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Mr. HUNTER:
Good morning, Chairman. As you said, I am Ken Hunter, Chief Postal Inspector, and accompanying me today is Postal Inspector/Attorney Bob DeMuro from Newark, New Jersey. We appreciate this opportunity to appear before your Subcommittee to discuss sweepstakes and government look-alike mailings. I want to thank you, Senator Levin, Senator Cochran, and Senator Edwards for the work that all of you have done to develop legislation to provide additional protections for consumers. We, too, are concerned that the adverse impact deceptive promotions can have is significant. I have submitted more detailed written testimony for the record and will simply summarize its main points today.
For over 200 years, the Postal Inspection Service has been protecting postal employees, the mails, and postal facilities from criminal attack and protecting businesses and consumers from being victimized by fraudulent schemes and other crimes involving the use of the mails.
Congress initially created the Nation’s mail service to maintain a reliable, efficient, affordable, and secure means of communication. A recent Harris poll affirms that the American public feels significantly more confident about the security of the mail than telephones, fax, or Internet.
Inspection Service employees are dedicated to preventing unscrupulous promoters from damaging public confidence in the U.S. mail. The Postal Inspection Service is not opposed to sweepstakes in general. They can be lawful, non-deceptive marketing programs. However, any sweepstakes promotion that does not clearly represent the true nature of the offer it is making in an effort to deceive and prey upon citizens deserves to be penalized.
Thanks to the attention you and Senator Levin have drawn to this problem, we are all now more aware of the heartbreaking stories of citizens, many of them elderly, who have invested their fortunes in deceptive and sometimes fraudulent sweepstakes promotions, receiving virtually nothing of value in return. This is a disgrace.
Unfortunately, the statutes that most readily address fraudulent and deceptive promotions are not adequate and provide little incentive for the operators to quit their promotions.
One of our best-known remedies to address fraudulent schemes that utilize the mail is the criminal mail fraud statute. During the past fiscal year, 1,339 investigations were initiated by postal inspectors regarding possible mail fraud violations. We obtained 1,278 convictions resulting in prison sentences, fines in excess of $11.9 million, and court-ordered and voluntary restitution of over $311 million.
Prosecuting fraudulent promoters under criminal statutes often occurs only after damage has been done to the victims. Additionally, many of the promotions that we address skirt the elements of guilty knowledge and criminal intent which are necessary to prove violations and sustain convictions under Federal and State criminal statutes.
Most often, we address these activities under current civil mailability statutes in an attempt to stop the schemes and limit the number of victims. What often happens is that our actions deny promoters the fruits of their schemes—incoming mail containing money—and diminishes the likelihood of criminal prosecution due to the fact that we stem the victims’ losses.
This would be an acceptable situation if promoters were influenced to discontinue the operation of their deceptive promotions. Unfortunately, as you know, this is not the case.
Current civil statutes concerning fraudulent promotions have been utilized by us to reduce victim losses related to a particular scheme. However, it is too easy for the promoter to set up new addresses and continue the scheme or start a new scheme.
What is missing are possible sanctions that make promoters who have been shut down think twice before resuming business as usual.
We remain committed to protecting consumers through any means available. However, it is time to quit trying to explain why our effectiveness is limited by weaknesses in the existing laws. As you have demonstrated, there is overwhelming evidence that people are misled by language allowed by the existing statutes. We need clear and unambiguous legislation to protect both consumers and businesses from deceptive promotions.
We wholeheartedly support S. 335, which we believe will greatly enhance our ability to conduct investigations, shut deceptive promotions down, and decrease the likelihood of a promoter’s recidivism. Provisions that you have included in the legislation will allow multi-district temporary restraining orders, establish significant civil penalties for mailing deceptive promotions or evading stop orders, and grant limited administrative subpoena authority to the Inspection Service for production of records relevant to the investigations. These provisions are key to more effective enforcement efforts.
