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

Date: April 29, 2004
Source: Computer Crime Research Center
By: Mohamed S. Wahab

“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...

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