oversight

Deceptive Mail: Consumers' Problems Appear Substantial

Published by the Government Accountability Office on 1999-08-04.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on the Postal Service
                          Committee on Government Reform
                          House of Representatives


For Release on Delivery
Expected at
1:00 p.m. EDT
                          DECEPTIVE MAIL
Wednesday
August 4, 1999

                          Consumers’ Problems
                          Appear Substantial
                          Statement of Bernard L. Ungar, Director
                          Government Business Operations Issues
                          General Government Division




GAO/T-GGD-99-150
Summary

Deceptive Mail: Consumers’ Problems Appear
Substantial

               In response to requests from three congressional subcommittees, GAO
               obtained information on the extent and nature of consumers’ problems
               with deceptive mail and identified initiatives various federal agencies and
               other organizations have made to address deceptive mail problems and
               educate consumers. Examples of deceptive mail include sweepstakes,
               chain letters, cashier’s check look-alikes, work-at-home schemes, and
               fraudulent charity solicitations.

               Officials in various agencies and organizations said that comprehensive
               data on the full extent of consumers’ deceptive mail problems were not
               available mainly because consumers often did not report their problems
               and no centralized database existed from which such data could be
               obtained. However, data GAO collected from various sources suggested
               that consumers were having substantial problems with deceptive mail.

             • Based on a GAO sponsored November 1998 statistically generalizable
               sample of the U.S. adult population, GAO estimates that about half of the
               adult population believed that within the preceding 6 months, they had
               received deceptive mailed sweepstakes material or cashier’s check look-
               alikes.

             • Officials from the Federal Trade Commission (FTC), Postal Inspection
               Service, and state Attorneys General offices estimated that in fiscal year
               1998, about 10,400 deceptive mail complaints led to or initiated about 100
               law enforcement actions.

             • For the period October 1, 1997, through March 31, 1999, FTC received over
               18,000 deceptive mail complaints, of which about 2,700 (15 percent)
               reported consumer payments of about $4.9 million. Also, the Postal
               Inspection Service received over 16,700 complaints on fraud and chain
               letters, of which about 3,000 (18 percent) reported consumer fraud losses
               of about $5.2 million. The Inspection Service also had over 1,800 open
               investigative cases on deceptive mail during fiscal year 1998.

               Various federal agencies and other organizations have undertaken efforts
               to address consumers’ deceptive mail problems and educate them about
               such problems. For example, FTC established a national toll-free hotline
               for receiving deceptive mail and other complaints. One joint effort was
               Project Mailbox, which involved such organizations as FTC, Postal
               Inspection Service, and various state Attorneys General. These
               organizations initiated over 200 law enforcement actions against
               companies and individuals that used the mail to allegedly defraud
               consumers.



               Page 1                                                      GAO/T-GGD-99-150
Statement

Deceptive Mail: Consumers’ Problems Appear
Substantial

              Mr. Chairman and Members of the Subcommittee:

              We are pleased to have this opportunity to discuss matters related to
              deceptive mail marketing practices, which have been used by various
              organizations and individuals to induce consumers to purchase goods and
              services or send money for misrepresented purposes. My statement will
              include a brief summary of our previous testimony on the extent and
              nature of problems that consumers experienced primarily with mailed
                                     1
              sweepstakes material. Also, I will discuss our most recent efforts to obtain
              updated information that could indicate the extent and nature of problems
              that consumers may have experienced with various types of mailed
              material that have been used to deceive, mislead, or fraudulently induce
              them into purchasing goods or services. This type of mail, known as
              deceptive mail, includes sweepstakes and other types of mailed material,
              such as lotteries and chain letters. Finally, I will provide information on
              initiatives in which various federal agencies and other organizations have
              participated to address consumers’ problems with deceptive mail
              marketing practices and help educate consumers about potential problems
              that could occur with such practices.

              Our most recent work on deceptive mail was done in response to your
              November 1998, request as well as an October 1998, request from the
              Permanent Subcommittee on Investigations and the Subcommittee on
              International Security, Proliferation and Federal Services, Senate
              Committee on Governmental Affairs. We are also providing copies of our
              statement to the chairs of the two Senate subcommittees.

              Mr. Chairman, as we agreed, the primary objective for our most recent
              work was to obtain updated available information on the extent and nature
              of consumers’ problems with various types of deceptive mail. Also, we
              obtained updated available information on efforts by various federal, state,
              local, and nongovernmental organizations to address consumers’ deceptive
              mail problems and educate them about possible problems that could occur
              with deceptive mail marketing practices. In addition, through an outside
              contractor, we conducted a survey to obtain opinions from the U.S. adult
              population about specific types of deceptive mail.

              We did our work from November 1998 through July 1999 in accordance
              with generally accepted government auditing standards. We obtained
              comments on a draft of this testimony from the Federal Trade Commission

              1
               Proposed Legislation: Issues Related to Honesty in Sweepstakes Act of 1998 (S. 2141) (GAO/T-GGD-
              98-198, Sept. 1, 1998).




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             Statement
             Deceptive Mail: Consumers’ Problems Appear Substantial




             (FTC) and the U.S. Postal Service, including the Postal Inspection Service
             and the Consumer Advocate. We included their comments where
             appropriate. We also arranged for the various state, local, and
             nongovernmental organizations that provided us information to review
             relevant sections of this testimony. We incorporated their technical
             comments where appropriate. Additional information about our approach
             is included in attachment I to this statement.

