oversight

Telecommunications: Overview of the Cramming Problem

Published by the Government Accountability Office on 1999-10-25.

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

                   United States General Accounting Office

GAO                Testimony
                   Before the Committee on Small Business,
                   U.S. Senate




For Release
on Delivery
Expected at
                   TELECOMMUNICATIONS
1:00 p.m. EDT
Monday
October 25, 1999
                   Overview of the Cramming
                   Problem
                   Statement of Stanley J. Czerwinski, Associate Director,
                   Housing and Community Development Issues,
                   Resources, Community, and Economic
                   Development Division




GAO/T-RCED-00-28
Mr. Chairman and Members of the Committee:

We are pleased to be at this hearing on Internet-related cramming directed
at small businesses. As you know, Mr. Chairman, cramming is the
inclusion of unauthorized, misleading, or deceptive charges on a
consumer’s telephone bill. Telephone companies can cram consumers by
adding unauthorized charges for telephone-related services, such as call
messaging. Cramming can also involve third-party vendors, who offer
products and services that are unrelated to telephone services, such as live
or recorded information about the stock market, sports, or products; chat
lines and dating services; club memberships; and services such as Internet
Web site designs.

Our statement today is based on our July 1999 report for Senator Susan M.
Collins, Chairman of the Senate Permanent Subcommittee on
Investigations, along with updated information that we obtained earlier
this month at your request.1 Details of our scope and methodology are
found in appendix I. We will discuss three topics: (1) the extent of
cramming complaints, (2) state and federal regulatory initiatives to protect
consumers from cramming, and (3) state and federal enforcement actions
against companies engaged in cramming. We will also mention actions
being taken by major regional telephone companies to curb cramming.

In summary:

Although there is no central source for the number of confirmed cramming
cases nationwide, we were able to gather information on consumers’
complaints about cramming from state and federal regulators and major
regional telephone companies. Overall, we found that consumers’
complaints to state authorities about cramming rose dramatically from
about 850 in 1996 to nearly 20,000 in 1998. While only 3 states reported
receiving cramming complaints in 1996, the total increased to 36 states by
1998. At the federal level, cramming complaints became the fourth most
common type of written complaint received by the Federal
Communications Commission (FCC) and the second most common type of
complaint received by the Federal Trade Commission (FTC) during 1998.
Four major regional telephone companies reported to us that they
received a combined total of about 160,000 unconfirmed cramming
complaints during 1998, and a fifth company reported substantially more
than that number during 1998. The picture for 1999 is a mixture of declines

1
 Telecommunications: State and Federal Actions to Curb Slamming and Cramming
(GAO/RCED-99-193, July 27, 1999).



Page 1                                                                    GAO/T-RCED-00-28
and increases, depending on the data source. Both FCC and FTC are
reporting declines in their complaint rates, as are all of the major regional
telephone companies. However, the situation at the state level remains
disturbing. Of the 38 state public utilities commissions we contacted this
month to obtain updated information on their cramming complaints, 18
reported declines in the number of complaints received, but 20 reported
either increases or no changes in the number of complaints received. In
addition, 23 of the 38 commissions noted that small businesses were being
charged for Web page designs and other Internet services that were never
authorized.

Both state and federal agencies are taking steps to protect consumers
from cramming. Most state public utilities commissions told us that they
provide consumers with information on ways to prevent cramming and
have administrative procedures for resolving complaints about telephone
billing. In addition, 18 of the 38 state public utilities commissions we
contacted this month reported enacting or proposing new rules designed
to combat cramming. At the federal level, FCC has developed consumer
information about cramming and streamlined the process by which
consumers can file complaints. In addition, FCC adopted a new order in
April 1999 requiring telephone companies to format their bills so that
consumers can more easily identify any unauthorized charges. Key parts of
this order are scheduled to become effective on April 1, 2000, though some
outstanding issues raised by members of the industry have not been
resolved. FTC also provides information to consumers about cramming and
takes their complaints. In October 1998, FTC proposed new rules for
combating cramming that, among other things, would require a
consumer’s express authorization before charges other than for local or
long-distance calling could be placed on the consumer’s telephone bill and
would allow the consumer to dispute any unauthorized charges. FTC plans
to issue a final rule this winter.

In the area of enforcement, public utilities commissions and attorneys
general in 16 states reported to us that from 1996 through 1998, they
completed 25 enforcement actions against companies or individuals for
cramming violations, resulting in over $3.5 million in penalties and
customer restitution. Eight states also reported initiating 22 enforcement
actions for cramming that had not been finalized when we conducted our
survey in early 1999. This month we learned that, since the beginning of
1999, 13 state attorneys general have reported completing an additional 22
enforcement actions, none of which were included in our July 1999 report.
These actions resulted in at least $460,000 in penalties and customer



Page 2                                                       GAO/T-RCED-00-28
             restitution. As of mid-October 1999, FCC had taken one enforcement action
             against cramming, and was working with FTC on another case. FTC has
             taken nine enforcement actions that have resulted in injunctions,
             restraining orders, and at least $52 million in consumer credits and
             restitution.

