Speaking Notes for Sheridan Scott Commissioner of Competition

Competition Bureau

The Challenges of Fighting Fraud in an Internet World

12^th Annual ACFE Canadian Fraud Conference
Toronto, Ontario

May 24, 2006

(Check against delivery)

(PDF: 48 KB)

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I want to begin with a confession: I enjoy science fiction and have for many years. So when I began thinking of how I would address the topic of "Fraud in an Internet World", my mind wandered to think of other "network" worlds. Worlds like those in "Tron" which emerged 24 years ago, well before "The Matrix" took us to another level of computer paranoia.

Now I admit that Isaac Asimov, the godfather of thinking-machine fiction, was able to populate worlds with benevolent and supportive robots. But most writings about the age of cerebral machines have been based on a profound paranoia regarding our electronic helpmates, their enormous potential for good, and their profound potential to be abused or to turn bad.

And our internet truth mirrors this fiction. We all see the huge advantages of the brave new e-world, but we also know that within this lurk some potential dangers.

And in the case of the internet, one of the greatest dangers lies in one of humanity's oldest professions: fraud. And in this, you and I share a common objective: finding and stopping it.

Now your role is self-evident - it is right there in the title of your association and accreditation. But my role puzzles some people - what is the relationship between fraud prevention and competition policy?

I am going to talk about this today, but only briefly. I am going to take the bulk of my time to speak about the changing nature of mass marketing fraud, what the Competition Bureau is doing to combat it, and some plans for our future work.

But first, a little background about the Competition Bureau.

As Commissioner of Competition in Canada, I oversee a group of lawyers, economists, business analysts and others who have two jobs. First, we enforce the Competition Act to protect competitive forces in the economy. And second, we are energetic advocates on behalf of competition.

I will speak a bit more about our advocacy work later, but let me begin with a quick primer on the four broad enforcement elements of the Act.

First, the Act provides the Bureau with civil powers to deal with certain potentially anti-competitive business practices. These include practices such as abuse by a firm of its dominant position in a market to reduce or preclude competition, refusal to deal, tied selling, and exclusive dealing. Now I know that aggressive pricing and bundled discounts can be legitimate business practices. As a result, we are very, very careful to differentiate business practices which support, or are part of intense and vigorous competition, from those with the effect of impeding competition.

The second part of the Act covers criminal practices such as price fixing. These practices have been described as the most egregious forms of anti-competitive conduct and we are going to be increasing our focus this year on domestic cartels and bid rigging.

You may in fact recall the announcement in late January of a major cartel decision involving the paper industry. Cascades Fine Papers Group Inc., Domtar Inc. and Unisource Canada, Inc. each pled guilty in the Superior Court of Justice in Toronto to two counts of conspiring to lessen competition unduly, contrary to section 45 of the Competition Act. Each company was sentenced to record fines of $12.5 million for their part in the domestic conspiracy of carbonless sheets and they were ordered to fire or at least demote key employees.

This decision demonstrates that we and the courts take domestic cartels very seriously.

And the economic reason is clear: cartels and bid rigging are capable of diverting large sums of money away from consumers, away from taxpayers, and away from other Canadian companies that compete globally. In short, these acts destroy markets and competitiveness.

Which in fact brings me to the third element of our mandate which is to preserve the integrity of the marketplace, and in particular marketplace information. To this end, the Act contains provisions dealing with false and misleading advertising. And I am going to return to this element of our Act in just a few minutes because it is central to our efforts to combat fraud in Canada.

The Bureau's role and powers in enforcing these three elements of the Act are those of a law enforcement agency. For example, we can and do seek search warrants and conduct searches. For criminal matters, we can and do seek wiretaps. We have an immunity program for individuals who want to bring us evidence of cartels or other criminal offences.

And if we do not settle a case, we proceed to the Competition Tribunal to deal with civil matters. This is a specialised body equipped with both judicial and economic and business expertise. For criminal matters, we proceed by way of the Attorney General to the ordinary court system.