             As you are aware, Mr. Chairman, since the summer of 1998, much attention
Background   has been focused on consumers’ problems with deceptive mail. Various
             activities, including specific legislative proposals and hearings, have raised
             congressional and public awareness about problems that some consumers
             have experienced as a result of deceptive mail marketing practices.

             A recent example of such an activity was the May 1999 approval by the
             Senate Governmental Affairs Committee of proposed legislation entitled
             “Deceptive Mail Prevention and Enforcement Act” (S. 335), which was
             introduced in February 1999, by Senator Susan Collins. In her introductory
             remarks, Senator Collins indicated that the proposed legislation was
             generally designed to help ensure that organizations that used various
             types of promotional mailed material, such as sweepstakes, were as honest
             and accurate as possible in their dealings with consumers. Provisions in
             the proposed legislation (1) authorized financial penalties against
             organizations that did not comply with proposed requirements, (2)
             authorized specific law enforcement actions, including the issuance of
             subpoenas, that the Postal Inspection Service could use in combating
             deceptive mail marketing practices; and (3) provided assurance that the
             proposed legislation would not preempt state and local laws that were
             designed to protect consumers against deceptive mail marketing practices.

             For a congressional hearing held in September 1998, we provided
             testimony in which we discussed information about consumers’ problems
             with specific types of deceptive mail and some initiatives that were
             intended to help educate consumers about potential deceptive mail
             problems. We found that comprehensive data indicating the full extent of
             consumers’ problems with mailed sweepstakes material and cashier’s
             check look-alikes were not available. However, FTC and the Postal
             Inspection Service had some data on complaints that could indicate the
             nature of consumers’ problems with deceptive mail. A sample of
             complaints from FTC showed that in many instances, consumers were
             required to remit money or purchase products or services before being
             allowed to participate in sweepstakes. Information about specific Postal
             Inspection Service cases that had been investigated largely involved



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                             Statement
                             Deceptive Mail: Consumers’ Problems Appear Substantial




                             sweepstakes and cash prize promotions for which up-front taxes, fees, or
                             insurance were required before consumers could participate in
                             sweepstakes promotions.

                             In our previous testimony, we discussed two initiatives that were intended
                             to address consumers’ problems with deceptive mail. The initiatives
                             included (1) Project Mailbox, which was established to help educate
                             consumers and appropriately deal with organizations and individuals that
                             attempted to defraud consumers through the use of mass mailings; and (2)
                             a multi-state sweepstakes subcommittee that was designed to facilitate
                             cooperation among states in dealing with companies that attempted to
                             defraud consumers through the use of mailed sweepstakes material. With
                             your permission, I would like to provide the Subcommittee a full copy of
                             our previous testimony for inclusion into the record of today’s hearing.

                             Comprehensive data that could indicate the full extent of consumers’
Extent and Nature of         problems with deceptive mail were not available. Various officials from the
Consumers’ Problems          agencies and organizations we contacted told us that such data were
With Deceptive Mail          unavailable mainly because consumers oftentimes did not report their
                             problems and no centralized database existed from which comprehensive
                             data could be obtained.

                             Due to the overall lack of comprehensive data, we contracted for a survey
                             to obtain perspective on the extent to which consumers believed that they
                             had received specific types of mailed material that appeared to them to be
                             misleading or deceptive. Also, we identified two federal agencies—FTC
                             and the Postal Inspection Service—that maintained some data that could
                             provide insight into the nature of consumers’ problems with deceptive
                             mail. However, these data may include some duplicative complaints
                             because some consumers who filed complaints may have done so with
                             both agencies.

Opinion Survey on Specific   To obtain perspective on American consumers’ opinions about specific
                             types of deceptive mail, we contracted with International Communications
Types of Deceptive Mail      Research (ICR), a national market research firm, to perform a statistically
                             generalizable sample of adults 18 years of age or older in the continental
                             United States. The results of the survey, which was conducted in
                             November 1998, indicated that 51 percent of the survey respondents
                             believed that within the preceding 6 months, they had received mail
                             involving sweepstakes or documents resembling cashier’s checks, known
                             as cashier’s check look-alikes, that appeared to be misleading or deceptive.
                             However, 45 percent of the respondents said they had not received such




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                              Statement
                              Deceptive Mail: Consumers’ Problems Appear Substantial




                              mail and the remaining 4 percent were not sure, did not remember, or did
                              not know.

                              Additional analysis of survey results indicated that the higher the
                              educational levels of respondents, the more likely they were to believe that
                              they had received these types of deceptive mail. The percentages of
                              respondents who believed that they had received such mail were about:

                            • 43 percent for respondents with a high school education or less;
                            • 56 percent for those with some college education; and
                            • 62 percent for those with a completed college education or higher.

                              A similar trend was identified for respondents and their income levels in
                              that at higher income levels, respondents were more likely to believe that
                              they had received such mail. The percentages by income level included
                              about:

                            • 32 percent for respondents whose annual income was less than $15,000;
                            • 52 percent for respondents whose annual income ranged between $15,000
                              and $49,999; and
                            • 62 percent for respondents whose annual income was $50,000 or more.

FTC’s Consumer                For our updated work efforts, various officials and representatives of the
                              agencies and organizations from which we obtained information again
Information                   believed that the most appropriate source of consumer complaint data
System Included Data That     would be FTC’s Consumer Information System (CIS). According to FTC
Could Indicate the Nature     officials, the purpose of CIS, which was first established around February
of Problems                   1997 and became fully operational in September 1997, was to collect and
                              maintain various data related to consumers’ complaints. FTC officials told
                              us that CIS data are used primarily by law enforcement organizations and
                              officials to assist them in fulfilling their law enforcement duties.