             FCC and FTC are also working with the states and telecommunications
             industry to curb this abuse. For example, in 1998, FCC sponsored a
             workshop with industry representatives to develop a set of “best
             practices” for combating cramming that telephone companies could use
             in developing their own anticramming procedures. The major regional
             telephone companies recently reported that they have a variety of
             measures in place to combat cramming, including several of the “best
             practices” developed at the FCC-sponsored workshop. FTC has also
             sponsored public workshops with telecommunications representatives,
             consumer groups, FCC officials, the National Association of Attorneys
             General, and others to address cramming and provide additional consumer
             education.


             Cramming is the inclusion on consumers’ telephone bills of charges that
Background   they did not knowingly authorize. Unauthorized charges can originate in a
             variety of ways. For example, a consumer may call a vendor’s advertised
             number to receive information or a service. Having obtained the
             consumer’s name and telephone number, the vendor may then levy a
             hidden or deceptive charge, even a recurring monthly charge, that the
             consumer did not know about and did not authorize. A consumer’s name
             and telephone number can also be obtained through sweepstakes entry
             forms, which may include some obscurely worded fine print authorizing
             charges to be placed on the consumer’s telephone bill. Some vendors
             apparently have simply lifted names and numbers from telephone
             directories to charge businesses for nonexistent services.

             In order to have charges placed on a consumers’ telephone bills, vendors
             typically use the services of companies called “billing aggregators,”
             which bundle billing information from many vendors. Billing aggregators
             contract with telephone companies to have the vendors’ charges included
             as part of the consumers’ telephone bills.

             The format of telephone bills can make it hard for consumers to recognize
             that they have been crammed, especially when the charges are identified
             only by nondescript phrases, such as “monthly fee,” “membership fee,”



             Page 3                                                    GAO/T-RCED-00-28
                       or “service charge.” The bills may not even clearly identify the names of
                       the vendors charging for these services, making it difficult for consumers
                       to contact them directly to have the charges explained or removed.

                       Both state and federal agencies are responsible for protecting consumers
                       from cramming and for taking regulatory and legal enforcement actions
                       against entities engaged in this abuse. At the state level, public utilities
                       commissions are responsible for regulating intrastate telephone services
                       and resolving consumers’ complaints, while attorneys general are
                       responsible for resolving consumers’ complaints about unfair and
                       deceptive marketing practices. At the federal level, FCC’s authority is
                       focused on preventing cramming by common carriers (telephone
                       companies) engaged in common carrier activities, while FTC’s authority is
                       focused on preventing cramming by companies that are not common
                       carriers, such as third-party vendors that charge for their services through
                       telephone bills. The Congress has, in some limited circumstances, granted
                       FTC concurrent authority with FCC to establish rules concerning certain
                       areas of telephone billing and collection.

                       Consumers who are the victims of cramming can attempt to resolve the
                       problem by directly contacting their telephone company or the vendor
                       involved. They can also file a complaint with their state public utilities
                       commission or their state attorney general’s office. These two state-level
                       bodies may attempt to resolve the complaint informally, or they may take
                       formal regulatory or legal action, as authorized by state statute, against the
                       offending company. In addition, consumers can send complaints about
                       cramming to both FCC and FTC. Each complaint that FCC receives is sent to
                       the appropriate company. The company in turn sends its response to the
                       complaint to both FCC and the affected consumer. On the basis of these
                       complaints, FCC investigates patterns of cramming and takes enforcement
                       actions when appropriate. FTC uses the cramming complaints it receives,
                       along with complaint data provided by state-level sources and other
                       contributors to its complaint database, to take law enforcement actions
                       against individuals and companies engaged in this abuse.


                       The number of cramming complaints received by state and federal
Cramming Complaints    agencies increased dramatically from 1996 through 1998 (see table 1). In
to State and Federal   1996, only three states reported receiving complaints about cramming. In
Authorities            1997, 16 states received a total of 1,188 cramming complaints. By the end
                       of 1998, 36 states had received 19,543 complaints about this abuse. The
                       situation is similar at the federal level. FCC and FTC have seen cramming



                       Page 4                                                       GAO/T-RCED-00-28
                                      emerge as a major problem as the number of cramming complaints to both
                                      agencies sharply increased from 1997 to 1998. In 1998, cramming became
                                      the fourth most common cause of written complaints received by FCC and
                                      the second most common cause of complaints received by FTC.2

Table 1: Number of Cramming
Complaints Reported to State Public                                       Cramming
Utilities Commissions, FCC, and FTC                            complaints received                  Cramming                 Cramming
for Calendar Years 1996-98                                            by state public    complaints received        complaints received
                                      Calendar year           utilities commissions        in writing by FCCa                   by FTCb
                                      1996                                         852                          0                        221
                                      1997                                       1,188                          0                      3,173
                                      1998                                     19,543                      4,558                       9,827
                                      a
                                       A consumer may call FCC’s National Call Center with either an inquiry or a complaint. While FCC
                                      keeps track of inquiries and complaints received by the Call Center for trend and analytical
                                      purposes, it did not, until recently, take action until a consumer had submitted a written complaint,
                                      accompanied by bills and any other supporting documentation. These FCC numbers reflect
                                      written complaints only.
                                      b
                                          The numbers for FTC include complaints received by mail, telephone, and the Internet.

                                      Sources: State public utilities commissions’ responses to GAO’s survey and data from FCC and
                                      FTC.



