By Geoffrey A. Fowler

EBay’s PayPal kicked off the Web 2.0 Expo in San Francisco Wednesday with a frightening presentation on the “arms race” between online fraudsters and online retailers and shoppers.

Online fraud is becoming so lucrative, said Katherine Hutchison, PayPal’s senior director of global risk management, that it has developed into an industry with specialized players that hire each others in areas such as harvesting credit card numbers and freight forwarding. “A single professional thief doesn’t have to have all of the skills needed to commit fraud,” she said.

Here’s one trick: fraudsters use telephone services designed for the deaf to get an operator with a friendly (and middle-American) sounding voice to make calls on their behalf to a call center. “The telephone operator could realize this is very likely to be fraud, but they are legally blocked from saying anything other than what the person placing the call tells them to say,” said Hutchison.

Old techniques to track down fraudsters are becoming less helpful, she added. For example, e-commerce sites regularly check the location of an IP address making a purchase to see if they’re coming from a known high-risk place or see if they’re trying to buy something far away from where they’re asking for it to be delivered. But increasingly fraudsters hide their location by using satellite-based Internet service providers, or use “zombie” computers to reroute their traffic so it looks like it is coming from someplace harmless.

Worse, the recession seems to be contributing to the problem. Hutchison said that consolidation of the banking industry has confused consumers and made many them susceptible to attacks from fraudsters who got them to hand over account information by pretending to be from a new bank that needed to confirm their address and other account details.

Layoffs of technically minded people around the world are also contributing to a spike in sophisticated online fraud, she said. “You always see white collar crime go up when we have a recession,” said Hutchison.

PayPal makes money by selling a transaction service to e-commerce sites and consumers that make them feel more secure with online sales, so the company has a stake in all this. But Hutchison admits that efforts to stop fraud can cause problems for businesses if they go too far, by annoying or turning away legitimate customers, especially outside of the U.S.

“There are some legitimate Nigerian shoppers, but it is very difficult to shop on the Internet if you live in Nigeria,” said Hutchison.