If you can't inspect a product in person, as is what happens when you order online, reviews become important. Fake reviews are problematic, both for consumers who rely on reviews to make a purchasing decision and for retailers who want consumers to trust their brand. If consumers can't trust Amazon (NASDAQ: AMZN), reluctance to shop there could set in. So why is Amazon allowing (by not banning) Chinese sellers to post fake reviews? And what does this mean for investors?
What's been happening
Amazon says it forbids fake reviews, and indeed, Amazon has banned "several" top Chinese sellers for rule violations, some of which were big sellers that represented over $1 billion in merchandise value, like Mpow and Aukey.
But -- and this is a huge "but " -- China's portion of Amazon's sales are between 30% and 40%, or $10 billion at the high end. So if you do the math, Amazon is allowing far more Chinese retailers to conduct business than it's banning. Why?
Amazon prioritizes seller count and high gross sales over seller screening. Of course, not all Chinese retailers engage in the fake review scheme. But it's a likely assumption that Amazon isn't banning all Chinese retailers that engage in fake review scams. And that's where the Federal Trade Commission (FTC) comes in.
Why the FTC warned Amazon
Although Amazon has cracked down on some Chinese merchants that were notoriously engaging in fake reviews, the FTC needed to step in to make at least one of those bans happen. Amazon has apparently not been enforcing its no-fake-review policy evenly. In other words, it appears Amazon is letting a lot of sellers get away with their deceptive practices.
Fake review scam exposed by cybersecurity team
A cybersecurity team called SafetyDetectives found evidence of a huge organized fake review scam thought to originate in China. (All internal communications were in Chinese.)
According to SafetyDetectives, "The server contained a treasure trove of direct messages between Amazon vendors and customers willing to provide fake reviews in exchange for free products."
The scam is widespread. SafetyDetectives found over 13 million of these records, which could implicate over 200,000 people. And that's not counting everyone, as only people who use Gmail were counted. Once you consider other mail providers, like Outlook, the number is probably far greater than 200,000.
The team at SafetyDetectives also says it's "confident" some interactions were taking place, not only through email but also by messaging apps on Facebook, making it more difficult for Amazon to detect.
How the fake review business works
Amazon sellers who engage in the fake review business want positive 5-star reviews for their products, and they get this by offering free products in exchange for a review, something like this real advertisement uncovered by SafetyDetectives: "Do you wanna join our Review Reward Program and participate in awesome Free product trials."
Some consumers/reviewers understand this is a scam, and others might not. The fact is, though, it's illegal to post a fake review in return for compensation, and the more an individual does this, the worse the punishment could be. But the real culprits are the sellers who are paying off consumers and the vehicles (Amazon) that allow this practice to happen.
The Millionacres bottom line
Chinese merchants represent 75% of Amazon's new sellers this year, up from 47% last year. While American sellers represent most of Amazon's total sales currently, the tide might be turning. When Amazon was asked about this fake review business, a spokesperson wouldn't respond when asked multiple times if enforcement is doled out evenly among violators. All this should make investors raise an eyebrow at the business practices of many Chinese merchants and likely others who sell on Amazon.