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Telecoms Fraud – History does repeat itself…

by | Mar 2, 2021 | News | 0 comments

Written by Luke Taylor, Lateral Alliances

A recent telecommunications fraud case that occurred in Australia has triggered a few memories as well as probably a number of nightmares…  I am sure a few CFCA veterans will recall a crime that first started 25 years ago in the United States with the criminals eventually dealt some form of justice exactly 15 years ago this month.

Before we go back to February 2006 or even further to 1996 when the fraud first occurred, let us remain in the present.  In recent weeks, two Australians have been extradited to the United States over their alleged role in a $50 million mobile phone scam, while a third individual awaits an extradition hearing over his alleged involvement.  Allegations against eight members of this international fraud ring reveal proceeds of their crimes allegedly funded an ostentatious and lavish lifestyle of multimillion-dollar homes, expensive holidays, and extortionate gambling.

In court, the men and their alleged co-conspirators were accused of using a practice called ‘Auto-Subscribing’ or ‘Cramming’.  Charging monthly fees for unsolicited messages about celebrity gossip, horoscopes, love tips, trivia, and more to unwitting phone subscribers.

Many of us in the fraud domain, will have probably all heard of Phone Cramming, the illicit practice of placing unauthorized charges on a telecommunication subscriber’s home or mobile telephone bill. Cramming that was likely born with the breakup of the Bell System in the United States leaving subscribers with different vendors for local and long-distance services. Local Exchange Carrier (LEC) billing consolidated charges from multiple vendors on one bill, but this opened an opportunity for fraudulent vendors to add their own charges to the consolidated bills.

In the Australian criminal case, the unsuspecting victims were charged $US9.99 a month even if they ignored or deleted the messages, and were often unaware anything was amiss until unintelligible items began appearing on their phone bills.

The scheme reportedly ran between 2011 to 2013. The alleged scheme also involved a co-conspirator who ran a content provider, auto-subscribing mobile users to premium SMS services in order to boost his company’s sagging revenues.

Prosecutors allege the unnamed businessman needed a way to make it appear that consumers who were illegally auto-subscribed, had actually agreed to be billed for the premium SMS service. He allegedly approached the accused fraudsters in 2011 and asked them to build a software program that could spoof the required consumer authorisations and generate the text message correspondence seen with genuine opt-in verification. By 2012 he had started auto-subscribing hundreds of thousands of consumers in the US and they quickly started generating millions of dollars of revenue.  Hence the playboy lifestyle and good living…

Now let us go back in time and travel back 25 years to 1996 and something very similar was about to occur, this time in the United States…

Can you remember 1996? I am sure some of our CFCA members will. Bill Clinton got his second term as US president, Atlanta, Georgia hosted the summer Olympics, there was about 100,000 websites globally, the average price of a car was $16,300… you get the idea, it was a while back…

In 1996, what was to become the largest consumer fraud in US history, overseen by a notorious New York mafia family, the Gambino’s started on its eight-year phone fraud.  The defendants in this case pleaded guilty to what was estimated to be between $650 million to $1 billion fraud.  An illegal caper that ran until 2003, that generated millions and millions in revenue and lined many criminals’ pockets.

Instead of protection rackets, intimidation, gambling, and loan sharking, the Mafia targeted internet and phone customers, lots of phone customers, tricking them into offers of free porn, psychic readings, dating services, and sports picks, and then undertaking a series of unauthorized credit card and telephone charges.

A $659 million fraud

Phone bill ‘cramming’ Cash Cow

A significant part of this crime was ‘Cramming’ – people who called the onerous 1-800 phone number advertising free samples of sex chatlines, psychic hot lines and dating services unwittingly triggered recurring monthly charges that appeared on their phone bills.  These were labelled as “voice-mail services” and other innocuous services.

According to the prosecution at the time, the elaborate scam brought in so much money that the defendants and co-conspirators were able to purchase a telephone company and a bank in Missouri. They also reportedly created at least 64 shell companies and opened a host of foreign bank accounts through which to pass their ill-gotten gains.

