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Investigation: How sellers exploit Amazon’s loopholes to sell unsafe products

Krystal Hu
Reporter

Amazon is having a “platform” problem, an issue shared by big tech peers like Facebook and Google’s YouTube.

The e-commerce giant, while branding itself “Earth’s most customer-centric company,” has been called out for product safety issues in its online marketplace. Numerous lawsuits have been filed, alleging products bought on Amazon.com are defective — for instance, causing a house to burn down or a person to go blind. A recent investigation by the Wall Street Journal found over 4,000 products sold on Amazon (AMZN) were deemed unsafe by federal agencies. U.S. senators have sent a letter questioning the company’s practices on product quality control.

As the commander-in-chief for its marketplace, Amazon is not catching up with bad actors and relies too much on algorithms to flag product issues, 10 third-party sellers from around the world and three former employees at the company told Yahoo Finance. They say that Amazon has a reactive system and fails to enforce its own rules, which some sources argue encourages third parties to risk selling non-compliant products. Some sellers revealed to Yahoo Finance how they exploit existing loopholes. Others expressed frustration as they feel Amazon is doing little to punish unfair competition practices, which allows unsafe products to proliferate on its platform.

Pricing race to the bottom

Amazon has been growing its online marketplace, which CEO Jeff Bezos says accounted for 58% of its total sales in 2018. By using Amazon services like Fulfillment by Amazon (FBA) to handle shipping and return, sellers don’t need to hold or see inventory before products have been delivered to customers' doorway.

A lot of sellers use FBA services to import products from foreign countries like China to Amazon warehouses in the U.S. Despite inspection at customs and Amazon warehouses, there is little check on safety issues. Amazon checks to see if a product is what it claims to be, but rarely tests if it actually works or if it complies with U.S. federal requirements, according to multiple sellers.

As the sheer amount of sellers and products flood into its platform, Amazon has adopted a reactive approach to regulating them. It’s easy for a seller to list a product on the site. Unless Amazon’s algorithm flags a product after the listing has been created or someone reports a listing for quality or brand infringement issues, a product can be sold on Amazon.

When asked for comment, Amazon directed Yahoo Finance to a blogpost published in August, in which the company claims it has “industry-leading safety and compliance program”.

“Every few minutes, our tools review the hundreds of millions of products, scan the more than five billion daily changes to product detail pages,” the post stated. “Our tools use natural language processing and machine learning, which means new information is fed into our tools daily so they can learn and constantly get better at proactively blocking suspicious products.”

Competitive prices and good reviews are critical for products on Amazon. In a pricing race to the bottom designed by Amazon and played by third-party sellers, sellers worry spending money testing products or buying insurance could eat into their margins. As a result, many sellers ignore such expenses to be able to provide the best offer.

Peter Koch, a Serbia-based seller who uses Fulfillment by Amazon to sell strollers on Amazon’s U.S. site, said he needs to pay an extra $300 for testing and certification for each shipment he imports from China, while some of his competitors skip the inspection to cut the cost.

Toys, for example, are required to come with certificates like Children's Product Certificate (CPC) to be sold to U.S. customers. On a Chinese seller forum, toy sellers are currently scrambling to figure out how to obtain such a certificate after they received a random check from Amazon related to products they had already been selling for a while. Rice Cheng, a founder of a Chinese seller community, attributes selling non-compliant products to ignorance of the foreign country’s safety requirements and negligent sellers who need to manage hundreds of products.

Amazon also requires sellers who generate more than $10,000 a month in sales to carry product liability insurance in the “terms of services.” But several sellers who spoke to Yahoo Finance say Amazon never checks it or asks for it.

“We used to have [insurance] in the past. And now, it's becoming to this point where a lot of times it's easier to shut down your company than actually get product liability insurance. So that's how most companies are acting on Amazon,” said Dave Bryant, a Vancouver-based longtime Amazon seller who also runs a company on advising other sellers.

Heather Oberdorf, an Amazon customer who bought a dog collar with a retractable leash from a third-party seller, says she became blinded in her left eye when the leash broke. Her lawyer, Dave Wilk, argues Amazon should be held responsible for her injury since the product did not have insurance. The U.S. Court of Appeals for the Third Circuit in Philadelphia has ruled Amazon could be held liable as a product “seller,” but Amazon has asked for the court to review the decision.

The listing you see is not what you buy

When customers browse a product page on Amazon, chances are there is a line on the right side of the page saying “also available from other sellers.” After clicking on the link, customers can see a list of sellers that provide the same product for different prices and different shipping options.

Amazon says it groups variations of the same product onto one detail page so customers have an easy and intuitive shopping experience. With such a feature, listing pages for any search results are not flooded with identical products, and it pushes sellers to compete with each other in a more direct format to make better offers.

Amazon merges the 75 listings of the alarm. But no one checks if they are all selling the same product. (Screenshot/Yahoo Finance)

Sellers can upload any products they claim to be the same without any due diligence on Amazon’s part. Some ill-intentioned sellers can take over the listing by selling a counterfeit or low-quality version of the product, masking it in different colors or sizes.

“This is one of the biggest loopholes on Amazon to exploit. There are so many ways to play with it,” said a Chinese seller who asks to be anonymous.

The practice, known as hijacked listings, has upset customers as well as legitimate sellers, because customers who place an order from the hijacker would receive a counterfeit or low-quality product. Instead of leaving a negative review on the hijacked listing, the user will leave the bad review for the seller with the original listing who is not responsible for the defective product.

In a statement, Amazon said bad actors that try to break its trust and abuse its systems make up a tiny fraction of activity on the site.

