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Hearing on Telemarketing Fraud

Hearing on Telemarketing Fraud

Testimony of Charles L. Owens, Chief, Financial Crimes Section, Federal Bureau of Investigation, to the Senate Committee on Aging, Washington D.C., March 6, 1996.

Good Morning, Mr. Chairman and members of the Committee. Thank you for inviting me to testify as the FBI representative at this very important hearing. As the Chief of the FBI's Financial Crimes Section, it is always an honor to discuss the FBI's role in attacking the crime problems facing our citizens.

Telemarketing has been an accepted way of conducting business since the early 1930s. The telemarketing industry employs over 3.4 million people nationwide and industry estimates place annual consumer spending through telemarketing at over $500 billion. However, most telemarketers do not generate sales. Many telemarketers perform market research, conduct polls, solicit political contributions and so forth. The FBI fully realizes that the legitimate telemarketing industry contributes to American society. Of great concern to the FBI, this committee, and every American is the scourge of telemarketing fraud. The annual cost of telemarketing fraud is estimated to be $40 Billion per year! Telemarketing fraud is now one of the FBI's top investigative priorities in our White Collar Crime Program.

Telemarketing fraud has often been mistaken to be a small crime problem. Though individual cases may be small, the cumulative affect of telemarketing fraud can mount quickly. As an example, our Denver office investigated a case predicated upon a $20,000 loss. The evidence led them to obtain a search warrant on a Las Vegas boiler room. Their investigation uncovered total losses to victims from the state of Colorado of nearly $1 million dollars and during that same time period, losses to victims around the country approximated $23 million dollars. This was one, medium sized, Las Vegas room. Some rooms take in $200,000 in proceeds daily.

Let me briefly share with you some of the FBI's history in telemarketing fraud. The FBI has been involved in the investigation of telemarketing fraud since the enactment of the fraud by wire statute. When it became apparent that traditional investigative techniques were only marginally successful in this area, the FBI pursued a different course. Most notable is "Operation Disconnect" a nation-wide undercover operation which targeted illegal telemarketers in 1992 and 1993.

Operation Disconnect Scenario

Operation Disconnect was developed as an innovative and unique approach to address Salt Lake City's identified telemarketing crime problem. Salt Lake City FBI Special Agents conceived and initiated an undercover operation designed to allow undercover FBI Agents to engage in direct conversations with the owners and operators of identified illegal telemarketing operations. During the conversation, the operators discussed explicitly how they conducted their illegal business. The undercover scenario proved to be so effective that similar undercover operations were initiated in a number of other FBI field offices around the country. At its conclusion, Operation Disconnect encompassed a total of 18 FBI field offices.

Operation Disconnect was a national criminal investigative effort unilaterally conducted by the FBI, and was at that time, the most significant investigative initiative undertaken to counter illegal telemarketing operations.

An essential feature of the undercover scenario centered around undercover FBI Agents visiting the owners of illegal telemarketing operations and representing themselves as salesmen of a company which leased a "one-of-a-kind" computerized automatic dialing system. This equipment was advertised by the undercover Agents as a method to dramatically reduce the telemarketer's operating costs and increase their incoming phone calls, thereby generating additional profits for the operation.

The undercover scenario continued with the undercover Agents designing a recorded sales pitch that was customized for that particular telemarketing operation. In order to develop the "pitch", knowledge of the operation was essential. The owners and operators disclosed that they were in the business to defraud people. The recorded sales pitch which was developed after interview with the owners and operators would be installed in the computerized dialing equipment and used to promote the telemarketer's operation. The undercover Agents arranged for a test of this customized recorded sales pitch in order to demonstrate its effectiveness. The test results were quite successful with a number of "consumers" purchasing the product. Based upon the success of the test, the owners of the telemarketing operation were so impressed that they expressed their interest in having the system installed. The telemarketers were unaware, however, that the sales pitch was never reduced to a recording nor was the dialing equipment ever activated. At a prearranged time, other FBI Agents, posing as customers made the "return" phone calls to the telemarketing sales personnel. The lure of quick illegal profits, in this instance, proved to be the undoing of these operations.

The success of Disconnect was based largely upon the use of recorded "pitches" as evidence against the telemarketers. To date, Operation Disconnect has been responsible for the conviction of 296 individuals and the seizure of $7.6 million in ill-gotten assets, of which, $6.7 has been successfully forfeited. Operation Disconnect brought to the fore, in more vivid terms than ever before, the scope of the crime problem and the unconscionable conduct of these financial felons.

The FBI conducted a thorough review of the cases in Operation Disconnect for its intelligence value. This led to the realization that while the elderly are not the only telemarketing victims; they are the victim group that is impacted most egregiously by this fraud. We noted Operation Disconnect that approximately 34% of the subject companies targeted the elderly. Responding to the intelligence gathered in this operation, we undertook efforts to strike as broadly and deeply as possible at those who would victimize our most vulnerable of citizens. In a follow up operation, Senior Sentinel, described more fully in the following pages, 78% of the subjects investigated, targeted the elderly.

