Consumer fraud

SIGNIFICANCE: There are many ways that consumers can fall victim to fraud by corporations and individuals. The financial cost of such crimes to the United States as a whole is immeasurable.

Consumer fraud takes many forms. Consumers fall victim to fraudulent acts such as false advertising, telemarketing and Internet scams, price gouging, chiseling, investment fraud, and many others. Such crimes are so prolific it is impossible accurately to estimate the total number of victims and costs to consumers. “Let the buyer beware” is a fundamental principle within a capitalistic economy. This assumption lends itself to consumer fraud by shifting responsibility from sellers, producers, and providers of goods and services to the consumers. Consumers should naturally be leery of products or services that seem too good to be true. Failing to distrust corporations and businesspersons, believing their claims to be true, is too often viewed as irresponsibility on the part of the consumer rather than victimization.

False Advertising and Bait and Switch Techniques

Goods and services are advertised almost everywhere. Television, magazines, billboards, sides of buses, and even park benches are sites of advertisements used to entice consumers to try new products, services, and companies. Consumers are bombarded with information intended to entice them into spending money. Using deceitful means or misrepresentations of facts to get people to buy particular products and services is the essence of fraud.

Consumers cannot make informed decisions about how to spend their money when the information they are given is untrue or misleading. For example, actors dressed in white laboratory coats are often used in television commercials. The professional-looking attire of the actors gives them the appearance of medical professionals making claims about the quality of products. Audiences may be more inclined to believe the claims made in the commercials because they assume that the persons presenting them are experts.

Similarly, celebrity endorsements can sway consumers’ purchasing decisions because people are often willing to trust the word of well-known individuals. It has only been since the 1990s that the Federal Trade Commission has required celebrity endorsers to base their remarks in commercials on their own personal findings or experiences with products. Before this requirement was instituted, celebrities were free to endorse products and services without any firsthand knowledge of their quality. Sellers occasionally included disclaimers within the fine print of their products’ packaging. Such disclaimers were both easy to overlook and often difficult to understand, but their mere existence left victimized consumers with little or no legal recourse if they found that their purchases did not match up to the claims made in endorsements.

Another fraudulent technique used by sellers is known as “bait and switch.” The “bait” is typically an exceptionally low-priced product or service designed to lure customers. The appeal of the bait is short-lived, however. Once customers are in the place of business, they are encouraged to purchase different and more expensive or more profitable goods or services—hence the “switch.” Sellers lure consumers in with little intention of actually selling the advertised bait to them. The products are advertised only to draw in customers who might buy different goods or services. Sellers generally do carry limited quantities of the advertised bait, but it usually sells out quickly or may be of such poor quality that customers are easily talked into buying something else.

Chiseling and Price Gouging

A second sales technique used to defraud consumers is chiseling, a systematic means of taking money from consumers, typically without their knowledge. Chiseling takes a variety of forms, such as scales calibrated to over-weigh products such as meat and produce sold by retailers, gas pumps calibrated to over-measure the quantities of fuel dispensed, and phone calls that are charged to the nearest whole minute. Consumers are often unaware they are being overcharged because the overcharge amounts are too small to be detected without special tools. However, the cumulative profits that can be generated from chiseling techniques can be substantial. Regardless of how small the overcharges are, consumers are ultimately defrauded by paying for goods or services they do not receive.

An equally sinister means of defrauding consumers is through the practice of price gouging. Price gouging occurs when sellers take advantage of emergency situations, such as gas shortages, to inflate prices for their goods and services. The threat of a shortage of a product or the increased need of a product might result in inflated prices and is in essence “gouging” the consumer. In times of natural disasters, for example, opportunistic sellers may inflate prices for emergency items. A bag of ice that normally sells for one dollar might instead go for three to five times as much.

Rumors of shortages of “must have” products, such as popular children’s toys, often drive up prices for consumers. The examples are endless, but the outcomes are the same. Consumers are forced to pay higher prices for goods or services, often in times of crisis, fear, or disadvantage. The poor are often especially vulnerable to price gouging because of their lack of purchasing options. As a result, the poor often pay much higher prices for the same goods and services that the rich buy for less.

Another aspect of price gouging is the practice of selling “knockoff” products—inferior goods designed to look like high-quality products, such as designer clothes. Consumers are often aware when they are purchasing knockoff products because of where they buy them. For example, an open-air flea market is an unlikely place to buy a genuine designer product. However, when consumers are unaware that the items they are purchasing are not genuine, they are victims of fraud.