                                      The numbers in table 1 do not capture complaints about cramming that
                                      consumers tried to resolve by dealing directly with their telephone
                                      company or third-party vendor without filing a complaint with state or
                                      federal authorities. At present, there is no central source of data on
                                      verified cases of cramming. During early 1999, we contacted major
                                      regional telephone companies to obtain data directly from them on the
                                      number of cramming complaints they received during 1998.3 The results
                                      we obtained were incomplete and highly qualified. Several companies told
                                      us that they did not begin tracking cramming complaints until the middle
                                      of 1998 and that, in any event, their numbers represented unverified
                                      complaints, which may prove to be unwarranted upon investigation. Four
                                      companies reported a combined total of about 160,000 unverified


                                      2
                                       The data in table 1 have some important qualifications. The complaint numbers do not equate to
                                      verified cramming incidents, since a complaint could prove to be unwarranted upon investigation. For
                                      example, a customer might misinterpret a legitimate service charge and mistakenly complain about
                                      being crammed. Also, adding state and federal complaint numbers together could result in some
                                      double-counting because consumers can complain to both state and federal authorities about a single
                                      cramming incident.
                                      3
                                       The regional companies consider the cramming data provided to us to be proprietary. To protect the
                                      confidentiality of the data, we agreed to report only cumulative totals for all companies. The
                                      companies included Ameritech, Bell Atlantic, BellSouth, SBC Telecommunications, and US WEST. We
                                      did not attempt to gather data from hundreds of smaller local service providers.



                                      Page 5                                                                            GAO/T-RCED-00-28
                       cramming complaints for all or part of 1998, and a fifth company reported
                       substantially more than that number.

                       The situation for 1999 is a mixture of declines and increases, depending on
                       the data source. At the federal level, FCC reported 2,929 cramming
                       complaints from January 1999 through September 1999, and FTC reported
                       5,153 cramming complaints. For both agencies, these numbers for the first
                       9 months of 1999 represent a downward trend from 1998 levels. Major
                       regional telephone companies are also reporting declines in cramming
                       complaint levels, according to information they provided to FCC this
                       summer. The companies attributed their improved numbers to actions
                       they have taken to crack down on cramming.

                       At the state level, the complaint numbers remain disturbing. We contacted
                       38 state public utilities commissions this month to obtain updates on their
                       cramming complaints. While 18 states reported declines in the number of
                       complaints received, 20 states reported either increases or no changes in
                       the number of complaints received.4 In addition, 23 of the 38 states noted
                       that small businesses were being charged for Web site designs and other
                       Internet services that were never authorized. The offices of attorney
                       general in North Carolina and North Dakota have begun to track this type
                       of cramming as a separate category.


                       Both the states and the federal government have taken action to help
Consumer Protections   protect consumers against cramming. Most states have some protections
Against Cramming       against cramming, and many are making efforts to alert consumers to
                       cramming and provide guidance on dealing with this abuse. At the federal
                       level, FCC adopted a new order in April 1999 (“Truth-in-Billing”) to
                       combat cramming. This order requires telephone bills to clearly identify all
                       charges and highlight any changes in service so that consumers can more
                       easily spot unauthorized charges. FTC has also proposed regulatory
                       changes that would address cramming by, among other things, requiring a
                       consumer’s express authorization to charge for services other than local or
                       long-distance calling, enhancing the consumer’s right to dispute


                       4
                        The public utilities commissions reporting declines in cramming complaint levels were Alabama,
                       Arizona, Delaware, Florida, Idaho, Illinois, Indiana, Maryland, Michigan, Montana, Nevada, Ohio,
                       Oregon, Pennsylvania, Texas, Vermont, Wisconsin, and Wyoming. The public utilities commissions
                       reporting increases in cramming complaint levels were Iowa, Missouri, North Carolina, Oklahoma,
                       Rhode Island, South Carolina, South Dakota, Tennessee, Utah, and Virginia. The public utilities
                       commissions in Arkansas, Connecticut, Hawaii, Louisiana, Maine, Massachusetts, Minnesota,
                       Mississippi, New Hampshire, and Washington reported that the number of cramming complaints they
                       received in 1999 was about the same as they had received in 1998.



                       Page 6                                                                       GAO/T-RCED-00-28
                                 unauthorized charges, and imposing liability on those engaged in
                                 cramming.


State-Level Consumer             In early 1999, 41 state public utilities commissions reported to us that they
Protections Against              had initiated some actions to help prevent cramming. These actions
Cramming                         included providing consumers with educational brochures and
                                 information on Internet sites and establishing procedures for handling
                                 cramming complaints. Some state commissions reported that they refer
                                 cramming complaints to FCC. In addition, a few state commissions
                                 reported taking additional actions to increase their ability to protect
                                 consumers from cramming. For example, during 1998, Illinois passed
                                 legislation that in part enhanced the enforcement actions the Illinois
                                 Commerce Commission can take to protect customers from telephone
                                 cramming. Specifically, the legislation gave the Commission the authority
                                 to fine an offending company up to $1,000 for each repeated and
                                 intentional cramming violation as well as revoke the company’s certificate
                                 to provide service in the state. In addition, the Tennessee Regulatory
                                 Authority implemented new regulations in 1998 against cramming that
                                 require the prior consent of an authorized individual before charges for
                                 additional services can be placed on the telephone bill. The Authority can
                                 assess a maximum fine of $100 per day, per offense, against a company
                                 engaging in cramming. The California Public Utilities Commission and the
                                 Indiana Utility Regulatory Commission also recently implemented rules
                                 detailing the types of information required before charges for other
                                 services can be added to a consumer’s telephone bill. In addition, 18 of the
                                 38 public utilities commissions we contacted this month stated that their
                                 states had either enacted or proposed new rules to combat cramming.5


Federal Consumer                 Both FCC and FTC have undertaken rulemakings to provide consumers with
Protections Against              greater protections against cramming. They have also increased their
Cramming                         consumer education efforts and are making it easier for consumers to file
                                 complaints about this abuse.

