Everything Is Bullshit: The Greatest Scams on Earth Revealed (15 page)

13.

THE
WORLD'S MOST EXPENSIVE

FREE CREDIT REPORT

I
n 2005,
the credit monitoring company Experian paid $925,000 to settle charges that the
company deceived consumers. Experian had advertised a “free credit report” on
its website, Consumerinfo.com, but it actually charged consumers $79.95 for the
service — a fact that was buried in the fine print. The Federal Trade
Commission (FTC), the federal agency in charge of regulating truth in
advertising, announced the settlement in a press release and declared victory
on behalf of consumers.

But Experian kept at it. The company disregarded the FTC’s
warning and continued to charge customers $79.95 for a credit report it implied
was “free” on Consumerinfo.com. So, in 2007, the FTC issued another triumphant
press release that proclaimed that this time it really had stopped those
roguish fellows at Experian. The company would have to pay a $300,000
settlement for violating the FTC’s prior ruling.

But in 2007, even as it was settling the second reprimand from
the FTC, Experian poured tens of millions of dollars into a television
advertising campaign for “FreeCreditReport.com,” a new website. The campaign’s
centerpiece was a television commercial featuring a band that literally sang
the praises of checking credit scores online for free. The only price mentioned
in the ads was “free,” which was sung loudly and written prominently on the
screen.

How could a website offering a “free credit report” afford
expensive television advertisements? Well, if you listened closely, you could
hear a barely audible voice whisper at the end of the commercial, “Offer
requires enrollment in Triple Advantage.”

As you may suspect, enrolling in “Triple Advantage” wasn’t free.
Experian provided a complimentary credit report, but it bundled it with an
on-going credit monitoring service for which it charged customers $19.99 a
month. People who signed up would be charged in perpetuity until they noticed
and figured out how to cancel the charges before the
seven
day
grace period ended. Experian gave away its credit report for free,
but then laughed all the way to the bank while collecting “monitoring fees.”

One person duped by Experian summarizes the whole situation in
this very typical online complaint:

“This company is a scam. Beware. They were billing me
[repeatedly] without any authorization. Another example of the degradation of
business practices in the US. When a capitalist society turns to deceit for
financial gain, everybody loses. I am ashamed to have fought for this country.”

But how could Experian perpetrate the same deceptive ploy over
and over, only to receive minor fines from the FTC? Well, the FTC can’t
technically fine a company for lying. The FTC can tell companies to cease and
desist a deceptive marketing technique, or to stop burying important
information in a footnote — but it can only levy fines on companies that
continue to do so after the warning. Or, as with the case of Experian, the FTC
can go to court and file a civil case against the company that may result in a
modest settlement. However, a determined company can launch a different —
if very similar and equally misleading — advertisement to evade FTC
sanction. It’s a cat and mouse game between the FTC and companies like Experian
that bend the truth in increasingly creative ways.

And the upside of distorting the truth can be enormous. The
FreeCreditReport.com advertising campaign was a profit bonanza for Experian.
Over twenty million consumers fell for this “free credit report” gambit, which
generated hundreds of millions of dollars that Experian could reinvest into
even more television ads for the service to attract even more victims. At its
peak, the company spent $70 million dollars a year advertising
FreeCreditReport.com. The commercials were so ubiquitous that the actors in the
commercials became minor celebrities.

The public soon realized that FreeCreditReport.com wasn’t
actually so “free” and started looking for alternatives. In another
masterstroke, Experian launched a second website called FreeCreditScore.com and
heavily advertised it as well. This produced the illusion of a competing credit
report website taking on the jerks at FreeCreditReport.com, when Experian
really owned both sites.

Ultimately, in 2009, Congress had to step in and pass a law that
prohibited companies from claiming to offer a “free credit report” if they
really were not. While one might congratulate Congress for diligently
protecting the American consumer, lawmakers also added an unrelated amendment
to the bill that made it legal to carry firearms in national parks. So, thank
you Congress?