                              The CIS database contained a total of about 200 categories within which
                              consumers’ complaints were included. The categories covered a wide
                              range of topics such as (1) creditor debt collection, (2) home repair, (3)
                              investments, (4) health care, and (5) leases for various products and
                              services, such as automobiles and furniture.

                              For the period October 1, 1997, through March 31,1999, our analysis
                              indicated that CIS included a total of 48,122 consumer complaints for




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                                                                                                 2
    which the methods of initial contact with consumers were identified. Such
    methods included mail; telephone; fax; printed material, such as
    newspapers and magazines; and the Internet. Of the 48,122 complaints, the
    largest number, 18,143, or about 38 percent, indicated that consumers
    were initially contacted through the mail. Of the 18,143 complaints, we
    found that in 10,145, or about 56 percent, of these complaints, companies
    had requested individual consumers to remit money. The total amount of
    money requested by the companies was reported to be about $88.2 million.

    Also, our review of the 18,143 consumer complaints showed that 2,715, or
    about 15 percent, of the consumers reported that they had remitted money
    to the companies. The total amount of money these consumers said they
    had paid was about $4.9 million. The amounts of money individual
    consumers said that they had paid ranged from less than $1 to over $1
    million. Of these 2,715 complaints, about:

•   50 percent were less than $100;
•   35 percent were between $100 and $999;
•   10 percent were between $1,000 and $4,999; and
•   5 percent were $5,000 or more.

    The largest reported amount of money paid by a consumer was $1,734,000.
    Available CIS information indicated that this complaint involved a
    consumer’s concerns about a credit bureau referring inaccurate
    information to a debt collection agency.

    In reviewing the 18,143 complaints in which consumers were initially
    contacted through the mail, we identified five CIS categories that included
    the highest number of consumer complaints, which totaled 10,776
    complaints, or about 59 percent. The five categories included

• Telephone: pay per call/information services, which can involve consumer
  complaints about calls to publicly available telephone numbers, such as 1-
  900 numbers, for which consumers incur per-minute charges in return for
  information or entertainment. Also, complaints can involve unauthorized
  charges on consumers’ telephone bills, also known as “cramming” (3,487
  complaints).



    2
     In order to obtain the most recent CIS data possible, we requested that FTC provide us with data for
    an 18-month period that, at the time of our request, extended from October 1, 1997, through March 31,
    1999.




    Page 6                                                                          GAO/T-GGD-99-150
  Statement
  Deceptive Mail: Consumers’ Problems Appear Substantial




• Telephone: carrier switching, also known as “slamming,” in which
  companies would switch consumers’ telephone services from one
  company to another without consumer authorization (1,051 complaints).

• Prizes/sweepstakes/gifts, which can oftentimes involve consumer
  complaints about mailed material that solicit advance fees for consumers
  to be able to participate in a sweepstakes or contest (2,859 complaints).

• Credit bureaus, which can generally involve consumer complaints about
  the methods by which such bureaus maintain and disseminate credit
  information (2,025 complaints).

• Third party debt collection, which can involve consumer complaints about
  methods used by various companies or individuals to collect debts owed
  by consumers (1,354 complaints).

  For the five CIS categories, we found that a total of 10,355 complaints, or
  about 96 percent, included comments that could provide insight into the
  nature of problems that consumers had experienced with deceptive mail.
  We randomly selected 20 consumer complaints from each of the 5
  categories for a total of 100 complaints. A discussion of the types of
  comments in the five categories and some examples follow.

  Two of the five CIS categories involved problems that consumers
  reportedly experienced with mailed material that involved various
  telephone services, including pay-per-call and specific information services
  as well as slamming and cramming. Generally, consumers’ comments in
  these two categories focused on complaints about unauthorized actions by
  companies in providing various telephone services, including (1) switching
  telephone services from one company to another without consumer
  authorization, (2) charging consumers for services they never requested,
  and (3) charging for services that consumers claimed were cancelled.

  For the prizes/sweepstakes/gifts category, consumer comments focused on
  complaints about companies’ requirements for participating in
  sweepstakes. According to FTC, various requirements, such as advance
  payments, fees, or purchases of products, should not be required before
  consumers may participate in sweepstakes. Also, consumers complained
  about being required to call specific telephone numbers for which they
  were charged fees.

  In the credit bureaus category, the comments included consumers’
  complaints about inaccurate information on their credit reports. Also,



  Page 7                                                      GAO/T-GGD-99-150
                             Statement
                             Deceptive Mail: Consumers’ Problems Appear Substantial




                             consumers expressed concerns about such issues as denial of credit and
                             dissemination of credit information to companies and individuals without
                             permission.

                             For the third party debt collection category, consumer comments focused
                             generally on harassment that consumers reportedly experienced from debt
                             collectors. Such harassment included being called nasty names, receiving
                             numerous telephone calls, and being treated without dignity. Also, some
                             consumers disputed owing specific debts or the amounts of the debts.

Postal Inspection Service    The Postal Inspection Service maintained two databases—the Fraud
                             Complaint System (FCS) and the Inspection Service Data Base Information
Consumer Complaint and       System (ISDBIS)—that included information related to consumers’
Investigation Databases      problems with deceptive mail. FCS was designed to collect and maintain
                             consumer complaint information about various types of alleged fraudulent
                             activities, including those involving deceptive mail marketing practices.
                             ISDBIS was designed to be a case-tracking system that recorded
                             information related to specific cases that postal inspectors used as they
                             investigated specific organizations or individuals involved in various
                             mailing activities that were allegedly intended to defraud consumers,
                             businesses, and the federal government.

