what is internet fraud

The term "Internet fraud" refers generally to any type of fraud scheme that uses one or more components of the Internet - such as chat rooms, e-mail, message boards, or Web sites - to present fraudulent solicitations to prospective victims, to conduct fraudulent transactions, or to transmit the proceeds of fraud to financial institutions or to other connected with the scheme.

If you use the Internet with any frequency, you'll soon see that people and things online tend to move, as the saying goes, on "Internet time." For most people, that phrase simply means that things seem to happen more quickly on the Internet -- business decisions, information-searching, personal interactions, to name a few - and to happen before, during, or after ordinary "bricks-and-mortar" business hours.

Unfortunately, people who engage in fraud often operate in "Internet time" as well. They seek to take advantage of the Internet's unique capabilities -- for example, by sending e-mail messages worldwide in seconds, or posting Web site information that is readily accessible from anywhere in the world - to carry out various types of fraudulent schemes more quickly than was possible with many fraud schemes in the past.

In general, the same types of fraud schemes that have victimized consumers and investors for many years before the creation of the Internet are now appearing online (sometimes with particular refinements that are unique to Internet technology). With the explosive growth of the Internet, and e-commerce in particular, online criminals try to present fraudulent schemes in ways that look, as much as possible, like the goods and services that the vast majority of legitimate e-commerce merchants offer. In the process, they not only cause harm to consumers and investors, but also undermine consumer confidence in legitimate e-commerce and the Internet.

Here are some of the major types of Internet fraud that law enforcement and regulatory authorities and consumer organizations are seeing:

• Auction and Retail Schemes Online. According to the Federal Trade Commission and Internet Fraud Watch, fraudulent schemes appearing on online auction sites are the most frequently reported form of Internet fraud. These schemes, and similar schemes for online retail goods, typically purport to offer high-value items - ranging from Cartier® watches to computers to collectibles such as Beanie Babies® - that are likely to attract many consumers. These schemes induce their victims to send money for the promised items, but then deliver nothing or only an item far less valuable than what was promised (e.g., counterfeit or altered goods).
   
• Business Opportunity/"Work-at-Home" Schemes Online. Fraudulent schemes often use the Internet to advertise purported business opportunities that will allow individuals to earn thousands of dollars a month in "work-at-home" ventures. These schemes typically require the individuals to pay anywhere from $35 to several hundred dollars or more, but fail to deliver the materials or information that would be needed to make the work-at-home opportunity a potentially viable business.

• Identity Theft and Fraud. Some Internet fraud schemes also involve identity theft  - the wrongful obtaining and using of someone else's personal data in some way that involves fraud or deception, typically for economic gain.

• In one federal prosecution, the defendants allegedly obtained the names and Social Security numbers of U.S. military officers from a Web site, then used more than 100 of those names and numbers to apply via the Internet for credit cards with a Delaware bank.
 
• In another federal prosecution, the defendant allegedly obtained personal data from a federal agency's Web site, then used the personal data to submit 14 car loan applications online to a Florida bank.

• Investment Schemes Online

• Market Manipulation Schemes. Enforcement actions by the Securities and Exchange Commission and criminal prosecutions indicate that criminals are using two basic methods for trying to manipulate securities markets for their personal profit. First, in so-called "pump-and-dump" schemes, they typically disseminate false and fraudulent information in an effort to cause dramatic price increases in thinly traded stocks or stocks of shell companies (the "pump"), then immediately sell off their holdings of those stocks (the "dump") to realize substantial profits before the stock price falls back to its usual low level. Any other buyers of the stock who are unaware of the falsity of the information become victims of the scheme once the price falls.

• For example, in one federal prosecution in Los Angeles, the defendants allegedly purchased, directly and through another man, a total of 130,000 shares in a bankrupt company, NEI Webworld, Inc., whose assets had been liquidated several months earlier. The defendants then allegedly posted bogus e-mail messages on hundreds of Internet bulletin boards, falsely stating that NEI Webworld was going to be taken over by a wireless telecommunications company. At the time of the defendants' alleged purchases of NEI Webworld stock, the stock was priced between 9 cents and 13 cents a share. Ultimately, in a single morning of trading, NEI Webworld stock rose in 45 minutes from $8 per share to a high of $15 5/16, before falling, within a half-hour, to 25 cents per share. The defendants allegedly realized profits of $362,625.
 
