Auction sites and online marketplaces are a staple of our modern economy. Many of these sites (like eBay) actually empower peer-to-peer selling in the process.
While these are great tools for most buyers and sellers, they can also be an avenue for fraudsters to make a hefty profit off both consumers and the marketplaces themselves. Fortunately, we’re here to help organizations stop auction fraud in its tracks.
To start, let’s look at what auction fraud is and how it works. Then we’ll dive into the different types of auction fraud to learn how fraudsters actually commit it and explore methods for detecting and preventing auction fraud at your organization.
What is Auction Fraud?
Auction fraud is any type of fraud perpetrated on auction websites. This type of fraud results from activities such as misrepresentation of a product that is being offered for sale, fraudulent bidding, or non-delivery of goods that were purchased during the auction.
How Does Auction Fraud Work?
In most cases of auction fraud, malicious sellers take advantage of unwitting customers by misrepresenting items or failing to deliver products. Typically, that takes place with the following steps:
- The fraudster sets up an account on an auction site, posing as a legitimate seller.
- The fraudster lists items for sale on their account, fraudulently misrepresenting the legitimacy of the sale in some way (either by intending not to deliver the items, misrepresent the condition of the items, or driving up the price by bidding on their own items using other accounts).
- The fraudster ‘sells’ items to legitimate consumers, failing to fulfill their side of the transaction in some way.
While this may seem clearcut, there are actually many ways that fraudsters can misrepresent the legitimacy of the sale, and it doesn’t just mean misrepresenting items — it can also mean failing to deliver the items they’ve sold, intentionally driving up the price of an item through shill bidding, and even selling black market items.
To really understand how fraudsters commit auction fraud — and help organizations understand how to tackle the threats they face — we cover the main types of auction fraud in the next section.
Types of Auction Fraud to Learn From
Seems straightforward enough, right? Well, there are actually many ways auction fraud can be conducted — some more complex than others. Let’s look at the main types of auction fraud below:
Misrepresentation involves misleading a consumer regarding the quality and condition of a product offered for sale on an auction website. This includes providing incorrect details about the item being sold, providing fake, edited, or otherwise misleading images that don’t accurately represent the state of the product, or even posting fake reviews on their own items.
This is done to increase the auction price of the items — and increase the fraudster’s profits. It could also be done to sell an otherwise ‘unsellable’ item.
Non-delivery involves selling a product on an auction website and then intentionally failing to fulfill the order by not sending the item to the buyer. The fraudster is able to make off with the entire value of the item, without ever providing the buyer with a real service.
Triangulation fraud involves three main parties — the fraudster, the customer, and an online vendor or marketplace. The fraudster opens an account pretending to be a legitimate seller and makes sales on an online marketplace. When someone makes a purchase from them, they turn around and buy the item they just ‘sold’ from a legitimate seller using a stolen credit card. They then ship the item they purchased using a fake or stolen credit card to the customer — who is none the wiser.
In this case, both the customer and the legitimate online marketplace are victims. The customer overpays the fraudster for the item, and the online marketplace loses an item — and likely receives a chargeback for the fraudulent payment.
Fee stacking involves adding hidden or unforeseen fees after a purchase has been completed. If there are fees that the consumer could not have reasonably anticipated (with the information provided to them) prior to purchase, it could be a form of fee stacking.
The buyer ends up paying more than they expected because the fraudster maliciously inflated the cost of the item. This is commonly done through hidden shipping or delivery fees, and other similar additional fees that aren’t conveyed prior to purchase.
Shill bidding is when a fraudulent seller deliberately increases the final sale price of their product by fraudulently bidding on their own products using other accounts. These accounts are often fraudulent themselves, using fake or synthetic IDs.
This could also be done by employing other participants to help bid on the seller's product, using human accomplices or even bots.
This drives up the cost of the seller’s auction item and sometimes the number of bids on the item — increasing both demand and the final sale price.
Multiple bidding involves a fraudster making several bids on a product, along with a high-value bid to deter competitors from continuing to bid. The result is that this fraudulent buyer has a few of the most recent bids on an item. During the last minute or seconds of the auction, they pull their highest offer, allowing their lower bid to go through as the highest bid. The fraudster gets the item for a much lower price, having driven off most of the competition.
Most auction and marketplace sites (like eBay) get around this by simply not allowing multiple bidding on their platform.
Black Market Goods
Selling black market goods on auctions or online marketplaces constitutes auction fraud, as it abuses the auction service. Typically, fraudsters present counterfeit products as legitimate ones, selling them for far more than their value.
Because of this, they often target high-value items, such as designer clothing and accessories, high-end art, and other products that can easily be faked and produced, such as pirated movies. Common examples would be designer handbags or — as was common back in the day — bootleg DVDs.
How to Detect and Prevent Auction Fraud
Since auction fraud can manifest itself in so many different ways, it’s important to have a comprehensive approach to auction fraud.
Online marketplaces and auction sites need to make sure they have diligent Onboarding Orchestration that ensures users are who they say they are and limit their ability to commit auction fraud in the first place. Having strong onboarding protections will also discourage fraudsters from targeting your organizations in the first place, instead targeting one with weaker protective measures.
Transaction Monitoring is a must-have — allowing teams to detect fraudulent activity and retroactively investigate cases. Rules can also be developed that allow teams to automatically block suspicious transactions, preventing fraud before it happens.
This can be taken a step further with true activity and event monitoring, which allows teams to analyze various user behaviors other than just transactions. With this information, teams gain insights that allow them to predict when fraud is likely to occur — and then stop it before it happens. With the ability to monitor logins, account changes, and other user behavior, risk teams can see early signals of potentially fraudulent behavior, shutting accounts down before they can commit fraud.
Schedule a demo to learn how Unit21 can help you detect and prevent auction fraud.