“We are making it increasingly difficult for bad actors to hide. We block bad actors before they reach our site and we work with sellers and law enforcement to hold them accountable by withholding funds and pursuing civil and criminal penalties,” an Amazon spokesperson told Yahoo Finance. “These bad actors show a flagrant disregard for our community, our policies, and in some cases, the law, and do not reflect the flourishing community of honest entrepreneurs that make up the vast majority of our sellers.”

Only Amazon can fix it

Several sellers expressed frustration over the listings hijack issues, because sellers don’t have the ability to edit or remove listings, which Amazon controls. Any issues with the listings need to be reported to Amazon to investigate. This reporting-based system creates loopholes that allow bad actors to manipulate sellers' listings without immediate consequences, some sellers argue.

On Amazon sellers’ forum, many complain about Amazon’s delayed response to complaints. It could take weeks for Amazon to investigate and respond and they may eventually take down the illicit listings, sellers say. But at that point, the potential sales are already lost.

“We work hard to support the millions of entrepreneurs worldwide that sell through our store, Amazon said in a a statement. “Our teams are based in our Seattle headquarters and around the globe in order to provide sellers with quick, 24/7 support via email, phone, and chat.”

The reviews sections about an adaptor sold on Amazon is about an iPad case in a different color.

“If Amazon does finally decide you are a hijacker and selling inauthentic items, they will withhold the funds from you. So Amazon wins in the end. The customer never notices,” said a seller whose listings have been attacked and asks to be anonymous for fear for retribution from Amazon.

Amazon told Yahoo Finance that it reacts quickly to take down counterfeit goods. “Amazon strictly prohibits counterfeit goods and more than 99.9% of pages viewed by our customers did not have an infringement concern. We take counterfeit seriously and pursue criminal and civil litigation against bad actors that attempt to evade our systems,” an Amazon spokesperson said.

What’s worse is bad actors can attack competitors by flooding Amazon’s investigation team with false infringement complaints. But Amazon doesn’t have a good system to tell whether the complaints are from sellers with a good track record or those simply using it to attack their competitors, according to Rachel Johnson Greer, a former Amazon employee who now runs Seattle-based Cascadia Seller Solutions.

Some sellers also use the loophole to fake reviews, one of the most important metrics for purchasing decisions. They could sell on top of an inactive listing with many reviews, so that a new product can take over the reviews, even though they are not relevant to the product. This doesn't help consumers make purchase decisions and impedes fair competition in the marketplace.

“The problem is not so much that black hats exist, they'll always exist. The problem is that Amazon isn't catching this behavior and doing something about it,” said Chris McCabe, a former Amazon employee who now works as a consultant for sellers.

The punishment for Chinese sellers is limited

Amazon’s innocent-until-proven-guilty approach helped the boom of its platform as third-party sellers have grown to take over half of the company’s sales. Stock keeping units (SKU) have expanded exponentially now that foreign sellers can sell to countries outside of its own.

Amazon opened the door to global selling opportunities for Chinese sellers in 2012. The move greatly benefitted Chinese sellers, who are close to the manufacturing hub and already home to many products. Among the top 10,000 Amazon sellers in the U.S. who sell at least $1 million or more annually, at least 40% of them are based in China, according to Marketplace Pulse.

On Oct. 26th, 2017, Amazon launches a "cross-border e-commerce park" in partnership with the government in Hangzhou, China. (Credit: Amazon)

If a seller’s account is involved with potential fraud actions, the account could face suspension. The move could be devastating and is supposed to discourage sellers from violating the rules, because Amazon explicitly prohibits sellers from registering multiple accounts. If a seller loses an account, it could effectively mean a seller is banned from the platform. When the seller tries to register with the same address, card information or IP address, it could raise a red flag for Amazon’s system and fail.

Amazon says its new seller account vetting “includes a number of verifications and uses proprietary machine learning technology that stops bad actors before they can register or list a single product in our store.”

But some e-commerce companies dedicated to selling products on Amazon see this as a reminder of the importance of having multiple Amazon accounts. They have come up with ways to establish multiple accounts that can’t be detected by Amazon, which involve using different VPNs and fake addresses.

An employee at a selling company in Henan, China told Yahoo Finance his team runs 38 seller accounts. In China’s sellers' groups, an active Amazon seller account for selling to the U.S. can be sold for around 6000 yuan ($840 USD).

Chinese sellers who don’t have established operations in the U.S. are more likely to take risks to violate Amazon’s rules, including selling unsafe products, according to experts. Lawyers say that since Chinese-based sellers don't need to submit themselves to the jurisdiction of U.S. courts, they are less likely to be sued by Amazon and customers.

“I look at the real crux of the matter, is that people who are headquartered in the U.S., or at least have significant assets in the U.S., tend to be a lot more careful about following rules,” said Greer. “I think it's the legal and liability risks, because when you have something to sue or you have assets to seize, then you run a risk of not complying.”

In Oberdorf’s case, the dog leash seller registered with a fake U.S. address. Amazon sent someone to Nevada to knock on the door of the address on file, but still wasn’t able to find the seller. It’s unclear if the seller is based in China.

“They’ve grown without any kind of effort to control the monster they're creating. And so now, it's out of control,” her lawyer, Wilk, said. “Amazon wants to say how can we be expected to keep track of all this stuff? Well, you're the one that's making $43 billion a year on third party sales. I think it's going to be on you, not on the people who buy bad product.”

The story has been updated with statement from Amazon.

Do you think Amazon should change its way of managing the marketplace? Write to Krystal Hu via krystalh@yahoofinance.com or follow her on Twitter.

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