How Online Fraud Works?

Public warnings

 

Perhaps you've received an e-mail from someone claiming to be a Nigerian government official. He asks for help in placing a large sum of money in an overseas bank account like yours for safekeeping. If you help, you'll share in a percentage of millions of dollars.

All you need to do is provide your bank name and account numbers -- and pay some bribes and incidental charges that'll be repaid once the money is deposited. But, if you do as he says, you'll find yourself the victim of online fraud.

Online thieves look for credit card information.

Or, maybe PayPal or your bank has sent an official-looking e-mail questioning whether someone else is dipping into your account. For verification, they ask that you click on a link, go to what seems to be their site and type in bank or credit card account numbers. "That's odd," you may think "they already have all that information." And you would be right.

Once again, you're staring at potential online fraud.

Before the Internet, fraud attempts were more direct. A stealthy hand in your pocket or purse left you without a wallet and making fast calls to banks and credit card companies to prevent fraudulent charges. Thanks to the Web, and usually a little unknowing help from you, thieves can take your virtual wallet and pilfer its contents without you even realizing it's gone.

In fact, the problem had become so widespread by 2000 that the U.S. Federal Bureau of Investigation (FBI) and the National White Collar Crime Center launched the Internet Crime Complaint Center (IC3) as a clearinghouse to receive and refer Internet-related fraud complaints and reports of other cyber crimes.

By June 2007, IC3 had logged its 1 millionth consumer complaint. The vast majority of cases were fraudulent and involved financial loss, according to the clearinghouse. The total dollar loss for all reported complaints since 2000 was estimated at $647.1 million.

However, because only an estimated one in seven incidents is reported, actual losses probably are much higher.

Victims of the Nigerian money scam, by the way, lost an average of $5,100 each [source: IC3 press release].

Fortunately, you don't have to wait until your account is drained to discover you've been taken by Internet thieves. Online fraud alerts can give you swift notification about unexpected account activity.

In this article, we'll identify the most common types of online fraud, explain how online fraud alerts work and describe the steps to take if you've been taken.

The Internet: Thieves' Playground

Online Fraud Complaints:

- Total complaints to IC3 in 2006: 207,492
- Total reported losses: $198.4 million, the highest total ever
- Average individual loss: $724
- Largest category of fraud: Online auction fraud (nearly 45 percent of complaints)
- Most common perpetrators: Men (75 percent) living in the United States (61 percent)
- Point of contact: 74 percent through e-mail; 36 percent through Web sites

[source: 2006 Annual Report of the Internet Crime Complaint Center (IC3)]

The Internet: Thieves' Playground

The Internet has become a great source of information for everyone -- including identity thieves and fraud artists. You can find anything on the Web, and that includes consumers willing to be conned and unknowingly share private information. Anyone who uses the Internet is susceptible. The IC3 has received complaints from victims ages 10 to 100, including men and women in every state.

Fraud means misrepresenting the truth or concealing important facts to encourage victims to do something that will harm them or cost them money.

IC3's Web site for consumers lists these common types of Internet fraud:

• Online pharmacy fraud: consumers respond to e-mails by buying drugs from Internet pharmacies that may not meet industry standards. The danger is that consumers may receive counterfeit, tainted and diluted drugs.
• Auction fraud: an item is purchased but never delivered.
• Sweepstakes or lottery fraud: participants pay to play or to receive their winnings.
• Identity fraud: Internet thieves steal money through identify theft -- by pretending to be the victim and using their name, Social Security number, account numbers or other information.


The thieves may access the information by:

• Hacking into industry or individual computer databases.
• Phishing, or sending e-mail or pop-up messages that deceive consumers into disclosing personal or financial information.
• Spoofing, or directing consumers to a "spoofed" or fake Web site that looks just like one they know, such as their bank's, to type in personal information.
• Downloading spyware from the Internet onto a computer to collect its owner's personal information.
• Financial fraud: the promise of a guaranteed loan if a fee is paid in advance, appeals from fraudulent charities, work-at-home jobs that require large upfront payments and requests for financial assistance that will pay off with more money later.

Financial institutions and credit card issuers are well aware of the magnitude of online fraud. Most offer a variety of services to help their customers avoid fraud and reduce financial loss. One of those services is usually some form of online fraud alert.

