Is Google profiting from illegal ads?

They’re impossible to miss online: all those ads hawking cheap drugs, penny stock fortunes, low mortgage rates and instant wrinkle-zapping solutions. For consumers, it’s not always obvious which operators are legitimate.

Search companies such as Google say they work hard to make sure ads that run alongside their search results are law-biding businesses. But government investigators have raised questions about whether Google and other major search engines have profited from selling ads to illegal online companies.

Critics say consumers can be left in the lurch, while companies profit from selling ads.

Internet companies can be liable for any ads run on their sites that violate U.S. law. The Justice Department and other federal agencies are investigating Google for accepting ads from illegal online pharmacies. The company has set aside $500 million for a potential settlement of the criminal probe.

Illegal drug sales are only one in a long list of shady activities that search engines are supposed to police when they sell their ads. Observers have pointed out other problematic activities that can turn up in online ads, including online gambling and fraudulent mortgage modifications, as well as the sale of pirated movies and goods.

Last year, Google generated 96 percent of its revenue from advertisers. The heart of the company’s business is an auction program that allows advertisers to place ads on Google Web sites. Companies bid on keywords and then pay Google when a user clicks on one of their ads.

“There are whole businesses that only exist because they buy traffic from Google,” said Ben Edelman, an assistant professor at Harvard Business School who consults for some of Google’s competitors, including Microsoft. “But Google is the primary beneficiary. Google does very, very well selling them the traffic.”

The process works through a combination of self-service and direct contact with Google employees, a Google spokeswoman said.

“Google has a natural long-term financial incentive to make sure that the advertisements we serve are trustworthy,” Diana Adair, a company spokeswoman, said in an e-mail. “We aren’t afraid to take aggressive action to achieve that goal.”

But some analysts and critics wonder whether Google’s automated ad auctions are fail-safe.

“By definition, if you have this automated system, it’s going to be perhaps more vulnerable in certain ways to these kinds of transgressions,” said Scott Kessler, a Standard & Poor’s equity analyst.

The nonprofit group Consumer Watchdog released a report this year tracking ads on Google’s site that preyed on consumers looking for mortgage modifications. The report called Google “a prominent beneficiary of the national home loan and foreclosure crisis of the past two years.”

The group looked up companies advertising on Google and found some falsely claiming to be affiliated with the U.S. government. Others required customers to give up personal financial information before referring them elsewhere, a practice that the report said raises privacy concerns. And a handful of companies required customers to buy credit reports before offering any assistance.

“There’s all kinds of ads that are sleazy at best and some of them fraudulent that run all the time on Google, and Google gets paid for them,” John Simpson of Consumer Watchdog said.

Google declined to comment on the investigation, but the company said it rigorously enforces its standards policies for ads. Many products and activities are banned from being advertised, including “get rich quick” schemes, counterfeit goods, fake IDs and cigarettes.

Google has acknowledged problems keeping so-called rogue pharmacies from advertising on its site. The company filed suit last fall against several operators that it said were violating its ad policies. One executive has described the battle against illegal online pharmacies as an “ongoing, escalating cat and mouse game.”

In December, Google said it was forming a group with Microsoft, Yahoo and others to combat illegal online pharmacies.

In an e-mailed statement, Jack Evans, a spokesman for Microsoft, said: “We have not been contacted by DOJ regarding the Google investigation reported last week.” He also noted that the company bans ads that promote illegal activities.

Yahoo did not respond to a request for public comment.

The online pharmacy investigation by the Justice Department is not the first time government officials have looked into advertising practices at search companies. In 2007, Microsoft, Google and Yahoo agreed to pay $31.5 million in fines to resolve charges they promoted illegal gambling by receiving payments for ads.

Jia Lynn Yang is a staff writer at The Washington Post who covers policy and business. Before joining the Post, she worked at Fortune magazine.
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