Following Disconnect, we teamed up with States Attorneys General, the American Association of Retired Persons (AARP) and numerous law enforcement agencies nation-wide. The National Association of Attorneys General (NAAG) funded the National Tape Library that allowed law enforcement agencies involved in telemarketing investigations to obtain copies of very valuable evidence. This library, which is maintained by the FBI and funded jointly with the United States Attorneys Office in San Diego and the FTC and State Attorneys General provides real time insight into telemarketing operations.

Immediately after Disconnect was publicly disclosed, telemarketers purchased the customer lists, known as lead lists or more colloquially as "sucker" or "mooch" lists by the telemarketers, from the subject companies and began to run "recovery operations." In the recovery operation pitch, the solicitors identified themselves as FBI agents or other government officials and began to contact the victims known to have been taken in Disconnect and advising that they could obtain some of their lost funds, if they would send in money to cover the costs of taxes, administrative costs or some other fee. Public awareness of Operation Disconnect led us to interact with state, local and other federal agencies on telemarketing fraud matters. This interaction led us to discussions of the problem with government and non-government agencies, such as States Attorneys General and the American Association of Retired Persons (AARP). This interaction developed to the point where we began to conduct joint operations and cooperate in sharing of case related and intelligence information. The AARP offered to locate volunteers who could be used to record conversations with telemarketers. The information and resource sharing produced a team synergy and was the foundation for the future of telemarketing crime activities.

Based upon the very successful use of the recording technique, the information contained in the National Tape Library, and the newly developed cooperative contacts, another national take down was envisioned. FBI agents from across the country attended a seminar in San Diego and were taught the recording technique and the victim venue prosecution theory; and were provided with tapes from their venue. Under the victim venue theory, we endeavor to prosecute the cases where the victims live and not in the venue where the subjects operate. This was a wholesale change in the traditional prosecutive approach and allowed for areas such as Las Vegas, a safety valve and to stem the prosecution to other districts. With the high number of illegal operations in certain venues, an extraordinary burden would have been placed on those venues if all of the prosecutions had been attempted there. This was the genesis of "Senior Sentinel." The participating offices were given time to obtain telephone lines, sufficient numbers of recordings and a coordinated takedown date was set. All of this occurred within one year.

Victim lines were identified through complaints made to the FBI or other government agency by the victims or their families. The tragedy of the victim lines, or "mooch lines" to adopt the telemarketer's colloquialism, is that the most productive and effective lines were those that were owned and thus seeded by largest dollar losses to victims. By the time we obtained permission to take over the calls and transfer them the control of an agent or a volunteer, hundreds of thousands of dollars, representing a lifetime of savings flowed through those lines. Once the victims agreed to transfer their old line to our control, they obtained new numbers. We began to make recordings and enjoyed great success. It was not unusual for the telemarketer to refuse to deal with the new volunteer, either by virtue of their being new or the fact that they asked a few questions or didn't quickly send thousands of dollars on a regular basis. It was not long before the calls began to wane in activity, showing the life of the victim lines to be directly correlated to the recent funds received from that line.

The foundation of Senior Sentinel is the recorded conversations, which are housed in the National Tape Library (NTL). The NTL is a central repository of fraudulent telemarketing pitches, consensually recorded by or for law enforcement agencies, nation-wide. The NTL contains many thousands of recordings and that number continues to grow daily, through the receipt of tapes that are continuing to be made by law enforcement officials. The tape is catalogued by company name and address, solicitor (or phone name), type of pitch and other pertinent information. When a law enforcement agency wants to obtain information on ABC prize company, a query of the NTL can provide information and recordings on their sales personnel and the sales pitch.

The NTL provides a real-time view of telemarketing actions in America today. It identifies emerging pitches, new companies and the movement of solicitors from one company to another.

The beauty of the NTL is not only in its enforcement effectiveness, but that its cost and information is shared through a cooperative law enforcement effort. It is the backbone of an effective strategy to focus on telemarketing crime.

The NTL includes many recordings made through our Senior Sentinel initiative. The AARP located volunteers through their volunteer database and provided volunteers throughout the country. The Society of Former FBI agents volunteered their services and located retired FBI agents to take phone calls. This small army of volunteers manned the recorders, which freed the investigators from the phone lines to conduct more substantive investigative tasks.

Since its inception with the cooperation of agencies on the Federal, state and local level, Senior Sentinel has resulted in 117 search warrants being executed and 565 individuals charged including the arrest of approximately 400 people on 12/7/95.

The recorders of Senior Sentinel are still rolling and recordings of fraudulent pitches are continuing. Two individuals who were arrested in Buffalo as a result of Senior Sentinel were released, recorded again, charged again and arrested again. One was declared a public nuisance, denied bond and remains in jail. Due to the notoriety of Senior Sentinel and the utilization of the NTL, we have observed that use of the prize pitch, which accounted for almost half of the Senior Sentinel cases is now decreasing; but the same lists of victims are being besieged with high dollar investment scams that will just as quickly dissolve their life savings.