Also, the legislation will establish for the first time specific guidelines for solicitations involving sweepstakes, games of skill, and facsimile checks. In addition, government look-alike provisions will be better defined.
While I am proud of our success in conventional law enforcement efforts, I am also convinced that arrests, convictions, and civil judgments are only part of the way to effectively deal with consumer fraud. The results of these efforts may only come after the victims have lost their money and the con artists have spent it. For this reason, we have been working closely with consumer groups and industry to develop fraud prevention strategies and share best practices. These efforts have produced dramatic results in the areas we have targeted. Last September, while testifying before the Subcommittee on International Security, Proliferation, and Federal Services, I announced that the Inspection Service had joined with the National Council of Better Business Bureaus to make a vision we share a reality. Assisted by other consumer and government agencies, including AARP, the Department of Justice, the Federal Trade Commission, and the Federal Bureau of Investigation, we plan to launch perhaps the most ambitious fraud prevention initiative ever undertaken, Project kNOw Fraud.
In October, we will mail to every home in America a card containing valuable fraud prevention tips and providing a toll-free number to call and an address to write for information. Also, there will be a dedicated web site which links to the participating agencies and organizations, and an informational video is being produced which will be available through 16,000 public libraries and on the website.
Senator the only way to reach everyone in this great country is through the mail, and that is what we intend to do.
Now, this card is being designed to be displayed by the phone as a reference and prevention tool in hopes of helping citizens make informed decisions regarding mail and telemarketing solicitations and to help them avoid becoming victims of fraud. Of course, I would much prefer that they not ever receive those offers that this education is necessary for. And in that regard, I applaud you for the bipartisan effort that you are leading on this bill and certainly commend you for holding this series of hearings.
We very much appreciate your interest in protecting the American public. We believe your bill is the most comprehensive legislation to date that relates to fraudulent and deceptive mailings. I assure you that the Postal Inspection Service will continue to combine aggressive investigations and widespread public awareness campaigns to rid the mail of fraudulent schemes. The American public’s confidence in the mail is not only important to the Postal Service, but also to the millions of businesses that rely on the mail as an important communications and marketing tool.
At this time, as you have requested, I would like to ask Postal Inspector Attorney Bob DeMuro to discuss a few examples of sweepstakes and government look-alike schemes that we have investigated. Thank you very much.
Senator COLLINS. Thank you very much, Mr. Hunter.
Mr. DeMuro.
Mr. DEMURO:
Thank you, Senator. I would like to thank the Subcommittee for this opportunity to address them concerning S. 335, the Deceptive Mail Prevention and Enforcement Act. The proposed legislation would enhance the Inspection Service’s efforts in combating deceptive mail practices that are plaguing American consumers. Several aspects——
Senator COLLINS. Excuse me for interrupting. Could you move the mike just a little bit closer to you? They are very directional, so you have to speak right into them. Thank you.
Mr. DEMURO. I would like to illustrate some provisions of the proposed legislation with current and past investigation cases of how your legislation would have been very helpful to us.
With respect to multi-district TRO authority, in the current investigation of Eagle Promotions, it was determined that after we filed for a TRO in New Jersey and that the promoter, James Bierman, was operating in 13 different trade styles, we discovered that he was also operating out of New York with a different corporation and in four different solicitations with different trade styles. Had we had multi-district TRO authority, the TRO we received in New Jersey would have impacted on the New York operation. Typically, promoters do use multiple addresses, multiple trade names, as testified earlier. In a previous case, a person by the name of Borden Barrows operated four different sweepstakes promotions in four States under three different names. Now, again, if we had the TRO authority for multi-district filing, if we were to have that authority, we could stop the future Barrows from operating with only one filing. This would promote judicial economy and it would help us to protect consumers better.
With regard to Mr. Barrows, interestingly, when we approached him in 1993 in New York City, Mr. Barrows closed up shop, failed to award the prize, which was cash or a car, and moved on. He set up shop sometime later in Massachusetts. Again, postal inspectors approached him. Once approached, he closed up shop, failed to award the prize, which was cash and a car, and moved on.
