Don't forget fraud: It may have faded, but it is far from extinct

By the looks of it, the wireless industry's battle with fraud has decreased significantly. With nearly $200 million shaved off the total revenue lost to fraud from 1997 to 1998, carriers can sit back and count their savings, right? Not so fast, say analysts and other industry members. Fraudsters are still around, but because subscriber bases are larger than in the past, the increase in revenue has shaded what may have been lost to fraud.

"Fraud is not down as low as the industry thinks it is. It does not recognize that a lot of fraud exists today with cloning and subscription," said Dennis Walters, director of industry relations for Systems/Link. "When someone uses another person's information to sign up, it is difficult for the carrier to recognize this as fraud."

Systems/Link offers an integrated suite of scalable, standards-based applications for fraud control, roaming services and real-time billing worldwide.

Because wireless is a hectic business, it can be easy to write off losses as bad debt, especially considering that many carriers do not have experts in-house to recognize if fraud was involved. Although it may be easier to blame bad debt, a carrier cannot take a tax write-off on bad debt as it can with fraud, Walters said.

Many write-offs can be attributed to customers who never have made payments. It has become difficult for the carrier to determine whether this was bad debt or subscription fraud, said Peter Whalen, vice president of marketing and sales for Systems/Link. Prepaid services also have fallen prey to fraud. About 20% of those using Systems/Link's prepaid product are paying with stolen credit cards, Whalen said.

However, as competition continues to rise, it is critical that carriers add items such as prepaid services and bring costs down. "Prices and revenue have to drop in order to remain competitive," Walters said. "[Fraud] is not measured accurately because of the reduction in revenue lost to it. Carriers should look at it on a usage basis and not dollar to dollar. Subscription fraud will continue to climb to surpass what cloning was in the 1995 to 1996 time frame."

The wireless market has not only grown significantly during the last five years, but the number of subscribers also is rising. The percentage lost to fraud is down, and carriers are not losing as much money to it because of the rise in customers, said Kim Parker, product manager for Tekelec. The company provides, among other offerings, a line of network surveillance, maintenance and diagnostic systems that includes an open interface to accommodate applications such as those used for fraud prevention, billing verification and quality of service.

The penalty for stealing wireless service is much less than drug trafficking, for example - perhaps another reason to believe that fraudsters are not going away. To combat fraud, about 30 North American carriers use an international call detail record exchange system, which allows them to see roaming calls in real time. Although many carriers employ this system, many international counterparts do not, which makes international roaming potentially wrought with fraud. Despite that, the industry is moving toward international roaming. For example, Latin America wants to roam with North America.

Because fraud can affect carriers differently, some do not feel it is necessary to publicly discuss it.

Sprint claims to have done a lot to alleviate fraud altogether, but the carrier does not like to be specific about its methods, according to a company spokesman. "[The industry] is incredibly competitive, and it is confidential information. We never disclose how we work around fraud," he said.

Credit card fraud has been an issue for the company, but Sprint has taken steps to make sure it is not a major issue.

However, "[carriers] are beginning to recognize that the industry has had a false sense of security. It is naive not to recognize the danger of subscription fraud," according to Walters.

During a 12-year period, fraud has gone from subscription to cloning to network, and it now is back to subscription, Whalen said. "The industry has to keep an eye on operators. Fraud may not be a sexy issue, but carriers need to focus on it and not lose sight of what affects them and users."

Fraud has been a foe of many industries, most notably banking and credit. These two sectors have combated the culprit for a long time, but never have fully overcome it. It continues to allude businesspeople and, as a result, will most likely stick around for a while.

"Fraudsters are businessmen, and they are not going to go away," Walters said.

Michael Julian, manager of business development for Tekelec, suggests another reason why fraud continues. "People have become complacent because they find some way to combat fraud," he said. "As convergence continues, fraudsters will become smarter."

Tekelec has witnessed operators that become unsure if fraud is an issue because they do not employ experts who can identify it. Fraud experts are hard to find, so operators look outside for a solution, Parker said.

As new carriers emerge and technologies converge, carriers will find themselves in extraordinarily competitive situations. This will lead them to search for unique ways to enhance the bottom line, manage fraud and reduce churn. For now, and possibly into the future, fraud is here to stay.

"As convergence continues, we have only seen the tip of the iceberg with fraud, especially as [the industry] nears interaction with IP," Parker said.

>From the beginning of the wireless industry, fraud has been an uninvited >guest. Like any newcomer, the early wireless providers believed that it >would be easier to win over customers by making the sign-up process as >painless as possible, throwing restrictions to the wind. As a result, >so-called fraudsters could use fictitious subscriber information. All they >had to do was change a few letters in the name or address on the >application. Once they racked up huge bills, they would then terminate >service, with the carrier wondering why its bottom line wasn't adding up.

As technology advanced, a new type of fraud took root. Technical fraud, including tumbling and cloning, surfaced in the early 1990s. This type appealed to those involved in large-scale theft of wireless service. By 1995, $650 million was lost to fraud, inspiring a new focus for wireless-fraud-fighting technology. The industry started to deploy technical containment tools, including personal identification numbers, RF fingerprinting, roaming verification reinstatement, authentication and real-time visibility of roaming subscribers.

As much as this helped control fraud, bringing losses down to $175 million in 1998, the industry continued to struggle with the problem, often finding fraud hard to recognize. In a December 1998 study, IDC projected that wireless fraud will cost cellular and PCS operators more than $677 million in 2002. Subscription fraud losses were found to account for $437 million of total fraud. And because the industry is on its way to offering paperless, over-the-phone or Internet transactions - where the customer can remain anonymous - subscription fraud is the easiest kind to perpetrate. For carriers, however, it is the most difficult to identify, making it beneficial for them to take a closer look at reported losses instead of quickly dismissing them as bad debt write-offs, said Dennis Walters, director of industry relations for Systems/Link. Walters recently compiled "The Status of Wireless Fraud Today."

Although current reported losses show a decrease in fraud, creating a false sense of security, the Association of Certified Fraud Examiners found that Africa and the U.S. have the highest fraud rates across industries. In addition, 66% of the fraud managers who responded said that it is worse now in the U.S. than it was five years ago.

Walters identifies other methods of fraud that will result in significant losses for the wireless industry, including network fraud, internal fraud and theft, feature-calling fraud and call-selling operations, but subscriber fraud remains the one that carriers should keep in check. Recognition is key. Implementing a program to not only detect it, but deter it, may be the answer to eliminating it all together.