FCC’s “Truth-in-Billing” Order   According to FCC, over 60,000 consumers made inquiries to the agency in
to Help Combat Cramming          1998 about the confusing format of their telephone bills. FCC believes that
                                 this confusion is contributing to the rise in cramming because consumers
                                 are having difficulty detecting unauthorized charges. On April 15, 1999, FCC
                                 adopted its “Truth-in-Billing” order, which establishes principles and

                                 5
                                  These states include Alabama, Florida, Illinois, Indiana, Iowa, Maine, Maryland, Massachusetts,
                                 Montana, New Hampshire, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia,
                                 and Washington.



                                 Page 7                                                                       GAO/T-RCED-00-28
                                 guidelines to make telephone bills easier for customers to understand.6
                                 The new rule, which FTC commented on and supports, requires that
                                 telephone bills (1) clearly identify who is responsible for each charge,
                                 (2) include full and nonmisleading descriptions of the services being
                                 billed, and (3) provide telephone numbers for consumers to call for more
                                 information about specific charges on their bills.

                                 This new order was originally to go into effect earlier this year. However,
                                 in September 1999, FCC announced that the implementation date for parts
                                 of the order was being postponed until April 1, 2000. This date applies to
                                 compliance with the requirement that common carriers highlight new
                                 service providers and identify deniable and nondeniable charges. All other
                                 deadlines under the rule, including a requirement that common carriers
                                 separate charges on bills by service provider, take effect 30 days after the
                                 notice’s publication in the Federal Register on October 12, 1999. FCC stated
                                 that the postponement came about because the Office of Management and
                                 Budget raised concerns that the original implementation date could impair
                                 the ability of some telephone companies, especially small and
                                 medium-sized ones, to ensure that their computer systems were Year 2000
                                 compliant.7 FCC has also received several petitions for waivers, stays, and
                                 other forms of relief from the guidelines adopted in the order and
                                 continues to work to resolve these issues.

FTC’s Proposed Revision to the   FTC is also taking action to combat cramming. Under a proposed revision
“Pay-per-Call” Rule              to its “Pay-per-Call” rule, FTC has laid out a fourfold approach to
                                 cramming.8 First, a consumer’s express authorization generally would be
                                 required for purchases unrelated to local or long-distance telephone
                                 service that are billed to the consumer’s telephone account. Second, a
                                 vendor would be prohibited from placing monthly or other recurring
                                 charges for pay-per-call service on a telephone bill without prior

                                 6
                                  “Truth-in-Billing and Billing Format,” CC Docket No. 98-170, FCC 99-72 (rel. May 11, 1999).
                                 7
                                  The Year 2000 problem is rooted in how dates are recorded and computed. For the past several
                                 decades, systems have typically used two digits to represent the year, such as “98” for 1998, to save
                                 electronic storage space and reduce operating costs. In this two-digit format, however, 2000 is
                                 indistinguishable from 1900. Because of this ambiguity, date-dependent software, firmware, and
                                 hardware could generate incorrect results or fail to operate altogether when processing years beyond
                                 1999.
                                 8
                                  Under the authority of the Telephone Disclosure and Dispute Resolution Act of 1992, FTC adopted its
                                 Pay-per-Call rule to curtail the unfair and deceptive practices engaged in by some pay-per-call
                                 businesses. 16 C.F.R. part 308. At that time, pay-per-call services were generally provided via “900”
                                 numbers that were billed directly to a consumer’s local telephone company. Since then,
                                 “telephone-billed purchases” have expanded beyond simply “900” numbers. The
                                 Telecommunications Act of 1996 authorized FTC, through its rule, to extend the definition of the term
                                 “pay-per-call service.” On October 30, 1998, FTC published a notice of proposed rulemaking to revise
                                 the rule. 63 Fed. Reg. 58524. Part of this revision focuses on cramming.



                                 Page 8                                                                            GAO/T-RCED-00-28
                              agreement with the customer billed for the service. Third, consumers
                              would have the legal right to dispute unauthorized charges “crammed”
                              onto their telephone bills and to have these charges removed. Finally,
                              dispute resolution protections would be provided for all transactions that
                              resulted in the placement of nontoll charges on a customer’s telephone
                              bill. Violators would be liable for civil penalties, currently $11,000 per
                              violation. FTC officials currently expect to issue a final rule sometime this
                              winter.

