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Articles 6th May 2016

Escrow fraud: a new risk for the logistics sector

Mona Schroedel, an expert in commercial disputes at Freeths, highlights how internet trade is making logistic companies more susceptible to fraud, one e-risk in particular being escrow fraud.

How it works

Escrow services are useful when it comes to “blind” online sales, where a buyer and seller may not know each other, but a reputable party can be a trusted go between. For example, a buyer purchases an item via an online auction site and money is sent to the escrow service, which then delivers it to the buyer. If the item is as expected, the buyer will confirm this to the escrow service and the money will be released to the seller.

This is an area that is susceptible to e-risk, whereby a fake website is cloned from the website of a reputable service provider and then used to convince the victim to part with cash/goods. The fraud is usually only discovered when the victim contacts the legitimate service provider to query the whereabouts of the money/goods not received.

Logistics and escrow fraud

Logistic companies are regularly used as the basis for fake escrow service websites because they are a natural middleman for internet transactions. There are websites dedicated to listing fraudulent websites cloned from reputable logistic companies.

The fraud does not require the perpetrators to hack into company computers. Instead, they use freely available information to create a site to ensnare unsuspecting victims. This means there are no preventative measures logistic companies can take to protect themselves. Instead, they must rely on spotting and acting fast when they become aware of a cloned website.

Case Study

A client was faced with disgruntled French customers who had used their escrow services. Our client did not provide any escrow services and quickly traced the problem to a cloned website using the company logo, trademarks and information. It looked convincing, but was limited in its functionality. To safeguard our client’s reputation and goodwill we needed to act urgently.

Practical Issues

PR: In the first instance, maintaining our client’s reputation was paramount to ensure goodwill was not further damaged. We advised on suitable text to be prominently displayed on the bona fide website to warn customers to be vigilant and to only use that website and making it clear they did not provide escrow services.

Investigations: We urgently carried out investigations to find out who was behind the fraud and obtained details of the perpetrator’s name, e-mail address, London residential address and telephone details. The website host and provider were based in North America.

Action: We then did a number of things in parallel:

  • Reported the matter to the police, providing contact details obtained. This gave us a crime reference number to quote in further correspondence with third parties.
  • Called and e-mailed the contact details for the individual who had registered the cloned site; unsurprisingly the details proved to be false.
  • Contacted the internet service provider and host, requesting that it be taken down.

Very shortly we received confirmation that the cloned website had been taken down which eliminated the immediate threat to our client’s reputation.

Difficulties in pursuing perpetrators

When it became apparent that the details for the person behind the cloned website were as fake as the website itself we investigated further to identify the true perpetrators but the trail ended in South America. The police kept the details on file, but their resources to pursue this matter were limited.

Legal Remedies

If it is not possible to have a cloned website taken down through the channels above (perhaps someone is trying to argue that the site is legitimate) then legal action must be seriously considered, which while it can be costly, will be vital if the fraud continues. Four main legal options are:

  • Claim for Passing Off: An ancient and well established law of more than 150 years.As a claimant you must show you have goodwill in relation to goods /services; there has been a misrepresentation to the public; and damage to goodwill/reputation has been suffered as a result of the passing off. All elements are usually present in escrow fraud via a cloned website. If successful the court is likely to order the defendant to cease the passing off (ie take down the site) and to pay damages to the claimant.
  • Claim for trademark infringement: Whether there is a valid claim under the Trademark Act 1994 depends on whether a trademark has been registered (if not, consider doing so) and whether a breach has occurred. This relates to where the public is confused by identical or similar trademarks being used in relation to similar goods and services. There are potential defences to a trademark infringement action, but is highly unlikely that they will apply in an escrow fraud type situation.
  • If the claim is successful relief will include damages, an injunction and potentially accounts for profits made (though where the profit is derived through fraud this is unlikely).
  • Obtaining an injunction: This is usually not a first step as they are costly to obtain. However, where it is impossible to have the cloned website taken down and damage to reputation continues, it may be necessary. An injunction can be taken out even if the identity of the person behind the fraud is unknown, as long as it is possible to identify a party with the power to take down the cloned site. The court can then order that party to take action.
  • Criminal sanctions: The police may be able to pursue perpetrators but, with limited resources available, it is unlikely that they will actively do so unless part of a wider fraud.

Preventing and controlling damage

Because cloned websites use freely available information it is impossible to prevent them, but there are steps to limit damage.

In particular:

  • It will help if IP rights are properly registered so that they can be enforced.
  • Consider buying up similar sounding domain names to limit the risk of them being used to set up cloned websites.
  • Insurance for e-risks may cover escrow fraud; discuss any concerns with your insurers.

It makes sense to carry out regular searches to ensure that no cloned websites are targeting your customers and to take immediate steps to have them taken down as soon as they are identified.

Facts

  • Escrow fraud is now most commonly committed online.
  • There were 2.5 million cyber crimes in 2015 (interim results from the Crime Survey of England and Wales). 70% of fraud is cyber enabled (according to Action Fraud).
  • Incidents of fraud or cyber crime can be reported to Action Fraud, the UK’s national reporting centre.

The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.

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