Consumer Complaint Process   To gain a better understanding of how consumer complaints about
                             deceptive mail were included in FCS, we obtained information about the
                             overall process through which consumers could file complaints with the
                             Postal Service. According to Postal Inspection Service officials, if
                             consumers have concerns or wish to file complaints about material that
                             they have received through the mail, consumers may visit or call their
                             nearby Postal Inspection Service offices or postal facilities, which included
                             post offices, stations, or branches. If consumers’ concerns are related to
                             mailed material that they believe is deceptive, misleading, or fraudulent,
                             postal employees are expected to refer consumers to the Postal Inspection
                             Service. The methods of these referrals generally include providing
                             consumers with the telephone number or address of the appropriate local
                             Postal Inspection Service office, the Internet website address of the Postal
                             Inspection Service, or a Postal Inspection Service mail fraud complaint
                             form. Also, Postal Inspection Service officials told us that in some cases, to
                             provide additional assistance to consumers, postal employees may offer to
                             forward the questionable mailed material directly to the Postal Inspection
                             Service.

                             We visited a total of 15 postal facilities to observe how postal employees
                             referred consumers to the Postal Inspection Service. The facilities



                             Page 8                                                       GAO/T-GGD-99-150
                              Statement
                              Deceptive Mail: Consumers’ Problems Appear Substantial




                              included post offices and stations in the metropolitan areas of Dallas,
                              Texas; Los Angeles, California; and Washington, DC. At the facilities, we
                              asked postal employees working at counters how to handle mail believed
                              to be deceptive. At 8 of the 15 facilities we visited, postal employees
                              appropriately referred us to the Postal Inspection Service. At the 7
                              remaining facilities, postal employees either referred us to organizations
                              other than the Postal Inspection Service or were unable to provide any
                              guidance. For example, two postal employees referred us to a national toll-
                                                                           3
                              free 1-800 number (i.e., 1-800-ASK-USPS). According to postal officials,
                              consumers could reach the Postal Inspection Service through 1-800-ASK-
                              USPS.

                              We made three calls to 1-800-ASK-USPS to determine whether consumers
                              could reach the Postal Inspection Service through this number. During one
                              call, the responding customer service representative provided us with the
                              telephone numbers of both the local consumer affairs office and Postal
                              Inspection Service office. During the remaining calls, the representatives
                              either provided us the telephone number for the local consumer affairs
                              office or the address of the Direct Marketing Association (DMA), which we
                                                                                             4
                              were told could remove consumers’ names from mailing lists.

Postal Inspection Service’s   We obtained FCS data for an 18-month period, (i.e., October 1, 1997,
Fraud Complaint System        through March 31, 1999). The data we obtained focused on two of the four
                              complaint categories within FCS—fraud and chain letters—because postal
                              officials told us that these categories were most likely to include relevant
                                                                                                     5
                              information about consumers’ problems concerning deceptive mail.

                              Our analysis of FCS data indicated that the Postal Inspection Service had
                              received 16,749 consumer complaints regarding fraud and chain letters.
                              Complaints in the fraud category totaled 7,667, or about 46 percent, of the
                              total complaints in these two categories, and 9,082 complaints, or about 54
                              percent, were included in the chain letter category.
                              3
                               The purpose of the 1-800-ASK-USPS number is to provide consumers with a quick means of obtaining
                              assistance with and information about a wide range of postal issues, such as the hours of operation at
                              specific postal facilities, mailing rates for packages, and appropriate ZIP codes.
                              4
                               DMA was established in 1917 as an international, nonprofit trade association whose primary objective
                              was to serve its members in bringing about more effective direct marketing techniques. As of June
                              1999, DMA had about 4,500 member companies from the United States and 53 other nations. Examples
                              of DMA members included catalogers, publishers, book and record clubs, financial service companies,
                              manufacturers, and advertising agencies.
                              5
                               According to Postal Inspection Service officials, the other two FCS categories included (1)
                              consumers’ general inquiries or requests for information and (2) consumer complaint program, which
                              involves complaints about such matters as fraud, bad business practices, or misunderstandings
                              between consumers and companies.




                              Page 9                                                                           GAO/T-GGD-99-150
    Statement
    Deceptive Mail: Consumers’ Problems Appear Substantial




    According to FCS data, no monetary losses were reported for the 9,082
    complaints in the chain letter category. However, for the 7,667 complaints
    in the fraud category, a total of about $5.2 million in monetary losses was
    reported by consumers. These losses were reported in 2,976, or about 18
    percent, of the 16,749 fraud and chain letter complaints. Also, the 2,976
    complaints that cited losses amounted to about 39 percent of the 7,667
    complaints in the fraud category. The remaining 4,691 fraud complaints, or
    about 61 percent, cited no monetary losses.

    For the 2,976 fraud complaints that cited monetary losses, the amounts of
    money individual consumers said that they had paid ranged from less than
    $1 to over $365,000. Of these complaints, about:

•   55 percent were less than $100;
•   29 percent were between $100 and $999;
•   15 percent were between $1,000 and $29,999; and
•   1 percent were $30,000 or more.