Federal Complaint-Reporting   FCC and FTC are augmenting their regulatory efforts with expanded
and Education Initiatives     consumer outreach and education, which are key elements in combating
                              cramming. FCC is making it easier for consumers to submit complaints
                              about cramming. In the past, FCC required consumers to submit complaints
                              in writing before it took action on them. Since January 1999, consumers
                              have been able to file complaints electronically via FCC’s Internet Web site.
                              And in June 1999, operators at FCC’s National Call Center started taking
                              consumers’ complaints over the telephone and electronically submitting
                              them for action directly to FCC’s Common Carrier Bureau. In response to
                              each complaint, the Bureau electronically issues an “Official Notice of
                              Informal Complaint” to all companies identified in the complaint.9 A
                              served company has 30 days to respond to FCC. FCC is also automating
                              some of its old manual processes for handling consumers’ complaints in
                              order to shorten its response time. In addition, FCC is bolstering its
                              customer education efforts by making information about cramming
                              available on its public Internet Web site. FCC is in the process of
                              establishing a centralized Consumer Information Bureau to be more
                              responsive to consumers’ concerns and requests for information. It is also
                              in the process of establishing a centralized Enforcement Bureau to better
                              marshal its resources for taking actions against entities that violate its
                              rules.

                              FTC has expanded its efforts to educate consumers about telephone billing
                              abuses by creating a Web page on cramming and has formed a
                              telecommunications working group to develop consumer education
                              publications. These materials emphasize that a consumer does not owe a
                              payment for unauthorized (crammed) services just because the call for the
                              service may have been placed from his or her home. In 1999, FTC added a
                              toll-free number for consumers to call with complaints about cramming
                              and other abuses and to obtain information on how to avoid such
                              problems. FTC’s database system, called the Consumer Sentinel, also

                              9
                               The issuance of a notice of informal complaint does not necessarily indicate wrongdoing by the
                              served company.



                              Page 9                                                                          GAO/T-RCED-00-28
                       contains details on over 210,000 consumer complaints on all topics,
                       including complaint data provided by a variety of organizations, such as
                       Better Business bureaus, state attorneys general, the National Fraud
                       Information Center, Phone Busters, and private companies. FTC uses the
                       database to develop enforcement strategies against companies engaged in
                       abusive trade practices, including cramming.10


                       Both state and federal enforcement actions against companies engaged in
State and Federal      cramming have resulted in financial penalties, restitution, and
Enforcement Actions    discontinued operations.
Against Cramming
Completed State        As of the end of 1998, 16 states had successfully completed 25
Enforcement Actions,   enforcement actions against companies and individuals engaged in
1996-98                cramming that have resulted in over $3.5 million in fines and other
                       penalties. In each of these cases, the public utilities commission and/or the
                       attorney general’s office participated in a formal hearing against the
                       violator that resulted in a final disposition or resolution of the case.

                       Usually, the accused company or individual was ordered to resolve the
                       complaint by providing consumers with some restitution, paying a penalty,
                       or providing an assurance that the cramming would stop. As shown in
                       table 2, the 16 states ordered companies to pay at least $1.7 million in
                       customer restitution11 and $1.8 million in penalties and fines.12 These
                       completed enforcement actions affected at least 42,000 consumers. These
                       totals, however, understate the actual outcomes of these actions because
                       the survey responses of state public utilities commissions and attorneys
                       general did not always include the number of consumers affected or the
                       amount of customer restitution and penalties involved.




                       10
                         Over 170 law enforcement agencies in the United States and Canada also have access to this database
                       to assist them in their own consumer protection efforts.
                       11
                        Customer restitution can include a complete or partial refund of the money consumers paid for
                       unauthorized services.
                       12
                        Penalties and fines include charges to cover the costs of court proceedings and investigations. In
                       some cases, the penalties and fines were used to cover the costs of consumer education campaigns.



                       Page 10                                                                         GAO/T-RCED-00-28
Table 2: Completed Enforcement
Actions Taken by State Public Utilities                               Number of                              Total amount         Total amount
Commissions and State Attorneys                                       completed            Number of          of customer          of penalties
General for Cramming, 1996-98                                       enforcement            customers            restitution           and fines
                                          State                          actions             affected             reported             reported
                                          California                              2             30,000a            $650,000              $25,000
                                          Florida                                 3                    2                 579              21,000
                                                                                                        a
                                          Georgia                                 1
                                                                                                                              b
                                          Idaho                                   1                    5                                    1,500
                                          Illinois                                1                   57            500,000               20,000
                                                                                                        a
                                          Kentucky                                1                                                         2,000
                                                                                                        a                     b                      c
                                          Missouri                                2
                                                                                                                             b
                                          New York                                3                 172              67,000              129,000
                                                                                                        a                     b
                                          North Carolina                          1                                                      273,000
                                                                                                        a
                                          Oregon                                  3                                                       14,350
                                                                                                        a                     b
                                          Pennsylvania                            2                                                    1,002,500
                                          Rhode Island                            1                   14                 400              35,000
                                          South Dakota                            1                    1                 229
                                                                                                                              b
                                          Tennessee                               1             11,878                                   280,000
                                                                                                        a
                                          Virginia                                1                                 435,000               15,000
                                                                                                        a
                                          Wisconsin                               1                                  40,000               25,000
                                          Total                                  25             42,129          $1,693,208           $1,843,350
                                          a
                                           The number of customers affected was not provided in at least one of the reported actions.
                                          b
                                           Restitution was ordered to be paid in at least one of the reported actions, but the specific amount
                                          was not provided.
                                          c
                                           A penalty was ordered to be paid in at least one of the reported actions, but the specific amount
                                          was not provided.

                                          Sources: State public utilities commissions’ responses to GAO’s survey and responses of state
                                          attorneys general to a survey from the National Association of Attorneys General.