We know these telemarketers are fully cognizant of the illegality of their activities. This was noted by the actions of some on the day of takedown, where telemarketers were calling FBI offices or showing up at the Las Vegas armory, which acted as a temporary court house, to turn themselves in. Although their admission and surrender was greatly appreciated, they had not been charged in the takedown.

We are continually identifying new operations and other schemes and I'd like to focus on some of the investigative challenges that we face today.

In Senior Sentinel, we have identified many different schemes, but categorized them into five broad areas. Prize rooms that offer one of four or five valuable prizes; Product rooms that offer a product (lottery tickets, gems, jobs); Charity rooms which claim to be calling to aid some worthy cause - the cause ultimately receives either nothing or a token donation; Recovery Rooms, who claim that for a fee they can return all or a portion of the funds lost to a telemarketer (and often identify themselves as law enforcement) and RIP and Tear operations, which purport to be operating one of the above four "services", but in fact operate from a hotel room, using false names and mail drops and is set up to vanish immediately, after receipt of a victim's money.

Of the operations, the RIP and Tear is the most difficult to investigate, because they are set up to vanish in a short time without a trace. They usually collect cash or use a check cashing service. Identifying and locating the perpetrator is very labor intensive. Since the modus operandi of Rip and Tear operators is to "GRAB and GO", they make the most outrageous statements and promises and inflict great damage in a short time. When they are caught, they are usually punished on the scope of the one Rip and Tear for which they were arrested and no records exist of the true depth of their operation. The tape that was prominently played in the national media at the time of the Senior Sentinel take down, where the victim was verbally abused by the telemarketer is an example of a Rip and Tear artist. You will be happy to know that we have identified this individual and that he is already in custody, held on other fraud charges brought by the FBI.

Currently, we are seeing a number of telemarketing operations that are involved in cross-border frauds and use sophisticated money laundering techniques. We have teamed up with our Canadian law enforcement counterparts to attack the Canadian boiler rooms. While law enforcement is aggressively investigating Canadian boiler rooms, prosecutive issues that are currently under review in Canada limit their efforts to effectively prosecute boiler rooms operating in Canada. As these operators target United States citizens for cross-border financial frauds, we are conducting victim-venue investigations. Canada is a new and emerging battle front and while we are making great progress, each day that the telemarketers operate, the costs to American victims rise.

We are seeing drug dealers in South Florida, give up the risks associated with the drug trade for the "easy money" as they put it in telemarketing fraud. We are seeing connections to Organized Crime; the La Cosa Nostra (LCN) and Motorcycle Gangs. Investment offers through the internet have been noted, opening a new arena for fraud victims. Based on our intelligence information, telemarketing is a large and growing crime problem area although we are hopeful recent efforts will begin to turn the tides. We continue to identify new and innovative approaches to the problems and we are taking investigative actions to develop cases that will cost effectively and systematically cut off any new approaches or avenues used by telemarketers.

After Disconnect, hearings such as this were held before the Consumer Subcommittee of the Senate Committee on Commerce, Science and technology, which led to the criminal telemarketing legislation in Title 18 Sections 2325 to 2327 which effectively enhanced criminal penalties for telemarketers who target citizens over 55 years of age. We are seeing the fruits of this enhancement. Based upon enhancements in the referenced statutes, two telemarketers from Chattanooga, Tennessee, one from Buffalo and one from Las Vegas have recently received ten year sentences for their crimes and we thank Congress for arming us with this effective legislation.

In closing, I'd like to point out that telemarketing fraud is not a new crime to law enforcement; but never before has it been used so prolifically to target our elderly citizens. The FBI's analysis of this crime problem revealed, tragically, the illegal telemarketers continue to prey in large measure on older Americans -- those who may be least able to recover from losses. A telemarketer in Las Vegas can use an alias, call an apartment in New York and make the next call to a farm in Kansas. No community, urban or rural, wealthy or poor is immune from this crime. It is therefore imperative that we aggressively pursue telemarketing investigations and we will be ever vigilant in our efforts to identify perpetrators and protect our citizens from these financial predators.

The FBI has a long history of aggressively and successfully battling frauds and we will continue to wage our war on telemarketing crime. The Senior Sentinel recorders continue to roll and new cases are being developed. The FBI believes that this unique operation has the potential of making a major impact on illegal telemarketers who will never know whether they are pitching a person known to easily fall victim to their lurid lines, or an undercover agent or cooperating private citizen who is gathering evidence for later use in a court of law.

Mr. Chairman, thank you for the opportunity to present this opening statement and for holding these hearings which cover these important issues.


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Directeur de la publication : Joël-François Dumont
Comité de rédaction : Jacques de Lestapis, Hugues Dumont, François de Vries (Bruxelles), Hans-Ulrich Helfer (Suisse), Michael Hellerforth (Allemagne).
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