E-Commerce and Internet Auction Fraud: The E-Bay Community Model

“Nobody realized auctions were going to be so big, and nobody realized that there was going to be so much fraud. We feel like the companies are working and they’re trying to do something to solve this problem. But 87% of our complaints are Internet fraud auctions. We have to be concerned.” (Holly Anderson, National Consumer League)

Introduction

The Internet revolution and advances in information and communication technology have triggered a massive influx of e-commerce transactions, which represent one of the fastest growing business segments that has ever existed, due to its convenience, absence of space and time limitations, limitless choice of goods and services, ability to compare prices and goods between various e-commerce providers, and round the clock online shopping. It is estimated that 63% of the online population will engage in e-commerce activities by 2006. Furthermore, it is perceived that the total value of e-commerce transactions around the world reached around $3.8 trillion in 2003, over $9 trillion in 2005, and around 18% of global sales in 2006.

Since their first appearance in 1995, online auctions have increasingly gained momentum and accelerated the pace of Business-to-Consumer (B2C) and Consumer-to-Consumer (C2C) e-commerce. In the autumn of 1998, 142 auction websites, 90 percent of which conducted B2C transactions, generated almost $100 million of trade each month. However, as e-commerce lacks face-to-face interaction and transactions are concluded online there exists a margin of risk with respect to security of payment, data protection, and transaction fraud. According to a very recent survey conducted by Eurobarometer, the prime reason stated by consumers for not trusting the Internet for trading purposes was security of payment, where virtually 73% of European consumers who have not used e-commerce gave this reason. Delivery issues were also a great concern, where 37% indicated that this is the main reason for their mistrust of e-commerce. Similarly, 36% their lack of trust was based on their worries of getting a warranty or refund.

The present paper seeks to examine transaction fraud in online auctions, and analyse some of the same harbour principles and fraud protection measures that aim to curtail and minimise online auction fraud. This analysis will be pursued in light of eBay policies, as a case study for the most successful online auction. Accordingly, the paper will be divided into two parts: the first will examine the phenomenon of online auctions, and the magnitude and forms of transaction fraud, and the second will analyse some of safe harbour principles and fraud protection schemes and their feasibility.

I. Online Auction Fraud and the eBay Community Model:

Online auction sites are amongst the top destinations for e-business and e-commerce trading. There are more than 250 online auctions so far. The most well-established being: eBay, Yahoo, and Amazon auctions.

It is worth noting that over 1.3 million transactions a day take place on Internet auction sites, nevertheless only a small percentage of this figure result in fraud. However, the number of fraudulent transactions should not be undermined, as online auction fraud ranks top of all cyber fraud complaints. The US Federal Trade Commission (FTC) stated that in 2002 auction fraud constituted the largest category of internet related complaints in the FTC’s Consumer Sentinel database, which logged more than 51,000 auction complaints in that year. Similarly, according to a recent survey by the National Consumers League (NCL) 63% of Internet fraud resulted from online auctions where the average loss was $ 478 per person.

In 2003, the US FTC released a report on Consumer Fraud and ID Theft, where Internet auctions fraud alone accounted for 48% of Internet-related fraud complaints, which resulted in the loss of $ 437 million in one year only.
Before examining the various forms of Internet auction fraud and its raison d’etre, it is necessary to state that online auction fraud is not exclusive to consumers or buyers; businesses and sellers also could be victims of online auction fraud. However, consumer buyers represent the major category of victims of auction fraud.

With respect to forms of online auction fraud, there are several activities which constitute fraudulent behaviour including:

Non-delivery:involves the seller placing an item up for bid when, in fact, there is either no item at all or the seller has no intention to sell. As a result, the item is never delivered to the buyer after he/she purchases the item.

Misrepresentation: Occurs when the seller’s purpose is to deceive the buyer as to the true value of an item by listing false information or using fake pictures of the item.

Non-payment:Involves a buyer placing the highest bid and winning the auction, and as the merchandise is delivered no money is paid. The victim in this case is actually the seller.