                                          In addition to these completed cases, three state public utilities
                                          commissions and five state attorneys general reported initiating 22 other
                                          enforcement actions against entities engaged in cramming. These actions
                                          had not been finalized when we conducted our survey in early 1999.13 This
                                          month we learned that, since the beginning of 1999, 13 state attorneys
                                          general reported completing an additional 22 enforcement actions, none of




                                          13
                                            The state public utilities commissions in Florida, Maine, and West Virginia, and the attorneys general
                                          in Illinois, Missouri, New Jersey, Ohio, and Wisconsin reported the pending cramming enforcement
                                          actions.



                                          Page 11                                                                           GAO/T-RCED-00-28
                           which were included in our July 1999 report.14 These actions resulted in at
                           least $460,000 in penalties and customer restitution. Four of the 38 public
                           utilities commissions we contacted this month also reported five more
                           pending enforcement actions for telephone cramming.15


Federal Enforcement        At the federal level, both FCC and FTC have taken enforcement actions
Actions Against Cramming   against entities engaged in cramming. FCC and FTC, however, operate under
                           different statutory schemes and generally have different remedies
                           available.16 As a regulatory agency, FCC has several tools for achieving its
                           enforcement goals. These include administrative remedies, such as
                           revoking a company’s operating authority, issuing a cease and desist
                           order, and assessing civil monetary penalties (forfeitures). As a law
                           enforcement agency, FTC pursues cramming in federal district courts,
                           seeking temporary and permanent injunctive relief and, ultimately,
                           restitution for affected customers. FTC can also take administrative
                           enforcement action, such as convening a trial before an administrative law
                           judge.

                           FCC has brought an enforcement action against one common carrier, Long
                           Distance Direct, Inc. (LDDI) for violations related to both cramming and
                           slamming. (Slamming involves switching a consumer’s telephone service
                           provider without the consumer’s authorization.) LDDI allegedly changed
                           consumers’ long distance service providers to LDDI and billed consumers
                           for “membership fees” simply on the basis of the consumers’ calls to a
                           “psychic hotline” service. In some cases, there was no evidence of
                           contact with the affected consumer.




                           14
                            The attorneys general in Arkansas, Florida, Idaho, Illinois, Kansas, Michigan, New Jersey, North
                           Carolina, Ohio, Oregon, Pennsylvania, Tennessee, and Texas reported these completed enforcement
                           actions.
                           15
                             The state public utilities commissions in Florida, Mississippi, North Carolina, and Tennessee
                           reported the most recently pending cramming enforcement actions.
                           16
                             Under the Communications Act of 1934, as amended, FCC has general authority to prohibit carriers
                           that provide interstate services (telephone companies) from engaging in unjust and unreasonable
                           practices, such as cramming. 47 U.S.C. 201(b). FTC, under the Federal Trade Commission Act, as
                           amended, has the authority to pursue law enforcement actions against unfair and deceptive acts or
                           practices. 15 U.S.C. 45(a). Common carriers (i.e., telephone companies) subject to the
                           Communications Act of 1934, as amended, are exempt from FTC’s statutory mandate under the
                           Federal Trade Commission Act. 15 U.S.C. 45(a)(2). FTC has taken the position that the statutory
                           common carrier exemption does not shield the non-common-carrier activities of an entity that may
                           otherwise engage in some common-carrier activities under another statute.


                           Page 12                                                                           GAO/T-RCED-00-28
FTC has brought nine cramming cases to court since April 1998 that have
resulted in at least $52 million in consumer credits and restitution.17 These
cases involve 22 companies, including billing aggregators and vendors. In
eight cases, FTC has sought and successfully obtained preliminary or
permanent injunctions, or temporary restraining orders, to stop these
companies’ cramming activities. In addition, FTC is seeking restitution for
the unauthorized charges that these companies collected from consumers.
According to FTC officials, these unauthorized charges range from
$4.7 million in one case to almost $40 million in another case. Of the nine
cases brought to district court, four cases have been settled with
substantial redress. The case involving Interactive Audiotext Services, Inc.,
resulted in approximately $11 million in consumer restitution and
compliance provisions, including a 3-year record-keeping requirement for
the company. In the second case, involving American Telnet, Inc., the
parties have agreed to $39.7 million in consumer restitution and changes in
their business practices. In the third case, Hold Billing Services, Ltd.,
agreed to $1.6 million in consumer redress. The fourth case, which
involved unauthorized charges to small businesses for Web site services
that were purportedly free for a trial period, was just settled earlier this
month with the company, U.S. Republic Communications, Inc. The other
five cases were still in various stages of discovery and negotiation as of
October 1999. Additional details on these cases are found in appendix II.

Officials at both FCC and FTC told us that they have several additional
investigations in progress, including one joint investigation. They expect to
take more enforcement actions against cramming before the end of this
year. They also told us that they are working with their state counterparts
to efficiently combat cramming. For example, the two federal agencies
share complaint data with each other and the states. FCC and the National
Association of Regulatory Utility Commissioners are also working to
coordinate their enforcement actions and jointly disseminate educational
materials on telecommunications issues affecting consumers. Both FCC
and FTC officials told us that they regularly participate in conference calls
with representatives from the state public utilities commissions and
attorneys general, respectively, to discuss telecommunications issues,
including cramming.




