Jun 30 1992 -
Mr. Chairman, I strongly commend the subcommittee for again addressing the issue of telemarketing fraud which continues to prey upon innocent victims in my state of Arizona, and around the country. Advancements in communications technology have ironically proven to be both a benefit and a liability to consumers. While new technologies have provided greater choices to consumers in the marketplace, they have also widened the options of scam operators in selecting a vehicle for cheating consumers out of their earnings.
Senator Bryan and I know all too well the prevalence of these practices. He and I have worked together on two telemarketing fraud bills, S. 2494, which was unanimously passed in the Senate in the fall of 1990, and S. 1392 which was again approved in the fall of 1991. This legislation has become increasingly more imperative as the practice becomes more and more sophisticated and less apparent even to the most alert consumer. The need for enacting federal legislation has never been greater. The Senate has sent the House of Representatives the same message numerous times: the urgency to act against scam operators is only intensifying, and Congress must act now. I strongly commend Congressman Swift for his efforts to bring about this action in the House, and I thank him for addressing this subcommittee today.
I have stated repeatedly that this legislation is not directed at the legitimate telemarketing industry. This industry has provided consumers greater options for obtaining information, entertainment and home shopping opportunities. A great many of these telemarketing companies are legitimately operated by honest businessmen and women. Nevertheless, the increases in telemarketing fraud have been a scourge on the industry, and consumers have lost money, in some cases their health, and, in all cases, their patience.
Telemarketing and consumer fraud costs American taxpayers tens of billions of dollars per year. Such fraud is often committed by individuals who escape legal action by dismantling their operation and relocating to begin the operation again. In the cases of these so-called "boiler room" scams, both the victims and the perpetrators are difficult to locate since the operations often consist of nothing more than phone banks which do not readily provide detailed evidence of illegal activity.
Of even greater concern are the so-called "root" organizations which support the "boiler rooms" and facilitate credit card laundering, an activity which has been shown to be integral to the telemarketing fraud industry. The federal trade commission (F.T.C.) has focused its efforts on bringing cases against these "root" organizations in order to bring down their client "boiler room" outfits, and stop credit card laundering.
The impact of credit card laundering has been harmful to both consumers and banking institutions throughout the nation. This is exemplified by the situation where a fraudulent telemarketer uses the credit card privileges of a merchant to obtain legitimate credit card drafts as records of transactions to receive payment from the unsuspecting customer's bank.
This exact scenario played out in my state of Arizona. On February 15, 1990, gateway national bank in phoenix was declared insolvent by the office of the comptroller of the currency. Just one year prior to insolvency, gateway claimed assets of $11 million. One of the main reasons attributed to its demise was the overwhelming number of chargebacks the bank had to absorb because of merchants' failure to pay. These chargebacks ate away at the bank's equity capital, depleting it so as to render the bank insolvent.
The message here is clear: with credit card fraud, and all kinds of telemarketing fraud, the consumer and the banking communities are the big losers.
The cases involving telemarketing fraud continue to make news. In April 1991, the F.T.C. brought charges against the makers and marketers of the Arizona-based Amerdream corporation which misrepresented its product, the so-called “Ultimate Solution Diet Program,” falsely claiming that a Harvard study showed an ingredient in the ultimate solution's "night trim" diet tablets to be effective in achieving significant weight loss and reducing cholesterol levels and blood pressure. The program also promised consumers of the ultimate solution a 100 percent money-back guarantee and a $1,000 U.S. treasury bond just for buying and testing a two-month supply, which has now been found to be false.
In July 1991, the F.T.C. brought additional charges against the president of Amerdream for false claims made through another one of his companies, also based in Arizona, Advanced Automotive Technologies, inc., the maker of the "Petromizer." A federal court found that advanced automotive falsely represented that the Petromizer increases gas mileage by more than 28 percent, increases automobile horsepower and acceleration by 11 percent, and reduces automobile emissions, including a 100 percent reduction in carbon monoxide emissions, and that various federal and state organizations helped develop or had tested the product and proven its effectiveness. This marketing technique was very effective in the period during the conflict in the Persian Gulf, where concerns about gasoline supplies were heightened.
As a result of the F.T.C.'s efforts in these two cases, a federal court ordered the companies to pay nearly $675,000 for consumer redress.
I wish these were isolated cases, but we all know they are not. Every segment of society is victimized by telemarketing fraud. The elderly are always targeted by scam operators peddling phony health care products, as are those who may not have a full command of the English language, as is everybody in this room today.
Every consumer cries out for greater law enforcement protection. Congressional action is overdue, but I also believe that it is close in coming.
I appreciate the efforts that have been made by the legitimate members of the telemarketing community and by the consumer advocacy groups, both of whom have worked together in a successful partnership to fight against fraud.
I welcome all of the witnesses here today, and look forward to hearing their testimony.
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