April 20, 2001 5:15 PM PDT

Consumers indifferent to auction fraud

Despite widespread reports of auction fraud, a new study suggests that consumers are not taking steps to protect themselves, and many auction sites make it difficult to know if and how they insure trades.

Few consumers use credit cards to purchase auction items online, and many believe mistakenly that auction sites prescreen listings for fraud, according to a report co-produced by the Washington State Attorney General's office and the Center for Law, Commerce and Technology at the University of Washington law school. Meanwhile, few of the smaller auction sites offer protections such as insurance, escrow or mediation services, and most of the bigger sites such as eBay have limited protections for auction buyers.

The report is meant to highlight the current problems with online auctions and to offer suggestions on how to combat fraud, said co-author Anita Ramasastry, an assistant professor at Washington's law school. "This is meant to be a best practices piece for the industry, consumers, and attorneys general," she said.

Consumers filed nearly 11,000 complaints about auction-related fraud with the Federal Trade Commission last year. That represented a slight dip from 1999, but still a huge increase from 1997, when the FTC only recorded 106 complaints.

On Tuesday, two eBay sellers pleaded guilty to defrauding bidders in connection with the sale of a fake Richard Diebenkorn painting last year. In a separate case, one eBay seller was arrested and another indicted in December for allegedly bilking bidders out of thousands of dollars last year.

Executives at eBay, the largest online trading site, say its fraud rate has dropped from one in 35,000 transactions in 1999 to one in 40,000 transactions in 2000.

One of the best ways consumers can protect themselves when purchasing through an auction site is by using a credit card, the report said. Still, as few as 17 percent of auction transactions are made using a credit card, according to the report.

Part of the reason for the low use of credit cards has to do with consumers' fears that their numbers will be stolen, Ramasastry said. Also, many sellers refuse to accept credit cards because of the charges they have to pay.

But credit card companies typically cover 100 percent of the cost of a transaction if a consumer doesn't receive a product or if the product is substantially different from how it was advertised. But this coverage may not be available if consumers use their credit cards through an online payment service such as Yahoo Payment or PayPal.

"Consumers may take as a given that that comes with service, but they later may find out that they're not protected," Ramasastry warned.

The report also suggests that consumers examine the insurance policies offered by individual auction sites. The report notes that only 7 of 40 smaller auction sites such as Auction Warehouse or Internet Auction offer insurance. And the insurance offered by larger sites such as eBay or Yahoo is often limited to a few hundred dollars, and the sites set up differing rules on how to file a claim.

The report also adds suggestions for state and local governments. While the FTC and some agencies seem to be stepping up the battle against online auction fraud, many government agencies could provide more information for consumers about how to protect themselves and how to report fraud, Ramasastry said.

"Consumer education is a great thing, but very few people have done anything about it," she said. "State consumer protection units need to keep up with what's happening and how they can deal with these issues."

 

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