Triangulation: Involves three parties: the perpetrator, a consumer, and an online merchant. The perpetrator buys merchandise from an online merchant using stolen identities and credit card numbers. Then, the perpetrator sells the merchandise at online auction sites to unsuspecting buyers. Later, the police seize the stolen merchandise to keep for evidence, and the buyer and merchant end up the victims.

Fee stacking: Involves adding hidden charges to the item after the auction is over to obtain more money. Instead of a flat rate for postage and handling, the seller adds separate charges for postage, handling, and shipping. As a result, the buyer has to pay more than anticipated.

Black-market goods: These goods include copied software, music CD’s, videos, etc. The goods are delivered without a box, warranty, or instructions. Auction sites such as eBay try to stamp out selling such items by prohibiting the selling of unauthorised copies of software, games, music, or video. Multiple violations of eBay’s unauthorised copy policy could result in the suspension of your account.

Multiple bidding: This occurs when a buyer places multiple bids (some high and some low) using different aliases. The multiple high bids cause the price to escalate, and scares off other potential buyers from bidding. Then, in the last few minutes of the auction the same buyer withdraws their high bids, only to purchase the item with their lowest bid. On eBay, it is not permitted to use secondary User IDs or other eBay members to artificially raise the level of bidding and/or price of an item. Equally, retracting bids is not allowed as a rule on eBay, as all bids are binding, except: sales of real estate or businesses, sales of items that are prohibited by law or by eBay’s User Agreement, and other exceptional circumstances (typographical errors, significant change in the description of the item, inability to reach the seller, and unauthorised use of the buyers ID and password)

Shill bidding: is the intentional sham bidding by the seller to drive up the price of his/her own item that is up for bid. This is accomplished by the sellers themselves and/or someone that is associated with the seller making bids to purposely drive up the price of the seller’s item.

Shield bidding: occurs when the buyer uses another email address or a friend (the shield) to drive up prices and discourage bids on an item she wants. At the last minute, the shield withdraws the high bid, allowing the buyer to win the item at a lower price. Most auction sites forbid retracting a bid once it’s made, and on eBay shill and shield bidding is clearly prohibited.

Although one or more forms may be prevented under the auction site policies, the main concerns for online auction fraud lies in the non-delivery, delivery of defective goods or late delivery, failure to disclose all relevant information, and non-payment. In the second part of this paper some of the anti-fraud measures that could be used to stamp out fraud will be analysed.

Online auction fraud represents a serious threat to e-commerce and undermines online trust. However, many of the cases involving consumer fraud are mainly due to the lack of prudent behaviour from the victim. Thus, the main reasons are:

(a) Lack of knowledge: where the buyer is not fully aware of the site policies or safe harbour principles. Many buyers act on the assumption that standard policies exist in all auction sites.
(b) Payment Methods: money orders or personal cheques were listed as methods of payment by 80% of the victims that reported Internet auction fraud. The National Consumers League found that most of the consumers who lost money in Internet auctions paid with a money order (48%), personal cheques (32%), or cashier’s cheques (7%).
(c) Negligence: engaging in online auction activities has its stakes as well as its advantages. Thus, the lack of cautious conduct may very well result in becoming a victim of fraud. Buyers and sellers who do not act carefully by checking retail prices and information about each other, reading their feedback ratings, or using common sense in assessing the price of the item up for a bid, could become the perfect victims of fraud.

Having examined online auction fraud, its forms, and main causes, it is necessary to briefly consider the phenomenon in light of the eBay community as the largest and most successful online auction empire.

On a financial level, eBay boasts yearly sales of nearly $105 million and is valued by Wall Street at more than $11 billion. The company now has more than 95 million registered users, with more than five million transactions per week, and more than twelve million items on sale at any given time. In 2004, eBay expects revenue for the year to be as high a $3 billion. The company’s net income for the fourth quarter jumped 64 percent to $142.5 million from $87 million a year earlier.

As the world’s largest online market, eBay offers its users a comprehensive website and a full range of services. It offers both buyers and sellers helpful tips for safe online trading and provides comprehensive safety information on trading, authentication, dispute resolution, payment options, verification and protection, members’ reputation, and warranty options.

