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INVESTIGATING ON-LINE
AUCTION FRAUD

By Cmdr. Dave Pettinari
Pueblo County (CO) Sheriff’s Office

 You don’t have to be “certifiably sane” to commit eBay fraud; nor do you necessarily need access to the Internet.

  A recent case we worked at the Pueblo County Sheriff’s Office in Colorado involved a patient housed in a secure ward at the Colorado Mental Health Institute. He had courted the mother of a fellow state hospital patient, convincing her he was in love with her. They even talked of marriage. Since she worked at a large jewelry store in a major metropolitan area, she was his link to knowledge about diamonds. 

This mental hospital patient also had a relationship of sorts with another woman in Pueblo where the mental health institute is located. Operating an eBay business with her ex-husband out of a storefront, she was our criminal mastermind’s link to the Internet. The patient was supposed to travel to New York to pick up the jewelry they advertised for him on eBay, but, even months later, the trip never materialized. 

The mother of our suspect’s fellow patient visited our suspect, as did the Pueblo woman who operated the eBay marketing business, and both called him regularly. Working together (the women claim unwittingly), this group bilked a number of people nationwide who paid large sums of money for diamonds and watches – $400 here, $500 there, $900 on another occasion – then never delivered the merchandise.

Internet auctioneering fraud, first noticed in 1997, has increased tremendously in recent years, with the FTC reporting nearly 11,000 complaints in 1999. Fraud artists haunt Internet auction sites because it is not complex – and, in fact, quite easy – to offer goods, accept payment, then either not deliver the goods or deliver something that is merely a cheap knockoff or imitation of the item advertised.

How Internet Auctions Work

An auction site set up for people to sell to other people – eBay, Yahoo.com, Amazon.com – never takes custody of the advertised merchandise. It merely provides space on a Web page for people to advertise and a means of communication between buyer and seller; nor do the site managers get paid for hosting these on-line deals.

Once the deal is consummated, the buyer and seller communicate by E-mail or phone and make arrangements between themselves for payment and shipment of the item.

Often, a seller will ask that the buyer pay by cashier’s check or money order before sending the item to the winning bidder.  Those who win bids can post their impressions of how the deal went and sellers often respond to the feedback on-line. That way, future potential buyers have a way of checking on the reputation of the seller before they buy from him.

How Auction Fraud Occurs

It is the anonymity of on-line transactions which makes it nearly impossible for buyers to distinguish between real, bona fide sellers and their fraudulent counterparts. In a maze of frenetic bidding on thousands of items at an auction site, shysters can blend in with the legitimate sellers and take advantage of a number of buyers before reports to fraud investigators get the con artists booted off the site.

Often, these con artists will bid on their own items to drive the price up (shill bidding), or craft glowing written testimonials about themselves (shill feedback) to make it seem as if they are safe people to buy from.

Investigating Auction Fraud

One of your first calls should be to the fraud team at the auction site. Many of them have become rather effective recently and can provide incredibly detailed information about your suspects and their transactions. The Federal Trade Commission maintains a list of contacts for the largest Internet auction sites for official investigations.

The Electronic Communications Privacy Act does not apply to auction Web sites. As a result, you do not need to serve a search warrant or subpoena because everything the auction site fraud teams provide to you happens out in the open, on a public Web page.  A simple letterhead fax from your agency explaining what you seek is all they need to kick into action.

In the event that you do have to trace an E-mail address to solve a fraud case, ECPA requirements must be met as you serve a subpoena or search warrant on the Internet service provider.

In your letter to the auction fraud team, you will want to ask for:

• information the seller provided when registering at the auction site;

• a list of auctions in which the seller has been involved; and

• any buyer feedback and responses from this seller.

If the seller has a Web site (a storefront of sorts) or uses an escrow service, you’ll want to do a “who is” query over the Internet to find out who maintains the site. But be aware that identities can be stolen and the contact information for the Web site you got from the “who is” query might also be fake.

Early in your investigation, you’ll likely discover that your suspects have taken a number of other victims across the country. Contact them and they probably can provide details which will help you identify patterns of fraud. In addition, they can put you in touch with other victims who have not complained to law enforcement yet. Also visit with investigators in the other local jurisdictions; they can provide you with more information to start stitching your case together.

