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| Will online escrow services protect you from auction scammers?
(IDG) -- If you feel uneasy about sending a large check to a total stranger for something you bought at an online auction, you're smart and not alone. Of the thousands of online fraud complaints fielded by the National Consumers League last year, 87 percent concerned Internet auctions. Enter online escrow services--neutral third parties that are supposed to make online transactions safer by acting as an intermediary between buyer and seller. Online escrow services are particularly attractive if you're buying or selling an expensive or irreplaceable item and want some added security. But not all these services are created equal. As we discovered in our research, many of these outfits aren't licensed or regulated. Authorities take noticeCalifornia, one of the first states to address the licensing issue, passed a law that took effect January 1 and holds Internet escrow companies to the same regulatory standards as their offline counterparts. The results so far have been modest: Only 2 of 22 escrow companies known to be doing business in the state are licensed, and 3 have applied for licenses. The others have either refused to comply or haven't responded to the state's demands. At press time, neither California officials nor representatives from the National Consumers League had received any reports of fraudulent online escrow companies. But the potential for abuse is there. "If you are dealing with someone who isn't regulated, how can you trust them?" says Louisa Broudy, an assistant commissioner at California's Department of Corporations. But not all online escrow sites agree. "Their laws aren't a good fit for escrow companies outside of California, and I think they're overly strict," says Ken Thompson, president of SecureTrades.com, an escrow business based in Michigan. "They're trying to apply a law written for real estate escrow companies in California to any Internet escrow company based outside California."
Current efforts: Tried but not trueTypically, online auction sites make some effort to protect their customers. Auction giant EBay insures against fraud in transactions up to $200, and Amazon.com Auctions covers up to $1000. But neither site compensates for bigger losses, and if you buy a product that doesn't meet your expectations, you could be stuck with it. Auction sites have taken other measures to safeguard transactions, such as implementing internal rating systems that record reports of auction participants' past behavior. But earlier this year, some sellers reportedly beat EBay's system by selling lots of low-priced items to increase their reliability ratings. Once they had high ratings, the same people sold a high-priced item, which was never delivered. EBay spokesperson Kevin Pursglove says that the company received reports of high-priced items that had not been shipped, but he has not confirmed that the incidents were intentional or scams. The time-tested strategy of paying with a credit card also has limitations. Most individuals can't accept credit cards. Services like PayPal that allow individuals to accept credit cards don't require users to have any more than a usable e-mail address to receive payments into an account. This protects sellers, but not buyers. For instance, if someone offers to sell you their Ming vase collection, they could collect your payment anonymously and never deliver the goods. In such a case, you'd have a tough time getting your money back. The escrow optionLike traditional escrow services, an online escrow service helps manage the completion of a purchase between two parties who don't know one another. Where the offline services typically manage a relatively low volume of very expensive property (like homes), the online services help large numbers of buyers and sellers who use online auctions or classified ads to buy relatively low-cost items. And most online escrow companies operate at Internet speeds, using a lot of automated processes to close the purchase or sale in a matter of hours, or a few days at the most. Some services offer a money-back guarantee if the buyer doesn't come through with the money or the seller never ships the product. The services require both the buyer and seller to register for the service with a credit card, and the buyer usually pays for the product up front. The seller then either sends the product directly to the buyer, using a shipper like Federal Express that tracks shipments, or to the service itself. If the buyer find the product to be as advertised, the escrow service pays the seller by check or direct deposit (less the service's transaction fees). If the buyer never receives the product, or if it doesn't meet their expectations, the escrow service helps the two parties negotiate a new deal or makes sure that the buyer gets a refund and returns the product in resellable condition. Either way, the escrow companies "guarantee" that both the buyer and seller will satisfactorily complete their purchase. Some services also say they carry insurance policies to cover losses to either the buyer or seller. That sense of security doesn't come cheap. Typically, escrow services charge a hefty 2.5 to 5 percent of the purchase price. Looking over escrow's shoulderUntil recently, Internet escrow companies haven't been required to prove their own trustworthiness. Most didn't register with any state authority, submit to audits or financial inspections, subject their employees to thorough background checks, or even keep surety and fidelity bonds that protect a customer's cash in case an employee or manager steals it. To address the potential risks to consumers, the California state legislature amended the state's escrow laws. The new law makes it illegal to operate as an unlicensed escrow agent. If any of the parties in an escrow transaction--the buyer, seller, or escrow service--is based in California, the service needs a license. The benefit to consumers is clear: If a licensed business commits fraud, the California agency that oversees escrow companies can seize control of the business before more money is stolen. But they can do little about an unlicensed operation. Victims "have no recourse," says Julie Stewart, spokesperson for the Department of Corporations. "Once [a fraudulent business has] absconded with the money, the chances of you getting it back are negligible." Earlier this year, Assistant Commissioner Broudy sent letters to more than 20 Internet escrow services asking them to either apply for a license (which would subject their operations to scrutiny) or stop offering their services to California shoppers. "If a company knows someone's going to be looking over their shoulder regularly, there's less opportunity for them to be doing something shady," she says. So far, California has licensed only 2 escrow companies, IEscrow and Escrow.com. (At press time, 3 others were in the process of completing the necessary paperwork and employee background checks.) At press time, 19 Internet escrow companies either refused to comply, or didn't respond to initial contact letters and have been sent a strongly worded Desist and Refrain Order, a stepping stone to legal action. The Department of Corporations has given the companies a "reasonable amount of time" to comply with the new rules, says Stewart. In the meantime, she says, "The message we want to get out is that [consumers] need to do their homework and make sure that an escrow service they plan to do business with is properly licensed, whichever state it's in." Services not for everyoneSo when should you even consider an escrow service? If you're the buyer, you might want to try using one if the seller can't accept a credit card or if the value of the purchase is more than you're willing to risk losing. If you're the seller, you might use a service if you want some legal recourse if the deal goes sour after you've shipped the goods. Of course, before you use any online escrow business, call or e-mail the service and ask whether it's licensed to operate as an escrow service in any state. The company should offer its license number or other corroborative information that you can check with the licensing agency. And if you're not certain that an Internet escrow service is up to snuff, you can call the California Department of Corporations (800/347-6995 from within California or 213/576-6201 from outside the state) or the National Fraud Information Center at 800/876-7060. RELATED STORIES: New center targets Internet fraud RELATED IDG.net STORIES: Sold! How to win at Web auctions RELATED SITES: Top Internet Frauds of 1999 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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