Future Shock and Fraud

Alvin Toffler made this profound statement in his book, Future Shock, in 1970.

"Our technological powers increase, but the side effects and potential hazards also increase."

Technology has provided us so much over the years but with each advance we also see side effects and hazards arise that weren't there before the technological progress took place.

I have seen this up close and personal over the last few weeks as I have been a victim of identity theft. In the process I have seen the ugly underbelly of technology as well as the dark side of power and greed when it is mixed into the equation. It is not a pretty picture when you pull back the covers.

My identity theft story began when I received what appeared to be a promotional prepaid debit card in the mail. It stated that I needed to call an 800 number to activate the card. I quickly shredded the card and did not think much about it as it appeared to be merely a marketing promotion.

Several days later I received a letter in the mail from the prepaid debit card company telling me that I had opted-in for overdraft protection. I immediately knew something was wrong because how could I have opted in for overdraft protection on a card I had never applied for or activated?

I quickly reached the company and told them I knew nothing about the card. They told me that I had 'purchased' the original card (a $10 fee is charged to get the card) at one of their retail partners and had "enrolled' online. As I continued the dialogue I found out that they had quite a bit of personal information on me in their file. I asked where the prepaid debit card had been purchased. I was told that it was at a 7/11 store in Washington, D.C.

It took me only a second to say, FRAUD! First, I probably have not been in a 7/11 in ten years. Second, I certainly was not in Washington, D.C. on the date the prepaid card was purchased.

However, for the life of me I could not figure out why someone would buy a prepaid debit card with their own funds in my name and fund it with $20 which brought the crook's total investment in "my card" to $30 ($10 to open it and $20 in cash on the card per the company).  Was it a money laundering scheme?  More on that below.

Two days later I received a call from a payday loan company asking me why I was late on my online loan. This time it took about a millisecond to say FRAUD. This company had even more personal information on me although some of the data was not currently accurate. In this case, "I had borrowed" $2,650 on a 8 month installment loan and I had "missed" the first payment. I understood the crook's motivation much more clearly on this one. What was more difficult to understand was why the loan company would have underwritten the loan if someone had looked at little deeper at my credit history and other facts.

Although the identity theft element of this story has been a hassle with the required police report, identity theft affidavit reporting and credit report agency fraud alerts, what is most troubling is what I found is occurring right under our noses in the United States of America. It is as if there is a parallel universe in play that many of us as law-abiding, hard working, straight shooting Americans never come into contact with.

It is also a world in which technological powers have increased and made things easier to defraud, cheat and steal and yet those in power are doing nothing about it. In fact, it can be said that they are actually complicit in creating incentives in the system for frauds like this to take place in the interests of their own power and greed.

Let me explain.

The online loan that was taken out in my name was done entirely online with stolen personal information or other personal information that was easily obtainable on me with a few keystrokes at a computer. At this point I don't know where the breach was in the numerous systems that have my personal information (banks, credit card companies, employer, health insurance, hospitals, doctors, investment companies). The reality is that your personal information is stored in a lot of different places. A whole lot of which you have little control no matter how careful you may try to be.

What is really unbelievable is that the loan was approved even though the review of my credit report showed a several generous credit limits were available on my credit cards.

Why is this significant?

Would you care to guess what the APR was on the loan I took out?

I have asked a number of friends and acquaintances this question as I told them my story. No one guessed higher than 25%.

The actual APR on this loan.

362.1%!

That's not a typo. The loan carried interest at a rate of 4.36% per day!

That $2,650 loan would require payments of $6,943 within 8 months to pay the loan off.

As I got into the details with the loan company, I asked them why would someone with my credit history and with substantial credit limits available on credit cards (at APR rates of around 15%) take out a loan at 362%? Needless to say, I did not get a good answer to that one.

This led me to do a little research into the dark side of the payday loan industry (or the small-dollar or alternative credit industry as they are more likely to refer to themselves in their political lobbying) in this country.

What I found was shocking.

• The United States has an estimated 30,000 payday loan stores. That is more than the number of McDonald's and Starbucks in this country, combined!
• Nearly 43% of U.S. households have used some type of alternative credit product in the past according to the FDIC.
• It is estimated that alternative financial products generated approximately $89 billion in fees and interest in 2012.

I think you can also see that when you are charging an interest rate of 362.1% you can afford a good number of fraudulent loans and defaults and still do way, way, way better than your local banker who is lending money at 5%, 6%, 7% or 8%.

The obvious question is how can this be legal? You would think that this is one area where our government should be protecting our citizens. These interest rates are higher than the loan shark charges down by the wharf. Also, what about usury laws which are supposed to prevent this type of exorbitant interest rate?

This is where the story gets really interesting as this loan was established under the laws of the state of Ohio. In 2008, the Short-Term Loan Act was enacted in Ohio which was supposed to impose a 28% interest rate cap on payday lenders in the state. However, six years later not a single lender is subject to the law according to this article in Cleveland.com.

This raises the question of whether the payday loan lobbyists outsmarted the legislators, the lawyers exploited a loophole in the law or the legislators passed a law without any teeth to give themselves plausible deniability.

