Fraud Protection Series

Common Cons...and How to Avoid Them

From The FDIC Consumer News Newsletter

Here are frauds that should be on your watch list, plus warning signs and the best defenses for each.

Identity Theft

How it works: Identity theft is, by far, the top fraud complaint reported to the Federal Trade Commission (FTC) for the past three years. By trickery, by stealing information from mailboxes or trash, or by using publicly available information, a crook obtains personal information about you—for example, your Social Security number, date of birth and mother's maiden name. With those details, he or she may be able to obtain a copy of your birth certificate and Social Security card as well as apply for a driver's license, a passport or other form of picture ID. Or the ID thief may be able to create phony documents with your personal information. The result could be that the fraud artist is able to obtain credit cards, take out loans, make counterfeit checks or cards and go on a spending spree in your name. In effect, he or she becomes you for the sole purpose of committing fraud or theft. The result of identity theft could be that the fraud artist is able to obtain credit cards, take out loans, make counterfeit checks or cards and go on a spending spree in your name.

This type of crime also can go undetected for many months, if not years, because bills and other documents often are sent to fake addresses, not to your house. "You may only become aware of the situation after unpaid and delinquent bills begin to accumulate and your credit record has been downgraded, and solving that problem can be a long and arduous tasks," says Kevin Hutchison, an FDIC examiner. You may even be denied a loan or credit card, an apartment, a job or other opportunities because an identity thief ruined your credit rating.

Best defense: Many of the tips in this special report can help prevent ID theft. Here are examples. Protect your credit card numbers, Social Security numbers, account passwords or other personal information. Be suspicious of unsolicited offers that seem too good to be true, because they could be fraudulent attempts to get your bank account numbers or other personal information. (See "Ten Simple Things You Can Do to Fight Fraud" for more examples of how to protect your personal information.)

If credit cards or IDs of any kind are missing, immediately notify the issuers. Pay attention to your bank and credit card statements, and quickly report a suspected fraud. Also monitor your credit reports for signs of ID theft, such as credit cards you don't have but are listed under your name and a different address.

Check Fraud

Does the FDIC Cover Losses Due to Fraud?
How it works: A criminal steals or finds a checkbook or collects enough information about a bank account to make a counterfeit check. To pull off the fraud, the criminal also normally needs some form of identification matching the name on the checking account. You may not discover the problem until you get surprising news that your checking account is overdrawn or someone who accepted a counterfeit check with your name on it is demanding you make good on the payment. (Also see the information about frauds involving cashier's checks and other "official" checks.)

Best defense: At home, keep your supply of blank checks in a closed drawer, a safe or other secure location. Don't keep your checkbook on your kitchen counter or other open area where it can easily be seen by someone you don't know or may not trust who happens to be in your home. Around town, it's a good idea to carry only as many checks as you expect to use, and keep them in your possession at all times. Pre-print as little personal information on your checks as possible and never have your Social Security number or driver's license number pre-printed on your checks. If a stranger asks you to accept a check as payment for a significant purchase, ask for a cashier's check or similar official check instead (and take additional precautions as explained in the item about cashier's checks). Finally, it's important that you review your bank statement soon after it arrives and immediately report any unauthorized transactions. Why? "If you're not paying attention to your account and fraudulent checks keep getting through, it's possible that you, not the bank, may be held liable for the losses," warns Christy Cornell-Pape, an FDIC fraud investigator.

Advance-Fee Scams

How they work: There are many variations of this fraud but they all follow a basic script. You receive an unsolicited and extremely attractive offer of a product, service, loan, credit card, vacation, business opportunity or similar deal, but you're told you must send money (supposedly to cover fees, taxes, shipping and handling, and so on) or divulge bank account numbers before you receive anything in return. Lo and behold, the promised goods or services never arrive or they come with significant flaws.

