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Re: Scam of the day
Chapman, Spira & Carson - Disscusion

From: National Consumers League, NFIC (National Fraud Information Center) . Cyberspace Fraud
Date: 4/26/99
Time: 8:15:27 AM
Remote User:

Comments

The NFIC and the IRS kind of did a joint job on this issue. They became concerned about fraud on Internet and Phillip C. McKee, III gave this address. We think you will find it interesting as you will their site. This organization did much to correct and advertise fraudulent practices over the years.

INTERNET SPECIAL ALERT

Remarks by Phillip C. McKee, III Internet Fraud Watch Coordinator to the National Trust Conference Public Awareness Day Sponsored by the Internal Revenue Service January 14, 1998 One hundred years ago next year, the National Consumers League was formed as America's first nonprofit consumer group. At that time, the League was at the forefront of the consumer movement fighting overcrowded working conditions, unsanitary food handling procedures, and other market and workplace abuses. NCL is still leading the charge to protect the American consumer. One of the many threats facing consumers today is fraud. Criminals attempt to raid the pockets of consumers over the phone, through the mail, in person and over the Internet.

To fight this growing threat, the National Consumers League founded the National Fraud Information Center in 1992. NFIC was intended to fight telemarketing fraud through prevention and by improving the enforcement capabilities of federal and state agencies. We run a national 800# hotline where consumers can call to ask questions and report cases of fraud. That number is 1-800-876-7060. Consumers all across the U.S. and Canada now know to call NFIC before sending their money. We handle on average 350 calls a day at the NFIC phone center. Of these, approximately 65% are consumers getting help before they lose their money. Unfortunately, the remaining 35% are consumers who have already lost money to scam artists. But we can still help them. Our telephone counselors can assist English or Spanish speaking consumers by taking a full report of what happened, including all the information a law enforcement agency would need. This report is entered into our computer system and uploaded to the Federal Trade Commission's/National Association of Attorneys General's fraud database. It is also faxed out on a real time basis to any of more than 160 law enforcement agencies whose interests match the report. We also can fulfill special information requests from federal, state and local law enforcement agencies. NFIC works closely with authorities in both the US and Canada to ensure that all cases of fraud reported to us are referred to the appropriate agents.

In early 1996 the National Consumers League decided to expand its efforts to cover scams in cyberspace. Thus was born both the NFIC website and the Internet Fraud Watch project. With the creation of www.fraud.org, consumers from all across the globe can get tips on how to avoid scams or can report fraud through our online forms 24 hours a day, 7 days a week. Fraud.org receives over 60,000 visits and over 1300 e-mails per week from consumers all across the globe. Internet Fraud Watch compliments the efforts of the National Fraud Information Center by performing the same prevention and reporting functions for Internet based fraud as NFIC does for telemarketing. IFW uses the same 800# and website as NFIC, allowing consumers and law enforcement one call or URL for all the information they need on telemarketing or Internet fraud.

While many of the scams found online are simply revised versions of tried and true telemarketing or mail frauds, the Internet itself creates a whole new set of problems for law enforcement and opportunities for criminals. There are millions of people online, with thousands of new users every day. Each one of these consumers is a potential victim. Once online, consumers are bombarded with unsolicited commercial e-mail (spam) advertising everything from legitimate services to fraudulent investment schemes. Websites abound offering both legitimate and fraudulent products and services. Consumers often find it difficult to determine which site is truly legitimate and which one is trying to steal their hard earned cash. Internet Fraud Watch and other groups attempt to educate consumers on how to spot a scam, but plenty of people find out too late.

Of particular interest here are fraudulent offshore trusts marketed over the Internet as a means to evade taxation. Not only have countless consumers received unsolicited e-mails advertising such services, but many more are also out searching on their own for a way to avoid paying taxes. Attempting to avoid taxes is almost as much an annual American past time as is the world series. But unlike baseball, tax evasion is an illegal preoccupation. Especially at this time of year, thousands of Americans are looking for ways to avoid paying taxes the next time Uncle Sam comes calling. And for those that want to find ways to avoid taxes, the Internet is a perfect resource.

