Getting serious about fraud: Industry hopes to stamp out subscription fraud before it takes off

Fraud in the wireless industry is decreasing-it accounted for only 0.5% of carriers' revenue streams, or $200 million, this year, according to figures that some carriers reported to the Cellular Telecommunications Industry Association. Two years ago, when cloning fraud was rampant, operators lost $800 million, according to the CTIA.

But if carriers aren't careful, the newest fraud threats-subscription and internal-may reverse that downward trend in fraud losses.

Subscription fraud has increased by 100% since 1996, accounting for one-third of losses today, said TomMcClure, assistant vice president for wireless security for the CTIA. Since carriers have widely implemented RF fingerprinting and authentication technologies, cloning fraud has decreased dramatically. "Therefore, the criminal is going on to the next weakest link: subscription fraud," McClure said.

Subscription fraud is actually one of the earliest types of fraud, which was largely ignored-by both criminals and carriers-with the introduction of cloning.

Increasing competition may have opened some new doors to fraud, as operators have become extremely aggressive in winning new customers. "Part of that is lowering the barrier of getting subscribers," said Bill Taliaferro, director of product marketing for Corsair. Some carriers have created promotions that forego credit checks or offerings such as pre-activated phones in a box. "They've done that at a cost," he said.

Carriers may have eased up on identity checks because there was very little subscription fraud, while other forms of fraud were widespread. The industry "forgot about the front-end processes during tumbling," said Natalie Briscoe, fraud manager for Aerial Communications. Tumbling was another early form of fraud.

Nonetheless, subscription fraud hasn't yet reached the proportions that cloning fraud once did, and operators don't intend to let it. Although carriers allowed other types of fraud to creep up on them, causing millions of dollars in losses before they were addressed, they plan to attack subscription fraud before it gets out of control. "Before, we were playing catch-up," said McClure.

One reason that operators want to be proactive with subscription fraud is because of its potential. When cloning fraud was rampant, about 40 million analog phones were being used that could be cloned. Today, with hundreds of millions of phones being used, the possibility for fraud is much greater. "When you look at the reservoir of opportunity, subscription fraud has the potential of being devastating," McClure said.

Operators are approaching subscription fraud in several ways that involve technical, manual and regulatory solutions. Vendors are developing more sophisticated profilers to track behaviors of fraudulent phone users. Systems/Link recently introduced a new product, Orion, that does some of the job of today's fraud analyst. Most profilers today identify possible fraudulent behavior, sending an alarm to an analyst who decides to pursue the case. Orion does statistical analysis based on algorithms that can recognize calling patterns to deliver high-probability fraud cases.

"Orion looks at wireless DNA," said Diane Sammer, president and CEO of Systems/Link.

The company said Orion is important because it fights many types of fraud. "No matter how a person comes on, there is one thing they don't change and that is their calling pattern," said Dennis Walters, director of industry relations for Systems/Link.

Corsair Communications offers a fraud profiler that it says is better than some other products because it examines a combination of factors to identify unusual account activity. For example, it might track a combination of the usual number of long-distance minutes, calling area and features used by a subscriber, said Diane O'Flaherty, director of product management for Corsair.

"It's a more sophisticated way of looking at that same data," Taliaferro said.

Carriers also are implementing better front-end systems to verify credit and identities. They check that an applicant's social security number was issued around the time of the applicant's birth. They check that addresses or home phone numbers haven't been used by fraudsters before. They check that a home phone number is within a reasonable distance of a work number.

Aerial does all the above processes and more. "Aerial has zero tolerance for fraud," said Briscoe. In addition to the above checks, Aerial uses Lightbridge's profiler and has authentication built into its phones.

Aerial, along with some other carriers, also sends thank-you cards to new customers. When those cards are returned because theaddress is bad, it's often an indication that the customer is fraudulent. But by then, possibly two weeks have passed. So Aerial has also recently implemented welcome calls, which also support marketing efforts. If the phone number is bad or the new customer cannot verify the address on the account, Aerial can terminate the fraudulent customer before incurring excessive airtime use.

Operators can also make fraud a chance for new business, Walters said. "If you have a problem with prepaid subscription fraud or even cloning, it may be an opportunity to make it a business opportunity," he said.

If operators notice that a significant amount of fraud happens in a specific area, they can create a service plan that might legitimately appeal to those people, Walters said. For example, if a university town has a high rate of fraud, it may be because none of the carrier's plans fit the needs of students. The carrier might make a special deal that would be attractive to those students and possibly reduce fraudulent activity there.

Prepaid offerings can also appeal to people who may have fraudulently obtained phones. "There were people out there buying cloned phones because they had bad credit," said Paul Boris, assistant vice president of technical compliance for SBC Wireless. Prepaid allows those people to legitimately use wireless phones.

Prepaid in general has had a mixed affect on fraud. "Prepay does open doors, but it also mitigates risk," said Dave Berndt, program manager for The Yankee Group. In some cases, prepaid makes it easier to commit subscription fraud. But because customers must pay for use up front, carriers avoid some risk to airtime charges.

Two recent law changes should also help the industry fight subscription and cloning fraud. The first is a zero tolerance change to laws regarding counterfeit access devices. Before, police could find criminals in possession of equipment used to clone phones, but without a phone that had been cloned by that equipment, law enforcement officers could not press charges against the criminals.

"Now, possession of the equipment is sufficient cause to arrest the individual," McClure said. "It's a very effective tool."

The second change involves new laws regarding identity fraud. "It's a crime of the '90s," McClure said. Identity fraud affects a growing number of industries and can be devastating to the victims. The law can help carriers prosecute criminals of identity fraud.

In addition to subscription fraud, internal employee fraud has been growing, and operators are beginning to pay more attention to controlling it. "The next big gush of fraud will be internal," Briscoe said.

The sheer volume of people that have worked in the wireless industry today increases the chances of internal fraud, McClure noted. Although most of those people start as honest employees, their situations might change. "Then they begin to compromise the system," he said. The CTIA will launch a training program in February to educate carriers on how to handle internal fraud.

Aerial has instituted numerous processes to control internal fraud. It makes internal audits of phones to make sure that all subscribers to the employee plan are actually employees. Aerial is also dedicated to ensuring that they mark a terminated employee's credit or records to note their fraudulent behavior. "These guys are bouncing from company to company," Briscoe said. At a recent roundtable, Aerial mentioned a particular employee who had quit after the company began to investigate him, only to find that four other carriers at the meeting had been hit by the same person. Aerial will benefit the industry as a whole by working to ensure that those criminals do not harm multiple companies.

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