Much the same is true of the fourth element of our act, the review of mergers. In the case of mergers, the Act provides the Bureau with the right to review any merger in order to prevent a significant lessening of competition. But only the larger mergers must be notified to the Bureau. These involve companies with combined sales or assets exceeding $400 million, and where the acquired firm has sales or assets exceeding $50 million. Historically, over 96% of all notifications are approved without change.

While enforcement is a big part of our job, we have another important role. We are specifically charged by our Act to advise on, and to speak for and about competition in Canada. We do this through our interventions in regulatory fora such as the Canadian Radio and Telecommunications Commission and the Canadian Transport Commission and by providing advice to governments of all levels on policies, regulations and other matters affecting the marketplace.

In this, we are reasoned advocates. We do not argue blindly for competition at the expense of all other goals. We do, however, advocate that these goals be achieved through and in concert with competitive forces, and with the least impact on the marketplace.

We need to continue the effort because the competitive marketplace is crucial for our future. The central role of competition in economic progress is well established. Competition ensures that consumers and business customers benefit from lower prices, higher quality and more variety. And competition helps drive investment and innovation - two cornerstones of our future prosperity.

That is why the objective of the Competition Bureau, to maintain and enhance competition in Canada, is so important. And it underlies the main reason why we are engaged in combatting fraud in Canada's marketplaces.

It is not the only reason, of course. We could be combatting fraud simply because we are equipped with the legislative tools to tackle fraud related to false and misleading product and service claims. Under the Competition Act, we can deal with these using either civil or criminal processes, and we have staff trained to take on such cases.

That said, simply having the power would not convince me that combatting mass marketing fraud should be a priority were it not consistent with the purpose of the Competition Act - to maintain and enhance competition in Canada.

And clearly, combatting mass marketing fraud - scams aimed at multiples of consumers using telephone, mail or the internet - is central to maintaining competition in Canada. I recently met with three innovative Canadian companies who are using the internet in ways to provide consumers with new services and products.

Their success and their ability to benefit Canadians depends on the integrity of, and confidence in the electronic marketplace. And this confidence is eroded by fraud. Based on US studies, for example:

• 33% of online shoppers are buying fewer items due to concerns about online fraud. (Gartner Research – June 2005)
• 14% of online consumers have stopped using online banking due to concerns about phishing. (Forrester Research – December 2004)
• 72% of Internet users who do not use Internet banking are worried about identity theft. (Entrust – October 2004)

Simply put, mass marketing fraud erodes confidence and distorts marketplace information. Bad practices drive out the good. Competition is damaged and people suffer. And that is why I have made it a priority to combat mass marketing fraud which exploits Canadians.

Of course, we have always had some interest in combatting fraudulent claims. Is this different? After all, there has always been fraud. The late John Kenneth Galbraith summed up the nature of the world this way:

The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced. The manners of capitalism improve. The morals may not.

Well, I suspect he's right. The basic forms of fraud have not changed. But the medium has. And so too has the speed, scope and complexity of fraudulent activity. Before, most people lived in relatively small economic neighbourhoods, where trust could be established and malfeasance dealt with relatively quickly. Wide-scale frauds were rare.

Now, the internet and modern telecommunications have opened our neighbourhoods to the world. And they have exposed us to all the traditional forms of fraud that Professor Galbraith had in mind. But in new ways, with blinding speed, diversity of approaches and the most modern technology.

These represent serious challenges made more difficult by the challenge of focussing our efforts. Despite what many believe, there is no typical victim of mass marketing fraud. In fact, an October 2002 study conducted by the Strategic Counsel for the Competition Bureau - a review of fraud victimization research from the US, Canada, and Australia - found that the likelihood of becoming a victim of fraud is not predictable by education, income or age.

The reason may lie in the fact that Internet users range from the very young up to the older Canadian. And scams are modified to target a myriad of human vulnerabilities - customized scams for different demographic groups are the fraudster's equivalent of target marketing.

Now many believe that the victims of fraud are often less educated, less affluent members of society who are most needy and least able to detect fraud. But separate studies by the National Institute of Justice in Washington and by the American Association of Retired People (AARP) both found that fraud victims are more likely to be well educated, well informed, relatively affluent and not socially isolated. Their affluence attracts the scammers; their education is not, apparently, always an adequate defence against a "too-good-to-be-true" sales pitch.