Do a search on the phrase "tax evasion" in one of the most comprehensive Internet search tools, Hotbot, and you'll get a list of 19,800 places on the Internet. In truth, some of those sites are legitimate agencies warning consumers about the illegality of tax evasion, but the vast majority are offering some tax evasion scheme or another for sale. A search of newsgroup postings using DejaNews finds 7109 newsgroup articles posted within the last two years selling tax evasion schemes. If you know exactly what you want and search for the words, "offshore," "bank," and "trust," then you'll find 12,159 different sites discussing the use of offshore trusts to avoid taxes. Once again, many are warning against the practice but most are promoting it. DejaNews has 4045 newsgroup articles since 1995 selling offshore trusts. And that's not counting all of the unsolicited e-mails offering offshore trusts to consumers. Clearly, if a consumer wants information on how to use an offshore trust to evade taxes, that information is there for the taking.

There are several different schemes offered to consumers online. The most basic is a simple offshore trust. The company claims that if a consumer pays the company a fee, then the company will set up an offshore trust to which the consumer will transfer all assets and thereby avoid all taxes on any income or use derived from those assets. There are several problems with this scheme. Many consumers find that the companies never set up the trusts in the first place. Some companies will set up the trusts but then place themselves as the beneficiaries instead of the consumer. When the consumer does the asset transfer, all of his/her hard earned money and property is now owned by the company and is forever lost. And finally, even if the company does set up the trust and the consumer is able to transfer ownership but maintain control of the assets, as long as the consumer still derives use from the assets under IRS regulations the consumer still owes taxes. Not only is the consumer paying money for a service that is useless, but he or she is breaking US law in the process by attempting to evade taxes.

Another, more complex and more common variation involves the combination of a pyramid scam, fake credit card issuer scam, and the offshore trust scam. In this case a consumer purchases a "banking center." This center comes complete with an offshore trust which acts as a security for an secured credit card. The consumer is then called a distributor and entitled to recruit new members and sell them "business centers." A portion of the profit from each business center sold is then deposited in the vending consumer's trust. The income is paid to the trust, not directly to the consumer. The perpetrators of this scam tell consumers that once they begin selling centers they can use their credit cards to cover personal expenses and never pay the bills. The charges will be paid off automatically by money deducted from the security - in other words the consumer gets to use the money deposited in the trust without being the official recipient of the income. The scam artists claim that this is how to avoid taxes. The dream promoted by the crooks is that a consumer will be able to make a living by selling centers and won't have to do any other work at all. And of course, the crooks encourage their victims to transfer other assets into the trusts as well.

The problems with this scenario are legion. First, as with any other pyramid scheme, sooner or later it has to collapse. Since money is supposed to be made by selling centers, and there are a finite number of centers that can possibly be sold, there will wind up being a substantial number of people who are unable to recoup their original investment. The second problem is the trust itself. Many victims find that they've paid their fees but the company doesn't set up a trust at all. The crooks simply take the money and run. Even if a trust is set up, the issuance of the credit card is often a problem. Once the victims have paid their several thousand dollar fee, many find that they've got a trust but the bank won't issue them a credit card. They find that they cannot reach their supposedly hidden assets. And of course, this scheme has the same problem as the first; since the consumer still derives full use from the assets, in the eyes of the government taxes are still owed by the consumer.

Many times these scams are marketed not just as a way a savvy investor can avoid paying taxes. The offers are cloaked in the rhetoric of the extreme right. Websites of this type usually start off with page after page of spurious logic trying to prove that the U.S. government has no legal right to levy taxes on its citizens. Sometimes they provide poor legal reasoning that attempts to prove it is possible to opt out of the current tax system. They use lines appealing to patriotism or the original spirit of the constitution. Often times the sites refer to the watershed moments in the extremist movement - Waco, Ruby Ridge, etc.. The scam artists themselves are not freemen or militia members. Usually they don't believe in that ideology at all. They simply know that the type of person who does believe is a perfect target for a scam promising to protect assets from a supposedly "criminal" government. And a con artist never passes up a gullible mark. These consumers often won't talk to the government but they will report to us. They shy away from a .gov domain name, but a .org is a friend.