    The largest monetary loss reported by a consumer was $365,432. However,
    available FCS information was insufficient to describe the nature of the
    consumer complaint associated with this loss.

    Similarly, we attempted to determine the nature of other consumer
    complaints in the fraud and chain letter categories using a random sample
    of 50 complaints with comments from each category for a total of 100
    complaints. For these complaints, we found that the comments were
    unclear or lacked sufficient detail to provide insight into the nature of
    consumers’ deceptive mail problems.

    We recently learned from a Postal Inspection Service official that
    additional fraud complaints were contained in a third FCS category called
    “consumer complaint program.” According to the official, for the period
    October 1, 1997, through March 31, 1999, the category included a total of
    about 48,000 complaints, which generally involved such matters as fraud,
    bad business practices, or misunderstandings between consumers and
    companies. Although the Postal Inspection Service was unable to
    specifically identify how many of these complaints involved fraud, officials
    determined that about 4,000, or about 8 percent, of these complaints were
    associated with active mail fraud investigations. The officials, however,
    could determine neither the number of investigations involved nor whether
    these complaints led to such investigations.




    Page 10                                                    GAO/T-GGD-99-150
                              Statement
                              Deceptive Mail: Consumers’ Problems Appear Substantial




Postal Inspection Service’s   We obtained information from ISDBIS that focused on fraud against
Investigative Database        consumers. For fiscal year 1998, our analysis identified a total of 1,869
                              ISDBIS cases, which included 1,333 cases that carried forward into fiscal
                              year 1998 from fiscal year 1997, and 536 cases that were opened during
                              fiscal year 1998. The cases involved various types of allegedly deceptive
                              mail marketing practices, including investment schemes, lotteries,
                              fraudulent charity solicitations, work-at-home schemes or plans, and
                              advance fee loan schemes.

                              By the end of fiscal year 1998, 576 cases had been closed, of which 293, or
                              about 51 percent, involved four top deceptive mail marketing practices or
                              schemes. The four were (1) lotteries, (2) telemarketing, (3) investment
                              schemes, and (4) work-at-home plans.

                              During fiscal year 1998, the Postal Inspection Service initiated various law
                              enforcement actions resulting from investigative cases involving the four
                              top deceptive mail schemes. According to ISDBIS data, a total of 911
                              enforcement actions were taken, which included arrests, convictions, and
                              other actions. Of the total actions taken, 480, or 53 percent, involved
                              arrests and convictions. Also, ISDBIS data for sweepstakes showed that a
                              total of 43 actions were taken.

                              For our most recent work, we obtained updated information on the two
Efforts by                    initiatives that we discussed in our previous testimony, namely Project
Organizations                                                                                      6
                              Mailbox and the National Association of Attorneys General (NAAG) multi-
to Address Deceptive          state sweepstakes subcommittee. Also, we obtained updated information
                              from various federal, state, and local agencies and nongovernmental
Mail Problems and             organizations about their recent efforts to help educate and make
Educate Consumers             consumers more aware of the potential problems that could result from
                              deceptive mail marketing practices. These efforts involved activities that
                              were initiated by various organizations, including FTC, the Postal
                              Inspection Service, state Attorneys General offices, and nongovernmental
                              organizations, such as the American Association of Retired Persons
                              (AARP) and NAAG.

Project Mailbox               Project Mailbox was established to help educate consumers and
                              appropriately deal with organizations, companies, and individuals that

                              6
                               NAAG is a professional association that was established in 1907. Its members include the Attorneys
                              General of 50 states and chief legal officers for other jurisdictions, such as the District of Columbia and
                              the Virgin Islands. The U.S. Attorney General is an honorary member of NAAG. NAAG’s overall goals
                              include (1) promoting cooperation and coordination on interstate legal matters and (2) increasing
                              citizen understanding of the law and law enforcement’s role to ensure both protection of individual
                              rights and compliance with the law.




                              Page 11                                                                             GAO/T-GGD-99-150
                           Statement
                           Deceptive Mail: Consumers’ Problems Appear Substantial




                           attempted to defraud consumers through the use of mass mailings. In
                           fiscal year 1998, FTC, the Postal Inspection Service, and Attorneys General
                           offices for various states initiated 203 law enforcement actions that
                           targeted specific organizations, companies, and individuals that allegedly
                           attempted to deceive, mislead, or defraud consumers through various mail
                           marketing practices. The practices included a wide range of schemes,
                           including not only sweepstakes, prize promotions, lotteries, advance fee
                           loans schemes, and government look-alike mail, but also such schemes as
                           guaranteed scholarships, vacation and travel packages, and fraudulent
                           charity solicitations.

                           For the 203 law enforcement actions, FTC, the Postal Inspection Service,
                           and various state Attorneys General offices provided us some information
                           on 101, or about 50 percent, of the actions, which provided perspective on
                           these actions. These federal and state organizations estimated that a total
                           of about 841,000 consumers had purchased products and/or services from
                           the organizations, companies, or individuals that were the targets of the
                           law enforcement actions. Also, an estimated total of about $424 million
                           was identified as sales to consumers or funds consumers had paid to the
                           targeted organizations, companies, or individuals. We have no information
                           on the extent to which deceptive mail problems may have been involved
                           with the total number of consumers identified and the payments made.
                           However, FTC, the Postal Inspection Service, and various state Attorneys
                           General offices estimated that about 10,400 consumer complaints led to or
                           initiated the 101 law enforcement actions.

