Fraud Prevention Blog

Apr. 01, 2013 - Red Flag Rules - Myths & Misconceptions

Posted by Sean Trundy on Mon, Apr 01, 2013 @ 09:19 AM

counterfeit moneySince the FTC announcement of expanded identity fraud countermeasures, commonly called the Red Flag Rules, there has been much confusion from consumers on what it means for them. This is understandable, since the FTC's own vague language mentions only “creditors” and “covered accounts” and is generally written in a language drier than the Sahara at noon. So here to dispel the confusion and correct some of the more common misconceptions we found from commentators on The Consumeristwebsite, is our list of FAQs on the FTC's decision.


1)    The rules state that any business that takes payment after the purchase of a product or service. Doesn't just about any small business do that? Will the mom-and-pop restaurant where I eat and my hairstylist be asking me for ID?

The confusion here is about “payment after” the purchase. This doesn't apply to businesses where you pay your tab before you leaving. Only businesses that allow customers to pay later – as in
ID Theft Statisticsweeks or months after the purchase – are subject to these rules. In other words, business that extend credit to their customers. Unless you have a written agreement with your restaurant to gladly pay them Tuesday for a hamburger today, you will not need to whip out your ID.

2)    Do I still have to show my ID if I don't buy on credit and pay everything in full with cash?

This largely depends on the business or organization you are dealing with. The FTC only requires businesses that routinely extend credit to customers to have a program in place to verify the customers' identities. It does not necessarily require an ID check from everyone regardless of the transaction. Chances are if you pay in cash, you will not need to show your ID (important to note: this applies to purchases under $10,000; anything over will trigger another law requiring identification). Same thing applies if you take out credit from a business that already knows who you are: your identity there is already established.

3)    What about buying pre-paid services?

The answer is, again, it depends. The critical factor with pre-paids is whether there is an “ongoing relationship” between the services vendor and the consumer. For example, the FTC considers pre-paid gift cards to fall outside the Red Flag Rules since they are used only once. On the other hand, gift cards or accounts that can be refilled constitute an ongoing relationship and require ID verification. That likely includes pre-paid cellphones, since they can be used month after month, so that life of crime you're considering is about to get a lot more tough. 

4)    This new requirement is an invasion of privacy!

To sum up the previous points, you show your ID only under the following two conditions: taking out a line of credit AND taking that line of credit from a company that frequently lends to its customers. If only one of two are met, like shopping at a big-name store (assuming you pay in full before you leave), or paying your babysitter the following week, your ID can stay in your wallet. And when you are taking out credit from an established lender, proving you are who you say you are is not an invasion of your privacy; it's just common sense.

Compliance To The Bank Secrecy Act

Topics: identity theft, red flag rules, verification of ID

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