Nevertheless, despite these efforts and continuous enhancements in security and fraud prevention schemes, eBay is not immune to online auction fraud. In one of the largest Internet scam cases on record, eBay was used as a platform.

In the case of the United States v. Teresa Smith, No.02CR40029-NMG (D. Mass.), over 300 victims were involved, totaling more than $800,000 in losses. The first complaint on Ms. Smith to the Internet Fraud Complaint Centre (IFCC) came in February 2002 and was sent to the Massachusetts State Police. At that time no one was aware that over 300 more complaints on the same subject would be filed through IFCC. From April 2001 through October 2002, Ms. Smith was selling hundreds of computers to individual buyers through Internet auction Web sites. Her scheme was simple: she would defraud her victims by selling a computer, requiring them to pay up front, and then not sending any of the merchandise and refusing any type of refund requested. It was also discovered that Ms. Smith was using a number of different identities through eBay to perpetrate her fraud. Each time eBay would receive complaints regarding Ms. Smith they would suspend her actions on their site. However, Ms. Smith would then simply change to another identity and the process would start all over again. Ms. Smith sentenced on 4/10/03 to 4 years, 9 months in federal prison.

This is definitely not the only case of fraud but there are many other encounters of Internet auction fraud even on eBay. More recently, hackers managed to deceive several online businessmen who use eBay’s PayPal payment system, and obtained their user names and passwords, and then logged into their accounts and downloaded lists of customer names, e-mail addresses, home addresses and transactions. Although this scam involves a very small percentage of eBay users and no credit card or financial information were compromised due to the utilisation of encryption technologies, yet eBay fears that the compromised data might lead to “spoof emails” which are deceptive emails claiming to be sent by well-known companies, and ask consumers to reply with personal information, such as their credit card number, social security number or account password.

Nevertheless, with such strong financial standing, increased user registration, acquisition of well-established companies such as PayPal, and the close cooperation with dispute resolution organisations, governmental, and non-governmental anti-fraud agencies, eBay is becoming an empire and a self-sustaining community, which for many users represent their only source of income.

By and large, online auction fraud is a persisting phenomenon even on the largest and most successful auction sites. Thus, it is necessary to analyse some of the anti-fraud measures available to reduce fraudulent behaviour in order to have a safer market place and promote e-commerce transactions.

II. Online Auction Fraud and Safe Harbour Measures:

Although the importance of the hallowed principles of caveat emptor and caveat venditor, which require the buyers and sellers to be aware and exercise caution when buying and selling has regressed in light of the surge of consumer protection rules and the increased level of regulation, it seems that these principles are of some relevance for buyers and sellers in online auctions.
Both buyers and sellers, especially in C2C transactions should exercise great care when engaging in cyber trading. Although sellers are under legal obligations to present precise and accurate information concerning the status, quality, and condition of the goods advertised or placed up for a bid, and buyers are equally required to act in good faith and pay for the items delivered according to the agreed terms, the principles of caveat emptor and caveat venditor are still important, as reasonable care should be exercised when dealing with a total stranger in the absence of face-to-face interaction.
Being aware in online auctions involves simple precautions before bidding or putting up an item for sale: (a) learning about the auction site: user agreements describing bidding procedures, protection and warranty schemes, selling information, privacy policies, and payment options; (b) security concerns: use online auction sites that utilise secure technology such as SSL in signing in and payment using secure technology; (c) learning about the other party: getting accurate contact information and ascertaining reputation through the schemes offered by the auction site.

These simple precautionary procedures could largely minimise the risk of fraud.
On a different note, there is a myriad of anti-fraud measures that could be utilised by global online auction sites to emasculate fraud, enhance confidence, and render online auctioning a safe experience. Amongst these measures are: identity verification systems, fraud protection programmes, secure payment mechanisms, escrow services, feed back rating systems, trust mark seals, and complaint centres and online dispute resolution services.
In the following pages, each of the above-mentioned processes will be examined with reference to eBay when applicable.