While contacting other victims can be helpful, beware that, once the word is out that a seller has defrauded someone, others may jump on the bandwagon and claim they were taken as well. Always require documentation from buyers before pursuing their complaint or using their information as corroboration in your local investigation. Get copies of canceled checks, printed or electronic records of transactions and phone bills. Confirm that they never received their merchandise and that it is not simply a problem with delayed delivery.

The FTC’s Mail or Telephone Order Merchandise Rule prohibits a seller from offering to sell merchandise unless, at the time he solicits the sale, the seller has a “reasonable basis to expect” that he will be able to ship the goods within the time stated in the on-line advertisement. If no time is stated, he must ship within 30 days. If there is a shipping delay, the seller must give the buyer the option to agree to the delay or to cancel the order and receive a full refund.

Another excellent place to check for more investigative leads is the Federal Trade Commission’s “Consumer Sentinel” database. It is a treasure trove of on-line complaints and all you need to do is search by your suspect’s name, E-mail address or MO and you will encounter other victims and other potential leads. The FTC can also provide you with Consumer Sentinel complaints about auction con artists and people they target in your jurisdiction.

Follow the Money

The quickest way to bring a case to closure is to focus on how the money passed from victim to the criminal. 

If a victim was asked to send payment by money order to a postal mail drop which the seller has rented, a Postal Form 1583 will help you identify who applied for that mail drop.  From there, you will want to trace the check or money order to where it was deposited. This may not be a straightforward process, as checks can be cashed at check cashing businesses or laundered through the bank account of your crook’s friend or family member.

Helping Victims

Key themes we should repeat when working with victims is that they must do some research before they purchase anything by mail, phone or over the Internet, and that they know with whom they are dealing. But, most important, if at all possible, pay with a credit card which limits the consumer’s liability and potential losses from the transaction should the seller deliver his advertised goods late or not at all or deliver something far less valuable than promised. Paying by COD (cash on delivery) is also a safe way to purchase.

Some sellers agree to use an escrow service. For a fee, of, say, five percent, the service will accept payment from the buyer by check, money order or credit card. When the buyer receives and approves the merchandise, the escrow service releases the money to the seller. This prevents buyers from paying and never receiving the merchandise. However, buyers should beware of the increased use of fake escrow services.

Phony Escrow Services

Would you buy a Mercedes-Benz automobile or a high dollar Harley-Davidson motorcycle on eBay, then send money to an escrow account to ensure the goods were delivered before your payment clears?

Many people accustomed to purchasing on eBay have done so in the past and have had safe, satisfying transactions. However, a new development – fake escrow Web sites – makes this practice incredibly risky.

A recent case investigated by our high-tech crimes unit involved a Pueblo man who paid $21,200 through a fake escrow service Web site for a Harley-Davidson motorcycle advertised on eBay.  The fake escrow service Web site was paid for with a stolen credit card and the supposed Web site manager turned out to be a real person whose identity had been stolen.  E-mails sent from the supposed seller to the unwitting buyer traced back to college and university servers at Harvard University, Indiana University and a university in Denmark. The money was first transferred to an international bank in New York City, then siphoned overseas to a bank in Latvia where, surprisingly, it was recovered and returned to the Colorado victim following intensive contacts by the victim, his Colorado banker, and law enforcement.

For years, “use an escrow service” was standard advice for on-line auction buyers. Escrow companies act as a third party referees, taking payment from buyers, but not releasing the money to sellers until the goods are delivered. Had this operated as expected in our Pueblo case, the escrow service would have held payment of the money until the motorcycle title and, in fact, the motorcycle itself, were in its possession or received by the buyer.

Escrow companies were heretofore one of the safest ways to avoid Internet fraud when purchasing big-ticket items, such as jewelry or cars, using Internet auction sites. But, early in 2002, con artists devised a successful formula for tricking unsuspecting victims into wiring thousands of dollars to fraudulent bank accounts. The criminals began building elaborate fake escrow Web sites with convincing names and interactive, glitzy Web site elements which made it impossible for the untrained eye to spot them as fakes.

