Internet Financial Fraud Rising as Prosecutions Drop

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Internet financial fraud has been increasing for two decades, and the latest statistics from the FBI show it is continuing to derail the lives of more people and causing more financial hardships.

Worse, prosecution levels for internet financial frauds are dropping dramatically.

In 2021, the FBI’s Internet Crime Complaint Report (released on March 22, 2022), listed 847,376 complaints of suspected internet crime. This was a 7 percent increase from 2020, and the crimes resulted in losses of over $6.9 billion.

This translates into an average of 2,000 complaints per day, according to the FBI Internet Crime Complaint Center. The victims include average people, as well as celebrities, such as Sylvester Stallone, Wesley Snipes, Al Pacino, Neil Simon, Martin Scorsese, David Blaine and Uma Thurman, Sting, Alais Morinsetts, Robert De Niro, Anne Hathaway, Sidney Poitier, Dane Cook, Liv Tyler, and Kiefer Sutherland.

But estimates about internet fraud are conservative because most people do not report it. “While it’s true that Internet-based financial fraud is on the rise, getting concrete information about how many people are being convicted of these crimes or even how much money is being stolen is next to impossible,” according to Linda Chavez and the Founder and CEO of Seniors Life Insurance Finder, in Los Angeles.

While the trend in internet fraud covers the gamut from phishing scams, ransomware, non-payment-non-delivery scams, and personal data breaches affecting businesses, individuals, and public facilities, including infrastructure and hospitals, the prosecution and conviction rates are not easy to discover.

Fraud is now an accepted practice among certain politicians and their supporters, such as Trump supporter Steve Bannon, who do it because hey know their chances of being caught are small. The ramifications of the historic 2008 housing fraud scandal disrupted the housiong market, caused a severe recession, and tainted the credibility of the Democratic Party, and its Attorney General Eric Holder.

While frauds are common among banks, such as BNY Mellon, Chase, Bank of America, it is an inherent part of the US medical insurance industry. For instance, Medicare fraud costs taxpayers an estimated $800 billion a year, according to the Bloomberg News. This includes false claims, overcharges, networks doctors and hospitals over-inflating bills and billing for services that were never delivered.

Worse, it seems few people in law enforcement and other regulatory agencies make those conviction and prosecution statistics readily available.

Why Internet Financial Fraud Prosecutions Are Dropping

What are the reasons for this?

First, the Justice Department “has never made internet fraud a real priority, in part because these kinds of cases are not particularly attractive to prosecutors,” attorney and former Federal prosecutor Ankush Khardori wrote in a March 2021 article.

Second, the losses from individual victims “tend to be relatively small and widely dispersed.”

Third, a lot of internet fraud emanates from outside the US, and “it can be hard and bureaucratically cumbersome to obtain evidence from foreign governments, particularly from countries where these scams comprise a large, de facto industry that employs many people.” Prosecuting fraudsters operating outside the US is a time-consuming process, and even if large frauds occur and perpetrators are identified, extraditing them is costly.

The bottom line is that internet fraud is a huge problem no one wants to address.  “Experts agree that the reason for this lack of transparency is that nobody wants to talk about it. Large insurance companies work with the banks to keep quiet about exactly how much money they lose to fraud every year because they don’t want their customers—or potential customers—to know things like whether or not they will be reimbursed if their accounts are hacked,” Chavez of Seniors Life Insurance Finder, said.

“This problem has gotten so out of hand that some banks don’t even bother reporting losses due to fraud anymore. According to some sources, large banks can lose as much as $500 million per year overall from various types of scams, but only report about 10 percent of those losses because they are embarrassed by how bad things have become,” Chavez continued.

Law Enforcement Tolerates White-Collar Fraud

Internet fraud prosecutions, as well as other white-collar criminal prosecutions, declined during the Trump administration. A report from the Justice Department and Syracuse University found that the average annual number of white-collar defendants decreased 26 percent to 30 percent during Trump’s first three years in office from the average under President Barack Obama.

The prosecution record in the current Biden administration, and the US Justice Department of Merrick Garland, is also off to a slow start, according to Khardori. Some of the reasons for this include poor coordination between the dozen or so federal and private agencies that collect internet fraud complaint data in the US.

This is not a new problem. Writing in a 2017 report from the Stanford University Financial Fraud Research Center, Marguerite DeLiema, said “The two main sources of official crime statistics in the United States both largely ignore fraud victimization. The primary source of agency data, the Uniform Crime Report (conducted by the FBI), currently does not include fraud in its list of closely watched crimes.”

DeLiema, who is now an Assistant Research Professor at the University of Minnesota, School of Social Work, wrote in a recent email that the COVID pandemic has caused an increase in crime rates, including fraud and scams. “While anti-money laundering rules apply to many companies that process payments, including fraudulent ones, these laws are not always enforced.”

Margaret DeLiema

This was certainly the case with an internet fraud that victimized a Beverly Hills PR firm owned by Devon Blaine and his client. The fraud involved a hacked email address, a Zelle scam, and identity theft. But, when the owner contacted the Beverly Hills police department to report the theft, they wrote a report but did not take any action because the owner was not the direct victim of the theft.

“No one at the police department wanted the email header code that would have pointed to the hacker’s email provider and address,” Blaine wrote in an e-mail. “How can there be a conviction if law enforcement does not pursue the crime? Certainly, no insurance company has covered these losses.”

Where are the Courts and Law Enforcement?

Another major problem stems from tepid enforcement directives that don’t prioritize fraud prosecutions. Some critics have blamed this failure to prosecute internet-related fraud crimes, directly on the leadership of Attorney General Merrick Garland.

At the local and state level, law enforcement people lack the resources and time to pursue fraudsters that are often outside of their jurisdiction and more technologically  sophisticated.  “There are few convictions for Internet fraud because it is easy to commit and hard to track down the perpetrators,” according to Adnan Jiwani, Digital Marketing Team Lead, at PureVPN, in Hong Kong.

“The criminals can be anywhere in the world, and they often use sophisticated methods to cover their tracks. Even when they are caught, it can be difficult to prove that they committed the crime,” Jiwani said. “Prosecutors may not have the resources or expertise to go up against well-funded cybercrime networks. And many people don’t report online scams because they are embarrassed or think that nothing will happen. As a result, Internet fraud remains one of the most rampant crimes in the world.”

Nick Hodge

Other reasons for the low conviction rate are that more people are doing it using more sophisticated schemes. This includes “sustained fraud schemes” that capitalize on data breaches, which “make it easier for fraudsters to access personal identification information (PII),” according to Nick Hodge, of the Daily Profit Cycle newsletter.

Using information from a data breach, Hodge said fraudsters will combine actual and bogus data to build new, synthetic identities. “Then, they open fake bank accounts and credit cards. These criminals just cease paying after they’ve acquired great credit scores.”

In a fraud takeover scheme, fraudsters can take control of an account and make fraudulent online purchases using stolen passwords and credentials obtained through data breaches and social engineering. “A modest transaction like buying groceries with a debit card can lead to a major one like borrowing money from someone else’s bank account,” Hodge said.

Finally, if fraudsters are caught, they often face more lenient penalties than others who are convicted of other types of fraud, attorney Ty Gibson of Gibson Hill LLC, Houston, Texas, said.

Ty Gibson

“A lot of insurances now cover internet fraud, also known as computer fraud, so I think that the ones to blame are the authority and legal teams in charge of catching and punishing this specific type of crime, as better methods need to be developed in order to put a stop to it.”

 

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Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry. He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial. He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site, www.mutualfundreform.com, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).

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