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Sep 13, 2004

Will new Illinois phone card law make a difference?

Robin Tobias & Arlene Hauben

A new state law, unanimously passed by the Illinois legislature, will make it more difficult for companies that sell prepaid calling cards to shortchange customers. The Phone Card Fraud Act was signed into law on Monday, August 30th. It will require companies that provide calling card services in the state of Illinois to be certified by the Illinois Commerce Commission.

Attorney General Lisa Madigan said it was necessary to regulate calling card companies that operate in Illinois because too many people are paying for time and services they aren’t getting.

This certification will ensure that the calling card provider has sufficient technical, financial and managerial resources to provide calling services. Distributors will be required to present a copy of the provider’s certification to partnering retailers to protect legitimate provider, distributor and retailer interests.

The law is scheduled to go into effect next July and requires that calling card packaging must display information about the maximum charge per minute, the expiration policy, and any additional surcharges that apply. The calling card must display the full name of the provider, toll-free customer service and network access numbers, the authorization code, and a disclosure as to where the remaining terms, refund policy, and conditions can be found.

Lack of regulation has resulted in numerous artificial fees that include hidden charges, which reduce the value of the card without proper disclosure. Some of the hidden charges include disconnection fees, connection fees, operation fees, cellular phone fees and payphone fees.

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“The Phone Card Fraud Act is a much needed consumer protection law that will safeguard users from being shortchanged by the calling card industry,” says Illinois Lt. Gov. Pat Quinn. “Consumers are entitled to know what they pay for, and when calling family members in other countries, every minute is important.”

Quinn states, “Many fake phone cards advertise their service to entice consumers, and then do not provide the promised services.”

“My office has found that some of the prepaid calling cards are not worth the plastic they are printed on,” explains attorney general, Lisa Madigan. “If E.T. tried to phone home today, he would probably go broke after all the surcharges, fees, fake claims and outright lies associated with some of these cards. If you gamble with playing cards, you know you might lose. Buying a phone card should not be a gamble.”

Len Bittner, president of Maverick Telecom Consultancy & Brokerage, says, “Most of the phone card providers/carriers are either selling below cost or are forced to rely upon various tricks in the form of numerous hidden fees and surcharges in order to be competitive. The exceptions are Tier One carriers like AT&T, Sprint, & MCI because they’re constantly on the radars of the feds and the states. Since the federal government and the states’ feeble attempts to police the Tier Two and smaller carriers are going un-checked, those carriers who are trying to offer honest pricing and service are at a disadvantage — they can’t compete. Many carriers/providers have taken the approach of ‘if you can’t fight ‘em, join ‘em’ by using the same tactics.”

Edward Maldonado, Esq., a Miami-based telecom attorney, and contributing writer to The Prepaid Press, provided much of the consultation in the drafting of the Phone Card Fraud Act. “What this law will do is even the playing field for prepaid rates,” says Maldonado. “It will induce legitimate companies to compete better, and diminish artificially low rates set by out fly-by-night companies that are uncertified in the Illinois phone card market.” He explains that the prepaid phone card market is quite often unstable due to fraudulent or unrealistic providers who devalue their rates so low it’s difficult to maintain good service. “In an unregulated and unlicensed environment, it is too difficult for legitimate providers to compete with such practices. The Illinois certification and consumer disclosure requirements force providers to keep things real in the marketplace, not only for consumer but also each other.”

Bittner explains that several states have already put legislation into play requiring phone card companies to become certified. “In such states, it hasn’t had any effect upon the real issue at hand, which is the fact that the consumer is not receiving the minutes quoted by the providers on their posters and other sales collateral. This is because no one is policing these providers. Plus, it’s relatively easy to get certified. In the states requiring certification, if you can ‘fog a mirror’, you can get certified/licensed to offer phone cards.”

Illinois, in fact, is now the 11th state to enact legislation to stop the prepaid calling card industry from fraudulent and misleading practices. Other states are Alabama, Alaska, California, Connecticut, Florida, Louisiana, Missouri, New York, Texas and Washington.

What makes this law different from similar laws in other states is that retail vendors will also be held accountable. Those stores that sell cards from uncertified companies could face fines and other penalties. “By making the retailer accountable, IL stands a better chance of knocking the bad cards out of the marketplace,” says Maldonado. “Without making the retailer accountable, the retailer can (and does) carry the cards that are ‘under the radar’, which sometimes amount to 50% or more of his inventory. With the new IL law, carrying hefty potential fines for selling uncertified product, retailers will be less likely to take chances on those cards.”