Experian finally stopped charging for “free” credit reports;
instead of offering a “free” credit report on FreeCreditReport.com, Experian
now offers a $1 credit report. When you pay this $1, however, Experian
mysteriously enrolls you in a monthly credit monitoring service that costs
$19.99 a month. Ah, you got us again Experian. We just can’t quit you.

Worst of all, since 2003, customers have had the right to a
truly free credit report at the government website AnnualCreditReport.com. As
required by federal law, the site is “brought to you by” the three major credit
reporting companies:
TransUnion
, Equifax, and
Experian. The site warns
visitors that
“Lots of sites
promise credit reports for free. AnnualCreditReport.com is the only official
site explicitly directed by Federal law to provide them.”

Profit margins are destiny. The companies with the most
lucrative business models can afford ads that attract the most customers. When
deception increases profit margins, dishonest companies crowd out the honest
competitors or free services that can’t afford to market themselves as widely.
Since it’s much more lucrative to charge customers absurd fees than give away a
free report, you’re much more likely to find out about FreeCreditReport.com
through television commercials and premium ads in Google search results. Beware
the company that has a lot of money to spend on ads.

Today, Experian is a publicly traded company worth over $10
billion. The Queen of England recently knighted the company’s Chairman and CEO
(who now goes by the name Sir John Peace) for “services to business and the
voluntary sector.”

So abusing your customers’ trust is not only profitable, but it
might earn you a spot in the aristocracy. And while Experian paid a measly $1.2
million settlement for its shenanigans with Consumerinfo.com, it was never once
fined for the epic rip-off that was FreeCreditReport.com.

As of 2014, Experian reports it will begin phasing out the word
“free” in the branding of its credit report products. In their latest financial
reporting, company executives mention that this might “constrain revenue
growth” this year.

14.

WHAT
HAPPENS TO

DONATED CARS?

A
sbestos law firms.
Personal injury
attorney.
Donating a used car.
Online auto insurance.

What do all these things have in common? They are among the most
expensive keywords available on Google
Adwords
.

This means that there is something very valuable about placing
an ad in the search results for these phrases. To place an advertisement within
some results, Google charges as little as five cents per click. For keywords
like “online auto insurance”, however, Google charges from $60 to $110 per
click.

Companies pay so much for these placements because each person
that clicks on the ad has a good chance of making the company a lot of money. A
sick patient interested in suing over asbestos poisoning represents a potential
jackpot for a law firm. Auto insurance companies can make good money in
perpetuity by signing up a new client. But what is so lucrative about car
donations?

Google search results are not the only place where car donations
are advertised. On billboards, in newspapers, and on the radio, charities
exhort people to donate their old car in return for a tax write-off. They
promise a win-win: easily get rid of an old car at a good rate, and help
support charity.

Born out of an IRS policy that imagined the occasional car being
donated to a family in need or a nonprofit that could use some wheels, the tax
write-off for car donations has spawned a market worth hundreds of millions or
perhaps billions of dollars. Hundreds of thousands of Americans donate their
used cars every year to charities, or more frequently, to for-profit companies
that sell them and return a portion of the proceeds to charity. But the portion
that is donated is often very small, raising the question of whether car
donations fund charity or subsidize a surprisingly lucrative business.

A
Multi-Billion Dollar Industry

The
tax write-off for cars is part of a much larger IRS policy that makes noncash
contributions to charities tax deductible. The intent is to incentivize
donating an old boat for use in oceanography research, old clothes to Goodwill,
or a used car for a charity’s use.

In 1978, the Goodwill of the greater Washington D.C. area
initiated a car donation drive as a way to raise funds. Instead of accepting
cars that it could use or give away, Goodwill sold the cars and put the
proceeds toward its general budget. Charities across the country soon copied
its creative use of the tax code. The IRS does not regularly collect statistics
on car donations, but press coverage makes clear that the practice was popular
and growing in the nineties. By 2000, Americans claimed $654 million in annual
tax exemptions on the basis of car donations. That represented 733,000 tax
returns, or 0.06% of all tax claims, donating a car for an average exemption of
$890.

