19th century, tonics often included codeine and a high percentage of alcohol to numb anyone who might doubt their efficacy.
• effortless income—offers that promise ways to earn huge profits, usually from currency exchange. Charles Ponzi, after whom the PONZI SCHEME was named, promised investors a 40-percent profit on their investment in 90 days. At the time, prevailing INTEREST RATES were around 5 percent, making the Ponzi proposition very attractive to investors. Ponzi’s proposition was based on International Postal Reply Coupons, which were redeemable at fixed rates of exchange negotiated by the participating governments. However, EXCHANGE RATES for currency fluctuate. Ponzi convinced investors he would take their funds, invest in International Postal Reply Coupons in countries where the currency had depreciated significantly, and then redeem the coupons in strong-currency countries, making a significant profit. After being caught and sent to jail, Ponzi moved to Florida to sell real estate.
• free-goods offers that promise expensive products such as computers for free if one pays to join the club and get so many other people to join.
• offers for investment opportunities, which, like Ponzi schemes, promise huge returns using “scientifically proven” trading methods or inside information of some upcoming breakthrough. Like health and diet claims, these are “snake oil” schemes for an INVESTMENT portfolio.
• cable descrambler, INTERNET services, pay-per-call scams, and other communications service offers that either do not work or contain hidden clauses costing unsuspecting consumers much more than they thought.
• guaranteed LOANS or credit scams offering, for instance, home-equity loans and CREDIT CARDS to anyone regardless of credit history. One of the worst types is the PREDATORY LENDING scheme in which homeowners are conned into refinancing their MORTGAGEs with low interest rates but huge fees, leaving the homeowner (often an elderly person) with payments that cannot be sustained.
• credit repair schemes involving companies that claim they will repair someone’s credit rating with the creditrating services. Under U.S. law, consumers are allowed to request a copy of their credit-rating reports once a year for free and submit documentation refuting claims made to the reporting agency by any creditor.
• vacation prize promotions, a classic fraud that involves claims of deluxe accommodations on luxury cruise ships and other sorts of misrepresentations.
To reduce the chances of being defrauded, experts recommend the following.
• Use common sense. If it sounds too good to be true, it is probably a scam.
• Watch out for “processing fees,” whether to borrow money, register for prizes, or to receive “free” things.
• Do business with companies one knows and trusts.
• Protect financial information. One of the latest frauds is a bogus form saying it is from the INTERNAL REVENUE SERVICE, looking to update personal information.
• Scrutinize charitable solicitations. Two common frauds are sound-alike charitable organizations—i.e., the soliciting group sounds like a well-known national charity—and the use of a paid, professional solicitor, with the charity receiving only a small percentage of the donations received. After September 11, 2001, many fraudulent solicitations duped millions from well-meaning Americans.
• Avoid the classic Nigerian money order fraud, in which callers or e-mailers requests help getting money that is “theirs” but need help transferring the funds to a U.S. bank account—the consumer’s. With that account information, they liquidate the account.
A relatively new area of fraud is Internet fraud. See the INTERNET FRAUD COMPLAINT CENTER entry for discussion of this topic.
Fraud
Fraud is intentional misrepresentation and has long been a major problem both for businesses and consumers. In 17th-century England, a law on oral contracts prohibited parties to a lawsuit from testifying on their own behalf. This frequently led to third parties offering false testimony about the existence of an oral CONTRACT. To reduce this problem, in 1677 Parliament enacted the Statute of Frauds, requiring written evidence before certain types of contracts would be enforced. American legislatures adopted similar rules, and today statutes of frauds vary from state to state. Most contracts covered by statutes of fraud require written evidence. Contracts for sale of real estate are the most common written agreement Americans encounter. Fraud statutes also cover executor or administrator contracts, contracts associated with marriage, and collateral contracts (in which a person promises to perform another person’s obligation). Today fraud against businesses includes a variety of misrepresentations with the intent to deceive. Employee EMBEZZLEMENT is a constant problem for businesses. Sham transactions, by which a company executive sells a PRODUCT, division, or other ASSET in order to record a PROFIT while agreeing to purchase the asset back in some future time period, is another type of fraud. Early evidence in the Enron fiasco of 2001 indicated significant use of sham transactions to boost reported earnings in order to bolster the firm’s stock price while executives were selling their shares. Bogus invoices are another serious type of fraud against businesses. Large companies are often fooled into paying what appear to be legitimate business expenses. Bogus checks, counterfeit currency, and devious contract agreements all challenge business managers. Misrepresentation in EMPLOYMENT is another problem. One sales representative courted a young woman, offering her a fantastic job with his company. Fortunately the woman was shrewd enough to contact the company’s HUMAN RESOURCES department in the company and find out that the sales rep had no authority to hire anyone. While businesses contend with a variety of frauds, criminals posing as businesses confront American consumers with numerous fraudulent representations. The FEDERAL TRADE COMMISSION has identified what they call their “Dirty Dozen” of fraudulent solicitations likely to be received by consumers by bulk mail or e-mail, including
• business-opportunity scams offering financial success with little or no effort. Often these are pyramid schemes, requiring the individual to find and sell the business opportunity to others in order to create a “downline” and profit from sales to others.