NAAG Multi-State           In February 1999, NAAG’s Subcommittee on Sweepstakes and Prize
                           Promotion convened a hearing in Indianapolis, Indiana. The purpose of the
Sweepstakes Subcommittee   hearing was to gather information about sweepstakes promotions and
                           create consensus on the best approaches for deterring and punishing those
                           who participate in fraudulent sweepstakes activities. Witnesses at the
                           hearing included representatives of the direct mail marketing industry,
                           individual consumers from various states, federal government
                           representatives, and experts from the academic community.

                           Based on information discussed at the hearing and lessons learned from
                           years of investigations and litigation, the subcommittee generally
                           recommended that the sweepstakes industry adopt specific voluntary
                           practices to ensure that consumers are not misled. Some of the
                           recommended practices included (1) clearly disclosing the odds of winning
                           the sweepstakes or contest, (2) not representing or implying that ordering
                           a product increases a consumer’s chance of winning, and (3) having a




                           Page 12                                                    GAO/T-GGD-99-150
                                  Statement
                                  Deceptive Mail: Consumers’ Problems Appear Substantial




                                  standard, simple, uniform means for entering sweepstakes both for
                                  consumers who place orders and those who do not.

Other Consumer Education          FTC, the Postal Inspection Service, and various state, local, and
                                  nongovernmental organizations have either completed or initiated efforts
Activities of Federal, State,     to help educate consumers and raise their awareness about problems that
Local, and                        could result from deceptive mail. These efforts range from the
Nongovernmental                   establishment of a national toll-free hotline to the publication of consumer
Organizations                     awareness articles.

FTC Activities                    FTC has initiated or participated in activities to help consumers deal with
                                  deceptive mail marketing practices. For example, FTC:

                                • established, on July 7, 1999, a national toll-free hotline (i.e., 1-877-FTC-
                                  HELP or 1-877-382-4357) that consumers could use to file complaints on
                                  various topics, including deceptive mail. According to FTC, the hotline is
                                  intended not only to make FTC more accessible to consumers who wish to
                                  file complaints but also to make consumer complaint data available to law
                                  enforcement agencies in the United States and Canada.

                                • maintains a website through which consumers may obtain information that
                                  can help them address potential problems associated with deceptive mail.
                                  This information covers topics ranging from prize offers to magazine
                                  subscription scams to receipts of unordered merchandise.

                                  In addition, FTC officials told us that FTC has continued to work with
                                  other organizations, such as NAAG, to encourage these organizations to
                                  share consumer complaint information with FTC, so that more
                                  comprehensive data on consumer complaints can be centrally collected
                                  and maintained in FTC’s Consumer Information System (CIS). CIS fraud
                                  consumer complaint data are made available to various law enforcement
                                  organizations through FTC’s Consumer Sentinel website.

Postal Inspection Service         According to Postal Inspection Service officials, the Inspection Service’s
Activities                        efforts to educate consumers are important to its continuing fight against
                                  deceptive mail marketing practices. These efforts range from national to
                                  local activities that are designed to help consumers avoid being victimized
                                  by deceptive mail marketing practices. For example, the Inspection
                                  Service:

                                • mailed out postcards in May 1993, to about 210,000 households in the
                                  United States, informing consumers that they had won prizes and asked
                                  consumers to call a telephone number. However, when consumers called



                                  Page 13                                                     GAO/T-GGD-99-150
                               Statement
                               Deceptive Mail: Consumers’ Problems Appear Substantial




                               the number, they reached the Inspection Service and were warned against
                               responding to the postcards because similar solicitations are often used by
                               companies to scam consumers.

                             • is developing another postcard mailing to alert consumers to potential
                               problems that could be caused by deceptive mail and telemarketing and
                               identify a national hotline through which consumers may file complaints.
                               The postcards are to be distributed to about 114 million households
                               nationwide in October 1999.

                             • distributed in December 1994, a video news release that was sent to
                               various television news stations throughout the United States. The video
                               included information on how consumers could identify whether elderly
                               relatives were having problems in handling mailed material from
                               organizations.

                             • is developing a video that will include information to help consumers avoid
                               both problems with deceptive mail and other types of deceptive marketing
                               practices via the telephone. The video is scheduled for distribution to
                               about 16,000 public libraries around October 1999.

                               In addition, according to Postal Service field officials, the Service has and
                               continues to help educate consumers and raise their awareness about
                               deceptive mail practices. In many instances, postal field personnel work
                               with their local postal inspectors to prepare news releases and make
                               presentations before consumer groups.

State and Local Activities     Officials in the state and local organizations that we contacted cited the
                               following examples of their efforts to help educate consumers about
                               deceptive mail.

                             • Representatives from the Connecticut Office of the Attorney General have
                               conducted half-day consumer education sessions for groups of senior
                               citizens to provide them information about deceptive mail. Since January
                               1, 1999, the office has sponsored 4 sessions with about 1,000 consumers in
                               attendance.

                             • Since January 1999, staff from Florida’s Division of Consumer Services
                               have spoken to consumer groups, many of which involved senior citizens,
                               about fraud-related issues. These efforts focused on telemarketing fraud,
                               but have also involved discussions about deceptive mail, including
                               sweepstakes.




                               Page 14                                                       GAO/T-GGD-99-150
                                  Statement
                                  Deceptive Mail: Consumers’ Problems Appear Substantial




                                • In April 1999, local consumer affairs staff from Montgomery County,
                                  Maryland, conducted an adult education class focusing on consumers’
                                  rights and responsibilities, but information was also provided on
                                  sweepstakes and fake award notification letters.