But these are early studies and we need to know more. For example, there is considerable debate as to the extent to which seniors are victims of this crime. And much of the research, and many of the enforcement and prevention initiatives that have been undertaken in the US and Canada, have been directed toward seniors. However, the Australian Institute of Criminology has found that fraud is committed among all age groups, and that older people are not at greater risk of being victims of fraud. Indeed, based on results from the Australian Institute of Criminology's 2000 Crime Victims Survey, researchers found that persons 65 years or older were almost three times less likely than persons in other age groups to be victims of consumer fraud.

The Australian research also suggests, however, that older persons are less likely to report fraud. Although reported reasons for this are anecdotal, a leading cause of under-reporting would appear to be concern among older victims that they not appear to be "out of it" or incapable of managing their affairs. Their greater unwillingness to report could then reinforce their attractiveness as potential victims.

We need to know more about all the potential fraud targets, including businesses. Fraud artists have targeted businesses, exploiting weaknesses in invoice and billing systems in particular, with great success. And again, there are no easy ways to predict which business will be the target. Scams are customized to attack large and small businesses in all sectors.

If there is a bottom line, it is that young or old, rich or poor, more or less educated, business or consumer, we are all potential prey for the fraud artists.

And these artists of deceit are not typically easy to catch. While the internet has made many of the things we do both more efficient and effective, it has made combatting fraud ever more difficult.

Traditional investigations of misleading advertising and deceptive marketing practices in the "bricks and mortar" world usually involve known or traceable businesses and individuals. Advertising is disseminated usually by a "non-interactive" medium such as television, radio or newspapers. Consumers usually present themselves to a store, or will complete a mail or telephone order to get their product from an existing and readily identifiable business.

The digital marketplace is different.

For example, current technology allows marketers and their affiliates to secure anonymity throughout electronic transactions. There are now networks involving hundreds, if not thousands, of infected computers that disseminate deceptive electronic messages and process orders and money payments.

From an investigative and enforcement standpoint, digital networks are different in other ways. For example:

• Professional scammers are now actively present on the Internet and, in many cases, there is mounting evidence that organized crime is involved; this phenomenon is expected to increase over the coming years.
• Unlike traditional fraudsters known to Canadian enforcement authorities, the profile of scammers using digital networks to defraud and deceive is different. Global scammers are young, well educated and skilled, technology-savvy and innovation-driven, and more often than not, better resourced than enforcement officials.
• Digital scammers operate anonymously as part of virtual entities. They can also use the flexibility of networks to impersonate legitimate entities or individuals. They can periodically vary their access and end points so their operations are conducted in unpredictable patterns making detection and tracking even more complex.
• Business models are also using multiple networks of affiliates and of infected computers to maximize the reach of deceptive claims and to generate profits at a minimal cost. This requires the implementation of proactive intelligence-gathering functions to access and disseminate relevant data within the law enforcement community to ensure quick detection, disruption and arrest.
• Promotional and marketing activities are increasingly automated, intelligent and capable of directing consumers insidiously towards specific products and services as well as to avoid detection by law enforcement bodies.
• Transactions occur at a very high speed and are extremely time sensitive.
• The proceeds of fraudulent practices can be moved and hidden almost instantaneously through electronic means and through the Internet making money flows difficult to trace and facilitating money laundering for any number of further criminal activities.
• Due to the proliferation of spyware and malware, the vast availability of critical data and personal information about consuming patterns and the needs and concerns of consumers on the Internet makes it easier for scammers to design very effective and persuasive scams; these scams are tailored to deceive masses of consumers on an individual basis.
• Networks and traffic are bound to become increasingly dynamic making the tracing of electronic communications even more complex if not virtually impossible. The use of wireless access to conceal entry points of communications is only one example of a means available to commit crime anonymously.
• The "work" is very rewarding:
  • There is a very high return (multi-million dollars per scam);
  • There is a perceived low risk (i.e. fines are mere license fees); and,
  • There are rarely jail terms for white collar criminals in Canada.