Investment Frauds

Named after its most notorious perpetrator, Charles Ponzi, Ponzi schemes are fraudulent investment schemes that promise to return high profits to investors but are actually only methods of funding lavish lifestyles for their originators. The promise of high returns on an investment is appealing to consumers. Initial investors in Ponzi schemes often receive returns, which make the offers more appealing to later investors. However, the returns the initial investors receive are simply the money paid into the schemes by new investors. The schemes work as long as investors receive returns, but they never pay at the levels promised.

Pyramid schemes are closely related to Ponzi schemes. Consumers are promised large returns by purchasing or selling goods or services and bringing additional investors into the businesses. The schemes are pyramid-shaped, with the initial investors at the top. As in a real pyramid, each lower level of investors must be larger. Each level makes its profits from the investments of the lower levels; the more levels below, the more return an investor receives. Eventually, however, the scheme collapses when no new investors come in, and the most recent participants receive no return at all on their investments.

Consumers are defrauded out of billions of dollars each year through investment fraud. Low-priced penny stocks are offered to investors with misrepresentations about their money-making potentials. Investment insiders inflate the prices of the stocks only long enough to sell their own shares when the market prices reach their peak. These investors make large amounts of money, while outsiders lose money.

Fraudulent investment firms, often called “boiler rooms,” make phone calls to unsuspecting investors telling them about “hot” stocks that will make them rich if they invest immediately. Brokers often make false claims about the stocks, their ability to make money for investors, and the inside information they have about the stocks. The investment firms profit from both the sales of the worthless stock and from the commissions they receive on the sales.

Telemarketing Scams

Smooth-talking telemarketers bilk billions of dollars from the unsuspecting public. Their offers are often too good to pass up. Good telemarketers quickly develop such trust with their customers that they can persuade them to pay for goods and services before they are received, even though the goods may never materialize or be of inferior quality.

Telemarketers often use travel scams and time-share vacation packages as their hooks. A typical travel scam works by informing consumers of “prizes” they have won. The prizes are typically expensive vacations to wonderful locations. However, in order to claim their prizes, the consumers must first purchase memberships in travel clubs or pay service fees. After the consumers pay the required fees, the vacation packages they receive often have so many restrictions placed that they are virtually impossible to use. The consumers are then left with little legal recourse because the vacation packages have been provided. Even when consumers do use the vacation vouchers, they often find that the quality of their vacations has been grossly misrepresented.

Similarly, time-share vacations are a lucrative and common type of scam. Consumers are again informed about the “no further obligation” prize(s) they have won and can claim if they attend an information session. The consumer is met with high-pressure sales people trying to sell them membership in the time-share. The prize they won rarely comes to fruition.

Bibliography

"As Nationwide Fraud Losses Top $10 Billion in 2023, FTC Steps Up Efforts to Protect the Public." Federal Trade Commission, 9 Feb. 2024, www.ftc.gov/news-events/news/press-releases/2024/02/nationwide-fraud-losses-top-10-billion-2023-ftc-steps-efforts-protect-public. Accessed 25 June 2024.

Lewis, Cora and Adriana Morga. "People Are Losing More to Scammers Than Ever Before. Here's How to Keep Yourself Safe." Associated Press, 7 Aug. 2023, apnews.com/article/scams-phishing-robocalls-facebook-marketplace-291255fc54f4bef161cb6155af562d96. Accessed 25 June 2024.

Rosoff, Stephen, Henry Pontell, and Robert Tillman. Looting America: Greed, Corruption, Villains, and Victims. Upper Saddle River, N.J.: Prentice Hall, 2003. Includes discussions and examples of a wide variety of fraudulent crimes and their impact on victims.

‗‗‗‗‗‗‗‗‗‗‗‗. Profit Without Honor: White-Collar Crime and the Looting of America. Upper Saddle River, N.J.: Prentice Hall, 2002. Critical evaluation of corporate criminals as well as government wrongdoing and the public’s perceptions of such crimes.

Simon, David. Elite Deviance. Boston: Allyn & Bacon, 2002. Examination of various deviant and criminal acts performed by corporations and the impact such behaviors have individually and collectively.

Swierczynski, Duane. Complete Idiots Guide to Frauds, Scams, and Cons. Indianapolis, Ind.: Alpha Books, 2003. Popular guide to the elements of confidence games that includes a typology of con men and illustrations of the most common scams and frauds.

Wells, Joseph. Corporate Fraud Handbook: Prevention and Detection. Hoboken, N.J.: John Wiley & Sons, 2004. Examines an array of fraudulent schemes and provides insight on prevention and detection.