The con artists who fashion the fake Web sites then advertise on popular auction sites such as eBay. In the ensuing E-mail discussion about how the auction winner is to pay for the item, the crook pretends to be overly concerned with security, insisting that the buyer use an escrow service. The seller/criminal then steers the auction winner to the fake escrow service and ends up wiring  money to the criminal’s bank account.

 Some crooks forge E-mails to appear to be from an escrow service confirming that the payment has been sent. The only safeguard against this scam is to read E-mails carefully. A telltale sign is E-mails full of misspellings.

Other illegal approaches involve sending E-mails asking the user to verify their passwords and E-mail accounts by directing them to an “account manager,” or the con artist uses embedded links in the E-mail which direct people to a spoof site resembling eBay or another auction site. The sites and E-mails look very professional, but eBay will never ask users for personal information. This should be a tipoff for the buyer, who should report the fraud attempt immediately.

Another variation involves wire transfers. Someone posing as a seller asks the buyer to pay through a Western Union money transfer rather than bank-to-bank transfers or other methods on-line auction services recommend – a credit card or the on-line bank PayPal. Western Union assigns each transfer an ID number which the buyer then gives the seller so he can pick up the cash. In the scam, the seller gets the number, takes the cash and never delivers the merchandise.

The simplicity of these scams is what makes them remarkably effective. Victims, thinking they are safely buying jewelry, fancy watches or cars, report losing sums as large as $10,000 to $30,000 in single transactions with no hope of recovery if stolen identities were used to set up the recipient seller’s bank account and the money is actually picked up at the other end.

These con artists also frequently piggyback on legitimate auction advertisements. For example, they might copy word-for-word advertisements posted by legitimate sellers of cars, then repost them elsewhere with contact information which, again, leads buyers to a fake escrow site.

Law enforcement officials working with Internet auction fraud investigators scramble to close down the fake escrow sites, but even if they operate for only a month or two, hundreds of other people are victimized nationwide.

On-line escrow fraud is escalating due to a number of factors:

• the anonymity the Internet affords users;

• on-line credit card theft;

• a lack of awareness about fraudulent escrow sites; and

• Web hosting companies which allow fraudulent escrow sites to be created with stolen credit cards and to remain on their service even after they have been reported.

Buyers themselves could short-circuit this whole deceitful process by being circumspect of a seller’s motives if he presses too hard for use of a certain escrow service (sellers don’t normally press for this; buyers do), and by carefully checking the escrow Web site. Does it look remarkably like a legitimate escrow site such as escrow.com? Are the punctuation and grammar sloppy and unprofessional?

More tips on how to spot these fake escrow sites can be found at www.SOS4auctions.com which has lots of articles about this phenomenon and lists of suspected fraudulent escrow sites.

Buyers should also use on-line newsgroups to search for complaints about the escrow company before agreeing to wire money. You can search by the escrow company’s name at www.google.com, Groups, Advanced Groups Search.

Also very interested in attempts to con unsuspecting buyers is the Internet Fraud Complaint Center at www.ifccfbi.gov where a person can use an on-line form to directly report his (or her) suspicions or an actual theft of money. Another good place to report such solicitations or to find out more information about an escrow service is the Federal Trade Commission’s Web site, www.ftc.gov. The FTC will enter the complaint into a database so referrals can be made to local law enforcement officers who can then search the database to pinpoint patterns of fraud.

If your “follow the money” efforts lead you to an overseas bank where the money has been transferred, contact the FBI’s Office of International Affairs at (202)616-9621 to determine what paperwork is required to get the bank records from the overseas financial institution. Also consider calling the FBI Legal Affairs Officer in the foreign country who can assist in laying groundwork to get information from the bank after correct documents have been prepared and filed.

About the Author: Cmdr. Dave Pettinari, a 15 year veteran of the Pueblo County, CO, Sheriff’s Office, heads the Pueblo High-Tech Crimes Unit which processes computers seized in criminal activities, and is a member of the Colorado Internet Crimes Against Children Task Force.

Cmdr. Pettinari holds a master’s degree in journalism from Marquette University in Milwaukee, where he was a J.L. O’Sullivan fellow. He also holds a bachelor’s degree in political science from Regis College in Denver.

The Pueblo County Sheriff’s Web page can be seen at www.co.pueblo.co.us/sheriff.

Cmdr. Pettinari can be contacted at davepet@cops.org.