Unintended Consequences of Government Regulation, #93621
By David Henderson
On April 6, 2010, an AT&T Inc. manager pondered a drop in volume in the company’s government-subsidized service for hearing-impaired callers.
Reassuring a colleague in an email, the manager said she was “not ready to throw up flags” because “it was Easter Monday yesterday, which is celebrated in Nigeria.”
So begins a news item in the Wall Street Journal about a Justice Department lawsuit against AT&T. AT&T’s “crime.” It complied with a regulation enforced by the Federal Communications Commission. Another excerpt:
AT&T did not comment on the suit, but said it followed the FCC’s rules for providing the service and seeking reimbursement.
The program at issue is a little-known text-based communications service called IP Relay that allows the hearing-impaired to place telephone calls by typing messages over the Internet. Those messages are then read aloud to parties on the other end of the line by call-center employees at companies like AT&T, which are then reimbursed by the FCC.
The government alleges that scammers operating out of Nigeria used the service to defraud U.S. merchants by ordering goods with stolen credit cards and counterfeit checks. In essence, the government alleges, AT&T’s operators became mouthpieces for the scam artists.
The complaint used an example of a scammer pretending to be a foreign buyer, who placed a large order with a stolen credit card. Typing text read aloud by the operator, the scammer would then ask the merchant to wire money for transporting the goods.
The advantage of using the IP Relay system is that it is anonymous, the Justice Department said in the complaint. The caller can’t be visually identified, and FCC rules say operators can’t disclose the contents of the conversation.
“As the FCC is aware, it is always possible for an individual to misuse IP Relay services, just as someone can misuse the postal system or an email account,” AT&T spokesman Marty Richter said, “but FCC rules require that we complete all calls by customers who identify themselves as disabled.”
IP Relay services are paid out of fees collected from telecom customers and are included in the federal budget. Providers like AT&T bill the government at a rate of about $1.30 a minute, the complaint says. [bold added]
AT&T is not blameless. After the FCC noticed this happening, it contacted AT&T, five years after the program began, and “began requiring telecommunications providers in late 2008 to register users of the service and verify the customers’ information.” According to the Justice Department, “AT&T in 2009 followed up on the FCC’s new requirements by sending a postcard with a verification code to IP Relay users’ purported addresses.”
It worked. And that was the problem. The story continues:
“We are expecting a serious decline in [Internet relay] traffic because fraud will go to zero (at least temporarily) and we haven’t registered nearly enough customers to pick up the slack,” one manager of the relay technical team said, according to the complaint, which doesn’t specify how the manager’s message was delivered.
In response to the concerns, the Justice Department says, AT&T switched to a less demanding registration process that simply involved asking users to provide their mailing address. If the address matched a real U.S. address, the users were registered, the complaint says.
The number of registered users soared after the switch, the Justice Department alleged.
Notice what didn’t happen after over 8 years of fraud: the FCC did not get rid of the rule.
HT to Charley Hooper.