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Compliance & Risk

Fraud prevention through the INFORM Consumer Act: Continuous evolution of regulatory change

Serena Dibra  Associate Product Marketing Manager / Risk & Fraud / Thomson Reuters

Dan Stark  Product Marketing Manager / Risk & Fraud / Thomson Reuters

· 5 minute read

Serena Dibra  Associate Product Marketing Manager / Risk & Fraud / Thomson Reuters

Dan Stark  Product Marketing Manager / Risk & Fraud / Thomson Reuters

· 5 minute read

The newly passed INFORM Consumers Act, which goes into effect later this month, will require that online marketplaces collect, verify, and disclose following information about their customers and suppliers

Gone are the days when businesses had to rely solely on local vendors or tedious research to find the right supplier. Today, thanks to the internet, businesses and consumers can access products and services from all corners of the globe with just a few clicks on their smartphones.

This convenience has undoubtedly accelerated the pace of commerce, but it has also opened the door to new forms of fraud. Practices such as Know Your Vendor (KYV), Know Your Business (KYB), and third-party risk management are becoming more common, but it can be difficult for organizations to know where to start.

Regulations, including the INFORM Consumer Act, guide different KYV practices to help protect consumers. Businesses can learn a lot from looking at passed and proposed legislation to help them develop their own KYV policies and practices.

The INFORM Consumer Act

The Integrity, Notification, and Fairness in Online Retail Marketplaces for Consumers (INFORM ACT) is designed to protect consumers from online fraud. The Act regulates “high-volume, third-party sellers” which includes “online marketplace participants that conduct 200 or more transactions resulting in total revenues of $5,000 or more during a continuous 12-month period.” The newly passed INFORM Consumers Act goes into effect June 27, 2023, when online marketplaces will be required to collect, verify, and disclose the following information about their customers and suppliers:

      • bank account information;
      • government-issued IDs;
      • Tax ID or taxpayer identification number; and
      • contact information, such as work email and phone number.

The INFORM Act will create a regulatory framework to support manufacturers by protecting them from fraudulent activities in online marketplaces. It requires several different practices including ID verification, process transparency, active reporting and enforcement — practices that any company can learn from. The act also aims to protect consumers from fraudulent activities by requiring specific actions that require online marketplaces to know who their vendors and suppliers are. Those actions include:

ID verification — Online marketplaces will be required to verify the collected information within 3 days of receiving it. This added friction in the process should deter sellers of stolen or counterfeit goods from using platforms that require the verification of seller identity. Additionally, this verification needs to happen annually, requiring marketplaces to keep a consistent process of validating their third-party vendors.

Transparency — High-volume third-party sellers will be required to disclose specific information about themselves including their name, address, contact information and if they also engage in manufacturing, importing, or reselling of consumer goods. While some exceptions apply, this level of disclosure provides a more complete picture and transparency of the vendors that buyers engage with on online marketplaces.

Reporting mechanism & enforcement — Online marketplaces are required to promote their reporting mechanism so consumers can easily report fraudulent activity by email or phone. This will remind and encourage consumers that they can take direct action against potential third-party sellers.

The Federal Trade Commission (FTC) will be responsible for the enforcement of the INFORM Act under broader regulations covering unfair and deceptive acts or practices.

Proposed legislation with Know Your Vendor practices

The INFORM Act is not the only legislation that is targeting fraudulent activities through these types of actions. The proposed SHOP SAFE act (Stopping Harmful Offers on Platforms by Screening Against Fakes in E-commerce Act) aims to hold online platforms potentially liable for third-party vendors selling unauthorized trademark goods on their site that may harm the health and safety of consumers.

The SHOP SAFE act provides requirements for online marketplaces to take to avoid this liability. Those actions include verifying the seller’s identity, requiring a valid US address or registered agent, and implementing prescreening measures to deter fraudulent vendors.

Like the INFORM act, the SHOP SAFE Act utilizes vendor data collection and ID verification to protect consumers. Additionally, it requires online marketplaces to implement additional prescreening measures. The SHOP SAFE Act focuses on health and safety products. Prescreening measures can be tailored to a specific product or industry to safeguard consumers.

Another potential regulation that utilizes screening is the ENABLERS Act which aims to prevent money laundering in the United States real estate business. It was added to the annual National Defense Authorization Act by the House of Representatives in 2022, but it was removed by the Senate before final passage. While still under consideration, if the proposed ENABLERS Act passes it will require additional KYV practices including ID verification and screening, in this case for sanctioned people or businesses. The ENABLERS Act also implies the need for verification of the ultimate beneficial owner of companies buying real estate, an additional due diligence step.

What companies need to know

Businesses of all sizes need to implement third-party risk management practices that make sense for their company. These practices should protect firms from financial, regulatory, and reputational risk. The practices being used by regulators provide a framework to get started. Those steps include:

      • ID verification to ensure you know with whom you are doing business;
      • Screening procedures that are tailored to your specific product or industry;
      • Transparency for vendors and consumers so they know whom to contact; and
      • Regular audits to make sure your practices are up to date.

Finally, effective vendor management practices are paramount for businesses to shield themselves from financial, regulatory, and reputational risks. The regulatory framework provided by the INFORM Consumer Act, the proposed SHOP SAFE Act, and the ENABLERS Act can serve as a guide for businesses to develop their own vendor management policies and practices. By conducting ID verification, implementing tailored screening procedures, ensuring transparency, and conducting regular audits, businesses can build trust with their customers and safeguard their operations.

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