The car donation process goes as follows: Donors contact
charities, often in response to advertisements that highlight the tax
write-off. The charity asks screening questions about the car (sometimes to
make sure that the sale will be profitable, but many charities accept even the
worst clunker to engender goodwill) and then pays a tow truck to pick it up
from the donor’s home and take it to an auto auction lot where it is sold. The
donor transfers the title of ownership and receives paperwork proving her
donation.

This paperwork allows donors to reduce their tax liability. If
someone donates a car worth $2,500, she cannot reduce her tax liability by
$2,500. Instead, the amount deducted reflects one’s tax bracket. In 2013, an
individual with a yearly income from $87,850 to $183,250 was taxed at a rate of
28%. So, if Americans lower their taxes by about $654 million per year, they
donate over $2 billion worth of cars.

Despite the multi-billion dollar scale of car donations, the
U.S. General Accounting Office, when it reported on the practice in 2003, found
that only 4,300 major charities (those with annual revenues above $100,000) had
car donation programs — less than 3% of such charities.

One reason that few charities pursue what seems to be a
significant pool of funding is that charities receive relatively little of the
money written off Americans’ taxes for car donations. In 2003, the General
Accounting Office followed the donation of 54 vehicles to car donation drives
and found that the amount received by charity for most of the vehicles was
“five percent or less of the value donors claimed as a deduction on their tax
returns.”

Some of that “lost” money reflects the costs of running car
donation drives. But it mostly reflects how people claimed deductions for more
than their car actually sold for.

IRS guidelines encouraged donors to use independent resources to
estimate the value of their car and therefore their tax write-off. But those
guidelines were written to reflect people donating goods that charities would
use directly. With the innovation of charities selling donated cars rather than
using the cars themselves, the assumption that charities received value equal
to the value of the car no longer held. To quickly sell cars, charities sold
them at auction, where they received a lower price than they would if owners
spent time searching for a buyer willing to pay the full market value of the
car.

In response, the IRS began requiring in 2005 that donors of cars
valued higher than $500 receive a receipt detailing how much their car actually
sold for at auction and then claim a deduction on their taxes based on that
price. Despite this reform, car donations remain an inefficient means of
transferring money to charities. A 2005 report (on data from the first year
after the IRS reform) from the California Attorney General found that only half
of the proceeds of car donation
drives
accrued to
charities. The disappearance of the other half is explained by the rise of
for-profit car donation fundraisers.

Selling
Cars is a Full Time Job

The
charities benefitting from car donation drives include Susan G. Komen for the
Cure, the largest and most well-funded breast cancer organization in the United
States, and the Purple Heart Foundation, which assists American veterans and
their families.
A minority of charities raise
most of
their funding from car donations, and therefore deal with most to all of the
donation process themselves. But the
majority see
it
as one of many revenue streams and prefer to outsource as much of the car
donation process as possible.

As car donation drives proliferated, private companies offering
to raise money through car donations popped up. These companies have names like
Car Donation Services and Car Program (LLC). They take care of every aspect of
the donation, from advertising to speaking to the donor to picking up the car
and selling it. In return for their services, they retain a portion of the
profits.

People donating their cars to charity rarely realize that a
private company is involved. The company websites look like a nonprofit’s. They
feature pictures of veterans, breast cancer awareness walks, or smiling
children, the names of the charities for which they raise money, and the
language of charitable giving. Their customer service representatives maintain
the fiction of working for a charity when they talk to donors on the phone.

There are no laws that regulate third party car donation
services, other than requirements in less than a quarter of states that they
fill out certifying paperwork or contribute regular financial disclosures. The
government merely recommends that people “be generous and informed donors.”

Given that the government subsidizes these private companies in
the form of the charitable tax deductions for donors, the companies’ legitimacy
would seem to rest on how well they fundraise for the charities they represent.
The verdict is decidedly mixed.

Some of the only data available comes from the Office of the
California Attorney General. California requires commercial fundraisers in the
state to file financial reports, and the Office of the Attorney General has
released reports on the percentage of profits going to charities.