Next, let's look at how online fraud alerts work to help reduce financial losses and the possibility of a damaged credit rating.

Notification to Reduce Damage

An online fraud alert can make you aware of suspicious activity on your bank or credit card accounts. By being notified early, you can let the financial institution know quickly if an unauthorized person is using your accounts. And you can find out about that activity without having to wait to receive a bank statement or credit report.

A fraud alert is a specialized type of electronic notification. Here's how it works. First, you, as the account holder, and the bank or other organization set parameters on when you want to receive notification. This could be each time more than $200 is withdrawn from your checking account, whenever a charge of $500 or more is made to your credit card, or when the bank receives a change of address request for you. You also indicate how you want to be notified: e-mail or SMS message (text message).

Once parameters are set, the bank or other organization monitors activity in your account electronically. A transaction that exceeds the set amount automatically triggers the command to send you a fraud alert. If no unauthorized activity has taken place, you can ignore the alert. But if there's a problem, you can respond quickly.

If the fraud alert is an interactive notification, you'll be given a way to respond immediately to approve or deny a suspicious transaction. For example, an interactive notification might say, "Mr. Smith, a $500 charge occurred on your credit card on May 3. If you did not perform this transaction, press 1 now."

Beyond free fraud alerts, some financial institutions offer more customized online alerts as part of add-on fraud protection programs. JP Morgan Chase, for example, offers the Chase Fraud Detector program to account holders for an additional $8 per month.

Users can choose to receive additional online alerts about account activities including:

• International transactions (outside the United States)
• Cash advances
• Internet transactions
• High-dollar single transactions ($1,000 or more)
• Change of address requests
• New PIN requests
• Balance transfer requests
• New credit card requests
• Authorized users added

Credit card companies also offer online fraud alerts and protection against identity theft. Discover card customers can pay a monthly fee for an identity theft and fraud-protection plan that sends e-mails or text messages detailing suspicious account activity

The three main credit agencies -- Equifax, TransUnion and Experian -- also offer subscriber-based, online fraud alerts. Subscriber fees are about the same for the Equifax program as for the Discover card plan.

The most important thing to remember about online fraud alerts is that you have the ultimate responsibility for acting on the information. Your account is designed to notify you of activity in your file, but you -- the customer -- must file a complaint, report suspicious activity and take direct action.

Finally, let's look at the steps you should take if you are a victim of account fraud.

What is a Credit Agency?

When a consumer opens a line of credit for a loan or credit card, potential creditors use personal data from the application to check the customer's credit report.

The credit agencies track your credit payment history and your current amount of credit debt to determine your overall credit risk.

Credit agencies report this information to the creditor on request, but you can also request your own credit report at any time.

Taking Action if You're Taken

Being stung by Internet thieves can go beyond emptying your wallet to damage your credit rating. If an online fraud alert shows that you've been hit, start by responding immediately to halt the thief's activity on the account.

After that, place a fraud alert of your own on your credit report.
You can do this with a toll-free phone call to:

Equifax ( 1-800-525-6285 ),

TransUnion ( 1-800-680-7289 ) and

Experian ( 1-888-397-3742 ).

The fraud alert will appear during any request for new lines of credit. This warns potential creditors to verify your identity before opening a new account in your name.

Equifax and TransUnion require fraud alerts by phone, but Experian also offers an online form.

Keep your information secure.

Once your fraud alert is active on your credit report, request a copy of the report to review. Depending on your state's laws, you may be entitled to a free report after filing the fraud alert. Study the report for any activity that you don't recognize, including new accounts you don't remember opening, and changes of account information like a new address or phone number. Report any suspicious activity by calling the credit agency.

You also have the option of placing a "credit freeze" on your credit report. This restricts access to your report. While it's not a foolproof measure, it makes life difficult for anyone trying to create new accounts in your name. A credit freeze is done in the same way you initiate a fraud alert on your credit report.

Consumers have access to a growing list of fraud-protection options, and financial institutions have increasingly sophisticated anti-fraud technology. The credit protection industry grows larger by the year with online fraud insurance, aggressive investigation of fraud complaints and an expanding range of services, but online fraud itself is a growth industry. For each of us, staying a step ahead of Internet thieves probably requires actively protecting our personal information and regularly monitoring our credit ratings.

 More