• In another federal prosecution in Los Angeles, a man who worked for a California company, PairGain Technologies, created a bogus Bloomberg news Web site which falsely reported that PairGain was about to be acquired by an Israeli company, and posted fraudulent e-mail messages, containing links to the counterfeit Bloomberg news site, on financial news bulletin boards. On the day that the bogus report was posted on the Internet, PairGain stock rose approximately 30 percent before PairGain issued its own press release stating that the report was false.
   
Second, in short-selling or "scalping" schemes, the scheme takes a similar approach, by disseminating false or fraudulent information in an effort to cause price decreases in a particular company's stock.

• For example, in one recent federal prosecution, a man who described himself as a "day trader" allegedly posted (more than 20 times) a bogus press release falsely stating that a major telecommunications- and Internet-related company, Lucent Technologies, Inc., would not meet its quarterly earnings estimates. The day trader allegedly traded approximately 6,000 shares of Lucent stock the same day that he posted the bogus press release. The false reports allegedly drove the stock's price down 3.6 percent and reduced Lucent's market value by more than $7 billion.

• Other Investment Schemes Other types of fraudulent investment schemes may combine uses of the Internet with traditional mass-marketing technology such as telemarketing to reach large numbers of potential victims.

• In a federal prosecution in San Diego, a major fraudulent scheme used the Internet and telemarketing to solicit prospective investors for so-called "general partnerships" involving purported "high-tech" investments, such as an Internet shopping mall and Internet access providers. The scheme allegedly defrauded more than 3,000 victims nationwide of nearly $50 million.

• Credit-Card Schemes. Some Internet fraud schemes, which appear to be variations on the online auction schemes described earlier, involve the use of unlawfully obtained credit card numbers to order goods or services online.

• One widely reported and intricate scheme, for example, involves offering consumers high-value consumer items, such as video cameras, at a very attractive price (i.e., below the price set at legitimate e-commerce Web sites). When a potential consumer contacts the "seller," the "seller" promises to ship the consumer the item before the consumer has to pay anything. If the consumer agrees, the "seller" (without the consumer's knowledge) uses that consumer's real name, along with an unlawfully obtained credit card number belonging to another person, to buy the item at a legitimate Web site. Once that Web site ships the item to the consumer, the consumer, believing that the transaction is legitimate, then authorizes his credit card to be billed in favor of the "seller" or sends payment directly to the "seller."

  
  As a result, there are two victims of the scheme: the original e-commerce merchant who shipped the item based on the unlawfully used credit card; and the consumer who sent his money after receiving the item that the "seller" fraudulently ordered from the merchant. In the meantime, the "seller" may have transferred his fraudulent proceeds to bank accounts beyond the effective reach of either the merchant or the consumer.

• Other Schemes. Some Web sites on the Internet have purported to offer those who want a "quick divorce" an opportunity to obtain a divorce in the Dominican Republic or other foreign countries for $1,000 or more, without even having to leave the United States. These sites often contain false, misleading, or legally inaccurate information about the process for obtaining such divorces (e.g., that neither spouse has to visit the country in which the divorce is being sought). Typically, people who have sent money to one of these schemes eventually receive false assurances that they are legally divorced. In fact, victims of the scheme have neither received legitimate legal services nor obtained valid divorces. People who are interested in obtaining a divorce, whether in the United States or elsewhere, should seek a lawyer with whom they can speak personally, and not rely solely on e-mail exchanges or online information.

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What Is The Department of Justice Doing About Internet Fraud?

Since February 1999, when the Department of Justice established its Internet Fraud Initiative, the federal government has been expanding its efforts to combine criminal prosecution with coordinated analysis and investigation as part of a comprehensive approach to combating Internet fraud.