He then surfaced in Florida, again, incorporating under new corporations using new trade styles, and this time he started to solicit the public with a solicitation called Cash Claim Service and National Cash Distribution Bureau. The solicitation was a delivery notice. It represented that the U.S. Government was holding money for the addressee. Barrows had set up CMRA, commercial mail receiving agencies, addresses in Arizona, New York City, Washington State, Washington, DC, White Plains, New York.
Senator COLLINS. Mr. DeMuro, I am going to have that put up since we do have that as Exhibit No. 24.1 It is this one that you are describing, I believe. Is that correct?
Mr. DEMURO. Yes, it is.
Senator COLLINS. Thank you. Please keep going.
Mr. DEMURO. In the case of Cash Claim Service, each time Mr. Barrows was approached, he would merely stop—or we would stop him in one location, and he would merely move on to another location. Currently, the penalties that promoters receives are only after they have violated a cease and desist order and after the Postal Service has granted us a breach petition. Barrows had signed a settlement agreement with the Postal Service for Cash Claim Service and National Cash Distribution Bureau in November 1997. Subsequently, he set up two addresses several months later, in April 1998 and June 1998, using a new trade style called Distribution Center. Barrows then solicited the public with a different delivery notice, violating the settlement agreement he signed with the Postal Service.
In August 1998, the Inspection Service and the Postal Service Law Department sought and obtained a breach petition against Barrows. Barrows defaulted on the breach petition, and it was granted. Barrows simply ignored the agreement and the cease and desist order. The proposed legislation would have subjected Barrows to penalties for the initial violation, and it would have taken the profit out of his illicit promotions. It would also have subjected Barrows to a double fine for violating the cease and desist order.
In another case, Mailworks International operated several sweepstakes out of Tempe, Arizona. Postal inspectors obtained a TRO in September 1998. Most of the defendants did settle in November 1998, except one, who has then become subject to a preliminary injunction.
Interestingly, in March 1999, a company called Wilson Perrie Corporation operated from Nebraska. Now, Wilson Perrie Corporation was using a Mailworks sweeps solicitation substantially similar to a trade style called Monetary Fulfillment Agency out of Tempe, Arizona. If we had administrative subpoena authority, we would be able to identify the parties behind Wilson Perrie Corporation, established the links between Wilson Perrie Corporation and Mailworks, and determine the scope of the scheme and the volume of mail to assess penalties.
In Eagle Promotions, again, we initially filed against them in New Jersey, but did not know about the New York operation. Had we had subpoena authority, we would have known very quickly about the New York operation and could have moved very quickly against it.
Subpoena authority also helps us establish whether there are funds available for consumer restitution. In the area of government look-alike legislation, the current law is a subjective standard. In the Eagle case, the government has argued that 2 of the 13 promotions violate the law. It violates it as reasonably construed as implying a Federal Government standard—excuse me, a Federal Government connection. Your legislation would provide an objective standard which would strengthen it, and it would also provide penalties.
The legislation calls for conspicuously listing on sweepstakes a no-purchase option. A clear and conspicuous no-purchase option on the claim and entry form allows consumers to make an informed decision as to whether to participate in the sweepstakes. In the Eagle promotion and in the Mailworks promotion, the no-purchase option on the claim forms would have helped clear consumer confusion about whether they are obligated to send money to receive the cash award.
Finally, with regard to working with State Attorney General’s Offices, the Inspection Service has worked in cooperation with the State Attorney General’s Offices and Consumer Affairs Divisions. In the Eagle Promotions investigation, we have worked jointly with the New Jersey Attorney General’s Office and Consumer Affairs Division. We shared information, exchanged consumer complaints, and jointly developed consumer witnesses. We even coordinated the filing of our cases in Federal and State court.
