Telephone fraud

SIGNIFICANCE: Because telecommunications have become integral parts of modern personal and professional life, the impact on victims of frauds and crimes that use telephones is similar to violations of trust and personal space.

Telephone fraud takes a variety of forms. One of the most common forms, telemarketing fraud, is the use of telephones to deceive people with false or misleading information to persuade them to make purchases or investments. Closely related to this is the use of telephones in the furtherance or commission of crimes. Other forms include the theft of telephone service and defrauding telephone customers.

Telemarketing Fraud

Telemarketing fraud involves lies, misrepresentations, intentional perversions of the truth, and other deliberate deceptions practiced for the purpose of gaining unfair advantages or injuring the rights or interests of others or providing unauthorized benefits to the initiators of frauds. Lying is an essential component of telephone fraud; without it, a telephone communication may constitute nothing worse than mere abuse. Moreover, the lies themselves must involve present or past facts; false claims about the future cannot constitute fraud. The lies must also be material or important to the parties making decisions, such as purchasing or investment decisions. Opinions do not constitute lies, unless those expressing them claim to have superior knowledge or state them as fact.

For an act to constitute fraud, three elements must be present. The first is the intention to make another party rely on the lie to change its position in a transaction. If the lie serves only to protect the liar’s ego or reputation, an intention to defraud may not exist. Also, if the liar does not know that the statement is false, the lie may constitute only an innocent misrepresentation and not fraud.

A second requirement is that the party hearing the lie must actually and justifiably rely on it in making a decision. If decision that is made would have been the same, without the lie, the lie might not be fraud. Also, if the lie is not meant to be believed, it might not be fraud. For example, a salesman’s puffery or exaggerated claims might not be fraud. If the party has reason to be suspicious of the claim, there might not be reliance. There is an obligation for the party to investigate or inquire about a suspicious claim.

A final requirement for considering a lie to be fraud is that monetary damage must result. If the lie merely causes hurt feelings or results in a decision with no monetary value—such as adopting a philosophical belief—the lie might not be fraud. The party must show a causal relationship between the lie and the damages suffered.

Other types of telemarketing fraud include promissory fraud, which involves promises that are made with no intention of keeping them, and negligent misrepresentation—assertions made as facts by persons who have no reason to believe their assertions are true. Specific telemarketing tactics and schemes include bait and switch, home improvement and repair scams, confidence tricks, false advertising, identity theft, prize offers in exchange for money or identity information, false billings, selling of products of spurious use, creating false companies or charitable organizations, and securities trading and investment schemes.

Telephone Service Frauds

Another broad form of telephone fraud is telephone service fraud, which may be practiced both by and on telephone service providers. An example of a service fraud perpetrated on telephone customers is “cramming”—charging customers for services they either do not receive or do not request, such as voice mail, paging, and Internet access.

Most service frauds are perpetrated by telephone users. For example, “phone phreaking” is the stealing of long-distance telephone services by manipulating the electronic dial tones, codes, or electronic signals used by telephone systems. Other methods of tampering with equipment or installing unauthorized equipment may also constitute service fraud, as does tapping into business private branch exchange (PBX) lines.

Some schemes affect third parties, such as the use of false identities or counterfeit credit cards over the telephone to receive services. Yet another of the many variations of service fraud is placing calls and transferring their charges to unsuspecting third parties by use of captured telephone numbers and stolen identities.

Telephone fraud can be a federal offense. The United States Code defines “wire fraud” as the use of interstate wire communications to carry out schemes to defraud. Violations of that law need involve no more than the devising, or intent to devise, schemes that involve, at least in part, some sound or voice transmission being wired in interstate commerce. Wire fraud includes telemarketing schemes but also extends to making false insurance claims over the telephone or plotting crimes.

Prevalence

Telephone fraud has existed almost as long as telephones themselves. Telephone service fraud was especially common during the 1960s and 1970s, when the high costs of long-distance services prompted the development of schemes to steal telephone service. During the early 1970s, a magazine called Youth International Party Line even published articles explaining how to steal service. Since that time, advances in telephone technology have made stealing service much more difficult.

The U.S. Congress has estimated that telemarketing fraud costs American consumers about forty billion dollars per year. A nonprofit consumer organization called the Alliance Against Fraud in Telemarketing, which formed in 1989, has claimed that one in every six private telephone users is cheated by telemarketers each year. Billing World magazine has estimated that up to 10 percent of telephone company revenue is lost to subscription fraud and other scams, some as simple as service subscribers signing up with fake names. The impact of telephone use to further other kinds of criminal schemes is inestimable.