The defendants routinely changed corporate billing names and merchant banks to stay one step ahead of any suspicious authorities. In 1999, they even began processing credit transactions in Guatemala to further complicate any possible investigation.

The criminal gang supposedly were involved in ownership of Cass County Telephone Co., a county telephone company in Peculiar, Missouri., with 8,000 customers (Fair Point Communications acquired the Cass County Telephone Company in 2006, which in turn was acquired by Consolidated Communications in 2016)

The gang reportedly also stumped up a further $3 million in February 2001 to buy the Garden City Bank in Garden City, Missouri., (now Lead Bank) for purposes of credit card processing.

At the same time, they formed a billing company called USP&C to place the false charges on customers’ phone bills.  USP&C had to set up a call center to handle complaints from outraged customers that handled an average of 17,000 calls a week at the height of the scheme.

Though USP&C billed telephone customers on behalf of numerous companies and gave varying descriptions of the services allegedly provided, the billing agent’s high charge-back rate began to attract attention from phone regulators.

In 1999, the California Public Utilities Commission investigated USP&C’s business conduct and found that of $51.5 million in billings to California customers over the previous 18 months, 50 percent were refunded after customers complained.

This was tip of the iceberg and as the investigation developed other states and authorities started looking at USP&C.

Estimates of the amount netted by the scam grew steadily and prosecutors estimated that the phone scam brought in approximately $200 million in revenue.

Federal charges filed in Kansas added another $9 million to that tally, accused of overbilling two federally supervised telecommunications funds — the Universal Service Administrative Co. and the National Exchange Carriers Association.

The estimate swelled even more when prosecutors obtained information indicating that the phone “cramming” actually generated at least $420 million, bringing the overall total to a phenomenal $659 million.

In 2018 The Federal Communications Commission (FCC) in the United States belatedly placed an official ban on the illegal practice of ‘cramming’ telephone bills. The practices although already federal crimes were not violations under the FCC regulation.

Two frauds separated by the Pacific Ocean, 15,000km and 15 years of time, the individuals the corporations involved are different, but the telecom fraud of ‘Cramming’ is exactly the same.

Telecommunication technologies have changed in the last 25 years since the Mafia’s fraudulent caper first started, service providers have diversified, telecom services have extrapolated, competition has increased.  As we move into a world of 5G, IoT, quadruple players (cable television, broadband Internet, landline and mobile phones), proliferation of OTT, multiple subscription services (Netflix, Amazon, etc.) adaptions to convergent billing systems and architectures, real-time charging, network slicing, and much, much more, will we be seeing the same large fraud scenarios repeat themselves in 15 years’ time? 

Without diligence from business and consumers, stronger criminal justice to deter fraudsters, sadly we will probably see large fraud cases repeat themselves even sooner…

The importance of Communication Service Providers to be diligent cannot be over exaggerated, the need for individuals, teams, departments to be aware of the possible implications such innocuous line items on an individual phone bill could mean, or the common theme in recent customer care complaints. This requires fraud, revenue assurance, billing and customer care teams to stay vigilant and constantly alert working together alongside risk management vendors to provide the best automated methods of detection.

It requires the voluntary activities and endeavours of individuals passionate about fighting fraud in organizations like CFCA, to instigate collaboration, networking, intelligence sharing and thought leadership, to ensure that working as a whole can mean, such frauds can be detected much earlier.

This will be the only way such high impact frauds will not become a constant repetition in history.

This blog was collated from a number of news articles including:

https://www.reuters.com/article/us-usa-crime-text-messaging-fraud-idUSKBN29V2L9

https://www.smh.com.au/national/australian-men-accused-over-us-50m-scam-in-america-s-biggest-phone-fraud-20210127-p56x8u.html

https://www.nbcnews.com/id/wbna6928696

https://www.cbsnews.com/news/mobsters-cop-to-huge-phone-scam/

https://www.theguardian.com/media/2005/feb/17/pressandpublishing.dailyexpress

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