Promoters often do not solicit from consumers in the same State that they are operating from. In the Eagle Promotions case, it did not solicit New Jersey consumers with Eagle Promotions, and only with Lexington, which is located in New York. Promoters believe that the attorney generals do not have jurisdiction over them if they do not solicit consumers from their States or perhaps that the attorney generals will put them on a lower priority list.
As in the Eagle Promotions case, the Inspection Service has worked jointly with the New Jersey Attorney General’s Office to develop out-of-State witnesses for both of our cases. The proposed legislation would enhance the Inspection Service’s ability to assist the Attorney Generals with their investigation as well.
Thank you very much.
Senator COLLINS. Thank you very much. I want to thank you both for your support for our legislation, for the excellent work that you have done to try to curtail deceptive mailings, and also for your technical advice and expertise which you have shared with the Subcommittee throughout our investigation and in drafting our legislation. That has been extremely helpful.
When the Subcommittee first began looking into deceptive mailings, I was familiar with the four large sweepstakes companies. I had no idea that there was an underground operation of dozens of small operators who are also reaching millions of Americans with their solicitations. It troubles me greatly that we have people, these underground operators, what I call the stealth sweepstakes operators, which are very difficult to detect, to track, to close down, who have been in operation for decades. Why is it so difficult to identify these small promoters? Why are they able to stay in business so long, Mr. Hunter?
Mr. HUNTER. Well, I think probably there are hundreds who are operating and that many of them are operating, as you have heard today, under multiple names so that many of them have multiple branches. And it has been possible for a number of reasons, primarily centering on their anonymity, the ability to use so many different names, and also loopholes in the law that you are trying to close such that, for example, if a TRO is issued in one judicial district, it would apply even if they moved to other districts. As you have heard, it is very easy to use commercial mail receiving agencies and not even have a physical presence in those locations, just a business you pay to receive those payments and forward them to you. And, of course, if there were some penalties, if there were some teeth in these civil administrative proceedings, the financial penalties that you are proposing, because, frankly, people are in the business for the money.
Likewise, the subpoena power would be very helpful, too, because as you heard today from the person responsible for your investigations, who has some of those powers, even then it is difficult to get this information. And we are hindered even further without the administrative subpoena power to learn more about the operation more quickly, and the victims, so that it can be shut down before further individuals are victimized.
Senator COLLINS. Following up on Mr. Hunter’s point, Mr. DeMuro, as we investigated Mr. Dobin’s enterprises, we found out that he had 40 different trade names that he was using for only three sweepstakes. Is the use of this complex layer of different names and different companies for the same promotion common? And does that make detection that much more difficult?
Mr. DEMURO. Yes, Senator, it is. It is very typical that promoters will use multiple names. Again, going to the Eagle Promotions case, there were 13 different trade styles in New Jersey and four in New York. Now, with the New York operation, we did not become aware of it until after we had filed. And Barrows, for instance, he had used three different sweepstakes operations in three different States.
What the difficulty is is to link those particular solicitations back to Barrows, and because they are in different locations, the complaints go to different locations. And it is only really by conversations with other inspector attorneys or inspectors that we find that there is a link between the two.
Senator COLLINS. We found that also in our investigation, that it took a great deal of work and digging to find out all of the multiple corporations, all the multiple DBAs, all of the fictitious names that were being used by these promoters. And we also found that there are companies that use straw owners who have nothing to do with the operations. So you think you have the individual who is the person responsible, and you find that you do not.
Have you had experience with companies being run by straw owners as someone who really has little or no involvement with the company that is putting out the deceptive mailings?
Mr. DEMURO. Yes, there’s been numerous examples, Senator, where even the postal forms will have the names of individuals who are straw owners or third parties, and when you approach those third parties, they know little or nothing about the operation. But we at that point, through interviews of vendors, will try to reach beyond that straw person to reach the real promoter or the principal who actually directs and controls those corporations. Senator COLLINS. That was one of the challenges for us in getting into this whole matter, was finding out who really is pulling the strings and benefiting from the money that consumers deceived by these mailings are sending in.