Popular versions include fraudulent or deceptive offers of credit or credit repair to people with a poor credit history; vacation clubs that require a "membership fee" and give little or no benefit; and the so-called "Nigerian scam" involving an unsolicited e-mail or letter from someone claiming to be an official from a foreign government or corporation promising an lucrative reward (even millions of dollars) or a business opportunity if you'll "help" by paying certain up-front expenses or allowing the temporary use of your U.S. bank account (which the crooks can drain if you give them your account number). Best defense: Be extremely skeptical of any unsolicited offer that seems unrealistic and requires you to send a payment or provide bank account information before receiving a service or product. Also do NOT reply to an unsolicited letter or e-mail offering a major reward in exchange for your financial assistance or bank account information. "If an offer seems too good to be true, be careful," says Bret Morgan, an FDIC examiner. "Think about why a stranger would offer to share a fortune with you simply for the brief use of your bank account or your help paying a few thousand dollars in fees. Think about the risks involved with sending funds or sharing your account information." Morgan adds, "By using your common sense and being realistic, you will likely conclude that you'll get nothing but trouble if you participate in one of these offers."

If you get an e-mail that you believe is part of a Nigerian-type scam, you can forward a copy to the U.S. Secret Service, the primary U.S. government agency investigating this kind of financial fraud, at 419.fcd@usss.treas.gov. If you've already lost money to a Nigerian-type scam, call your local field office of the Secret Service, which will be listed in the blue pages of your phone book.

Credit/Debit/Atm Card Fraud

How it works: With credit cards, a thief might use your card or obtain a new card in your name, perhaps by stealing a pre-approved card application from your mail and having the card sent to a different address. Or he or she might counterfeit your current credit card. One scenario: The crook or an accomplice might work at a retail establishment—perhaps a bar or restaurant—where the card briefly may be out of sight. This person can swipe your card through an electronic "skimming" device that captures key account information from the card's magnetic strip.

As for ATM cards (which deduct amounts taken at automated teller machines from your checking account ) and debit cards (which deduct for cash or payments transacted at ATMs or retail establishments), the perpetrator might steal an existing card or make a new one. He or she also might obtain your personal identification number (PIN)—the security code you use to authorize transactions. One way to learn your PIN is to watch over your shoulder (even with binoculars or a video camera) as you use your card. Another tactic used by criminals is to attach a keystroke recording device to an ATM or checkout register, perhaps at a gas station, convenience store or other establishment where customers may be in too much of a hurry to notice something suspicious. Yet another way to obtain a PIN is to trick a consumer into divulging the numbers in response to a deceptive call or e-mail.

Best defense: Check your bank and credit card statements soon after they arrive and immediately report any unusual or unauthorized transactions. While federal law limits your liability for fraudulent credit card transactions to up to $50 per card, the rules are different for debit and ATM cards. The sooner you report an unauthorized transaction involving your debit or ATM card, the more you reduce your potential liability under the federal Electronic Fund Transfer Act (see Federal Laws Protecting You Against Fraud). Remember that criminals steal credit card solicitations, bank statements and other important papers out of mailboxes, so take precautions with your incoming and outgoing mail (see "Ten Simple Things You Can Do to Fight Fraud"). Also contact your financial institution if your credit, debit or ATM card is lost, stolen or stuck inside an ATM. Never give your credit card or debit card number or PIN in response to an unsolicited e-mail or phone call. Never write your PIN on your card or on a piece of paper in your wallet—memorize the number instead.

Avoid ATMs in dark or remote areas or if people seem to be loitering by the machines. Steer clear of anyone offering to "help" you carry out a transaction—it may be a setup. Also walk away if it appears that any machines may have been tampered with or if there's a sign directing you to use one of multiple machines—the one that may be rigged with a keystroke recorder or a plastic insert that grabs cards until the criminals come for them.

Be very skeptical if a retail employee swipes your credit or debit card through two devices instead of one—the second device could be a skimmer for recording your account information. If you spot a suspicious employee or machine at a retail establishment, report it to a manager or, if you still have concerns, to your card issuer's fraud department. Always take your credit, debit and ATM receipts with you—never leave them for a crook to find useful account information printed on the receipts.

