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Mar 07, 2003

"Know Your Enemy… Young Grasshopper" - Part 1

Ed Maldonado

In any business or industry, there is always some level of fraud. White-collar, Blue-collar, Multi-level - the truth of the matter is that if someone has the intent to scam you in the prepaid business, they can, and will, and in the end will steal more money than by robbing a bank. The nature of prepaid telecommunications is that, at some point in the business, money is fronted for services to be rendered in the future. This also means that at some point in time, money or product has to be given in good faith in order for the whole process to work. This is what the scam artists prey upon in the prepaid industry. So how can the small to mid-sized prepaid provider protect their business from scams and fraud? First and foremost, know the scams. You can't protect yourself from things you don't see coming. Unfortunately, there is no central library or online database of all the known prepaid scams and their unique characteristics. Let's face it, you're in the business of selling and providing prepaid services, not studying the profiles of scam artists.

Anticipating the need for an article such as this, I tapped the knowledge and experience of the Regnum Consultants and asked: what can we do to help people in the industry to remember the classic and common scams we have encountered over the years so that they can see them coming? Their response was a page out of Sun Tzu's Art of War - know your "enemy" by giving the scams memorable names that describe their modus operandi. With this in mind, we began to review all the scams and artists we have either encountered first-hand, or at least could confirm of through their victims. The end result was that there were just too many scams to properly warn prepaid businesses in just one article. We did, however, divide the scams by their intended victims so that each group could be highlighted in separate articles: the Prepaid Calling Card Provider/Distributor, Prepaid Carriers, and Investors in the Prepaid Businesses. And then, we gave them names that Sun Tzu would approve of. It is hoped that by outlining some of the most common scams our readers will be better able to see them coming. It is also important to remember that scams are never exactly the same because they play upon trust, common custom and practice in the industry, and most of all, the element of surprise. In Part 1 of this series, we will highlight victims that are either prepaid calling card providers or distributors. In Parts 2 and 3, we will highlight the other types of victims. That being said, let's begin.

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This scam is one that is usually attempted by artists portraying themselves, or actually working as distributors with deep access to retail markets of a given geographic area or various areas in the country. These artists prefer to do all transactions by invoice as opposed to contracts or any thing resembling a committed relationship. The "SPIKE" in this scam refers to a rapid and voluminous increase in card orders, far in excess of prior usage increases, or any trended sales history. The key to this scam is to gain possession to a large number of activated cards after a minimal showing of prior results. Once the cards are in the possession of the artist, the cards are sold to the retail points of sale at a very significant discount (like a 50% to 70% discount), payable in cash, of course. Unfortunately, the prepaid calling card service provider has very little knowledge of, or control over, the final retail points of sale to know what is happening until they see that there has been heavy usage "SPIKE" in a given month. By the time the usage spike is seen, the service provider will want a large payment from the scam distributor, and, this is where the "RUN" part of the scam comes into play. The artist pulls a disappearing act along with whatever was collected from the retailers for the discounted sales. Sometimes the artist leaves a check, which is usually worthless, but will buy the artist a few days of "RUN" time before the check is finally returned "NFS" - Non-Sufficient Funds. There are two variations to the "SPIKE and RUN" that are often seen.


The Third Month Spike tends to target new entrants into the prepaid industry (those with less than two years in the industry) and usually providers who are switchless and thus, dependent on a facilities based prepaid service provider for reports and CDRs. The artist will focus on quick, but modest, profits in the first and second months that will be proffered as a benchmark for future sales - and his increased order. The first two months' payment to the provider will be prompt and with full funds available, usually by a commercial check in the name of the business or a d/b/a. This is so the expectation can be planted that the artist's checks are good. The provider's actual knowledge of where the distributor has placed the cards will be very sketchy, at best, and the artist will be elusive on this point. The scam artist will start showing his hand about the second month. A heavy lobbying effort will occur for increased cards with little talk of logistical commitments by the artists. Any counter offer by the provider of gradual increases or signing a contract will be immediately re-buffed. Once the artist gets the cards in hand, then communication slowly drops until a final RUN occurs.


This scam usually comes from good businesses gone bad - or more accurately - desperate. Much like the Third Month Spike, the primary targets for these scams are again the switchless providers, however, switched based resale carriers have also been victimized by this scam. In contrast to the Third Month Spike scam, the Last Month Spike involves a longer-term relationship where solid business may have been done between the artist and victim. Then some internal event, be it the loss of a partner or a major account, places the distributor in economic peril. The internal decision to close shop usually occurs shortly after this event, however, the facade of growth is promoted to everyone outside of management. Here is where the SPIKE occurs. The Distributor may start by doubling or tripling his current orders, then before or just after a full thirty days cycle, they close their doors and the RUN occurs. Interestingly enough, the company does not go into bankruptcy - it just closes its doors so that the company, not the people behind it, takes the initial hit as a "commercial" civil claim. Usually it is only after some level of Discovery in a active lawsuit that the intent to defraud may be found - however this is too late for the victim.

How to Recognize a SPIKE and RUN Scam:
o Request by a distributor for a dramatic increase in card orders without any prior history of usage or prior demonstration of distribution capacity.
o Avoiding long-term contracts with contractual remedies or jurisdiction to enforce.
o High pressure sales pitch in second month for more card orders.
o Request by a long-term distributor for a dramatic increase in card orders, immediately after major commercial or business loss.
o Concealment of the actual retail market that the distributor utilizes.