The simple bottom line is that crime often does pay in the digital world.

So we face an intimidating list of challenges. To overcome them, we know that law enforcement agencies must be proactive in their intelligence gathering and capable of initiating targeted enforcement actions very quickly. This capacity is predicated on continuous training, skill sets, and the sufficient resourcing of investigators.

And we have to have the relevant tools. We are fortunate within the Bureau in having an excellent Electronic Evidence Unit (EEU). The primary function of this unit is to support Bureau officers by collecting electronic evidence through execution of search warrants, production orders, voluntary submissions or from open sources. The Unit conducts forensic examinations on computer systems and other electronic storage media, and identifies, extracts, preserves and documents evidence stored in the form of electronically encoded data.

Keeping up to date is a challenge, as you know too well. We are dealing with increased availability of high capacity data manipulation platforms, high speed network connections, new hardware, software and services. Ways are being developed to enable computer records to be easily hidden, or eliminated without leaving obvious traces.

In response to these new challenges we are keeping our own Unit up to date and working on the development of specialized software which will facilitate searching for and identifying some of this information.

But we know we cannot work alone. Our tradition and modus operandi is based on partnerships.

A good example is one of the early efforts to deal with mass marketing fraud. The Bureau is proud to have participated with the RCMP and OPP in what became the PhoneBusters National Call Centre since its inception in 1993. Its job is to centralize the collection of information from victims of Canadian telemarketing fraud, to analyze the information and determine with accuracy the most effective response by law enforcement. The scope was expanded to include not only telemarketing fraud, but also fraud by mail, fax and the Internet.

PhoneBusters has continued to evolve and is a proven success. And because a large number of complaints come from US residents, the National Call Centre also works very closely with a number of American enforcement partners, including the US Postal Inspection Service and the Federal Trade Commission. In fact, roughly 40% of phonebusters' complaints came from US sources between 1996 and 2005 which amply demonstrates how mass marketing fraud can damage our international reputation.

Pursuing those who commit offences through mass marketing fraud is a broad area of law enforcement which the Bureau shares with numerous other domestic and international agencies. The trans-national and international character of such crimes has compelled agencies to cooperate with each other on a number of different levels to assist each other's investigations, avoid duplication of effort, establish priorities, share information and intelligence, and learn from each other's approaches. The shared interest that characterizes this work is much more acute than any other work undertaken by the Bureau and has led the enforcement community to pursue means to cooperate more effectively, including the creation of enforcement partnerships at the local level.

As a result, we now have six law enforcement partnerships across Canada devoted to combatting Mass Marketing Fraud - whether by way of mail, telephone or Internet or a combination of these three vehicles. These include:

• The Vancouver Strategic Alliance (Competition Bureau, Vancouver Police Department, Business Practices and Consumer Protection Authority of BC, United States Federal Trade Commission, United States Postal Inspection Service. Based in the City of Vancouver, BC)
• Project Emptor, based in Surrey, BC. (Competition Bureau, RCMP, Vancouver Police Department, Business Practices and Consumer Protection Authority of BC, United States Federal Trade Commission, United States Postal Inspection Service and the United States Federal Bureau of Investigations)
• The Alberta Partnership Against Cross-Border Fraud (Competition Bureau, Alberta Government Services - Consumer Services Branch, Alberta Justice and Attorney-General, RCMP Commercial Crime Section, Edmonton Police Service, Calgary Police Service, United States Federal Trade Commission, United States Postal Inspection Service)
• The Toronto Strategic Partnership (Competition Bureau, Toronto Police Service, Ontario Provincial Police, Ontario Ministry of Government Services - Consumer Protection Branch, York Regional Police Force, United States Federal Trade Commission, United States Postal Inspection Service, United Kingdom Office of Fair Trading. The Bureau has a full-time officer within the Toronto Police Fraud Squad.)
• Project Colt in Quebec (Competition Bureau, RCMP, United States FBI, United States FTC, United States Department of Homeland Security, Sûreté du Québec, Montréal Police Service. The Bureau has officers assigned full-time to Colt dependent on the investigation in question)
• The Atlantic Partnership to Combat Cross-Border Fraud (Competition Bureau; Royal Newfoundland Constabulary; New Brunswick Office of the Attorney-General; RCMP - Service Nova Scotia and Municipal Relations; Halifax regional Municipality Policing Services; Charlottetown Municipal Police; Saint John (NB) Municipal Police; Canada Post Corporation; United States Federal Trade Commission; United States Postal Inspection Service).