Rishi Garg, policy advisor to the Lieutenant Governor, believes that the phone card laws enacted by other states have been beneficial to consumer protection. Florida was one of the states the IL law was modeled after. “With the help of Ed, we studied Florida’s bill and also their administrative rules when we were drafting our legislation. But we really surveyed all existing legislation. The industry was helpful in parsing through the ten other states with similar legislation, but I would say Florida was the most influential from a consumer protection standpoint.” When asked why Florida continues to be known as one of the worst states regarding phone card fraud, Garg attributed it to the state’s lenient bankruptcy laws, not the lack of phone card regulation. “Florida has strong Sunshine Laws, enabling consumers to readily gain information about any utility service in the state – rates, customer service information, and more – right online.” Illinois took this law a step further by imposing penalties for not only the first link in the distribution chain, but also the last.

Bill Kelly, director of marketing for Excel Switching, a prepaid platform provider, says, “It might slow down card sales because retailers will try to avoid the risk of carrying uncertified cards. Some providers may fall out, but if they are running successful businesses, they have nothing to be afraid of.” Andy Tan, national sales manager for Total Call International, agrees saying, “Carriers with good reputation would then be clearly differentiated from the carriers with less respectable reputations. Customers would win out in the end because they would choose to buy the cards that have consistent minutes, high quality and help reduce the fraudulent cards in the marketplace.”

Illinois already has consumer fraud laws in place, but the newly enacted Phone Card Fraud law explicitly gives the Attorney General enforcement authority, and structured measures, for combating deceptive phone card practices.

Howard Segermark, executive director for the International Prepaid Communications Association (IPCA), says, “The new law reiterates current law concerning fraud related to phone cards that don’t deliver what they promise. But, whether they will enforce the law now remains to be seen.” Garg agrees, “The law is only as effective as the agencies enforcing it.” To that end, over the next few months the Illinois Commerce Commission will engage in rulemaking sessions to further define the bill, and parse out the fine schedule.

Garg says that they do not intend to begin a crusade against retailers, and will predominantly be working off of consumer complaints. He explains that the law puts providers and retailers on notice, and that once an investigation takes place over a complaint, fines/penalties will apply.

The state has also launched an aggressive consumer campaign to raise awareness for the law. “We have developed a significant outreach and consumer awareness program, that has garnered a lot of media attention,” says Garg. “While nothing has been decided yet (since the bill was just signed) each party will do their part to educate the community about this bill. We are asking leaders in the Asian and Latino communities, including the two sponsors of the bill (Sen. Martin Sandoval, Rep. William Delgado), to help educate their constituents. We are also promoting the Attorney General’s consumer protection toll-free number. The Lieutenant Governor’s office will be working with the ICC to pass rules that protect and inform consumers by establishing a website.”

“If other states follow Illinois lead it will make for some big changes in our industry,” says John Gill, president of Phoenix Telecommunications Group, a long-time prepaid provider. “In theory it sounds great, this will weed out any of the bad apples as they will find it difficult to get certified. But in practice I think it will complicate things with the consumer as many of them who don’t understand the disclosures will be returning cards at a rapid pace. It will also open the door to dishonest consumers who just want to get a free calling card. If the retailers are going to held accountable then they wont think twice when refunding a consumer, whether the complaint is valid or not.”

A big hurdle to enforcement, according to Bittner, is that “the state of Illinois ultimately only has jurisdiction over calls that originate in Illinois and terminate in Illinois. The bulk of the phone cards sold in the USA are for making international and interstate calls, which is under the jurisdiction of the FCC. The FCC already requires that phone card companies get licensed. Again, if you can fog a mirror, you can get your FCC 214 license, which authorizes you to provide interstate and international long distance calls. The issue at hand here also is that the FCC does not police the phone card companies they have licensed. It’s probably a funding issue for them.”

“The bill’s sponsors adopted some of the changes IPCA recommended but I wonder how they will enforce the new rule that as of July 1 of next year, retailers must have a copy of the Illinois registration certificate of every company whose phone cards they sell,” says Segermark. It may be no easy task, but according to Maldonado, between the recent FCC crackdown on authorized 214 holders and increasing state regulation, card issuers should pay close attention. Bittner, however, is not so convinced, stating, “It’s time the Feds and the States stepped in and cleaned this business up for the benefit of the consumer. Turning retailers into the Phone Card Police is not the answer.”

State of
IL Phone Card Fraud


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