Carrier Shuffles are scams that build upon the normal custom and practice of carriers that service the prepaid industry, but with no real intent to do proper business or to deliver adequate service. The artists behind these scams are usually facility-based resellers or providers (or at least they purport to own or lease a switch) and they may, or may not, have gone as far as to acquire an FCC 214 authorization or other license to operate as a carrier. The target victims of these scams tend to be new entrant switchless providers but may also include new entrant resellers. The "shuffle" part of the scam refers to the way these "carriers" deal; just like a Vegas card scam - they taint the deck in the shuffle, and not the deal of the cards. From day one, they are looking to either run with a deposit, slowly bleed the victim through over-billing, or provide low grade service that will maximize their billing, but cost you customers. There are two points where the Carrier Shuffle will become apparent:

1. When carrier services are to be first rendered.
2. After several months of service and billing. While there are several variations of these types of scams, we identified three basic types.


This type of scam is notorious in the industry. The shuffling carrier meets prospective victims at a convention, an industry event, or through the Internet. Although there is usually a documented series of negotiations through either email or fax, the end deal is that a deposit will be made first and all other formalities will be worked out later. The motivation is high to do business quickly because the rates offered by the shuffling carrier are usually very reasonable, or even cheap for specific hard-to-get foreign routes. Many times the shuffling carrier will disclose the name of "its" underlying carrier or carriers in order to give the victim some assurances as to the quality and capacity they can provide. Once the victim is willing to hire the shuffling carrier, a wire transfer will be requested for the deposit so that the traffic can be provisioned. The victim will then begin to see paperwork, as if their access numbers are being pointed to the shuffling carrier. Alternatively, the victim may see information related to being issued access numbers by the shuffling carrier. The truth of the matter is that neither is occurring. The shuffling carrier already has what it wants - the deposit. The next step in the scam's process is that the victim is informed of some technical problem or delay. This is simply to buy time until the final exit by the shuffling carrier. This exit usually occurs about a week after informing the victim of the supposed problem when all phones, fax lines and emails of the carrier go out of service.

The Never-Completely-Stated Bill

The Double-Double is a scam where carrier over-billing is unsupported by detailed invoicing or CDRs. These scams target primarily new entrant prepaid calling card providers. The scam has a number of forms, and it has become more prevalent over the past two years with increased use of email billing and deposit notice between carriers and their clients. The basic gist of these types of scams is that the victim is given flexible terms to induce a contract with the shuffling carrier - and these terms later become the mode of double billing. Sometimes the flexible term is a lower initial deposit or longer billing cycle (more than five days), allegedly to give the victim a better chance on the market. After the first couple of cycles of billing and payment the victim is given notice that there are marked increases in traffic, or that, a larger deposit is needed to cover the underlying carrier deposits. The problem is that CDRs or details of the calling card's traffic are not forthcoming. There is no way to verify the amounts billed. Usually the victim does not question the shuffling carrier because they feel that the carrier is working with them because of the flexible terms, and if, the carrier was reasonable before - why not now? The problem is that over-billing is occurring on a monthly basis and, in essence, the carrier is doubling a double-billed amount. This shuffling carrier knows that based upon the information already provided the over-billing could be discovered, however, this will take time, effort, and money on the part of the calling card provider. So the over-billing continues until either the calling card provider fails, or challenges the billing through legal avenues.


This scam occurs when a Prepaid Calling Card Provider/Distributor contracts with a shuffling carrier for a turnkey solution for a private label calling card program. In all aspects of the negotiation and contract, dealings are fair and reasonable. There is a written contract and the terms of the contract are clear. The rates are also unbelievably low. The private label card is introduced into the market and the carrier transports the calls. In the first few months, the carrier provides good communications services and consumers and the intended victim are content. This is usually when sales and distribution of the card increase and traffic volumes also increase.

Then the quality and reliability of service begin to degrade - either gradually or abruptly. There are increased complaints related to incomplete calls, echoes, loud annoying static and other serious quality problems. This is especially true for foreign routes. As the traffic of the card increases, the consumer complaints do as well. When confronted with the problems and complaints the shuffling carrier cites either the direct routes have had problems or that another underlying carrier is to blame. Here is where the victim has just fallen for the High-Grade to Low-Grade scam.

From day one, the shuffling carrier has intended to provide carrier services up to a certain traffic volume based upon the negotiated rates. The shuffling carrier provided good service at the beginning, perhaps even at a loss, because the volume of calls was low, their losses were minimal. Now as volume increases, they must look for other carriers in the right price range to terminate. This involves the use of inferior direct route providers - the Grays - the Leaking Route Provider. Since these are usually unlicensed or illegal providers in foreign countries, there is no real quality control. Likewise, these providers work extremely cheap. By substituting good quality telecom providers with inferior ones at lower cost, the shuffling carrier begins to re-cooperate previous losses for providing good service. The problem is that quality will continue to suffer and this will damage the reputation and sales of the private label card. The shuffling carrier knows this and many times depends on it. They also know that inferior service is an issue, in most carrier service contracts, for credits to be given to the calling card provider by the shuffling carrier. They also know that the process of changing carriers for a private label card can be complicated and costly. So they continue to provide low-grade service until the victim either fails, re-negotiates the present contract for higher rates, or gives notice to change carriers.


o Documented series of negotiations through either email or fax, in which a deposit will be made first, and, all other formalities of contract will be worked out later.
o A technical problem or delay of service immediately after wiring deposit.
o Carrier gives very flexible terms to begin a contract with little to no production of CDRs or detailed invoicing.
o Dramatically degrading Voice quality or call completion when call volume increases from low to high.

More Scams, Shuffles & Secrets.
In the meantime, be careful out there!

Edward A. Maldonado, Esq., a principal of the Regnum Group, is a telecommunications attorney based in Miami, FL who represents and advises communication companies both in the US and Latin America. He can be reached


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