House Committee Holds Hearing on Internet Fraud

(June 26, 1998)  The House Telecommunications Subcommittee held a hearing Thursday morning on consumer protection in cyberspace.  The panel heard from state and federal officials involved in prosecuting Internet fraud, and persons from the private sector involved in limiting Internet fraud.

Rep. Chris Cox (R-CA) stated at the outset that "much of what we are talking about concerns issues that consumers, Americans, are concerned about in other venues -- not just when they are on line."  Cox addressed the misuse of private information.  "Computers facilitate its collation, they can vacuum it out of you faster, and they do it more anonymously."

"What computers do is permit people with bad motives to collect some of this stuff for nefarious purposes a little bit faster and a little bit more anonymously -- and that's the problem.  The Internet is not the problem in itself -- crime is."    Cox said that "technology enables you to do everything better, faster, and cheaper, including crime."

Rep. Billy Tauzin (R-LA), who is Chairman of the Telecommunication Subcommittee, of the House Commerce Committee, presided at the hearing.  "Consumers must have the same confidence in the electronic store front that they do in the stores of their local mall," said Tauzin.

Rep. Eshoo and Encryption

Rep. Anna Eshoo (D-CA), who represents a Silicon Valley district, stated that two pieces of pending legislation could advance consumer protection: the "SAFE" encryption bill (H.R. 695), and the Electronic Commerce Enhancement Act (HR 2991), which addresses the use of digital signatures.   Rep. Tauzin, who is cosponsoring the digital signatures bill with Rep. Eshoo, stated that he is pressing for a markup session as soon as possible.

Eshoo stated that, "customers have to believe that the transactions are secure, and that there is recourse for them if in fact they do experience problems.  And of particular importance, of course, businesses have to be allowed to have access to the tools that are necessary to provide that level of assurance to their customers."

"One of the methods that can be used to fight fraud and provide safeguards for consumers in our nation is encryption technology."  Eshoo continued that "encryption technology makes sure that communications are secure, that stored information is secure, and that the identity of other parties on line can be verified."

Rep. Eshoo told the witnesses before they testified that "I hope that you will provide us with some examples of how encryption is a necessary component of protecting consumers."  Eileen Harrington, who testified on behalf of the Federal Trade Commission, said nothing.  Moreover, the massive statement which she submitted for the record said nothing about encryption either.

The focus of Harrington's testimony was the scams and schemes on the Internet perpetrated against unwitting web users.  Her testimony evaded illegal activity involving theft and misuse of private data that could be avoided by the use of strong encryption products.  Her statement was cleared by the four Commissioners of the FTC before the hearing.  The Clinton administration opposes encryption rights legislation. 

Witness Panel

The Subcommittee heard from the following panel of witnesses:

• Eileen Harrington, Associate Director, Division of Marketing Practices, Bureau of Consumer Protection, Federal Trade Commission.  (Prepared Statement.)
• Shirley Sarna, Assistant Attorney General, Bureau of Consumer Protection, New York State.
• Walter Effross, Law Professor, American University.
• Everett C. Johnson, American Institute of Certified Public Accountants.
• Russ Bodoff, VP and General Manager, Better Business Bureau Online.

"Most of the Commission's law enforcement actions," said Eileen Harrington of the Federal Trade Commission, "have involved old-fashioned scams dressed up in high-tech garb."  She stated that   "the Commission has taken the offensive against fraud on the Internet through a three-pronged strategy that emphasizes targeted law enforcement action, complemented by education of consumers and new Internet entrepreneurs, both of whom may be venturing into cyberspace for the first time."

Harrington elaborated on some of the activities of the FTC.  These include:

• Monitoring the Internet for fraud.
• Law enforcement "surf days."  There have been nine of these gatherings to search the web for pyramid, credit repair, business opportunities, and other illegal schemes.
• Sending e-mail warnings to website operators whose sites violate the law.
• Setting up "teaser websites" to educate consumers.  These sites look like other get rich quick, or similar sites.  However, after several pages the viewers receives a page warning them that they can get defrauded on the Internet, and directing them to the FTC website for more information.

Shirley Sarna, of the New York Attorney General's Office, testified that New York and about a dozen other states are active in investigating and prosecuting fraud on the Internet.

Walter Effross testified on several related topics, including unwanted linking to the websites of other businesses, website disclaimers, and "web wrap" contracts.

Everett Johnson and Russ Bodoff talked about private sector efforts to protect consumers.  Johnson is a CPA who addressed how audits of websites could increase consumer confidence.  Bodoff discussed the use of Better Business Bureau seals on websites.

Rep. Gene Green (D-TX) questioned witnesses about whether there was a problem with Internet Service Provider (ISP) slamming, as there is for long distance telephone service, where service providers are switched without the consumer's permission.  Harrington said that the FTC has not received many ISP slamming complaints yet.

Rep. Eshoo questioned Harrington about the FTC's tools and resources for fighting Internet fraud.  Harrington stated that currently 16% of the Consumer Protection Bureau's resources are devoted to Internet fraud.  She also stated that the FTC should be permitted to use the quicker rule making procedure set out in the Administrative Procedure Act.

Rep. White on Over Regulation

Rep. White cautioned the FTC and others about going too far in regulating what people say on the Internet.

What I would like to do this morning is cast a little bit of note of caution about some of the things we are talking about.  You are absolutely right.  We want a good safe marketplace in the Internet and for electronic commerce.  On the other hand, we don't want a market, or at least I don't think we want a market, where people can't promise, or maybe not promise, or talk about getting rich quick, or talk about how they've got a wonderful product, or even puff their products a little bit, in a way that we see in other market places.  I think that if you go too far in regulating what people can say, you take the edge off the marketplace, you loose the vitality of the marketplace, and find yourself in trouble.   I don't necessarily find anybody disagreeing with that.  I think that it is a balance here that we have to strike very carefully.

I know that even in the very clever and persuasive ad you have up on the Internet, you have a little bit of deception on your teaser website, where you draw somebody in, through a marketing device, and then you give them a message we would all like them to get.   So, I want to make it clear that we don't want a marketplace, especially in electronic commerce, which has some much vibrance, some much froth to it, where we loose some of the vitality that we have here.  And I also say Ms. Sarna, you want a safe marketplace, but safe may not be the right word, because we are never going to have a safe marketplace on the Internet.  If there is not a certain level of risk in the marketplace, you don't really have a marketplace.  And my own sense is that if Craig and Kevin were standing on a corner in Times Square promising us all that we could all get rich quick, we probably would not be having this conversation.  We rely on people's natural instincts in some of these cases to know how far they can go.

So I guess that this is all a way of saying, our goal here really is to find a tolerable level of risk in the marketplace that allows that market to function, that allows people to puff their products, but also adds a minimum level of assurance to the consumer.  I know that is what we are all trying to accomplish here.  I just want to make it clear that we are never going to make it totally safe.  But frankly, we don't want it totally safe.

The members of the Subcommittee who participated in all or part of the hearing included Billy Tauzin (R-LA), Rick White (R-WA), John Shimkus (R-IL), Chris Cox (R-CA), Anna Eshoo (D-CA), Albert Wynn (D-MD), Gene Green (D-TX), and Nathan Deal (R-GA).