(A) Identity Verification Systems:

Identity verification is a trust inducing process that enables trading partners to establish a proof of identity. The scheme does not perform credit check but works by submitting personal contact information including addresses, and this information will be cross-checked against consumer and business databases for verification. Once verified, the buyer or the seller will be granted an icon or a mark that proves that his/her identity has been verified.

Utilisation of identity verification systems minimises the risk of using fake contact information or addresses, which reduces the risk of fraud.
eBay is currently using Verisign, one of the leading providers of digital trust services, to provide verification services for buyers and sellers using their Consumer Authentication Service (CAS), which is an XML-based web service for risk management and fraud prevention. However, this service is currently offered for residents of the USA and US territories (Puerto Rico, US Virgin

Islands, and Guam) only for a nominal fee of $ 5.
The benefits of getting ID verification on eBay includes: bidding above $15,000, selling on eBay’s Mature Audiences category, and buying with eBay’s ‘Buy It Now’ feature.

The drawbacks of ID verification are the territorial limitations and the fact that contact information can generally be changed after a short period of time (30 days in the case of eBay).

(B) Fraud Protection Programmes:

Most online auction sites provide fraud protection programmes for safe electronic trading. These programmes have a wide range of applications for both buyers and sellers, the most important of which are: (i) fraud detection software programmes that scan databases and screens users for certain patterns of fraud thus enabling online auction sites to monitor or check suspected buyers or sellers to prevent fraud; (ii) partial reimbursement for losses resulting from non-delivery or misrepresentation; and (iii) protecting sellers against fraudulent chargebacks and unwarranted claims of non-delivery or misrepresentation.

These fraud protection schemes are available under the auspices of eBay. Firstly, eBay runs a Fraud Automated Detection Engine (FADE) which aims to detect fraud by screening and analysing eBay databases for fraud patterns and comparing transactions with reported fraud and scammer modus-operandi in general.

The drawback of automated fraud detection software is that it is not 100% accurate and in some cases no fraudulent patters was detected yet the transaction was fraudulent.
Secondly, eBay operates a standard purchase protection program for buyers to provide them with coverage of up to $200.00 with $25.00 deductible fee to cover processing costs in cases of non-shipment or significant misrepresentation. PayPal equally offers eBay buyers with coverage of up to $500 for claims of non-delivery or significant misrepresentation on qualified eBay listings that are paid for with PayPal. Thirdly, although sellers are not eligible for the eBay Fraud Alert and Protection Claim programs, PayPal which is now owned by eBay offers a Seller Protection Policy only to U.S. or Canadian sellers transacting with U.S. buyers, and for U.K. sellers transacting with U.K. or U.S. buyers against chargebacks due to fraud.
The drawback of some of these policies, especially the seller protection schemes is their territorial limitations, which is inconsistent with the nature of fraud. Moreover, the value of coverage in such protection schemes could be relatively low if the transaction involved paying a large amount of money.

(C) Secure Payment Mechanisms:

Payment methods constitute a very important factor of fraud. As previously stated, 80% of online auction fraud victims used money orders and cheques for payment. Thus, it is obvious that cash, money orders, and cheques are not the best options for payment. Alternative methods of payment that could minimise the risk of fraud are: credit cards and secure online payment companies.
Credit cards are a relatively secure form of payment against fraud because of the existence of charge back guarantee schemes used in consumer disputes (B2C and C2C). Credit card charge back is a banking facility, which enables a cardholder who paid for goods or services to dispute certain or all aspects of the transaction through the payment card issuer. This form of consumer protection, which gives the consumer the right to claim against the card issuer, is sometimes mandated by national laws. It involves the return of a transaction from the issuer of the card used by a consumer to the financial institution that ‘purchased’ the transaction from the merchant. Charge backs generally apply to all card-based payments, irrespective of whether a card was actually presented.
Although, in cases of fraud chargeback guarantee could be effective, yet the personal bank and card information of the victim will be violated and revealed to the perpetrator.

