Telemarketing Fraud represents a problem in the workplace. The Federal Trade Commission will oversee telemarketing fraud, using the Telemarketing Sales Rule as a tool to launch an investigation.
Title: Know Your Customer Rules Apply to Marketing
Purpose: To learn the possible legal exposure for failing to adequately vet customers.
After completing this case study, participants will be able to:
- Understand the need to investigate how customers will use its product.
- Describe how due diligence protects companies and individuals from fraud committed by third parties.
- Explain the concepts of online marketing and telemarketing.
- Identify ways in which to better understand how their customers operate.
Telemarketing, Willful Blindness, Data, Sweepstakes, Deferred Prosecution Agreement
Current State of the Industry
Telemarketing fraud has plagued the United States for decades, constantly evolving with the advent of technology. United States Attorney’s offices prioritize prosecution of these types of cases. The government brings cases as quickly as it can, imposing major fines and lengthy sentences, but frequently finds itself overwhelmed as it brings cases to set examples in order to dissuade others from committing such fraud. As a result, some people get caught while most do not.
Future State of the Industry
Out of frustration and a desire to gain the upper hand in consumer fraud cases, U.S. prosecutors will continue to expand the universe of those who may be held liable. Marketing companies and those providing technological services and assistance to companies committing fraud will find themselves increasingly obligated to perform due diligence on those they do business with.
Four individuals in a single unit of a large marketing company elect to indiscriminately sell data to all comers. As a result, numerous companies buy such data only to use it for illegal purposes. These individuals believe they have no legal exposure because they’re not the ones committing the fraud. The government, however, teaches an invaluable lesson on the important legal concept of willful blindness, holding companies and people responsible for conspiring with those who commit the actual acts.
Epsilon Data Management, LLC, founded in 1970, conducts its business worldwide, providing sophisticated, high-tech direct marketing services including consulting, marketing analytics, database, email and loyalty marketing technology, predictive modeling, proprietary data, and digital marketing. It counts numerous major, iconic corporations as customers including Kellogg, Dell, Marriott, The Humane Society and Dunkin’ Donuts, among dozens of others.
The company prides itself on operating with “truth, truth and transparency” at the heart of everything they do, “committed to doing what’s best for all parties, choosing what works and what’s right over what’s easy and accepted.” It also promotes its work as a good corporate citizen actively supporting such noble charities as the Make-a-Wish Foundation, Ronald McDonald House, and Habitat for Humanity, among several others.
The Publicis Group acquired Epsilon from Alliance Data Systems Corp. in 2019 in what they touted as one of the world’s largest marketing company acquisitions. This acquisition occurred even though the companies had become general aware of a government investigation lurking behind the scenes. In fact, Alliance agreed to pay all costs associated with any potential fallout. Unfortunately, for both companies, the investigation was more than just a mere nuisance, causing significant costs, upheaval and turmoil after completion of the purchase.
Data is a very important tool in modern society making it invaluable for both legitimate and illegitimate purposes. Many unscrupulous marketing companies utilize such information, creating an avalanche of spam emails and phone calls, in violation of our nation’s Do Not Call list. They feed off the most vulnerable and unaware. Many such companies salivate at the prospect of obtaining data collected by businesses like Epsilon. And, despite all the fancy rhetoric on its website and world-renowned clientele, certain employees at Epsilon’s Direct-to-Consumer Unit had no problem with selling such data to the highest bidder.
Those customers, in turn used the data in schemes, targeting the elderly and other vulnerable individuals, included false notices that those receiving the mailers had won a sweepstakes or free astrology reading, either of which would be accessible once the customer paid a fee. The victims would then pay the fee and be left with nothing to show for it. Sometimes, these groups would then promise to fix the problem, for an additional fee, bilking the unwitting victim for yet even more money.
Government investigators caught wind of these schemes and brought criminal actions against the companies and individuals committing the fraud, sending several of the principals to prison to serve lengthy sentences. It’s an ongoing game of whack-a-mole played by government prosecutors, as new unscrupulous tele-marketers later step in to take the place of those imprisoned.
In this instance, however, the government decided to use a different tactic in an effort to get to the root cause. The Colorado United States Attorney’s office brought charges of conspiracy to commit mail and wire fraud against Epsilon claiming that data for over 30 million people had been compromised in these sales. Prosecutors claimed that Epsilon had a duty to not sell information to customers they knew or should have known used such information for nefarious purposes. Even more egregiously, Epsilon further incensed prosecutors by continuing to sell data even after certain of these and similar clients had been arrested.
The indictment claimed that four employees in Epsilon’s Direct-to-Consumer unit, all of whom had since left the company, knowingly sold consumer data to companies that had been “subject to law enforcement actions for engaging in misleading practices.” It further claimed Epsilon sold the data from as early as 2008 through 2017. The Employees engaged in this conduct to enrich themselves through sales-based compensation, and to enable their clients to grow so they could buy more data and recommend Epsilon to their fellow cohorts.
Epsilon settled the case with the government for $150 million in January of 2021, with $127 million going towards going toward repaying victims. The company also agreed to enact stricter internal compliance measures and cooperate with government officials in further investigations. Epsilon received full credit for extensive cooperation with the government’s investigation, including conducting a thorough and expedited internal investigation (once the wrongdoing had come to light) making regular factual presentations to the Government, voluntarily making employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Government. It also voluntarily dissolved its “Direct-to-Consumer unit. The four individuals at the heart of the case have not yet been indicted but based upon the terms of the settlement it appears that charges might be forthcoming.
The lessons from this case are succinctly summed up by the US Attorney who handled the case. “Companies who sell consumer information have a responsibility to avoid knowingly selling it to those who will use the data to defraud or swindle consumers.” Yet, this principle can be applied to all companies who provide dual use material. Can someone sell a gun to a customer whom they seriously suspect will use it to commit a crime? How about selling a dual use technology to a rogue government regime? Cases like this point out, that a company’s responsibility does not end at the point of sale. It imposes a duty to learn more about how the product will be used. Or, if not, suffer the significant consequences.
A mere four people cost a company $150 million, enormous costs and legal fees, wasted executive time negotiating a settlement and conducting an internal investigation and a tarnished reputation. They themselves, moreover, are looking at potential prison time. And, for what? Maybe a few million dollars in bonuses. Short-sighted decision making frequently leads to problems for both companies and individuals. It’s also more likely to occur in a business environment with weak internal compliance practices.
Interestingly enough, most companies give little thought to their compliance programs until a problem a occurs. In reality, though, the opposite should occur. A company must make time when a business is growing. Proper procedures and practices put in place early help to ensure expansion on a positive trajectory. It helps employees to create an honorable corporate culture and better understand the company’s moral compass. This case serves as a shining example that an ounce of prevention is most definitely worth a pound of cure.