The text of this speech, which will be posted on the Bureau's internet site, has a list of all the partners in these initiatives. If you look, you will see that in addition to Canadian police and other interested partners, these groups include, in all cases, representatives of the US authorities who share our focus in combatting mass marketing fraud, including the US Federal Trade Commission and the US Postal Inspection Service.

These partnerships have facilitated a deeper and more frequent level of co-operation and communication, built upon mutual respect and understanding. Each partner contributes specific expertise, allowing us to be more efficient, effective and timely. In the Pacific Liberty/Centurion credit card scams matter, where the crooks sold to victims a credit card they never received, the Alberta Partnership and the Toronto Strategic Partnership worked together to lay charges within six months of the start of the investigation.

As we become effective in North America, we expect the criminal operators to move offshore - we already have noted they are moving into Spain and the Netherlands, for example. And Canadian fraudsters are well known for their attacks on overseas consumers.

So our partnerships are expanding. For example, reflecting that UK residents are being victimized from Canada and that Canadians are being victimized from the UK, the United Kingdom Office of Fair Trading has joined the Toronto Strategic Partnership and is in the process of joining the Vancouver Strategic Alliance.

Our enforcement steps will take us a long way, especially if coupled with effective deterrence. For example, Ontario and British Columbia have laws facilitating the freezing of the assets of fraud artists as proceeds of crime. These laws can be very effective in their respective jurisdictions and can complement the Criminal Code Proceeds of crime provisions.

But we all know that enforcement alone will not put and end to fraud. The challenge is too persistent, pervasive and punitive to our economy. We need a creative continuum of approaches which make the need for enforcement less pressing by making life more difficult for the fraud artists.

One way we can do this is to harness the capacity of potential victims to engage in economic self-defence against fraud through a program of action involving education and awareness. In effect, we want to equip Canadians to recognize, report and stop fraud.

An integral part of our efforts to achieve this goal is the Fraud Prevention Forum. Stemming from 1997 meetings between President Clinton and Prime Minister Chrétien, this is a group of private sector firms, consumer and volunteer groups, and government and law enforcement agencies, who are committed to fighting fraud aimed at consumers and businesses.

Membership in the Forum has grown considerably in the last two years from 22 members in 2004 to some 75 members today.

And the work has expanded exponentially.

In March 2004, the Competition Bureau spearheaded the first international anti-fraud public education campaign in partnership with the Ontario Provincial Police, the Royal Canadian Mounted Police, the private sector and consumer groups.

We also involved the International Consumer Protection and Enforcement Network (ICPEN), a network of government organizations involved in the enforcement of fair trading laws. By October of 2004, 17 member-countries agreed to promote "Fraud Prevention and Awareness Month", and in 2006, that number had swelled to 25, including: Australia, Belgium, China, Denmark, Estonia, Finland, Hungary, Ireland, Korea, Latvia, Lithuania, Mexico, New Zealand, Norway, Poland, Portugal, Switzerland, United Kingdom, and The United States.

As further evidence of the increasingly international scope of our efforts, in March 2006, the Competition Bureau, along with 61 other government agencies world-wide, participated in a three-day Internet surveillance and enforcement program targeting bogus product claims found on the Internet. This year's international sweep was spearheaded by 23 agencies from ICPEN.

And back here in Canada, our 2006 Fraud Prevention Month sent nearly 75 million fraud awareness messages to Canadians through a variety of channels including the distribution of brochures, public service announcements, newspaper ads and widespread coverage by the media. These messages conveyed one consistent point: Fraud - Recognize it, Report it and Stop It!

