Why the FTC Cannot Fight Biz Op Fraud
Here is the advice that the FTC routinely passes out about how to Recognize Business-Opportunity Fraud
"The Federal Trade Commission (FTC) says that fraudulent business opportunities consistently rank in the top 10 categories in its database of consumer fraud complaints.(my emphasis)"Some scam artists are really sophisticated," says Dan Salsburg, attorney for the FTC. "They know exactly how to keep consumers from guessing the true nature of their business by rounding up phony references or creating misleading documents."
Salsburg says savvy consumers can learn to spot the telltale signs of fraud. For example, many fraudulent promoters send spam email or post Internet ads involving vending machines for candy, soda, snacks or personal care items; display racks for greeting cards, CDs, perfume or similar items; or opportunities to buy into medical-billing or envelope-stuffing businesses or activities related to the Internet.
Other tip-offs include claims of high pay in weeks or months for little effort ("work only hours a week"), as well as claims about working conditions like the ability to "set your own hours," "be your own boss" or "work from home." The opportunities cost $5,000 on average, Salsburg says.
According to the FTC, many business opportunities offered through the classifieds or via spam email have little chance of success -- for example, a business with little or no demand in the market; cheap, low-quality or outdated merchandise; poor customer service; and few, if any, locations."
The problem with this advice is that it wrong. (Also, Salsburg is completely wrong about the average biz op loss -the average pitch is for around $20k)
People who are get conned or defrauded are not lacking in rationality or reason.
The people I have interviewed over the years all felt that there was something wrong with the scheme -but for some reason, they overrode their gut concerns.
Why?
There are a number of reasons, but the basic pyschological mechanism is cognitive dissonance. Individuals who get cheated have made a commitment, which is often unknown to them, to the business opportunity or franchise. When they uncover problems with the scheme, they have a choice: give up the commitment or rationalize away the gut concerns. The latter choice enables fraud.
Here is a simple example. One client of mine was defrauded over almost $100k in a vending scam -nothing was delivered.
This client is very bright, and had uncovered a number of real problems with the scheme. I was quite impressed with the resulst of his due diligence.
But for him, purchasing this vending route was going to provide much needed economic independence from his family business obligations.
Therefore, every flaw in the scheme was indirectly an attack on this important value.
He rationalized, therefore, the flaws he discovered with his due diligence as attacks on his work ethic -this was a vending opportunity, surely hard work could overcome all the problems.
Well, all the problems except for not getting working machines and have no locations.
We will not stop fraud by treating the victims as somehow deficient in reasoning or rationality.
To attack fraud, we need to be more aware of the automatic compliance techniques that con criminals use.
We need to develop automatic and unthinking defences to these techniques.
