Fraud is a hang-up for prepaid calling card market

WASHINGTON -- Rosalba Posada can tick off a list of problems she has encountered trying to use prepaid calling cards to stay in touch with family back in Colombia.

There were the cards that didn't deliver as many minutes as promised and the cards that charged extra fees to call a cellphone. There were the cards that offered several hundred minutes of calling time, but began deducting minutes if they were not all used in a single call. There was the card that had already expired when Posada tried to use it just a few months after buying it. And there was the card that simply didn't work at all.

"Some of those prepaid calling cards are good for nothing," said Posada, a high school registrar who lives in Pembroke Pines, Fla., and now uses Skype, a free Internet calling service, to talk with her family. "All they do is make some companies rich while we the customers have no say."

Over the past decade, the prepaid calling card business has mushroomed into a $4 billion industry that has injected new competition into the market for international phone calls and provided a critical lifeline to connect immigrants with family and friends back home. The cards are sold in gas stations, newsstands, convenience stores, bodegas and groceries across the country.

But consumer watchdogs and government officials warn that certain segments of the market are plagued by fraud and deceptive practices that give consumers fewer minutes than they pay for and tack on all sorts of hidden and unfair "junk fees."

The problem takes many forms: connection fees on calls that don't go through because no one is home or the line is busy; post-call service fees and 99-cent hang-up fees on cards that are only worth a few dollars to start with; calling rates that go up when a card is used more than once; activation and weekly maintenance fees; and cards that bill customers in three- or four-minute increments even if they use just a few seconds of calling time.

These charges and fees often end up leaving buyers with far fewer minutes for calls than they thought they were getting. The Hispanic Institute, a nonprofit advocacy group, estimates that the average calling card delivers only 60% of the minutes promised — cheating consumers out of $1 million a day.

Government officials are starting to force card providers to be more upfront about their card terms. But some consumer advocates worry that better disclosure alone is not enough to protect customers.

Victims include soldiers calling home from abroad and foreign students studying in the U.S. But the people most vulnerable to these scams, consumer advocates and government officials say, are the newest arrivals who speak little English and don't have the money or documentation to get a home phone line or cellphone — much less a computer — to communicate with relatives overseas. They are also the people who are least likely to seek redress if they are cheated.

"People operating outside the mainstream economy are the ones who typically fall victim," said Pablo Bressan, a telecom consultant and prepaid calling card distributor in Miami. "You have companies with no scruples targeting low-income minorities with no access to traditional credit and banking services who view themselves as defenseless."

One thing that particularly disturbs industry critics is that many prepaid calling card companies advertise in Spanish, but provide disclosures of card terms and conditions in English only — if at all.

The Federal Trade Commission and attorneys general in Florida, Texas and a handful of other states have cracked down on bad actors in the market, while state and federal lawmakers have begun to craft regulations to clean up the industry.

"It is the government's responsibility to protect the most vulnerable among us who are being taken advantage of by these fly-by-night criminals," said Sen. Bill Nelson, D-Fla., who is sponsoring a bill that would force prepaid calling card companies to clearly disclose the number of minutes that their cards provide as well as any fees and charges.

The House passed similar legislation last month.

But while both measures are an important first step, Sally Greenberg, executive director of the National Consumers League, noted that neither prohibits most "unconscionable" industry practices.

"Disclosure only goes so far and these are primarily disclosure bills," Greenberg said. "It doesn't help the consumer to tell them we are ripping them off."

Consumer advocates say the prepaid calling card market has become ripe for abuse because there has been so little industry regulation — and so little enforcement of the rules that do exist.

"The problem is that these companies can set whatever terms they want," Greenberg said. "It's a free-for-all, a Wild West."

Plus, con artists face a low barrier to enter the market since calling card providers do not need to own their own telecommunications networks. Bressan estimates it can cost as little as $20,000 to buy the long-distance minutes and back-end computer platform to get into the business. Some companies simply redistribute cards made by others.

No wonder HBO's mob show The Sopranos had an episode in which Tony Soprano ran a calling card scam.

Nsalambi Nkongolo, a college professor in Jefferson City, Mo., buys four $5 calling cards a month so that he and his wife can call family back in the Democratic Republic of the Congo. He says it's better than running up big charges on his home phone bill, but it still comes out to $240 a year. And Nkongolo knows he isn't getting all the minutes he is paying for.

"You're supposed to get 20 minutes of calling, but in practice you are lucky if you get 10 minutes," he said. "All I need is honesty. If I buy a card for $5 worth of minutes, give me $5 worth of minutes."

A number of card companies have fallen into the sights of government officials.

Florida Attorney General Bill McCollum has been among the most aggressive, bringing cases against — and reaching settlements with — 11 prepaid card providers. Under the settlement terms, the companies must clearly disclose exactly how many minutes their cards provide and when they expire and must provide all disclosures in the same language as any advertising. In addition, they cannot levy any charges that resemble taxes and must bill all calls in one-minute increments.

Because those obligations apply to the calling card companies no matter where they do business, McCollum said "we'd like to think we've set national standards."

The Texas Attorney General has also brought deceptive marketing charges against NextG Communications Inc., accusing it of delivering only 40% of the minutes promised on its cards. And the Federal Trade Commission is pursuing injunctions against Clifton Telecard Alliance and Alternatel Inc.

Those three companies declined to comment or simply didn't return phone calls. But other calling card companies were quick to defend the industry.

Michael Acevedo, chief executive of CVT Prepaid Solutions Inc. — one of the companies that the Florida attorney general has settled with — insisted that "trap doors" are hardly unique to the calling card market. He added that "these cards are still the best value consumers have to stay in touch with loved ones."

The problem, argues James Courter, chief executive of market leader IDT Corp., is that the misdeeds of small, shadowy companies that make their money and then disappear are harming the entire industry. Courter says honest calling card brokers can't compete with those who promise more than they actually deliver.

IDT, which is based in Newark, N.J., estimates its calling card revenue is off more than 40% from 2006 levels because of unfair competition.

The company has approached state and federal officials to try to illuminate shady practices in the industry. It has also sued CVT and five other competitors, accusing them of cheating and defrauding customers, and reached settlements with CVT and three others.

But IDT hasn't been entirely blameless either. It changed some of its practices after being hit with a class-action lawsuit alleging that it provided inadequate disclosure of its calling card terms. Acevedo argued that IDT sued its competitors after it settled the case because it wanted to ensure that they would be subject to the same disclosure rules.

Now lawmakers are stepping in and not just at the federal level. Roughly a dozen states have passed laws tightening oversight for prepaid calling cards.

"This is a fairness issue," said New Jersey Assemblywoman Bonnie Watson Coleman, who sponsored a calling card measure that recently became law. "It's about ensuring you are getting what you pay for."