17
   FTC’s Fighting Consumer Fraud: The Case Against Cramming, June 1999, discusses its actions
against cramming.



Page 13                                                                        GAO/T-RCED-00-28
                          FCC and FTC officials also noted that that they are working with members
Industry Actions to       of the telecommunications industry to curb cramming. For example, in
Curb Cramming             May 1998, FCC sponsored a workshop, attended by representatives of the
                          telephone industry, to develop a set of voluntary guidelines on “best
                          practices” in combating cramming that individual companies could
                          consider implementing. These best practices cover issues such as
                          screening products and service providers to identify programs that may be
                          deceptive or misleading, establishing procedures for verifying that charges
                          have been authorized by the consumer, and establishing a dispute
                          resolution process. In addition, FTC has sponsored public workshops with
                          industry representatives, consumer groups, FCC officials, the National
                          Association of Attorneys General, and others to address cramming and
                          provide additional consumer education.

                          Earlier this year, several major local and long-distance telephone
                          companies provided us with information on initiatives they have
                          undertaken to deal with cramming. Among them are the following:

                      •   Using brochures, press releases, and Web sites to educate customers on
                          what constitutes cramming, what their rights are, and what steps they can
                          take if they have been victims of cramming.
                      •   Limiting billing to vendors engaged in telecommunications-related
                          services.
                      •   Eliminating billing for certain products and services susceptible to abuse
                          by third-party service providers, such as prepaid calling cards and debit
                          cards.
                      •   Eliminating billing for recurring monthly service charges associated with
                          pay-per-call 900 number services or charges for services accessed via 800
                          and 888 numbers, which are widely associated in the public’s mind with
                          toll-free calling.
                      •   Refusing to bill on behalf of programs that use sweepstakes or “check
                          box” methods to sign up customers.
                      •   Requiring information providers to provide clearer billing descriptions,
                          toll-free numbers for complaints, and procedures for handling complaints.
                      •   Requiring information providers to provide a notarized affidavit attesting
                          to the validity of their descriptions and billings; requiring billing
                          aggregators to sign an affidavit certifying that the third-party charges they
                          are submitting are authorized by the consumer.

                          The companies maintain that measures such as these (which reflect
                          several of the FCC workshop’s “best practices”) have been effective in




                          Page 14                                                      GAO/T-RCED-00-28
                   combating cramming, as evidenced by the generally declining volume of
                   cramming complaints that they reported receiving during 1999.


                   Mr. Chairman, this concludes my prepared remarks. We would be pleased
                   to respond to questions that you and Members of the Committee may have
                   at this time.


                   For information about this testimony, please contact Stan Czerwinski at
Contact and        (202) 512-7631. Individuals making key contributions to this testimony
Acknowledgements   include John Finedore, Mindi Weisenbloom, Mike Volpe, Terri Russell,
                   Martha Chow, Faye Morrison, Ed Warner, and James Sweetman.




                   Page 15                                                   GAO/T-RCED-00-28
Appendix I




                        Our objective for this testimony was to provide general background
Objective, Scope, and   information on cramming and efforts to combat it. We based our testimony
Methodology             largely on the work we did for our recent report, Telecommunications:
                        State and Federal Actions to Curb Slamming and Cramming
                        (GAO/RCED-99-193, July 27, 1999). The objectives of that report were to
                        describe the (1) number of complaints about slamming and cramming
                        received by state and federal authorities, (2) types of protections
                        implemented by state and federal authorities to increase consumers’
                        ability to protect themselves against slamming and cramming, and
                        (3) state and federal enforcement actions taken against slamming and
                        cramming violations from 1996 through 1998.

                        To determine the states’ actions to combat cramming, we administered a
                        survey to the public utilities commissions in the 50 states and the District
                        of Columbia early in 1999. This survey collected information on the types
                        of consumer protections offered by the states, the number of cramming
                        complaints received, and details on each of the formal enforcement
                        actions taken by the commissions from 1996 through 1998. The National
                        Association of Attorneys General collected similar information about
                        formal enforcement actions taken by each state’s attorney general. We
                        assisted in collecting this information. In addition, we reviewed relevant
                        FCC and FTC documents and met with officials of these agencies to discuss
                        their efforts in developing regulations to combat cramming and their
                        enforcement actions against those engaging in this abuse. We also
                        contacted regional Bell operating companies and major long-distance
                        companies for data on cramming complaints and descriptions of their
                        initiatives to curb cramming.

                        During October 1999, we obtained updated information on cramming
                        complaints and enforcement actions from FCC, FTC, and 38 state public
                        utilities commissions. We also obtained an update on cramming
                        enforcement actions reported by some state attorneys general to the
                        Illinois Office of Attorney General. To update cramming complaint data
                        from major regional telephone companies, we relied on their responses to
                        a July 1999 request by FCC for information on their anticramming initiatives
                        and current complaint levels.

                        Our initial review, performed from December 1998 through June 1999, and
                        our October 1999 update were conducted in accordance with generally
                        accepted government auditing standards.