In order to maximise the level of protection, many credit card issuers such as Visa and MasterCard offer zero liability for unauthorised use of card and account information when shopping online such as American Express Ironclad Guarantee Scheme, although the drawback is that in some cases this protection scheme is limited to US based cards.
Another alternative secure method is paying through well-established e-payment companies, which enable the buyer to open an account with the company, and then the money is securely transferred to the seller without disclosing any bank or credit card information.

According to eBay policy, a wide range of payment options are available including: credit cards, money orders, personal and cashier cheques, cash, and wire transfer. Furthermore, in October 2002 eBay has acquired PayPal, one of the biggest e-payment companies which constitutes a valuable addition to eBay payment options. PayPal has over 40 million registered account holders worldwide. In addition to being a secure medium for payment, PayPal offers a buyer protection scheme, where buyers are eligible for up to $500 of coverage at no additional cost, for items purchased on eBay and paid for through PayPal. Moreover, PayPal offers a seller protection scheme against chargebacks due to fraud and a money back guarantee, which if purchased enables buyers to be fully reimbursed for purchases under $1000 by returning the goods to PayPal within 30 calendar days following the date of payment or seven days after receipt, whichever is earlier.

(D) Escrow Services:

Companies offering genuine escrow services though could be considered a form of secure payment mechanisms takes security level a step further by allowing buyers to escrow their payments until they have inspected, approved, and accepted the delivered merchandise. The function of online escrow services is a very similar system to the documentary letter of credit, and protects the interests of both buyer and seller against fraud and the risk of non-performance on one side or the other. Online escrow is often used in high value transactions.
eBay, recommends using escrow guarantees provided by Escrow.com for merchandise of $500 or more.
The possible drawback for escrow services is that they require a mutual agreement between the buyer and seller and some sellers refuse using escrow services as it could delay the transaction, drive up its cost, and give bidders the opportunity to return merchandise even when it’s exactly as advertised.

(F) Feedback Rating Schemes:

Feedback ratings systems is a software-supported reputational system, which enables a potential e-buyer in electronic consumer transactions to check the reputation of the seller through his/her feedback rating that is accessible from the page advertising any item s/he is selling. This scheme is adopted by eBay, as a deterrent to fraud because most sellers are eager to maintain their good reputation in order to attract customers. The feedback system is based on comments from other eBay users and operates by granting positive points for positive comments and negative points for negative comments.

Once a feedback comment has been placed it cannot be changed, however the drawback of this scheme is the possibility of negative retaliatory feedback comments, which could affect the reputation of either the buyer or the seller. Furthermore, buyers or sellers with negative feedback rating will not prevented from using a different ‘user name’ or from establishing an account on a different auction site. Accordingly, eBay encourages buyers to report questionable sellers to the site-sponsored Community Watch, adding another layer of protection and regulation.
This scheme will not be effective against or deter fraudulent one-shot sellers who do not intend to engage in subsequent transactions at least on the same auction site.

(G) Trustmark Seals:

A trust mark is used by a commercial body, which offers subscribing organisations its services against the payment of a subscription fee. The subscription may be coupled with a licence agreement, which regulates the use of the body’s trust mark by the subscribers. The enforcement of the body’s decisions may be ensured by the threat of the withdrawal of the trust mark and the termination of the subscription. Trustmarks may be offered by private organisations (including trade associations and consumer organisations) and some ODR providers. Trustmarks generally boost consumer confidence in online transactions by ensuring that the seller is committed to good selling standards as set by the licensing body. Thus, bidding in online auctions over goods offered by sellers bearing a trustmark seal minimises the risk of fraud to a great extent.

On eBay trustmarks are valued and two of the most powerful seals are: PowerSeller and SquareTrade.

The PowerSeller icon displayed next to an eBay seller ID acts as a strong assurance for buyers that they are dealing with an experienced reputable seller who has consistently sold a significant volume of items, maintained a 98% positive feedback rating, and provided a high standard service.
The SquareTrade seal displayed next to a seller ID proves that the seller’s identity and contact information has been verified, s/he is committed to mediating any disputes, adheres to good selling practices. Furthermore, Square Trade offers buyers who buy from SquareTrade seal holders coverage up to $250 minus a $25 deductible fee against fraud, which is in addition to and supplements eBay and PayPal protection schemes.
Despite being a reliable sign of good reputation and trust, many buyers are not aware of trustmarks and their potential importance. Based on the Eurobarometer survey, only one in ten citizens in 15 European countries has heard of Internet trustmarks.