I think that is why the administrative subpoena power is so important that is in our legislation, as well as the ability for you to have multi-district TROs so that you can’t have a Mr. Barrows just moving his operations to another State and you have to start all over again. Is that correct, Mr. Hunter?
Mr. HUNTER. I would agree those are very valuable tools. Senator COLLINS. Let me ask just one final question to you, Mr. DeMuro. On the exhibit that we have on the posterboard 1—and this is the Barrows case, I believe—this really troubles me not only because it was received from one of my constituents, but because it is a perfect example of a government look-alike mailing that is deliberately using words associated with government to deceive consumers.
For example, it says that all U.S. Government payments are 100 percent guaranteed. True, but totally irrelevant to this mailing, is it not?
Mr. DEMURO. That’s correct, Senator.
Senator COLLINS. It also says special notification—it appears to be designed to look like a postal document, one of those postcards that the Postal Service uses. Is that correct?
Mr. DEMURO. That’s correct. That’s what we call a delivery notice scheme, if you will.
Senator COLLINS. How common are these kinds of schemes?
Mr. DEMURO. The ingenuity of the people, of questionable promoters, are unlimited. In this particular case, Senator, the fulfillment is a book of addresses, U.S. Government addresses, and when the consumer gets it, basically it is like a telephone book of free information.
Senator COLLINS. Thank you very much. Again, I want to thank you for your very valuable assistance to the Subcommittee throughout our investigation. I am very hopeful that the hearings that we have held will result in the legislation that we have introduced being passed to give you the tools that you need.
Senator Edwards.
Senator EDWARDS. Thank you. Thank you both very much for being here. I want to follow up on a question that was asked by Senator Collins for just a minute. Could the two of you just comment on why you believe the administrative subpoena power that is in our bill is so important?
Mr. HUNTER. Sure. It gives us the ability under the constraints that are provided in the bill to quickly get in and to ascertain the significant details in terms of the extent of the scheme and to be able to make a determination for referral to the appropriate authority more quickly for appropriate action so that you avoid further victimization.
Senator EDWARDS. Mr. DeMuro.
Mr. DEMURO. Senator, I think the administrative subpoena power is the keystone of the bill in that it allows us to reach beyond and peel away the layers that protect the true principals that are operating, and most importantly because once we do obtain a cease and desist order, we want to be able to serve it on the true principal so that that principal could be assessed the penalties and they could be subject to further fines down the line.
Senator EDWARDS. Both of you I think have advocated—changing subjects, both of you have advocated there being real and meaningful separation between the processes used to enter a sweepstakes and the processes used for purchasing a product. Can I get the comments from the two of you on how you think that could be done most effectively?
Mr. HUNTER. Well, I think the key for both is the same in that people who are extending an offer to someone for something of value should be required to explain very clearly what the nature of the offer is and what the reasonable expectation in terms of an outcome is. If it is a sweepstakes, that it is a sweepstakes, what the odds are, what the term of the sweepstakes is, etc.; and likewise for products, a clear representation——
Senator EDWARDS. If I can interrupt you just a minute, what about, for example, the idea of requiring separate addresses, separate envelopes for the two so that you can’t—so they are both not part of the same envelope and same address?
Mr. HUNTER. You mean for the response back, that requirement?
Senator EDWARDS. Buying a product versus entering the sweepstakes.
Mr. HUNTER. Well, I would encourage very clear information and uniform information on how you respond. If I understand you correctly, you are talking about if you are not going to buy, you follow some different procedure than if you are.
Senator EDWARDS. Well, what I am really saying is you just have two separate envelopes, requiring that you have two separate envelopes, so that if you are responding to the sweepstakes, you send one envelope in; if you are responding to it by buying a product, you send a separate envelop in.
Mr. HUNTER. Very good. I emancipated myself from those types of responses a couple of years ago, and I’ve felt very free every since. But only if it would be very clear to the consumer what the ramifications are, because I think today that it is misleading often in those offers. So if the provision facilitated the rapid filling of an order, but it was very clear in the offer that that was the case, perhaps it would not be objectionable. But it would be very important that the legislation be such that the wording was very clear in that regard.