Tackling one specific source of fraud, we have undertaken efforts to combat identity theft. A one-day Fraud Prevention Community Shredding event took place simultaneously in 20 cities across Canada. This event aimed to encourage Canadians to shred unwanted personal documents and received wide media coverage on national television networks and radio stations, and in newspapers.

All of this is important and complements some of our other work in various international fora.

For example, in addition to the consumer awareness work with ICPEN that I have just mentioned, we are also exploring the possibility of enforcement actions that are international in scope. One of the long term goals of the network is to take action to combat cross-border breaches of consumer protection laws, i.e. mass-marketing fraud. The Competition Bureau and the U.K. Office of Fair Trading are chairing the ICPEN Mass-Marketing Fraud Working Group whose aim is to undertake cross-border enforcement cases.

We are also active within a NAFTA context, fighting fraudulent health claims in the electronic marketplace.

Given the importance of this new market place for our future prosperity, we are making enforcement in this area a particular priority, with a specific focus on health related claims. Such claims are amongst the most harmful to society - health fraud can take not only money and trust from its victims, but can damage their health.

To address this area of concern, the Mexico - US - Canada Health Fraud Group, or "MUCH", brings together the leading health and fraud enforcement agencies in North America. In addition to the Competition Bureau, members of this group include Health Canada, the Federal Trade Commission and the Food and Drug Administration in the US, and the corresponding agencies in Mexico.

This group has been active. The Competition Bureau participated in a two-year campaign with its MUCH partners targeting fraudulent weight loss products. Our contribution to this campaign was supported by Project FairWeb, the Bureau's dedicated Internet surveillance and enforcement program. In targeting Internet-based weight-loss fraud, over 450 suspect sites were reviewed and 73% percent of Canadian firms contacted complied with our concerns by removing misleading claims.

And sometimes, we can turn the fraudsters' weapons to our advantage. On the outreach and consumer front, the Bureau joined forces with the Federal Trade Commission, on an education initiative called FatFoe. This initiative is composed of a "teaser" site which exposes seven of the most outrageous weight-loss claims found on the Internet. When consumers go online to purchase or learn more about the fictitious FatFoe product, they receive a warning from the FTC and the Bureau, through an information pop-up, advising them of the fraudulent nature of the claims, and preventing them from being duped into making a purchase. The site can be accessed at "www.wemarket4u.net/fatfoe/".

As with the weight-loss initiative, through MUCH, the partner agencies continue to take a unified stance against targeted consumer health fraud threats. We hope that the message to the marketers of bogus health products and services is clear: "there is no place to hide".

Education aside, progress has been made in one other important way - cutting SPAM. I won't go into all of the details about SPAM, about its explosive growth, its clogging up the internet's arteries, or the fact that it is the e-mail equivalent of the Blackfly, both annoying and painful. But I do want to emphasize that SPAM is one of the primary conduits of mass marketing fraud. Control it, and we make major gains.

This has become the focus of major international efforts, including at the Organization for Economic Cooperation and Development. The OECD Task Force on Spam is currently developing the OECD Anti-spam Toolkit (www.oecd.org/sti/spam/toolkit) to provide OECD member and non-member countries with policy orientation and support in their fight against spam.

The toolkit has eight elements:

• Anti-spam Regulation
• International Enforcement and Co-operation
• Industry-driven Solutions against Spam
• Anti-spam Technologies
• Education and Awareness Raising
• Cooperative Partnerships against Spam
• Spam Metrics
• Outreach

These are important efforts, and with improved technology, including SPAM blockers, and user awareness, progress is being made in the fight against SPAM, though much remains to be done.

I want to wrap up today by returning to the world of science fiction. As often as not, science fiction at its heart is not about science or technology, but about the fallible, sometimes corrupt, human beings who use and abuse the science.

So it is with the internet: it is not the technology that cheats us, but the ever-present scamsters of the world who hide their perfidy behind electronic veils.

We need to strip away those veils to expose them for what they are. We need to ensure that we have the systems in place, across our society and economy, to recognize their efforts, to report them to our law enforcement agencies, and to stop them in their tracks.

This is a priority of the Competition Bureau and our many partners. And I know that it is one you share with us.

Thank you.