Consumer Fraud in the United States: An FTC Survey Staff Report of the Bureaus of Economics and Consumer Protection Federal Trade Commission Keith B. Anderson August 2004 Federal Trade Commission Timothy J. Muris Chairman Mozelle W. Thompson Commissioner Orson Swindle* Commissioner Thomas B. Leary Commissioner Pamela Jones Harbour Commissioner Luke M. Froeb Director, Bureau of Economics J. Howard Beales, III Director, Bureau of Consumer Protection The author is an economist in the Bureau of Economics of the Federal Trade Commission. The views expressed in this report are those of the author and do not necessarily reflect the views of the Federal Trade Commission or any individual Commissioner. * Commissioner Swindle did not participate in this matter. ii iii Acknowledgments John Yun and Hajime Hadeishi made major contributions to the econometric analyses in Chapters 4 and 5 respectively. Without their hard work and expert advice, the study would not be what it is. James Lacko, Jesse Leary, Alan Mathios, and David Newhouse provided extremely useful advice on methodological issues. The survey was conducted by Public Opinion Strategies, and Bill McInturff, Elizabeth Frontczak and Tom Dewhurst of that firm made significant contributions to the survey design, as did various staff in the Bureau of Consumer Protection of the FTC. Christopher Kelley and David Yans provided valuable assistance in coding open-ended responses. Dawne Holz in the Office of Consumer and Business Education in the Bureau of Consumer Protection was responsible for the formatting of the report. Drafts were reviewed and valuable editorial suggestions provided by Howard Beales, Pauline Ippolito, Lydia Parnes, Paul Pautler, Nat Wood, and Kial Young. Assistance was also provided by Carolyn Samuels, Stefano Sciolli, Marie Tansioco, and Lance Toler. ii iii Table of Contents iv v Table of Contents Table of Contents List of Tables.................................................................................................................................vii List of Figures............................................................................................................................... ix Executive Summary................................................................................................................ ES-1 Chapter 1: Introduction ...............................................................................................................1 Other Studies ............................................................................................................................2 Chapter 2: Description of the Survey..........................................................................................7 Types of Fraud Investigated......................................................................................................7 Specific Types of Fraud .....................................................................................................8 More General Problems That May Be Associated With Fraud .......................................17 Switching of Long Distance Telephone Service Providers .............................................18 Victims of Fraud or Targets of Fraud?....................................................................................19 Consumer Purchasing Behavior .............................................................................................20 Chapter 3: Which Types of Frauds Are the Most Common? .................................................25 The Number of Victims ..........................................................................................................25 The Number of Incidents........................................................................................................30 Media Employed.....................................................................................................................37 The Cost of an Incident of Fraud............................................................................................38 Open-Ended Descriptions of Fraudulent Experiences............................................................41 Methodological Appendix to Chapter 3 .....................................................................................45 Chapter 4: Who is a Victim of Fraud?......................................................................................49 Characteristics Analyzed ........................................................................................................49 Methodology...........................................................................................................................52 Analysis of Aggregate Measures of Risk................................................................................54 Race and Ethnicity...........................................................................................................55 Current Income................................................................................................................62 Future Income..................................................................................................................63 The Burden of Debt.........................................................................................................65 Age ..................................................................................................................................68 Marital Status...................................................................................................................69 Other Characteristics .......................................................................................................69 The Likelihood of Being a Victim of Specific Frauds............................................................70 Slamming vs. Frauds .......................................................................................................71 Different Types of Frauds................................................................................................74 The Role of Language ............................................................................................................75 Conclusion ..............................................................................................................................76 iv v Consumer Fraud in the United States: An FTC Survey List of Tables Chapter 5: Who Complains? .....................................................................................................79 Complaint Data Collected ......................................................................................................79 To Whom Do Consumers Complain?.....................................................................................80 Characteristics of Those Who Complain................................................................................82 Internet Usage..................................................................................................................84 Education Level...............................................................................................................96 Age ..................................................................................................................................97 Income .............................................................................................................................98 Gender and Marital Status...............................................................................................99 Race and Ethnicity.........................................................................................................100 Method of Payment .......................................................................................................101 How Satisfied Are Those Who Complain?...........................................................................102 Entity To Whom Complaint Was Made.........................................................................103 Amount Lost..................................................................................................................108 Internet Usage, Education, Marital Status, Gender, and Age ........................................108 Income ...........................................................................................................................109 Race and Ethnicity.........................................................................................................109 Payment Mechanism .....................................................................................................110 Conclusion ............................................................................................................................111 Chapter 6: Conclusion..............................................................................................................115 Issues for Future Studies.......................................................................................................117 Appendix A: The Survey Instrument..................................................................................... A-1 vi vii Consumer Fraud in the United States: An FTC Survey List of Tables List of Tables Table ES-1: The Most Common Types of Consumer Fraud ....................................................ES-3 Table ES-2: Percent of Survey Participants Who Are Victims of Frauds, by Single Characteristic .......................................................................................ES-8