The latter conclusion is easy to arrive at when you look at the political contributions of the payday loan industry in Ohio and nationally. In fact, the two principals of the parent company that "my loan" was with are spreading money around to anyone who has a vote at the state, local and national levels. Republicans. Democrats. Conservatives. Liberals. It does not matter.

For example, Federal Election Commission reports indicate that both Sherrod Brown, the Democrat for the 2012 U.S. Senate seat in Ohio, and Josh Mandel, the Republican, got money. Harry Reid (D) and Barney Frank (D) both received contributions in recent years as did Marco Rubio (R) and Trey Gowdy (R). From looking at the reports, these were not political contribution motivated by principles or values, but payments clearly intended to protect their business from any unfriendly government action.

If people want to see an example of how the system is rigged by an unholy alliance of powerful monied interests and power hungry politicians they should look no further than the payday loan industry. How can this be in anyone's interest but the payday loan owners and the politicians?

Back to the prepaid debit card? What was that all about?

My research led me to this article on CNN.com.

Criminals across the country are raking in billions of dollars in tax refunds through a new and brazen form of fraud that takes advantage of the IRS's fast online returns, law enforcement officials say.

Using laptops and free Wi-Fi connections, criminals are stealing identities and using the names of legitimate taxpayers to file fraudulent online tax returns. They've raked in billions, buying luxury cars, expensive jewelry and plastic surgery, police said.

"It's like the federal government is putting crack cocaine in candy machines," said Detective Craig Catlin of the North Miami Beach, Florida, Police Department. "It's that easy." 

First, thieves obtain Social Security numbers and other personal information from insiders at hospitals, doctor's offices, car dealerships or anywhere the information is stored. Then, they file an online tax return using the real taxpayer's name and a fictitious income. In most cases, the criminals buy a debit card so the IRS can issue the refund on that card, although some thieves have also gotten their returns on actual Treasury checks.

The thieves know that the IRS does not verify the employer W-2s sent with the return until after the refund is issued.

Credit:Kay Bell, Don't Mess With Taxes

In case you can't believe what you just read, let me repeat what is going on under the very noses of hard-working taxpayers like you that are paying the bills in this country.

A thief can steal your name and Social Security number and e-file a completely phony tax return. The IRS has no way of checking the accuracy of the return data at the time the return is filed (including whether the withheld taxes are correct because no W-2 is filed with electronic filing). The IRS accepts the tax return at face value and if a refund is claimed it will transfer the money on to a prepaid bank debit card.

All the fraudster has to do is file the fraudulent tax return before you file your legitimate return. In fact, if you file your tax return after the fraudulent tax return, I have heard stories that indicate that you will feel like the criminal. As you can imagine, it can take hours and hours of your time to get the IRS bureaucracy straightened out.

With the increased use of e-filing this fraud has become rampant. For example, the Treasury Inspector General for Tax Administration recently reported  that it believed that the IRS paid out over $5.2 billion in fraudulent refunds in 2011 alone!

Tax-related identity theft jumped from approximately 52,000 incidents in 2008 to over one million in 2012, according to a 2012 report by the U.S. Government Accountability Office. All of this clearly driven by the trend toward e-filing of tax returns.

Why has this become such a popular way to defraud the federal government and law-abiding taxpayers?

Technology and the advent of electronic filing is part of the answer. However, a significant share of blame must go to the Internal Revenue Service for allowing a tax refund to be put on a prepaid debit card. The IRS argues that they are merely trying to make it easier for individuals who do not have bank accounts to access funds. However, it is hard to believe that this benefit outweighs an annual cost of over $5 billion in fraudulent payments.

After all, for decades and decades, individuals got tax refund checks and somehow found a way to cash those checks. It would seem to me that until the IRS can do a better job of matching returns with W-2 and other information at the time of filing, that they should not allow tax refunds on prepaid debit cards with the overwhelming evidence of fraud that is occurring.

The IRS also rarely investigates these incidents of fraud due to the small amount ($5,000 or less on average) of each individual case. The majority of identity fraud cases are never investigated and the criminals face no legal repercussions.  In addition, privacy laws limit local law enforcement from investigating many cases because they cannot access IRS information.

It seems that I am good company having my identity stolen as even Attorney General Eric Holder was the target of the IRS refund scam this past March. In that case someone at the IRS figured something was suspicious when Holder's return listed WalMart as his employer and the fact that he wanted his refund on a prepaid debit card. There clearly are a few sharp minds still working at the IRS!

You begin to understand how bad it is when you realize that former drug dealers in Florida have given up the cocaine business and spend their time filing tax returns instead. As one suspect told police.

“Why would I take the risk to sell drugs and get busted when I can put $10,000 on a card and do it all day long from home while the cartoons are on?”

Indeed. Who can argue with that logic?

The only problem is that I am the one that thinks they are in the middle of The Looney Tunes.

Who is running the IRS to let this occur?

What are our elected officials doing to allow anyone to charge someone 362.1% annual interest?

Future Shock is here and it did not take long for power, greed and fraud to come along for the ride.

As usual, it is only those who are living the straight and narrow who pay the price.