The Inform Act, a new law that aims to curb organized retail theft and the sale of counterfeit and harmful products on online platforms, takes effect Tuesday as more retailers blame theft as a reason for lower profits. 

The bipartisan legislation, which stands for Integrity, Notification and Fairness in Online Retail Marketplaces, passed in December as part of an omnibus spending bill, more than a year after it was introduced by Reps. Jan Schakowsky, D-Ill., and Gus Bilirakis, R-Fla.

You Might Like

The identity of sellers on online marketplaces is typically unknown, but the new law seeks to change that. Under the Inform Act, web vendors such as Amazon and eBay will be required to verify and share information on third-party sellers that do a high volume of transactions on their platforms.

“The goal of the INFORM Consumers Act is to add more transparency to online transactions and to deter criminals from acquiring stolen, counterfeit, or unsafe items and selling them through those marketplaces,” the Federal Trade Commission, which will be tasked with enforcing the law along with state attorneys general, said on its website. 

“The Act also makes sure online marketplace users have a way to report suspicious conduct concerning high-volume third party sellers.”

Once the bill passed, online marketplaces were given six months to get into compliance. Now that the law has taken effect, they can face steep civil penalties for violations. 

The law comes after trade associations and retailers lobbied Congress about an alarming uptick in retail theft that they say was driven by lax regulations governing third-party sellers and verification processes on online platforms. They claim organized crime groups steal merchandise from stores and then resell it on online marketplaces, typically at a lower amount than the sticker price.

Many experts say organized retail theft has grown alongside the rise of online shopping, which boomed during the Covid pandemic and became the primary way consumers shopped.

During the second quarter of 2020, e-commerce sales in the U.S. accounted for 16.1% of total retail sales and reached $211.5 billion, a 44.5% increase from the prior-year period, according to Census data. E-commerce growth in the U.S. has since leveled out, but its share of sales has remained consistent.

In the first quarter of 2023, e-commerce in the U.S. accounted for 15.1% of total retail sales, and reached $272.6 billion, a 7.8% jump from the year-ago period.

While stolen or counterfeit goods make up a small fraction of those transactions, retail groups and law enforcement officials have increasingly called on legislators to address the problem. They’ve said it’s been difficult to catch bad actors who sell stolen goods online because their identities were shielded.

Criminals have been able to operate with “complete anonymity using fake screen names and fake addresses,” but the Inform Act will change that, Lisa LaBruno, senior executive vice president of retail operations at the Retail Industry Leaders Association, told CNBC.

“Under INFORM, online marketplaces can no longer turn a blind eye to criminal actors using their platforms to sell stolen and counterfeit goods. The FTC and state attorneys general will be empowered to hold these platforms accountable, and consumers will also have their own reporting mechanism to flag suspicious activity,” said LaBruno. “For retailers, INFORM’s implementation means we have more support and partners in the fight against organized retail crime.”

Online marketplaces are now required to collect, verify and disclose certain information about third-party sellers that have high transaction volumes on their platforms. 

The rules apply to sellers that had 200 or more separate sales or transactions and $5,000 or more in gross revenue in any continuous 12-month period during the past 24 months, according to the FTC. 

Digital marketplaces will now be required to collect bank account details, a tax ID number and contact information from relevant sellers and verify that information is correct within 10 days of a vendor reaching “high-volume” status. 

Individuals that carry out the relevant number of transactions will only be required to give their name, email address and phone number to the platforms. Legal entities and corporations will have to provide the same information. But they also have to give a copy of a valid government-issued ID or a valid government record or tax document that includes the business name and physical address of the seller.

Third-party vendors are required to keep the information current and certify it as accurate at least once a year. Marketplaces must disclose that information either in the sellers’ product listings or in order confirmations. 

The new law requires marketplaces to suspend sellers from the platform if they fail to disclose the required information. The marketplaces also have to provide a clear way for consumers to report suspicious conduct on product listings from relevant third-party vendors. 

For sellers that have annual gross revenues of $20,000 or more on a particular marketplace, the platforms must clearly disclose their information on product listing pages, or in order confirmation messages and account transaction histories on the platform. That data includes the name of the vendor or their business, and their address and contact information, including a phone number and email address. 

Many of the online marketplaces subject to the legislation are national, household names. But smaller, more niche platforms with relevant sellers and volume are covered, as well. 

The FTC and states will share enforcement authority of the Inform Act. 

Marketplaces found to have run afoul of the law could face civil penalties of $50,120 per violation. 

State attorneys general and other state officials can also file actions in federal court that could result in higher penalties from damages, restitution or other compensation, the FTC said. 

It’s not clear how the law will be enforced, or if the FTC will actively seek out violations or only respond to complaints made through the new reporting systems. 

The Buy Safe America Coalition, a group that advocates against the sale of stolen or counterfeit goods, sent a letter to the FTC this month urging the agency to “take immediate action” once the Inform Act takes effect. 

“While our respective organizations represent a diverse group of industries and interests, we are singularly united in our belief that INFORM must be fully enforced by the FTC (and the state AGs) to protect consumers and businesses from what has become a serious threat to consumers, honest businesses, and a fair and healthy marketplace,” the letter, signed by retailers including Gap, Home Depot, Walgreens and Best Buy, states. “We strongly encourage the FTC to act quickly and publicly to rigorously enforce the law.”

The group also offered its assistance to the FTC. 

A week before the measure took effect, the FTC sent a letter to 50 online marketplaces about their new obligations under the law and reminded them of the penalties associated with violations.

It urged the groups to communicate the new requirements to the sellers they work with and advise them on how to avoid “potential imposters” that could trick them into sharing personal or account information. 

“The Commission will enforce the Act to the fullest extent possible and will collaborate with our state partners to hold online marketplaces accountable,” Samuel Levine, the director of the FTC’s Bureau of Consumer Protection, said in a statement.

In a statement, a spokesperson for eBay said the company is “fully prepared” to comply with the new law.

“eBay fully supports transparency and is committed to a safe selling and buying experience for our customers,” the spokesperson said. “We were proud to support passage of the INFORM Act to create a national standard to protect consumers from bad actors who seek to misuse online marketplaces, while also ensuring important protections for sellers.”

Meta, Facebook’s parent company, told CNBC it has already rolled out a business verification tool for shops and sellers that meet the relevant threshold. 

Amazon has notified high-volume sellers that they must verify their information before the law takes effect in order to avoid getting kicked off the platform or having their funds frozen.

— Additional reporting by CNBC’s Annie Palmer.