                                • In the spring of 1999, the administrator of the Office of Consumer Affairs
                                  in Alexandria, Virginia, made a presentation on pyramid schemes received
                                  through the mail that pay commissions for recruiting distributors, not for
                                  making sales. The presentation was made to both staff in Alexandria’s
                                  Office of Aging and local consumers.

Activities of Nongovernmental     Various nongovernmental organizations, including DMA, AARP, and
Organizations                     Arizona State University, reported that to help educate consumers, these
                                  organizations offered conferences and seminars as well as distributed
                                  information on deceptive mail marketing practices. Representatives of the
                                  organizations identified several examples, which included

                                • DMA prepares and distributes action line reports on deceptive mail
                                  problems, as well as other marketing issues. These reports are distributed
                                  to approximately 800 to 900 consumer affairs professionals and press
                                  contacts who are encouraged to share the reports with consumers. A
                                  recent action line report, dated July 11, 1999, established a special
                                  Sweepstakes HelpLine, which is intended to help various caregivers, such
                                  as adult children, who care for elderly relatives; consumer affairs
                                  personnel; and social service professionals address problems some people
                                  may have with sweepstakes.

                                • AARP has conducted 26 training seminars throughout the United States
                                  that were attended by about 1,300 law enforcement professionals. The
                                  seminars were held during 1998 and provided the professionals with
                                  information on deceptive mail, including sweepstakes, prize promotions,
                                  and foreign lotteries.

                                • Arizona State University, in cooperation with AARP and the Office of the
                                  Arizona Attorney General, hosted a conference entitled “New Directions:
                                  Seniors, Sweepstakes and Scams.” The conference, which was held in
                                  October 1998, was designed for individuals who have been and continue to
                                  be involved in consumer education and awareness efforts. Among the
                                  conference attendees were representatives from FTC, the Postal
                                  Inspection Service, and NAAG. Information on deceptive mail marketing
                                  practices was presented and attendees were encouraged to share this
                                  information with consumers.




                                  Page 15                                                    GAO/T-GGD-99-150
                 Statement
                 Deceptive Mail: Consumers’ Problems Appear Substantial




                 Mr. Chairman, this concludes my prepared statement. I would be pleased
                 to respond to any questions you or the members of the Subcommittee may
                 have.

                 For future contacts regarding this testimony, please contact Bernard L.
Contact and      Ungar at (202) 512-8387. Individuals making key contributions to this
Acknowledgment   testimony included Gerald Barnes, Anne Hilleary, Lisa Wright-Solomon,
                 Anne Rhodes-Kline, and George Quinn.




                 Page 16                                                   GAO/T-GGD-99-150
Page 17   GAO/T-GGD-99-150
Attachment I

Scope and Methodology


                 In developing the scope and methodology for our work, we first obtained a
                 general description of the term “deceptive” as it could be applied to mailed
                 material. According to FTC, mailed material would generally be
                 considered deceptive if the material included a representation or practice
                 or if the material omitted information that caused a consumer to be misled
                 and eventually suffer some loss or injury, despite the fact that the
                 consumer behaved reasonably under the circumstances.

                 Both FTC and the Postal Inspection Service identified various types of
                 mailed material that have been used to induce consumers to remit money,
                 pay upfront fees, or purchase goods or services through deceptive means.
                 However, in many cases, the promised goods or services were not
                 delivered or were not of the quality that consumers may have reasonably
                 expected to receive. Some examples included

               • lotteries from foreign countries or from states that did not have authorized
                 lotteries.

               • chain letters that required consumers to remit payments to participants in
                 the chain letter scheme for which substantial financial returns were
                 promised but never delivered.

               • mailed material that involved various types of consumer credit schemes,
                 such as loans, credit repair offers, and credit card solicitations, for which
                 advance fees were required.

               • requests for charitable donations from organizations that were not
                 legitimate charities.

               • mailed material that looks as if it has been distributed or endorsed by a
                 government agency, also referred to as government look-alike mail.

                 In some instances, mailed material may be illegal in that it violates specific
                 postal or other statutes. For example, chain letters that request money or
                 other items of value and promise a substantial return to the participants
                 are generally illegal. Such letters are considered a form of gambling and
                 sending them through the mail violates section 1302 of Title 18 of the
                 U.S.Code, the Postal Lottery Statute.

                 To obtain updated information about the extent and nature of consumers’
                 problems with deceptive mail, as well as consumer education efforts, we
                 attempted to contact the 17 federal, state, and local agencies and
                 nongovernmental organizations that we contacted for our September 1998



                 Page 18                                                       GAO/T-GGD-99-150
  Attachment I
  Scope and Methodology




  testimony. In our earlier work, we identified these agencies and
  organizations as those which had been involved in dealing with consumers’
  complaints about questionable or deceptive mail marketing practices
  involving mailed sweepstakes material and cashier’s check look-alikes.
  The 17 agencies and organizations included 2 federal agencies—FTC and
  the Postal Inspection Service—as well as other state and local government
  agencies and nongovernmental organizations such as

• state attorneys general offices for such states as Florida and West Virginia;

• local government offices that handled consumer protection issues; and

• various nongovernmental organizations including (1) American
  Association of Retired Persons; (2) National Consumers League, which
  established National Fraud Information Center; and (3) Direct Marketing
  Association.