In 2001, private car donation services in California raised
$45.8 million in gross proceeds from car auctions. (Gross in the sense of the
“profit” left after the company paid operational expenses.) Of that, charities
received $16 million — about 35 percent. In 2005, after the IRS rule
change, charities actually did better, receiving 49.03% or $17.02 million of
the $34.72 million raised.

Is it exorbitant for a commercial fundraiser to take 50% of
gross proceeds? Reports from national and local government express scorn at 50%
takes, and not without reason. That 50% figure comes after fundraisers have
already paid themselves fees, so the full share of car sales captured by
for-profit fundraising companies is much higher than 50%.

What these averages may cover up, however, is that the
percentage of proceeds given to charities by more civic-minded companies could
disguise the greedy actions of others. State Attorney Generals investigating
car donation practices, as well as the Better Business Bureau, have reported on
corporations that give charities only a small, flat rate per car sold or a cut
dramatically lower than 50%. The California Attorney General’s 2001 data showed
that the cut of proceeds given to charities by private companies ranged from 2%
to 80%. The companies that keep most of the money for
themselves
are likely the ones that can bid $85 for a visitor from Google.

The
Nonprofit Profiteers

Just
as private companies popped up to run car donation schemes for charities that
cannot or do not want to sell donated cars themselves, a number of large
nonprofits that focus on selling used cars to fundraise for charities have been
founded as well. This is generally good news for charities, as a nonprofit
fundraiser can pass on all of its gross proceeds to the charities it
represents. But there is good reason to believe that many large nonprofit
fundraising organizations may be more interested in paying fees to themselves
than maximizing their contributions to charity.

One of the organizations that
advertises
in Google search results for the phrase “donate a car” is
CarsFightingCancer.org. The website has pictures of cancer survivors undergoing
chemotherapy and the pink ribbon that represents breast cancer awareness. It
also proudly states that it is an official IRS 501-C3 charity. Only with some
digging can a viewer discover that Cars Fighting Cancer is part of the
nonprofit Others First Inc.

The Better Business Bureau advises donors to regard Others First
with extreme caution. The nonprofit pays 30% of its proceeds to consulting
companies owned by Rick Frazier, a man who ran several defunct car donation
companies that charities accused of fraud. “The Virginia-based Military Order
of the Purple Heart Foundation alleged in a court suit that an audit found
widespread problems with Frazier's role in that program,” the BBB writes,
“including self-dealing, illegal practices and destruction of incriminating
records.” Nevertheless, Others First has deals with many charities to run
donation drives in their name, some worth tens of millions of dollars.

Kars 4 Kids, a nonprofit that raises nearly $30 million annually
and advertises on Google and on nationwide radio, also demonstrates how easily
organizations can mislead donors. Although the Kars 4 Kids website speaks of
work benefiting disadvantaged children, it is actually an assumed name of
Oorah
Inc., a charity that “provides religious education
for kids of non-observant Jews.” It is only the largest of several
organizations pulling in millions of dollars from car donations in New York
whose proceeds go toward exclusively religious purposes under the guise of more
standard charitable work.

It is also not uncommon for sham charities to make millions from
car donations without donating a single penny. In 2010,
Shoba
Bakhsh
, the head of “Hope for the Disabled Kids,
Inc.,” pled guilty to charges of fraud. She received $2 million in donations
over two years, but did not contribute any to charity. She simply forged
testimonials from local hospitals that made it seem as if they received support
from Hope for the Disabled Kids.

The New York Attorney General discovered
Bakhsh’s
fraud during an investigation into car donation drives. While it may seem like
her clumsy operation would inevitably be discovered, many other frauds
may
go undetected for years. The IRS does not audit the
deductions taxpayers claim for donating vehicles — instead prioritizing
larger scale deductions — so there is no one to check that tax deductions
actually benefit charity. Nor do attorney generals in most states regularly
investigate car donation companies and nonprofits. The only way for a fraud to
be caught is for a suspicious donor to refer it to the state attorney general.
Until then, faux charities can continue to bring in “donations.”

Fundraising
for Profit