Regulators Continue to Crack Down on Job Scams

By Toni Vranjes

February 16, 2012

Mass layoffs and high unemployment have destroyed the hopes of many Americans in recent years. And scammers have been coming out of the woodwork to take advantage of people who are desperate for money.

In some cases, fake recruiters tell job seekers they can help them find work in exchange for a fee. Other fraudsters promise to pay people to stuff envelopes or assemble crafts, but they never deliver on those promises.

These are only a few examples — the scams come in many shapes. But whatever form they take, the scammers have been lurking, waiting to stretch their tentacles into people’s wallets and grab hold of any remaining money.

In response, the federal government has aggressively targeted these types of schemes. Since 2008, the Federal Trade Commission has brought more than 20 cases against employment and “business opportunity” scams, according to agency spokesman Frank Dorman. By stopping them, the agency estimates that about $1 billion worth of future scams has been avoided.

In several recent cases, the FTC has obtained court rulings permanently banning first-time offenders from operating in the same business, Dorman notes. Previously, the agency had sought bans only for repeat offenders.

Meanwhile, the FTC also is trying to help people better assess the risks of “business opportunities,” which generally involve the sale of goods or services for the purpose of starting a business. Last year, the agency revised its rule for protecting consumers from deceptive practices by business-opportunity sellers.

The rule, which is set to take effect next month, has several elements:

  • Streamlined disclosure. Sellers must provide a one-page document that highlights five key items: identifying information, legal actions, cancellation or refund policy, earnings claims, and references. (Sellers that make any earnings claims must provide information to support those claims.) After providing the document, the seller must wait at least seven days before asking the prospective buyer to sign a contract or make any payments.
  • Broader Scope. The new rule covers a wider variety of business opportunities. The rule applies to activities that previously weren’t subject to regulation, such as envelope stuffing, craft assembly, and medical billing. Meanwhile, it continues to cover ventures such as vending-machine and rack-display opportunities.
  • Help for non-English speakers. If an opportunity is marketed in a language other than English, then the disclosure must be in that same language.
  • Prohibited Activities. The rule prohibits a number of misleading practices, such as making false earnings claims and using paid “shills” as references. It also forbids sellers from depicting the business opportunity as a job. Among other things, it also prohibits sellers from misrepresenting the total costs involved in buying or operating a business.

When announcing the new regulations last November, the FTC highlighted the case of Darling Angel Pin Creations Inc. The agency sued the company in 2010, alleging that it misled consumers by claiming they could make hundreds of dollars assembling angel pins from their homes. The company ultimately was shut down.

“It has been an industry which unfortunately has had more than its share of fraudsters,” says Michael S. Rosenthal, an attorney at Wagner, Johnston & Rosenthal in Atlanta.

In his view, consumers will benefit from the streamlined disclosure form (PDF file). The document is more focused on the information that a prospective buyer is seeking, says Rosenthal, who represents sellers of business opportunities.

His clients include rack-display companies, which provide sports hats or team items that can be sold at gas stations and truck stops. Other clients include a company that sells a DVD rental machine, and a company that sells a product for treating floors and other slippery surfaces to make them non-slip.

Under the FTC’s revised rule, a “business opportunity” has three elements:

  • The seller must solicit a prospective buyer.
  • A payment is required.
  • The seller indicates that the buyer will receive some type of assistance. For instance, the seller might promise to provide locations for use of the equipment being sold (like DVD rental machines), provide sales outlets for the goods (such as a truck stop), or buy back goods made by the buyer.

According to the FTC, the new rule generally exempts business opportunities that meet the definition of a franchise. This usually involves a license agreement providing the right to use the franchisor’s trademark, Rosenthal notes.

Many states also have disclosure requirements for sellers, and the states’ definitions of a “business opportunity” can vary slightly, he adds.

If you’re a prospective buyer who’s trying to tell the difference between the legitimate sellers and the scammers, you should be on the lookout for red flags, Rosenthal advises.

As part of its efforts to put the scammers out of business, the FTC last year announced the results of a high-profile sweep. The agency teamed up with law-enforcement agencies in “Operation Empty Promises,” which involved a variety of enforcement actions. They included 10 FTC cases, 48 criminal actions brought by the U.S. Justice Department, seven civil actions by the Postal Inspection Service, and 28 actions by various state agencies.

In a press conference last year announcing the results of the operation, FTC official David Vladeck described the emotional and financial toll of the schemes.

“The victims of these frauds are our neighbors — people who are trying to make an honest living,” said Vladeck, director of the FTC’s bureau of consumer protection.

“Under pressure to make ends meet, they risked their limited financial resources in response to the promise of a job, an income — a chance at a profitable home-based business. But these turned out to be empty promises — and the people who counted on them ended up with high levels of frustration and even higher levels of debt.”

Video: The FTC Business-Opportunity Rule

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