• making money by sending bulk e-mail—that is, offers to sell the consumer bulk e-mail distribution lists and products, services, or software to promote through e-mail.
• chain letters, a classic fraud received through the mail or e-mail, asking people to send money to the person on the top of the list. The recipient adds his or her name to the bottom of the list, and supposedly, when that name rises to the top, he or she will receive huge sums of money. Sometimes these solicitations include some type of information package designed to suggest that something of value is being exchanged and therefore it is not fraud.
• work-at-home schemes, which usually involve stuffing envelopes with promises of earning hundreds and even thousands of dollars per month. These are often advertised in classified ads and on signs tacked onto telephone poles. Like the old saying, “If it sounds too good to be true, it probably is too good to be true,” these solicitations prey upon the least sophisticated and usually poorest people in society.
• health and diet scams—miracle cures for every ailment that have been around for centuries. In the 19th century, tonics often included codeine and a high percentage of alcohol to numb anyone who might doubt their efficacy.
• effortless income—offers that promise ways to earn huge profits, usually from currency exchange. Charles Ponzi, after whom the PONZI SCHEME was named, promised investors a 40-percent profit on their investment in 90 days. At the time, prevailing INTEREST RATES were around 5 percent, making the Ponzi proposition very attractive to investors. Ponzi’s proposition was based on International Postal Reply Coupons, which were redeemable at fixed rates of exchange negotiated by the participating governments. However, EXCHANGE RATES for currency fluctuate. Ponzi convinced investors he would take their funds, invest in International Postal Reply Coupons in countries where the currency had depreciated significantly, and then redeem the coupons in strong-currency countries, making a significant profit. After being caught and sent to jail, Ponzi moved to Florida to sell real estate.
• free-goods offers that promise expensive products such as computers for free if one pays to join the club and get so many other people to join.
• offers for investment opportunities, which, like Ponzi schemes, promise huge returns using “scientifically proven” trading methods or inside information of some upcoming breakthrough. Like health and diet claims, these are “snake oil” schemes for an INVESTMENT portfolio.
• cable descrambler, INTERNET services, pay-per-call scams, and other communications service offers that either do not work or contain hidden clauses costing unsuspecting consumers much more than they thought.
• guaranteed LOANS or credit scams offering, for instance, home-equity loans and CREDIT CARDS to anyone regardless of credit history. One of the worst types is the PREDATORY LENDING scheme in which homeowners are conned into refinancing their MORTGAGEs with low interest rates but huge fees, leaving the homeowner (often an elderly person) with payments that cannot be sustained.
• credit repair schemes involving companies that claim they will repair someone’s credit rating with the creditrating services. Under U.S. law, consumers are allowed to request a copy of their credit-rating reports once a year for free and submit documentation refuting claims made to the reporting agency by any creditor.
• vacation prize promotions, a classic fraud that involves claims of deluxe accommodations on luxury cruise ships and other sorts of misrepresentations.
To reduce the chances of being defrauded, experts recommend the following.
• Use common sense. If it sounds too good to be true, it is probably a scam.
• Watch out for “processing fees,” whether to borrow money, register for prizes, or to receive “free” things.
• Do business with companies one knows and trusts.
• Protect financial information. One of the latest frauds is a bogus form saying it is from the INTERNAL REVENUE SERVICE, looking to update personal information.
• Scrutinize charitable solicitations. Two common frauds are sound-alike charitable organizations—i.e., the soliciting group sounds like a well-known national charity—and the use of a paid, professional solicitor, with the charity receiving only a small percentage of the donations received. After September 11, 2001, many fraudulent solicitations duped millions from well-meaning Americans.
• Avoid the classic Nigerian money order fraud, in which callers or e-mailers requests help getting money that is “theirs” but need help transferring the funds to a U.S. bank account—the consumer’s. With that account information, they liquidate the account.
A relatively new area of fraud is Internet fraud. See the INTERNET FRAUD COMPLAINT CENTER entry for discussion of this topic.