LAS VEGAS – An official representative of the Federal Trade Commisssion has addressed a gathering of adult webmasters for the first time ever. The discussion Wednesday, organized by The Free Speech Coalition for the XBIZ Summer Forum, ranged from issues having to do with fraud by consumers on adult merchants as well as fraud perpetrated by adult merchants on consumers.
Stephen L. Cohen (photo, left), a staff attorney in the consumer fraud division of the FTC, joined FSC Executive Director Diane Duke and noted industry attorney Gregory Piccionelli before a crowd that filled the seminar hall o about a three-quarter capacity, a good turnout for a panel that was met with some controversy within the industry. Piccionelli mentioned a thread on a popular adult chat board that condemned the invitation of the agent of a federal law enforcement agency as, to inviting “a wolf into a den of sheep.”
“That is not what is going on here,” Piccionelli told the crowd as the session began. “First, we do not agree that our industry is made up of sheet, and also, it is imperative that discussions like this happen.” He referred to past action by the FTC against adult companies that resulted in huge fines that could have been avoided with open communication between the two enitites. Duke enthisiatically agreed that the intercourse was essential and healthy, and that Cohen was there to educate and inform, not to investigate.
For his part, Cohen, affable, precise and reasonable in his remarks, stated up front that his comments were his own and not official Commisssion policy. That said, Cohen has been at the FTC for years and was involved in previous actions involving the industry, making his take on consumer fraud issues authoritative.
The issues of most interest to the audience as well as those who objected to the seminar is pre-checked cross sales, used by many programs in the business to increase revenue. The practice invloves pre-checking boxes on the billing pages of adult sites that “up-sell” the purchaser to one or two more memberships to sites other than the one s/he is paying for at that time.
Acknowledging that cross-sales on their face are not illegal, Cohen said that pre-cheking the boxes was a problematic practice that raised red flags for the agency.
“I definitely recommend not doing it,” Cohen said.
As is the case with all fraud, the FTC reduces desirable behavior to very basic guidelines that invlove allowing consumers to cancel memberships easily and for merchants to make absolutely clear to consumers what they can expect to be charged before those charges are billed to them. Cohen also said that while many high-risk processors assess the success or failure of their billing methods by the number of chargebacks assessed to a particular merchant, they really need to count both chargebacks and credits.
“When we do an investigation of a company, without their knowledge we contacts their banks and subpoena all of their records. Then, we look at all of the credits and chargebacks they have, and that is the number we use to assess what is going on.” He said that in some cases – not specific to adult – merchants are refunding 60 percent or more of their original transaction, a clear sign that something is wrong.
As far as “friendly” fraud by consumers on merchants, usually in the form of denying charges made to a credit card, Cohen said the agency has mechanisms through which merchants can fight unfair claims by consumers, and that they take fraud by consumers as well as organized groups very seriously. As an agency whose mission is to protect consumers, however, most cases of criminal fraudulent action against merchants would probably be dealt with by other law enforcement agencies, such as the Justice Department,