TELECOMS: More Proactive Stance Needed in Telco Fraud Fight

Bottom line: Chinese companies need to become more proactive in ending practices that harm consumers, or risk facing pressure from regulators and hurting their prospects for expansion abroad.

Telcos get tough with real name registration

A campaign requiring all mobile phone users to register with their real names was in the headlines for much of last week, in the latest step to curtail rampant phone fraud in China that has grabbed recent attention due to several high-profile cases. Notably, the real-name registration drive was led by 6 government ministries, rather than the nation’s 3 major wireless carriers whose networks are the primary platform for committing most of the fraud.

Both the government and carriers have known about this kind of fraud for years, but did little to aggressively tackle the problem until the recent wave of negative publicity.
While regulators could have been more active, the trio of China Mobile (HKEx: 941; NYSE: CHL), China Unicom (HKEx: 762; NYSE: CHU) and China Telecom (HKEx: 728; NYSE: CHA) should be held more responsible for letting their networks become breeding grounds for such fraud when they could have easily taken steps to curtail the problem. Instead, many believe the three carriers put profits ahead of consumer safety, reaping big money from fraud perpetrators who sent millions of text messages and used similar volumes of voice minutes to commit their crimes.

This kind of behavior is all too common in China’s corporate sector, where the western concept of corporate social responsibility (CSR) is largely non-existent.

Publicity surrounding China’s rampant phone fraud, and the huge toll it takes on average citizens, should be a wake-up call for all Chinese companies that they need to become more responsible for their actions that can harm consumers. The government could play a role by levying heavier fines on companies that knowingly engage in practices that can harm consumers, but ultimately the companies themselves need to take more initiative.

Phone fraud has become a huge problem in China in recent years with the growing use of cellphones and increasing sophistication by criminals who often operate offshore to avoid arrest. The number of telecoms fraud cases reached nearly 600,000 last year, up nearly six-fold from 2011, leading to consumer losses of 22.2 billion yuan ($3.3 billion), according to police statistics.

The issue recently splashed into the headlines after a case went viral involving an impoverished student who was bilked out of 9,900 yuan by scammers posing as education officials. The student, Xu Yuyu, later died of a heart attack, which her father attributed to stress from the fraud. Another major case saw a professor at the prestigious Tsinghua University bilked of 17.6 million yuan.

In response to the growing public outcry, China’s 3 wireless carriers and regulators have finally begun taking aggressive steps to tackle the problem. Media reported earlier this month that leading carrier China Mobile was testing a system in Inner Mongolia to alert consumers to calls and messages that might be coming from fraudsters.

Getting Aggressive

Beijing regulators have also stepped up calls for real-name registration on all mobile accounts, a move that would deprive many fraudsters of the anonymity that helps them avoid detection. Regulators have made similar calls in the past, but this time are becoming more aggressive by demanding that all accounts that aren’t registered with a real verifiable name be shut down.

Last week, 6 government agencies, including the Ministry of Industry and Information Technology (MIIT) and the Ministry of Public Security, stepped up the campaign by issuing a joint notice saying all non-verified accounts must be shut down by year end. (Chinese article) Separate media reports quoted a China Telecom official saying the company was moving even more quickly, and planned to shut down all non-verified accounts by the end of November. (Chinese article)

The flurry of activity looks similar to another case earlier this year that saw leading search engine Baidu (Nasdaq: BIDU) come under attack for its longtime misleading practice of mixing paid and organic search results together without telling users. That case also splashed into the headlines after a high-profile scandal involving complaints by a young cancer patient went viral on the Internet, prompting Baidu to clean up its act under heavy pressure from regulators in Beijing.

The Baidu case ultimately cost it 10-15 percent of its revenue, and this latest cleanup by the mobile carriers could ultimately have a similar impact. That kind of a loss is obviously difficult for any company to take, which is why many find it difficult to wean themselves off such practices that put profits ahead of consumers interests. But such practices ultimately have a far more negative impact on society, and for that reason should be aggressively tackled by the companies themselves without having to wait for scandals or pressure from government regulators.

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