Mr. DEMURO. I think, Senator, the no-purchase option clearly and in boldface on the entry form would probably be the best advice to permit consumers to check off that option. Currently what happens is on the reverse side of most of these sweepstakes, the consumer does have an option to send in a No. 10 or a No. 9 envelope with a 3-by-5 card and/or the claim form if they don’t want to participate by sending money. That is very confusing. I find that lawyers can kind of wiggle the language so that the consumer will remain confused. But I think on the claim form if you have in boldface no-purchase option and you just check that off, I think that is probably the best device to allow consumers to participate without sending money in.
Senator EDWARDS. So basically just the most effective thing, you think, is just a clear, easily identifiable, conspicuous disclaimer.
Mr. DEMURO. Yes, I do, particularly for our senior citizens who may not read the rules as astutely as someone else will.
Senator EDWARDS. Can we get Exhibit No. 14 up, please? I don’t know if you all can read this from where you are, you have a copy in your book there. But if you look down at the lower right-hand corner of this exhibit, it says, ‘‘Do you have a valid major credit card?’’ Then there are two boxes to check, yes or no. Do you all have any idea why this information is requested? Or have you looked into that? What do they do with that information?
Mr. DEMURO. Well, Senator, I could only speculate because I didn’t investigate this particular case. But I think what they will end up doing is adding that to their mailing list, which then they will rent to other questionable promoters, and on there they will indicate that the consumer has a credit card, and then that consumer will suddenly be targeted either for legitimate or non-legitimate mail that will involve the use of credit cards.
Senator EDWARDS. I understand that you haven’t specifically investigated this particular case, but one reasonable interpretation of this would be that it would be used to make the list more valuable for selling it to other people or renting it to other people. Is that right?
Mr. HUNTER. To make either list more valuable, because there are a lot of schemes that extend credit to people or the ability to get credit to people who otherwise are unable to. So I don’t know which names would be more valuable, those who have the valid credit card or those who don’t who could be targeted in a scheme to get credit cards in which they don’t get a card are valuable.
Senator EDWARDS. But the information in any event is valuable, no matter how you use it. Is that correct?
Mr. DEMURO. That’s correct, Senator.
Senator EDWARDS. Could we get Exhibit No. 9 up, please? About halfway down on this, there is a portion that says that this mailing is void, and then there is a list of States: Arkansas, etc.— my State of North Carolina is listed. Do you have any idea why they make their mailings void in those States? I think there are 21 States listed in here.
Mr. DEMURO. Senator, in my experience, I have seen both situations where they don’t list any States and those States where perhaps there are orders pending against that particular company where the State Attorney General’s Office was successful. I can’t answer the question specifically for these particular States, but it could be a combination of things. And one situation definitely is where the attorney general has taken action and the promoter signed a settlement agreement with that State.
Senator EDWARDS. What about whether they are just under investigation in those States? Do they sometimes void them in those States, too?
Mr. DEMURO. I don’t believe so. I think they wait until there is some final action by the State before they void because it is too profitable for them.
Senator EDWARDS. Mr. Hunter, do you have any comment about that?
Mr. HUNTER. My comment in general is that our country continues to have an adequate supply of attorneys, and I would encourage legislation that doesn’t require you to be an attorney to understand it.
Senator EDWARDS. Right.
Mr. HUNTER. But specifically these States on this offer, I don’t know.
Senator EDWARDS. Right. You ought to be able to figure it out without being a lawyer is what you are saying.
Mr. HUNTER. Yes, sir.
Senator EDWARDS. Thank you both very much. We really appreciate your being here and participating. Both Senator Collins and I both feel this is very, very critical legislation, and your support of it is very important. Thank you.
Mr. DEMURO. Thank you, Senator.
Mr. HUNTER. Thank you.
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