(H) Complaint Centres and Online Dispute Resolution Services:

Online dispute resolution services are increasingly becoming popular and are exceedingly gaining momentum. Although online dispute resolution services are not exclusive to online auction disputes or fraud, yet the existence of swift and effective dispute resolution services in online auctions adds an element of confidence and trust for both buyers and sellers.
Furthermore, the relative proliferation of fraud complaint centres sponsored by governments, consumer organisations, and online auction sites could provide an effective method to tackle fraud and increase awareness among genuine buyers and sellers. Accordingly, online auction fraud complaints could be filed with the Better Business Bureau, the US Federal Trade Commission, the IFCC (a partnership between the FBI and National White Collar Crime Centre), and the online auction site used.

To complete their fortified matrix of anti-fraud measures, and in addition to the possibility of filing a fraud complaint with eBay, the latter uses Square Trade as their dispute resolution provider, which provides a swift services where parties could settle their dispute through direct negotiation or with the help of a mediator through a process of online mediation. Sellers holding a SquareTrade trustmark are committed to participating in good faith in any possible disputes with Buyers through Square Trade’s online dispute resolution services.

Square Trade has successfully resolved over 200,000 disputes through their panel of more than 200 mediators. Thus, eBay users could resort to Square Trade for not only a swift and effective dispute resolution process but also a cheap one, as the fee for hiring a mediator for eBay disputes is $15, and it is free to file a case, respond to a case, and for each party to use the Direct Negotiation tool.

The possible drawback for the utilisation of online dispute resolution services are the general requirement of mutual agreement between the buyer and the seller and the willingness of participating in the process in good faith, which is difficult in disputes based on fraudulent conduct. Equally, the absence of a binding decision in many cases could be a negative aspect. However, such services could be valuable in disputes involving the quality and standard of the delivered goods, and payment.

Conclusion:

E-commerce is increasingly expanding its share of the world trade, and is becoming a global phenomenon that is not affected by physical or territorial barriers. However, the lack of face-to-face interaction in conducting e-commerce acts as a barrier to trust and confidence, especially for consumers who may be dealing with total strangers thousands of miles away. The relative risks associated with e-commerce are further aggravated in online auctions, which constitute the number one medium for cyber fraud. Thus, there is a persisting need for boosting confidence and trust in e-transactions carried out on online auction sites through the establishment of an effective system of safe harbour principles and anti-fraud measures.

Whilst auction sites such as eBay are combating fraud by constantly boosting the level of security and trust in online trading through the regular implementation of anti-fraud measures and the provision of guidelines for safe trading, the nature of e-commerce makes it virtually impossible to eliminate it totally, especially in countries which lack the necessary executive and legislative framework to deal with computer-related and cyber crime.
Although Internet auction fraud is a borderless activity, we have seen that some of the anti-fraud measures are limited by territorial constraints. This calls for a high level cooperation between governmental and non-governmental organisations across the globe and requires extending the scope of protection to all victims of fraud regardless of territorial or national constraints.
Having reviewed the main reasons for fraud and some of the effective anti-fraud measures, it is safe to say that the key aspect of fraud prevention is public awareness of the best practices in buying and selling. This includes: reviewing the online auction site policies, dealing with sellers and buyers of good feedback ratings, giving preference to holders of established trustmarks and people with verified identities, processing payments by credit cards or through well-established payment companies or using escrow services for high value purchases, and resorting to swift and effective dispute resolution services in cases of actual fraud.

The more protection schemes are offered by an online auction site, the less cases of fraud could occur, which promotes e-commerce and render the site a safe market place. Thus, on global auction sites such as eBay, which offers many forms and levels of protection and where millions and millions of items are on sale everyday, cases involving fraud do not exceed several thousands each year, which constitutes a relatively small percentage of the total amount of transactions.