Prosecution

The Justice Department has begun to bring a number of criminal prosecutions throughout the country against individuals and groups engaging in various types of Internet fraud. Here are some examples of federal criminal prosecutions directed at Internet fraud:

Auction and Retail Schemes Online

• Oxford, Mississippi On August 27, 1998, a woman was sentenced in the Northern District of Mississippi to 15 months' imprisonment and $9,432 restitution on fraud charges relating to her conduct of a fraudulent scheme. The scheme involved her use of Web pages and interactive computer locations on the Internet for falsely advertising various computer hardware and software and computer accessories.
 
• Philadelphia On March 2, 2000, three men were criminally charged in the Eastern District of Pennsylvania for their alleged roles in falsely offering the sale of Beanie Babies® on the Internet, and then failing to deliver the orders or sending stolen Beanie Babies® that generally were of substantially less value than the items ordered.

• San Diego On March 6, 2000, a man pleaded guilty in the Southern District of California to mail and wire fraud in connection with his conduct of a fraudulent scheme involving Internet sales of Beanie Babies® that he never delivered.
 
• Santa Ana, California On November 1, 1999, a man was sentenced in the Central District of California on mail and credit-card fraud charges to 14 months' imprisonment and $36,000 restitution, for his conduct of an Internet auction fraud that falsely offered digital cameras and laptop computers to consumers.
   
• Seattle On August 6, 1999, a man pleaded guilty in the Western District of Washington to wire fraud in connection with his role in placing on various Web sites false advertisements for computer systems, for which he accepted victims' payments but which he never delivered.
   
• West Palm Beach, Florida On February 12, 1999, a man was sentenced in the Southern District of Florida on wire fraud charges to six months home detention and more than $22,000 restitution, for his conduct of a fraudulent scheme in which he falsely advertised on Internet auction and retail sale Web sites computer components that he purported to have for sale, but did not have or obtain most of the merchandise he advertised.

• Business-Opportunity Schemes Online

• Los Angeles In November, 1999, four individuals were criminally charged in the Central District of California for their roles in conducting a fraudulent scheme, in which they sent out approximately 50 million e-mails that falsely advertised work-at-home opportunities for people but provided few actual opportunities for people who paid the $35 advance fee.

• Investment Schemes Online "Pump-and-dump" schemes, short-selling schemes, Ponzi schemes, and other fraudulent investment schemes have all been subjects of federal prosecution throughout the country.

• Alexandria, Virginia In September 1997, a man was sentenced in the Eastern District of Virginia to one year's imprisonment and fined $20,000 on securities fraud conspiracy charges relating to his touting of a stock involved in a "pump and dump" scheme.
 
• Brooklyn, New York In August, 1999, four individuals were indicted in the Eastern District of New York on securities fraud charges for their alleged roles in the fraudulent promotion of eight stocks through misleading Internet Web site and e-mail newsletter profiles.
 
• Charlotte, North Carolina In 1999, two individuals pleaded guilty in the Western District of North Carolina to securities fraud charges for their roles in offering securities in a nonexistent investment bank that purportedly offered, among other things, a "guaranteed" 20 percent return on savings.
   
• Cleveland On March 22, 2000, four people were indicted in the Northern District of Ohio, on charges including conspiracy to commit and committing mail and wire fraud. The defendants allegedly devised and carried out a scheme to defraud "investors" in a "Ponzi" pyramid scheme. A company with which the defendants were affiliated allegedly collected more than $26 million from "investors" without selling any product or service, and paid older investors with the proceeds of the money collected from the newer investors.
 
• Los Angeles On January 4, 2000, two men were indicted in the Central District of California on securities fraud charges for their alleged roles in the NEI Webworld scheme described earlier. In addition, on August 30, 1999, the individual who conducted the PairGain Technologies scheme mentioned earlier was sentenced in the Central District of California to five months' home detention and $93,000 restitution.

• New York On August 9, 1999, a man was criminally charged in the Southern District of New York with securities fraud. The man allegedly conducted a scheme to unlawfully inflate the price of stock of a company involved in acquiring retail auto dealerships, by making various false claims that another company (located in the same office suite as the auto dealership company) had developed a cure for HIV infection and AIDS.

• Credit Card Fraud

• Ft. Lauderdale In November, 1997, a former graduate student was sentenced in the Southern District of Florida on wire fraud charges to four months' home detention, for a scheme in which he obtained the names of multiple students from a local university and fraudulently applied for 174 credit cards via the Internet. Because of the quick investigative work by the Postal Inspection Service, no losses were incurred.
 
