Phone "Phreakers" Steal Minutes

The telephone industry has been in an upheaval ever since upstarts began competing with the big telecoms by sending voice calls over the Internet. Now even big firms use so-called voice over Internet protocol. But VoIP is not as secure as the old-fashioned phone lines—as carriers that rely on the Internet are finding out. They are increasingly falling prey to "phreakers," who steal their minutes and resell them on a thriving black market.

Of course, anybody with a PC and an Internet connection can talk free of charge to another PC user. For the telecoms, the profit is in using VoIP to deliver calls from one telephone to another. That requires a "gateway" server to connect a carrier's telephone network to the Internet. Phreakers break into these gateways, steal "voice minutes" and sell them to other, usually smaller, telecoms. Many of these firms then sell printed phone cards, operate call centers or run phone boutiques. "It's a great racket," says Justin Newman, CEO of BinFone Telecom of Baltimore, which has been stung by phreakers.

These thieves steal 200 million minutes a month, worth $26 million, says New York telecom Stealth Communications. With more than 5,000 wholesale-minutes markets worldwide, located mainly on Internet forums, fraud is hard to track. Emmanuel Gadaix, head of TSTF, a Hong Kong firm that investigates VoIP thefts, says it's "very easy to set up a temporary link" through a hacked gateway. His company was recently hired by a Panamanian telecom that lost $110,000 to phreakers. TSTF followed tracks, in vain, that snaked through Bulgaria, Canada, Costa Rica, Hong Kong and the United States. Phreaker trails are "way too complicated" to track successfully, says Gadaix.

The hackers use one of hundreds of cheap, illicit phreaker programs. One source says he wrote a program, Lesion, in a few weeks and sells it for $10,000. Small telecoms, which lack the money for secure gateways, are "constantly under attack," says Marco Ivaldi, a telecom expert in Turin, Italy.

For protection, telecoms are turning to private VoIP networks, separate from the public Internet. More than 1,000 telecoms, including AT&T, SunRocket and China Telecom, now buy and sell minutes on a network owned by Stealth Communications. It carried more than 10 percent of all VoIP traffic last year, a sevenfold increase over 2005. That percentage is expected to keep growing.