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What is auction fraud: Protect your business from online scams

Learn about the different types of auction fraud and how they can impact your business.

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⚡ Key takeaways
  • Online auction fraud can be carried out by both buyers and sellers, but is most commonly perpetrated by fraudulent sellers.
  • Auction fraud can damage your platform’s reputation and trust amongst users, leading to reduced profits and slower growth.
  • Identity verification, reverification, and link analysis can help you identify and mitigate fraud on your platform.

Online auction sites and platforms can only exist as long buyers and sellers trust those platforms.  

Unfortunately, there are many ways for bad actors to damage this trust through fraud. 

Below, we define auction fraud, take a closer look at how it works, and discuss the different types of fraud that might affect your platform. We also share strategies for mitigating auction fraud. 

What is auction fraud?

Auction fraud broadly refers to any type of fraud that occurs through online auction sites. Though it can occur on both sides of the platform, it is more commonly associated with sellers than buyers. In many ways, auction fraud is similar to marketplace fraud

Fraudulent sellers frequently misrepresent their merchandise, sell counterfeit goods, do not deliver the product to the buyer once the auction has closed, or engage in fraudulent bidding. 

What is the impact of auction fraud?

Auction fraud can damage your credibility and business in a number of ways:

  • Reduced profitability: According to LexisNexis, the true cost of fraud continues to rise: For every $1 of fraud in 2022, the true cost to the defrauded business was $3.75. In 2021 and 2022, the true costs were $3.60 and $3.36, respectively. Fraud continues to be highly profitable for bad actors and damaging to businesses. If fraud on your platform results in a refund and other remediation measures, that money comes out of your pocket, reducing profit for you and other stakeholders. 
  • Slowed growth: Users who have experienced fraud on your platform may leave you for a competitor or stop referring friends, family, and other users.
  • Damaged customer trust: In order for your auction site to function, you need your users to trust your listings, security practices, and the fairness of the auction process. Once this trust is damaged, they won’t come back. 

How does auction fraud work?

Generally, auction fraud involves a buyer who believes they are engaging in a fair and trustworthy process, and a bad actor trying to scam that buyer. 

Some of the most common cases of auction fraud look like this: 

  1. A bad actor opens a seller account on an auction site.
  2. The bad actor lists an item for sale and initiates an auction.
  3. The auction runs its course, with legitimate buyers bidding on the item.
  4. The auction closes, and the buyer with the highest bid must pay the seller (i.e., the bad actor) in order to receive the item.

The buyer only realizes they’ve been defrauded upon delivery. They may receive a counterfeit item, or one that does not match the product description from the listing that they bid on. In a worst-case scenario, their payment clears but they never receive their purchase. 

In more complicated cases, the bad actor may open multiple accounts in order to manipulate the auction process and extract more value from legitimate users — for example, by using one account to list an item for sale, and then a second account to falsely bid on that item and drive the final sale price higher. 

Types of auction fraud

Below is a closer look at types of auction fraud that can affect online auction sites.

Non-delivery fraud

Non-delivery fraud occurs when a buyer pays for an item but does not receive it from the seller. Non-delivery fraud often results in a chargeback request from the buyer’s card issuer once they realize their purchase is never coming. 

Misrepresentation fraud

Misrepresentation fraud occurs when a buyer wins an auction but then receives an item that is different from what they were expecting to receive — for example, a counterfeit item or item of lower quality than what was depicted in the listing. 

Sellers on an auction site can misrepresent their listings in a number of ways:

  • Fake ads
  • Doctored photographs
  • False product descriptions
  • Inaccurate product specifications
  • Failure to disclose damage or defects
  • Fake reviews

Note: The INFORM Consumers Act requires online marketplaces to implement measures specifically designed to root out the sale of counterfeit goods. This includes the verification of contact information, bank details, and tax identification number of any seller grossing at least $5,000 in sales, or completing more than 200 transactions in a 12-month period.

Triangulation auction fraud

In cases of triangulation fraud, a bad actor lists an item they don’t have for sale on an auction site. Then, when a buyer wins the auction, the bad actor uses stolen credit card card information to purchase the item from an online marketplace or retailer, and has it delivered to the buyer. Because the buyer receives the item that they expected to receive, they will typically be unaware that anything is amiss. 

If the cardholder realizes their card information has been used to make a fraudulent purchase, they will file a complaint with the card issuer. At this point, a chargeback is typically requested, hurting the online marketplace, the buyer who purchased what they thought were legitimate goods from the marketplace, the cardholder, and the legitimate businesses where their stolen card was used.

The name comes from the fact that there are three main parties involved — the seller (bad actor), the buyer, and the online marketplace. 

Shill bidding fraud

Shill bidding occurs when a seller lists an item for sale on an auction site, and then uses other fraudulent accounts to bid on their own item in an attempt to drive up the final sale price. Fraudsters engaged in shill bidding will sometimes leverage bots or other bad actors in an effort to avoid detection.

Shill bidding artificially inflates the final sale price of an item beyond what it would be if market forces were allowed to work as intended, causing the buyer to pay a higher price. 