• Wilmington, Delaware In 2000, three individuals were indicted in the District of Delaware on charges of conspiracy, bank fraud, identity theft, Social Security fraud, and wire fraud, for their alleged roles in the military officers' Social Security number/credit-card fraud scheme described earlier.

• Other Types of Internet Fraud

• Los Angeles On February 7, 2000, a man was sentenced to 87 months' imprisonment for his role in a scheme that purported to provide immigration assistance to aliens seeking to become residents or citizens of the United States. Using Web sites, newspaper advertisements, recruiters, and word of mouth to offer their services to aliens, the leaders of the scheme typically charged more than $10,000 per client and promised that the client would receive particular immigration documents. In some cases, however, the leaders of the scheme provided their clients with counterfeit or false immigration documents; in other cases, they provided no documents at all, and blamed the government and the legal system for the delay in providing the promised documents.
   
• Los Angeles In November, 1999, four men were criminally charged in the Central District of California for their alleged roles in conducting the "work-at-home" scheme described earlier.

National Coordination and Cooperation

The global nature of the Internet, and law enforcement experience in conducting Internet fraud investigations, have made it increasingly clear that law enforcement authorities need to work in closer coordination to have a substantial effect on all forms of Internet fraud. Two major steps that the Department has taken to foster national coordination and cooperation among law enforcement authorities on Internet fraud matters are the Internet Fraud Initiative and the Internet Fraud Complaint Center.

• Internet Fraud Initiative The Internet Fraud Initiative, which the Attorney General approved on February 26, 1999, is a national initiative by the Department of Justice intended to provide a comprehensive approach to combating Internet fraud. The Initiative has six main elements:
  
  (1) Developing information on the nature and scope of the problem, through coordination with the Federal Trade Commission on Internet fraud data, and exploring the development of methods for reliable estimates of the prevalence and incidence of Internet fraud;

  (2) Developing and providing specific joint training for prosecutors and agents on Internet fraud, through National Advocacy Center (NAC) training at basic and advanced levels, other federal law enforcement training programs, and coordination with joint training efforts by the National Association of Attorneys General and the American Prosecutors Research Institute for state and local law enforcement;

  (3) Fostering the development of investigative and analytical resources to identify and investigate Internet-related fraud schemes, by supporting joint FBI-National White Collar Crime Center efforts to establish the Internet Fraud Complaint Center and forging closer ties and establishing referral procedures with other federal agencies;

  (4) Providing and facilitating coordination among federal prosecutors, the Department and other federal law enforcement and regulatory agencies, and state, local, and foreign law enforcement agencies on Internet fraud investigations and prosecutions;

  (5) Supporting and advising on Internet fraud prosecutions throughout the country; and

  (6) Establishing a program of public education and prevention on Internet fraud, including encouraging the private sector to use technological solutions (such as biometrics) to prevent frauds, adding Internet fraud pages to the Department's Web site, and expanding public-private prevention efforts;

• Internet Fraud Complaint Center The Internet Fraud Complaint Center (IFCC) is a joint project of the FBI and the National White Collar Crime Center. The IFCC's key functions for federal, state, and local law enforcement agencies will be (1) receiving online complaints, (2) analyzing them to identify particular schemes and general crime trends in Internet fraud, and (3) compiling and referring potential Internet fraud schemes to law enforcement. In addition to FBI and NWCCC personnel, the IFCC will include agents and analysts detailed from the Internal Revenue Service and Postal Inspection Service.

  
  In effect, the IFCC provides federal, state, and local law enforcement agencies with a single point of contact - a "one-stop-shopping" approach - for identifying and referring Internet fraud schemes for criminal enforcement. Because criminal fraud schemes on the Internet, such as major investment or credit card frauds, can be initiated and concluded in a matter of days or even hours, traditional methods of investigating fraud schemes will no longer suffice. By co-locating agents and analysts from the FBI, the NWCCC, and other agencies, the IFCC can provide a substantial investigative and analytical resource available on a nationwide basis to law enforcement and regulatory agencies.