  Based on our most recent work efforts, we obtained information from 12
  of the 17 agencies and organizations, which are listed in attachment II to
  this statement. At the 12 agencies and organizations, we interviewed
  officials and reviewed documents to obtain available information about the
  extent and nature of consumers’ deceptive mail problems and consumer
  education efforts. Also, we obtained and analyzed consumer complaint
  data from FTC and Postal Inspection Service databases. In addition,
  during the course of our work, we obtained from FTC, the Postal
  Inspection Service, and 45 state attorneys general offices information on
  specific law enforcement actions involving organizations, companies, and
  individuals that attempted to defraud consumers through the use of
                  1
  deceptive mail.

  To obtain information about the consumer complaint process at the Postal
  Service, we interviewed postal headquarters officials in the Postal
  Inspection Service and the Postal Service’s Office of Consumer Advocate.
  Also, we interviewed postal officials at various field locations in different
  parts of the country who were knowledgeable about the consumer
  complaint process. Specifically, we spoke with consumer affairs and
  marketing officials in postal district offices and inspectors in Postal
  Inspection Service offices located in the metropolitan areas of Dallas,
  Texas; Los Angeles, California; and Washington, DC. In addition, to obtain

  1
   According to FTC, for Project Mailbox in fiscal year 1998, five states did not identify such actions.
  The states included Alaska, Louisiana, New Hampshire, Rhode Island, and Tennessee. Also, no such
  actions were identified for the District of Columbia.




  Page 19                                                                           GAO/T-GGD-99-150
Attachment I
Scope and Methodology




insight into how the consumer complaint process was implemented, we
visited 15 postal field facilities, including post offices and stations, that
were located in the metropolitan areas of Dallas, Texas; Los Angeles,
California; and Washington, DC. These locations were selected mainly
because staff from our Dallas Regional Office, as well as headquarters
staff, were available to conduct face-to-face meetings with appropriate
postal field employees.

In addition, we had an outside contractor conduct a survey to obtain
opinions from the U.S. adult population about specific types of deceptive
mail. Through the survey, we attempted to determine whether survey
respondents had received any mail delivered by the U.S. Postal Service
within the last 6 months involving sweepstakes or documents resembling
cashier’s checks that the respondents believed were in any way misleading
or deceptive.

We contracted with International Communications Research (ICR) of
Media, Pennsylvania, a national market research firm, to administer our
survey question, which was worded as follows.

“We would like to ask you a question concerning mail delivered by the U.S.
Postal Service. Within the last 6 months, have you received any mail
delivered by the U.S. Postal Service involving sweepstakes or documents
resembling cashier’s checks that you believe were in any way misleading
or deceptive?”

A total of 1,014 adults (18 and older) in the continental United States were
interviewed between November 18 and 22, 1998. The contractor’s survey
was made up of a random-digit-dialing sample of households with
telephones. Once a household was reached, one adult was selected at
random using a computerized procedure based on the birthdays of
household members. The survey was conducted over a 5-day period,
including both weekdays and weekends, and up to four attempts were
made to reach each telephone number.

To ensure that survey results could be generalized to the adult population
18 years of age and older in the continental United States, results from the
survey were adjusted by ICR to account for selection probabilities and to
match the characteristics of all adults in the general public according to
such demographic groups as age, gender, region, and education. Because
we surveyed a random sample of the population, the results of the survey
have a measurable precision or sampling error. The sample error is stated
at a certain confidence level. The overall results of our survey question



Page 20                                                        GAO/T-GGD-99-150
Attachment I
Scope and Methodology




regarding the public’s opinion about misleading or deceptive mail are
surrounded by 95 percent confidence levels of plus or minus 4 percentage
points or less.

The practical difficulties of conducting any survey may introduce
nonsampling errors. As in any survey, differences in the wording of
questions, in the sources of information available to respondents, or in the
types of people who do not respond can lead to somewhat different
results. We took steps to minimize nonsampling errors. For example, we
developed our survey question with the aid of a survey specialist and
pretested the question prior to submitting it to ICR.

We did our work from November 1998 through July 1999, in accordance
with generally accepted government auditing standards. We did not verify
consumer complaint data obtained from FTC and Postal Inspection
Service nor did we verify data provided by FTC, Postal Inspection Service,
and state Attorneys General offices on specific law enforcement actions.




Page 21                                                     GAO/T-GGD-99-150
Attachment II

List of Federal, State, and Local Government
Agencies and Nongovernmental Organizations
Contacted and Their Locations
                Name of agency/organization                                  Location
                Federal government agencies:
                Federal Trade Commission (FTC)                               Washington, D.C.
                U.S. Postal Inspection Service                               Washington, D.C.
                State government agencies (Offices of Attorneys General):
                Connecticut                                                  Hartford, Connecticut
                Florida                                                      Tallahassee, Florida
                Local government agencies:
                Citizen Assistance (Consumer Affairs) for City of Alexandria Alexandria, Virginia
                Consumer Affairs Division for Montgomery County              Rockville, Maryland
                Nongovernmental organizations:
                American Association of Retired Persons (AARP)               Washington, D.C.
                Arizona State University (Gerontology Program)               Tempe, Arizona
                Direct Marketing Association (DMA)                           Washington, D.C.
                National Association of Attorneys General (NAAG)             Washington, D.C.
                National Consumers League (NCL)/National Fraud Information
                Center (NFIC)                                                Washington, D.C.
                U.S. Public Interest Research Group (USPIRG)                 Washington, D.C.
                Source: GAO.




                Page 22                                                              GAO/T-GGD-99-150
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