Fraudulent Cashier's Checks

How they work: Crooks know that consumers trust cashier's checks, money orders and other official bank checks because the money is already set aside at the bank. That's why con artists are increasingly counterfeiting official checks, especially for use when dealing with consumers long-distance over the Internet but also in face-to-face transactions, such as trying to cheat someone selling a used car through an ad in the local paper. Another element of the fraud may involve a cashier's check for more than the amount due. Here's an example: You're selling a $5,000 item online to a buyer overseas who offers to pay with a cashier's check from a bank in the U.S. When the official check arrives it is for $10,000, and you are instructed to deposit the $10,000 check into your bank account and wire the excess amount to the buyer's account abroad. You comply... and later find out that the cashier's check is phony. Depending on the circumstances and state law, you may be held responsible for the entire amount of the fraudulent cashier's check you deposited into your account. Using our example, you may need to reimburse the bank for $10,000, even if that's far more money than you have in your account.

Best defense: Independently confirm the name, address, home number and work number of the purchaser by consulting a phone book, directory assistance, or an Internet database. Insist on an official check drawn on a local bank or a bank that has a local branch, so you can make sure it's valid. If that's not possible, call the bank where the check was purchased (get the bank's phone number from directory assistance or an Internet database, not from the person who gives you the check) and ask if the check is good. If you'd rather not call the bank, ask someone at your bank to inquire about the check.

Look for warning signs that an official check may be counterfeit. "A cashier's check for more than the amount due with a request to transfer the excess amount to another bank account is like a neon sign that says 'scam,'" according to Jeff Kopchik, a senior policy analyst with the FDIC's electronic banking branch. Other red flags: The check shows it was purchased by someone else, not the person you are dealing with. Or the check doesn't have the look or feel of a real check issued by a financial institution—perhaps words are misspelled or the paper is flimsy.

Be very cautious if you wish to wire money or hand over merchandise before the check you accepted is confirmed as paid (cleared) by your bank—a process that could take several weeks. Be especially careful if you're dealing with someone long-distance, such as over the Internet. One way to protect yourself in an Internet sale is to use a reputable online escrow service that will hold the payment until the promised goods arrive. For more information about avoiding Internet payment scams, including fraudulent escrow services, read the FTC's new "Internet Auctions" brochure (online at www.ftc.gov/bcp/conline/pubs/online/auctions.htm).

Automated Payment Fraud

How it works: Millions of consumers benefit from the overall safety and convenience of automated payment programs that authorize an electronic withdrawal from an individual's checking account to cover a recurring expense (for example, a mortgage loan or utility bill) or a one-time payment (such as merchandise purchased over the phone). Unfortunately, fraudulent telemarketers and other con artists have used the electronic payment system for their benefit, too. Here's how you could be scammed.

A crook, posing as a legitimate business or charity, establishes an arrangement with a bank to process deposits electronically. Then the criminal finds the name of your bank and your checking account numbers, perhaps by tricking you into divulging the details over the phone (in what appears to be a legitimate telemarketing sales call) or by sifting through your trash for old bank statements or checks. The con artist is now in a position to send an electronic command to your bank instructing it to debit (withdraw) a certain amount of money from your checking account and forward the funds to the perpetrator's bank account. If you're not paying attention to your bank statements, the fraud can continue until your account is drained.

Best defense: Never give your checking account number to authorize an automated payment unless you initiated the contact and you know you're dealing with a reputable business or charity. Be aware that con artists try to tug at your heart—and your wallet—by contacting households about bogus fundraisers for victims of a tragic event. Shred bank statements and old checks before putting them in the trash. "You also can ask your bank to block all automated payments from your account or put a 'filter' on automated transactions so that only those you have approved will get through," says the FDIC's Cornell-Pape.

Review your bank statement as soon as it arrives and promptly report any suspicious or unauthorized electronic transactions, says FDIC attorney Janet Norcom. That's because, under the Electronic Fund Transfer Act, if you notify your bank of an unauthorized transaction within 60 days of the date the statement containing the error is mailed by your bank, you are not liable for any loss. "But if you don't notify the institution within 60 days," Norcom says, "you may have liability for any subsequent transactions that occur after 60 days and before you notify the institution."

Internet Fraud

How it works: There are numerous, inventive ways being used by Internet crooks to commit fraud. One approach involves a fraudulent Web site touting extremely attractive deals on goods, services, deposits or investments in hopes that consumers will provide a credit card number, bank account number, password or a check. Some con artists set up fake banks (on the Web or elsewhere) and use false or misleading statements to indicate they offer FDIC-insured accounts.

