David R. Henderson  

Unintended Consequences of Government Regulation, #93621

Leveraging and De-leveraging... The Problem with a Variable Ta...
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.

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CATEGORIES: Regulation

COMMENTS (3 to date)
Joseph K writes:

Here's some articles from 2004 discussing the problems: one, two, three, four. And people were abusing the system in other ways than fraud, by typing in sexual or offensive statements and forcing the operators to speak the words, or using the service for prank calls. The FCC apparently started reimbursing the telcos for this service in 2001, and by 2004 it was obvious that abuse vastly outweighed legitimate use, and here we are, 8 years later and nothing has improved since no one has any incentive to anything about it.

Joe Cushing writes:

I'm surprised that anyone still uses this service in the era of text messaging. a def person could just text somebody.

Mike W writes:

I get your point (although your excerpts don't make it clear) but, is this really a problem or is it actually the way the system works? What's the alternative...other than eliminating regulation altogether?

The fraud that Justice is alleging AT&T committed was in billing to the government, at $1.30 per minute, calls that were known, or should have been known, to AT&T to be placed by international scammers.

"An internal analysis by AT&T in 2004 found some of the worst abusers generated over 10,000 minutes per day of usage, according to the complaint. The study found that on Jan. 14 and 15, 2004, 10 of the top 12 users of the service at AT&T were calling from outside the U.S., primarily from Lagos, Nigeria... A single Internet address was the source of 100 hours of calls in those two days, placing multiple calls at the same time..."

The regulator's explicit response to this problem was, "requiring telecommunications providers...to register users of the service and verify the customers' information". A typical reaction by a regulatory bureaucracy...unimaginative and costly.

Alternatively, Sprint's response to this problem was "blocking users making an unusually high volume of calls and maintaining a database of Internet addresses used to make international calls."

AT&T made a business decision to follow the regulator's explicit instructions. Probably to facilitate its rent seeking or because, as it will likely allege in response to the lawsuit, to do otherwise might have opened it up to government sanctions for failing to follow the rules.

"AT&T has followed the FCC's rules for providing IP Relay services for disabled customers and for seeking reimbursement for those services," Mr. Richter, the AT&T spokesman, said.

AT&T made a rational decision given the incentives made available to it at the time. The government's lawsuit is the system's response to the unintended consequences of its rulemaking. Now the two will negotiate a settlement.

So where's the problem?

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