As you can tell, a whole list of agencies could theoretically bring cases against the operators of these scams. Of course, there's the Internal Revenue Service and Department of Justice, as mentioned by Mr. Wilson of the IRS. The FTC could file charges for deceptive marketing and for running illegal pyramid schemes. The State Attorneys General can also bring similar charges. Moreover, the perpetrators can be prosecuted for unauthorized practice of law if they purport to perform legal services. Since usually these schemes involve soliciting deposits for an offshore bank, if that bank isn't registered with the state banking regulators, then they usually can also file charges. So, theoretically, there could be several different investigators all spending their energy on the same case, covering the same information and filing suits against the same company. In such a situation there is a definite need for cooperation.

Our NFIC and IFW programs can help. When consumers have reported scams to us either over the phones or through our website, we then make sure that any agency which has requested information on that topic gets it. If any agency asks for a special search for such information we happily provide it, through there may be a research fee in some instances. However, there is one question we hear over and over - a question we can't answer. "Who else is investigating this company?" Most agencies don't tell us if they've decided to launch an investigation. We simply know that the information was faxed to them. We can't tell if the report is being investigated or if the report was thrown away. Usually the first time we are alerted is when a press release is issued announcing that charges were filed or settled. Obviously, if the question is being asked, knowing if another agency is working the same case would be of use to an investigator.

Cooperation during these investigations allows for better use of resources. Some agencies are simply better set up to do certain types of work. If agencies are working together, they can maximize efficiency by sharing findings and concentrating on what they do best. However, such cooperation requires communication. Especially when the scams fall into so many people's territories, communication is absolutely essential. Many agencies cannot to reveal to the general public that they are investigating a company. There are also some legal constraints on sharing information between agencies in the U.S. and other countries. But some states have public reporting laws that require them to release such information. The representative from the Florida Attorney General's office mentioned that such is the case in his state. It is even possible to search the current investigations of that office through their website. To shut down these scams before too many consumers are lured into perpetrating tax evasion, agencies must communicate amongst themselves and cooperate in investigations where possible.

As an information clearinghouse for consumer reports on fraud, NFIC and IFW could be invaluable assets in that communication. Our existing systems could be modified to better facilitate communication and coordination. But before any of that can happen, representatives from law enforcement agencies must sit down with each other and with representatives of NFIC/IFW to lay a foundation for greater cooperation.

Reciprocal links on websites and mentions in each other's publications are a good start. As mentioned earlier by another speaker, it's also useful to publicize each other's actions. Even if a judgment or settlement against a company only effects consumers in one state, the simple presence of a settlement often is enough to dissuade consumers in another state. For example, recently Oregon took action against the makers of "The Laundry Solution." This product was marketed as being able clean laundry without using detergents. After testing the product, the Oregon Department of Justice found it could not perform as advertised. They forced the manufacturer and distributor to stop selling the product in Oregon and to provide money for consumer refunds. Now, that settlement does not apply to consumers in other parts of the country. But, when consumers in other states hear about it they ask, "If it's not good enough for someone in Oregon, why is it good enough for me?"

We also need help from the public to sustain our services. In 1996, an AARP poll of senior citizens found that NFIC had a 25% name recognition. Our phone number is printed repeatedly in articles all across the country. Our website has been promoted in magazines, TV shows, and newspapers not just in North America, but also in Europe and Asia. Many consumers have gotten the message to call us. But we need more counselors to handle the increasing demand for advice and reporting fraud. If NFIC/IFW is going to continue to serve as the primary data source for the FTC/NAAG database and if we are going to continue to provide our fax alert service to law enforcement, then we need to supplement the donations we receive from corporations - which don't cover our operating costs. Law enforcement agencies can help by directing part of settlement funds to our NFIC/IFW programs.

The problem of offshore trusts is not just a problem of non-compliance with tax codes. It is a problem of consumer fraud. Consumers are being fooled into thinking that what they are doing is actually legal. And often times the promised services are never even provided, or they are provided in a form that is useless even as a means to evade taxation. The solution is not simply greater enforcement of tax codes in relation to individual trust owners. The solution involves a larger cooperation of federal and state law enforcement agencies and consumer groups such as NCL's National Fraud Information Center and Internet Fraud Watch projects. We must educate consumers about the illegality of these schemes. We must communicate to ensure that everyone in the law enforcement community who needs information, gets that information. We must cooperate so that the most effective tools at each agency's disposal are used in a coordinated attack that stops the vendors of these schemes in their tracks and helps bring individual taxpayers into compliance. The solution involves the government, consumer groups and consumers.

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