wairua » publications » internet auction security and fraud

Andy Williamson, Wairua Consulting
March, 2000

Fraud and buyer security are the biggest issues facing the Internet auction industry. According to the National Consumers League (NCL), Internet fraud accounted for U.S.$3.2 million in 1999 alone. Over 87 percent of online frauds reported to the NCL's Internet Fraud Watch related to online auctions, up from 68 percent the year before.

Seller fraud is the dark side of this new business that was already making headlines in its early days. Back in March 1998, The New York Times reported that a buyer at industry leader eBay paid U.S.$615 for a personal computer that never arrived. Even in the early days of online auctions, it was recognised that online fraud was much easier to perpetrate than in the "bricks and mortar" world. Common scams include bogus sellers with no intention of shipping goods, counterfeit goods and shills (where the seller places bids themselves to artificially increase the price. The Internet makes a difficult environment in which to gauge the authenticity of goods and the honesty of sellers (Barret), leaving consumers vulnerable. According to the U.S. Federal Trade Commission, the primary cause of complaint is non-delivery of goods. In the U.S. at least, this offers buyers a remedy since it is classified as mail fraud and therefore open to investigation and potential prosecution by the U.S. Postal Service. A Californian man was convicted of mail fraud totalling U.S.$37,000 for failing to supply consumer electronics offered for sale on eBay. This prosecution represents a growing interest from government agencies with regard to online fraud.

Many of the leading online auction sites have come under media scrutiny for their lack of security and disclaimers of responsibility. In January 1999, eMarketer said of eBay: "over the past few months the company has come under increasing criticism for its security and anti-fraud measures. In short, it had none." Auction sites have countered such arguments by improving their payment services and seller vetting. eBay response is that it would be physically impossible to audit every auction without significantly disrupting service: eBay hosts 3.5 million auctions at any one time with 340 auctions new start every minute. Auction sites such as eBay also claim to be restricted in that rigorous auditing of auctions could leave them open to prosecution under the U.S. Digital Millennium Copyright Act 1998.

If the major source of fraud is fraudulent sellers, then the majority of victims are the buyers who insist on transacting their payments offline, by either money order or cheque. In an attempt to improve the situation, online auction companies have introduced new payment methods, which include:

Credit card

The ability to pay the auction site or another third party by credit card provides the buyer with a level of comfort, ultimately supported by legislation against fraudulent sellers.

Escrow

A number of auction sites now offer an escrow service, where the buyer pays the money over to a third party, who in turn only hands over the money to the seller when the buyer is satisfied. eBay uses an organisation called I-Escrow (www.iescrow.com) and Australian auction site ozetraders.com.au (www.ozetraders.com.au) offers a similar service via AustraliaPost (which also provides delivery as part of the service). The downside of such a service is that it incurs an additional cost.

This method is not without risk, highlighted in the case of a buyer who used such an escrow service to transact the deal only to discover that the goods he had bought were purchased illegally with a credit card bearing his name but a fictitious number.

Free Insurance

A number of major sites, including eBay and Amazon.com, are now offering free insurance to purchasers. The insurance amounts are limited to U.S.$1,000 on eBay (eBay, 2000) and U.S.$250 for Amazon.com, rising to U.S.$1,000 if the buyer is registered for Amazon.com's one-click service.

Seller Registration

To succeed at online fraud, sellers need to create fictitious identities and be anonymous. To solve this problem, many sites now require sellers not only to register but to authenticate who they are. This can be done using credit card authentication (without cost), social security numbers and drivers license numbers. Sellers on eBay can be vetted by a third party, Equifax inc, and eBay then displays a symbol to help buyers determine who is trustworthy.

Whilst it is impossible to prevent online fraud, following a number of simple rules can greatly reduce the buyer's chances of falling victim. In 1998, Internet Fraud Watch offered some tips to help potential auction buyers minimise their risks, these still hold true today:

• Use a secure, third-party payment system and never pay with money order or a cashable cheque.
• Understand the auction process; be a spectator first.
• Discover as much as you can about the seller, this is helped by sites allowing past buyers to comment on the sellers reputation.
• Ensure that you have a physical address for the seller and that this is verified.
• Get firm details on delivery, return policies and warranties.
• Be wary of collectables and ensure that the claims are backed up with authenticated evidence.
• Use common sense: are the seller's claims and promises too good to be true?

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