Soap Box: Does the Punishment Fit the Crime?

Posted: 7/2003

Slamming. The word itself conjures up images of aggressive, even violent, misconduct. It is quite appropriate then that, in the telecom world, the word has become associated with unauthorized conversion of a consumers telephone service.

From the onset of competition in the telecommunications industry and, particularly, since equal access became the reality, unscrupulous carriers and marketing companies have sought to gain financial advantage by converting consumers telephone numbers to a carrier other than the carrier the consumer had selected. The problem has proliferated because of the extraordinary financial gains available to the wrongdoer.

For example, marketing companies, that often are paid a fee for each new customer obtained, have a very strong financial incentive to falsify customer authorizations. This incentive has led marketing companies, on their own and in concert with unscrupulous carriers, to develop schemes to convert customers without proper authorization. Carriers, of course, also have strong financial incentives to acquire new customers through all available means.

To no surprise, many carriers, including many of the largest carriers in the industry, have acted on their financial incentives. Indeed, the extraordinary scope and duration of the slamming problem strongly suggests that certain, and perhaps many, carriers have made a strategic business decision to incorporate slamming  both at the retail and the wholesale levels  as a centerpiece of their customer acquisition programs.

For their part, legislators and regulators at the federal and state level have taken steps designed to deter slamming. Congress took the first major step through Section 258 in the Telecommunications Act of 1996. Section 258 provides that [n]o telecommunications carrier shall submit or execute a change in a subscribers selection of a provider of telephone exchange service or telephone toll service except in accordance with such verification procedures as the Commission shall prescribe. In addition, through Section 258, Congress sought to take the financial incentive out of slamming by making the slamming carrier liable to the carrier previously selected by the subscriber in an amount equal to all charges paid by such subscriber after such violation, in accordance with such procedures as the Commission may prescribe.

The FCC, and to a lesser extent the states, have adopted regulations implementing this statutory scheme. In its slamming orders, the FCC has implemented and then revised its specific requirements requiring carriers to acquire letters of authorization or third-party verifications supporting the customers selection of that carrier. In subsequent orders, the FCC increased the scope of its slamming regulations to cover both local as well as long-distance services and to implement preferred carrier freezes which prohibit carriers from changing a consumers preferred carrier without that consumers express authorization to lift the freeze.

Recognizing that these measures had failed to deter carriers from engaging in slamming, in April 2000, the FCC adopted what it described as more aggressive new rules to take the profit out of slamming. The rules require the slamming carrier to pay 150 percent of the amount paid by the consumer to the authorized carrier. In implementing these regulations the FCC, once again, hoped to take away the profit motive and thus the financial incentive to slam.

Moreover, it is most noteworthy that, despite these efforts, the available data reveal that slamming remains a very significant problem. Despite the FCCs most recent efforts, in 2002, slamming complaints rose from 767 in the first quarter to 1,001 in the second quarter, an increase of 30.5 percent. And, more significantly, these data suggest that incentive remains, even though the FCCs orders may have reduced the size of the financial incentive to slam.

There are several reasons for this. First, not surprisingly, not every consumer realizes that he or she has been slammed. In circumstances, the slamming carrier succeeds because the consumer is unaware that slamming has occurred.

Second, while the FCC has implemented regulations designed to require slamming carriers to pay 150 percent of the amounts they received from slammed customers to the authorized carrier, in many cases such payments are never made. This is because, among other things, the carrier alleged to have slammed has the right to dispute that allegation, requiring the customer to file a complaint and to participate in a proceeding to resolve the issue. The complaint process creates a substantial disincentive for customers who report a slam, as well as their authorized carriers, to sustain the effort necessary to obtain relief. Thus, even among those customers who realize they have been slammed and among those who report the slam, few have the incentive to see through the process.

Few customers report they have been slammed. Indeed, recent data indicate only about a third of consumers who know they have been slammed report the slam to their authorized carrier or to regulatory authorities. The net of these circumstances is, despite the FCCs efforts, well less than onethird of the slamming incidents are reported and far fewer result in financial consequences for the slamming carrier. Thus, the potential 150 percent payment obligation on the minority of reported slamming incidents that are litigated to resolution, does not come close to offsetting the financial gains that are derived from the majority of customers who do not report or pursue their claims. The slamming carriers are fully aware of these facts and correctly calculate that the economic benefits of continuing to slam far exceed any costs. As a result, the current regulatory scheme does not create the intended financial disincentives to slam.

The failure of the current approach begs the question of whether alternative approaches need to be considered. The weapons in the FCCs arsenal have been limited to regulatory strictures designed to thwart efforts to slam and monetary reimbursement and/or forfeitures for confirmed slamming incidents. To date, carriers involved in slamming have not been subjected to criminal penalties. Why? Like many other financial crimes, slamming results in millions of dollars of improper charges being assessed against and collected from telecom consumers. There also is reason to believe that, in many circumstances, slamming is the byproduct of planned and intentional and fraudulent conduct. Thus, one could argue slamming is no different than many forms of conduct that are recognized and treated as criminal and against which criminal penalties are applied.

Indeed, one could easily argue the scope and nature of the slamming problem far exceeds other forms of conduct that results in criminal penalties. For example, no one questions the attachment of criminal liability to the theft of property, even of modest value. Yet, telecom carriers can slam customers at the retail level, or entire customer bases at the wholesale level, and in so doing steal thousands or millions of dollars, without any fear of criminal exposure. The act is not substantively different than a pickpocket taking a modest amount of money from millions of unsuspecting people. The only difference is the mindset and a white collar.

The line between conduct that should be punished through regulatory and civil remedies and conduct for which criminal sanctions can be fuzzy one. Often, the determination is based on a range of public policy considerations and historic factors. These considerations include the perceived harm to the public and the need to deter the conduct at issue.

Slamming is theft, pure and simple. Its impact is widespread and has serious financial consequences on individuals and competing businesses. The parties perpetrating slamming often do so with the premeditated intent to steal from thousands of customers and/or their serving carriers. Efforts at regulatory and civil deterrence have not worked. Perhaps, the time has come to see slamming for what it is and to apply a punishment that fits the crime.