Investigation

Telecommunication frauds are difficult to investigate and prosecute, but efforts to do so are necessary to protect telephone users, especially the most vulnerable citizens, including the elderly, less educated, and mentally challenged. However, all telephone users are vulnerable to the messages and practices of telephone fraud.

Telemarketing and telephone service fraud is investigated by the offices of state attorneys general, the Federal Communications Commission, and the Federal Trade Commission. Most investigations are undertaken in response to complaints of victims, who may also sue perpetrators of fraud for damages in civil court and conduct private investigations.

Telephone service providers use electronic equipment designed to detect ringback tones and changes in phone line power levels that may reveal illegal uses of telephone services. Telephone companies also respond to complaints from telephone users and investigate accused customers. Law enforcement uses wiretaps and electronic surveillance to pursue wire fraud.

Prosecution and Punishment

The Telephone Consumer Protection Act of 1991 and Federal Trade Commission Telemarketing Sales Rule of 1994 require telemarketers to identify themselves to the people whom they call and to disclose the purpose of their calls. Telemarketers are also required to disclose the full costs of payment agreements they offer and are prohibited from making misrepresentations. They are further required to respect consumer do-not-call lists, limit the hours during which they make calls, limit their use of automatic dialing systems and pre-recorded messages, and not send unsolicited advertising messages by fax. The National Do Not Call Registry fines businesses that initiate calls to registered telephone numbers, unless the businesses can show they have already established a business relationship with the phone owner whom they call. Registered charitable organizations, professional poll takers, and representatives of political campaigns are exempt from registry rules. Some state registries include businesses such as real estate, insurance, and newspapers in lists of exempted callers.

Penalties for telemarketing and telephone service fraud take into account the seriousness of the individual offenses. Frauds for small amounts—less than five hundred dollars—may be prosecuted as class A misdemeanors. Frauds for larger amounts may rise to class C felonies, which are punishable by fine and up to five years in prison.

In addition to being a criminal offense, fraud is also a tort in civil law, which means that its victims can recover damages from offenders. Victims may receive out-of-pocket costs, which are the differences between fair market prices for goods or services and the prices charged in fraudulent contracts. This measure is used in property and real estate fraud. Victims can receive benefit-to-bargain costs, which are the differences between the values of what has been promised and the value actually received. This is the measure used in service fraud and cases in which there are fiduciary relationships that obligate the liars to protect their victims, such as real estate agents and home buyers. Victims may also recover some of the costs of their litigation and, only occasionally, damages for emotional distress.

Wire fraud offenses are often attached to more serious criminal offenses. Such offenses may raise the penalties for the criminal acts that involve interstate wire communications.

Bibliography

Ayres, Ian, and Gregory Klass. Insincere Promises: The Law of Misrepresented Intent. New Haven, Conn.: Yale University Press, 2005. Detailed discussion of promises, lies, and misrepresentations of fact.

"Cell Phone Fraud." Federal Communications Commission, 17 Nov. 2023, www.fcc.gov/consumers/guides/cell-phone-fraud. Accessed 11 July 2024.

Champion, Fred. America’s Guide to Fraud Prevention. New York: Kroshka Books, 1997. Practical handbook offering advice on how to avoid becoming a victim of corrupt practices, fraud, and deceptive advertising in areas including telephone sales and telemarketing.

Corwall, Agnes S., ed. Telecommunications: Issues in Focus. New York: Nova Science Publishers, 2002. Discussions of issues of the future, including billing, telemarketing, and law-enforcement surveillance.

Dunn, Robert L. Recovery of Damages for Fraud. Westport, Conn.: Law Press Corporation, 2004. Detailed state and local information and cases on recovery for damages and defense from recovery.

Grabosky, Peter, and Russell Smith. Crime in the Digital Age: Controlling Telecommunications and Cyber Illegalities. New Brunswick, N.J.: Transaction Publishers, 1998. Extensive discussion of theft of services, piracy, telemarketing fraud, funds transfer crimes, the use of telecommunications in crime, terrorism, electronic vandalism, and more.

Schulte, Fred. Fleeced! Telemarketing Rip-Offs and How to Avoid Them. Amherst, N.Y.: Prometheus Books, 1995. Exposé on telephone schemers.

Sifakis, Carl. Frauds, Deceptions and Swindles. New York: Checkmark Books, 2001. Collection of brief articles on 150 of the most common American frauds and the people who have created them.

"US Department of Justice, Federal Trade Commission, Federal Communications Commission and Other Federal and State Law Enforcement Agencies Announce Results of Nationwide Initiative to Curtail Illegal Telemarketing Operations." Office of Public Offices, US Department of Justice, 18 July 2023, www.justice.gov/opa/pr/us-department-justice-federal-trade-commission-federal-communications-commission-and-other. Accessed 11 July 2024.