Multiple bidding

Multiple bidding is a form of auction fraud where the fraudster is the buyer who places multiple bids on a single item, without letting anyone else place a bid in between. Their final bid is typically high — well above both their previous bids, as well as the amount a legitimate buyer would be expected to pay for the item. In the last moments of the auction, the buyer withdraws their final high bid, leaving their lower bid as the new highest and allowing them to purchase the item for a lower price than if they had not scared off the competition with their fake high bid. 

Multiple bidding hurts the seller, who was unable to get the highest possible price for their item; other buyers, who were deterred from bidding; and potentially the platform, which may garner lower fees due to the reduced final sale price.

Bid shielding

Because multiple bidding can be quite harmful to auction sites, many platforms do not allow single users to bid on the same item multiple times in a row. To skirt this, bad actors may engage in bid shielding, which works in a similar way.

In bid shielding, a bad actor places a low bid on an item. Then, they place a higher bid on the item using one or multiple fake accounts in an attempt to drive off the competition. As with shill bidding, this can be accomplished using bots or human accomplices. At the last moment, these other accounts withdraw their bids, leaving the initial low bid as the winner.

Account takeover (ATO) fraud

Account takeover fraud refers to instances where a bad actor gains access to a legitimate account through measures like phishing, password spraying, credential stuffing, and more. 

Once the bad actor has gained access to the account, they can complete a fraudulent transaction, engage in bid shielding or shill bidding, leaving fake reviews, and more. 

It’s important to note that account takeover fraud is not unique to online auction sites. Virtually any website or online platform requiring its users to create an account may experience account takeover fraud.

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How to prevent auction fraud

Because auction fraud can take many different forms, there is no single solution to prevent its occurrence. Each type of fraud is best mitigated by different solutions. In most cases, an auction platform will need to leverage multiple complementary solutions for a truly comprehensive anti-fraud strategy.

Some anti-fraud methods and tools you may want to consider for your platform include:

Identity verification

Implementing identity verification measures during the account creation process can be an effective first layer of defense against fraud on your platform. It ensures that you know who your users are, making it easier to identify duplicate or fraudulent accounts, as well as to suspend a user when they engage in fraudulent activity. 

It’s important to note that under the INFORM Act, online marketplaces are now required to verify the identity of any seller who completes more than 200 sales or grosses at least $5,000 annually. Implementing identity verification to all sellers across the board makes it easier to comply with the law, and can even help root out bad actors well before they hit those thresholds. 

Reverification & two-factor authentication

Once you’ve verified the identity of a user, you can periodically reverify them at high-risk moments — for example, if a user tries to change their payment details, shipping address, contact information, or other sensitive account details, or does something unusual like sell a high number of items after a long period of dormancy. This can help you mitigate account takeover fraud on your platform or uncover a fraudulent seller hoping to fly under the radar. 

Implementing two-factor authentication can also be an effective measure against ATO fraud, making it more difficult for fraudsters to force their way into user accounts through phishing, password spraying, and credential stuffing attacks.

Link analysis

Link analysis is a data science technique used to understand how different accounts are related to one another. You can leverage link analysis to catch fraud before it happens.

Commonly, link analysis is used to look for accounts that share suspicious details which may be indicative of fraud — for example, an IP address, device fingerprint, or physical address. Likewise, you can use it to find accounts connected to known bad actors on your platform. This can help you quickly identify fraud rings on your platform and ban the affected accounts. 

How Persona can help 

We understand the damage auction fraud can inflict on your platform. That's why we’ve designed a fully customizable suite of identity tools you can use to fight fraud throughout your customer lifecycle. 

Use our Verifications product to design custom identity verification and reverification flows that make sense for your business and customers. Supplement these verifications with additional Reports to gain a fuller understanding of who your users are. Leverage Graph, our link analysis tool, to identify not just fraudulent accounts but broader rings they’re associated with — and quickly take action against entire networks. Automate as much or as little of the process as you want. 

Interested in learning more? Start for free or get a custom demo today.

Frequently asked questions

Is internet auction fraud preventable?

There are steps that you can take to make it more difficult for bad actors to defraud both your users and your platform. 

Auction fraud can take many different forms, and each of these types of fraud is best addressed through different means. If you operate an auction site, it’s important for you to understand the different forms of fraud that your business is susceptible to, and to implement a plan for mitigating each type. For many businesses, the most effective course of action is to layer together multiple anti-fraud measures, instead of relying on a single method, tool, or strategy.

What are the steps an online auction site can take to protect themselves from fraud?

How you mitigate fraud on your online auction site will depend on a number of different factors, including the types of fraud that you are dealing with, the expectations of your users, and how much friction you are willing to introduce into your platform in order to prevent fraud. 

Some anti-fraud steps that you can take include:

  • Verifying seller identity during onboarding, to act as an initial filter against fraud and comply with INFORM Act requirements
  • Implementing reverification and two-factor authentication, to mitigate account takeover fraud
  • Leveraging link analysis, to understand how different accounts on your platform are connected to one another and to uncover potential fraud rings
  • Deploy transaction monitoring, to identify and flag suspicious activity for manual review

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