A variation involves a copycat Web site that deliberately uses a name or Internet address similar to, but not the same as, that of a large, well-known bank, retail store or other company. Yet another scheme uses an e-mail, which appears to be your Internet service provider or a company that you already do business with that asks you to "re-enter" your Social Security number, credit card or debit card number, or personal identification numbers (PINs). Keep in mind that some fraud artists also have been known to use the FDIC name or logo illegally to make false claims about federal insurance.

Best defense: Never give money, credit card or debit card numbers, PINs or any other personal information in response to an unsolicited e-mail, no matter who it's supposedly from or how legitimate it may appear. For example, "If you already have an established relationship with a company, they should not be asking you for account numbers because they already have that information," says Michael Benardo, chief of the electronic banking branch at the FDIC.

If you're tempted by an e-mail offer that claims to be from a company you already do business with, Benardo suggests that you contact the company using a phone number or e-mail address you know is legitimate, such as one listed on a recent account statement or other literature from the company. And always be suspicious of offers that seem too good to be true—for example, an Internet deposit paying 20 percent interest when local banks and other Internet banks are paying five percent. "Common sense should tell you that no one gives you something for nothing," says the FDIC's Morgan.

Before providing your credit card or debit card number or other personal information to a Web site in a transaction you didn't initiate, double check the Web address or "URL" with another, reliable source. "Even a one letter difference in URLs could land you on a fraudulent Web site," Benardo says. Avoid a Web site that looks sloppy (such as misspelled words), doesn't include key information (a mailing address or telephone number) or has an unusually long Internet address (which could indicate it's a temporary Web site set up by a crook). Also look for information confirming that your card number will be "encrypted" (scrambled) so that it cannot be intercepted by a third party.

You can also make sure an unfamiliar company is legitimate by contacting your state's Attorney General's office or consumer affairs department (listed in your phone book) or the Better Business Bureau http://www.bbb.org/ where the company is located. To check out an unfamiliar banking institution, contact the FDIC (see "For General Information from Financial Regulators"). For more information, read the FDIC brochure "Tips for Safe Banking Over the Internet," available online at www.fdic.gov/bank/individual/online/safe.html or from the FDIC's Public Information Center.

Predatory Home Loans

How they work: An unscrupulous lender—typically a nonbank company that specializes in marketing to people with poor credit histories—dupes a homeowner into taking out a home equity loan or mortgage refinancing with unnecessary, excessive or undisclosed costs. Victims who have trouble repaying often face harassing collection tactics or are encouraged to refinance the loan at even higher fees. In the worst cases, people who can't repay end up losing their home. It's a problem known as "predatory" lending.

Examples of predatory practices include schemes where the lender promises one type of loan or interest rate but switches to another one that's more costly to the borrower, and "equity stripping," in which the lender deliberately makes a loan that is beyond the borrower's ability to repay in hopes of foreclosing on the loan and taking possession of the house. Predatory lenders primarily target consumers they believe are vulnerable, such as older people who need money for medical bills or home repairs. "It's particularly tragic when an elderly borrower who takes such pride in the home he or she worked many long years to acquire loses it to a predatory lender," says Elizabeth Kelderhouse, a Community Affairs Officer with the FDIC.

Best Defense: Beware of a letter or phone call from an unfamiliar lender or loan broker with what appears to be a fantastic offer to consolidate your debts or pay for new bills by refinancing your home. Think long and hard before taking out a loan where your home serves as collateral and can be lost if you can't repay. Talk to knowledgeable friends or professionals (perhaps your financial advisor or accountant) to discuss other options.

If you decide to get a home loan, contact several banking institutions or other reputable lenders, not just one, and try to negotiate the best deal. Walk away from a lender who refuses to put all costs in writing, dodges your requests to explain loan terms, tries to pressure you into quickly signing a contract or discourages you from allowing another person to review the contract before you sign. Don't agree to a loan contract if you don't understand the terms or conditions, dollar amounts or other key sections are left blank, there is information you know is false, there are unexplained changes in terms, or you feel you're being pressured to sign quickly. Remember that for certain loans secured by your home, the federal Truth in Lending Act gives you up to three business days after signing a loan contract to change your mind for any reason and cancel the deal without penalty.

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For more information on consumer protection, please contact: www.FDIC.gov