                        Page 16                                                      GAO/T-RCED-00-28
Appendix II

FTC’s Enforcement Actions Against
Cramming

              The Federal Trade Commission (FTC) protects consumers by taking law
              enforcement actions against unfair or deceptive acts or practices.1
              According to FTC officials, the Telephone Disclosure and Dispute
              Resolution Act (TDDRA) of 1992, as amended, gives FTC the authority to
              regulate all “telephone-billed purchases” that are distinct from charges
              for the transmission of local or long-distance telephone calls.2 FTC seeks
              and obtains temporary restraining orders, preliminary injunctions,
              permanent injunctions, and other equitable relief, such as the appointment
              of receivers, to halt unfair or deceptive practices and to reserve the
              offending companies’ assets for consumer restitution.

              Between April 1998 and October 1999, FTC filed nine cases against 22
              companies for cramming violations. In some instances, FTC entered into
              court-approved settlements with the companies. Table II.1 provides details
              on the publicly filed enforcement actions that FTC took during this period.




              1
               Common carriers (i.e., telephone companies) subject to the Communications Act of 1934, as
              amended, are exempt from FTC’s statutory mandate under the Federal Trade Commission Act. 15
              U.S.C. 45(a)(2). FTC has taken the position that the statutory common carrier exemption does not
              shield the non-common-carrier activities of an entity that may otherwise engage in some
              common-carrier activities under another statute.
              2
               Under TDDRA, the term “telephone-billed purchase” includes any purchase that is completed solely
              as a consequence of the completion of a telephone call, or the subsequent dialing or comparable action
              of the caller. The term specifically excludes all “local exchange” or interexchange telephone service.



              Page 17                                                                         GAO/T-RCED-00-28
                                                   Appendix II
                                                   FTC’s Enforcement Actions Against
                                                   Cramming




Table II.1: FTC’s Publicly Filed Cramming Cases, as of October 1999
                                                     Amount of suspect                                             Comments and
Company                       Date of action         billing                           Status                      additional information
Interactive Audiotext            4/22/98, in U.S. District   $11 million               Permanent injunction;       Settlement entered as
Services, Inc. Includes          Court for the Central                                 about $11 million in        final order; redress
American Billing and             District of California;                               restitution to consumers.   phase under way and
Collection Services, U.S.        amended filing on                                                                 changes required in
Interstate Distributing, Inc.;   5/28/98.                                                                          business practices.
and Allstate
Communications
(parent company).
International Telemedia          7/10/98, in U.S. District   $17,100,000               Temporary restraining       Bankruptcy court has
Associates, Inc. (ITA); and      Court for the Northern                                order with freezing of      appointed a trustee for
Online Consulting Group          District of Georgia.                                  Online’s assets and         ITA; ITA is closed down
(vendor for ITA).                                                                      preliminary injunction;     and trustee is winding up
                                                                                       receiver appointed to       its business affairs.
                                                                                       manage Online.              Receiver is closing down
                                                                                                                   Online after deciding
                                                                                                                   that it could not be run
                                                                                                                   as a lawful business.
Hold Billing Services, Ltd.; 7/16/98, in U.S. District       $4.7 million              Permanent injunction on     Settlement entered as
HBS Inc.; Avery              Court for the Western                                     9/22/99; $1.6 million in    final order.
Communications (all closely District of Texas.                                         consumer redress.
related companies that are
aggregators); and Veterans
of America Association, Ltd.
(VOAA) (vendor).
Communications Concepts 12/22/98, in U.S. District           Not yet determined;       Not yet determined.         Formal discovery and
and Investments, Inc. d/b/a Court for the Southern           formal discovery is under                             negotiations are under
Crown Communications         District of Florida.            way.                                                  way.
and Crown
Communications Two, Inc.;
and Global Collections, Inc.
(Crown’s in-house collection
agency).
Shared Network Services,         6/7/99, in U.S. District    Not yet determined.       Stipulated preliminary      Resolution not yet
LLC, d/b/a Shared Network        Court for the Eastern                                 injunction; discovery is    determined.
Services and 1st Page            District of California.                               under way.
Wazzu Corporation                6/7/99, in U.S. District    Not yet determined.       Temporary restraining     Resolution not yet
                                 Court for the Central                                 order; discovery is under determined.
                                 District of California.                               way.
American Telnet, Inc.            6/8/99, in U.S. District    $39.7 million             Permanent injunction;       The parties have agreed
                                 Court for the Southern                                complaint and consent       to $39.7 million in
                                 District of Florida.                                  filed together.             forgiven charges and
                                                                                                                   redress to consumers,
                                                                                                                   and changes required in
                                                                                                                   business practices.
                                                                                                                                 (continued)




                                                   Page 18                                                               GAO/T-RCED-00-28
                                               Appendix II
                                               FTC’s Enforcement Actions Against
                                               Cramming




                                                           Amount of suspect                                 Comments and
Company                       Date of action               billing                 Status                    additional information
Web Valley, Inc.; Profile    7/4/99, in U.S. District      $9 million              Preliminary injunction.   Resolution not yet
National Business Directory, Court for Minnesota.                                                            determined.
Inc.; National Business
Directory, Inc.; Protel
Advantage, Inc.; U.S. Protel
U.S. Republic                 10/14/99, in U.S. District   To be determined.       Complaint and final       Up to 124,000
Communications, Inc.; T.      Court for the Southern                               consent filed together.   consumers may receive
Gary Remy                     District of Texas.                                                             redress as a result of this
                                                                                                             settlement; changes
                                                                                                             required in business
                                                                                                             practices.

                                               Source: FTC




(385833)                                       Page 19                                                             GAO/T-RCED-00-28
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