Black Market Billions: How Organized Retail Crime Funds Global Terrorists (Gal Zentner's Library) (2 page)

Legal Issues: Defining ORC Versus Shoplifting and Shrinkage

Regulating the Resale Market

Chapter 11 Letting the Bad Guy Get Away

Regulation Epic Fail: How Banking BSAs and AML Programs Let Terrorist Funding Slip Through the Cracks

Continued Failure to Regulate IFTs: The Costs to Local and Federal Governments as Well as Retailers

Failure to Regulate Hawalas

IFTs Get Sophisticated: Stored Value Cards

Bulk Cash Smuggling Comes in a Smaller Package

Retailers Feel the Pain of SVC Fraud

Credit Card Fraud Is Even Worse

RICO Defined

Why ORC Rings Still Exist: Money Laundering and the RICO Statute

More Problems with RICO: It’s in the Definition

Laws That Once Protected Potential Terrorists Have Changed

Defining “Material Support” and “Coordination”

Epilogue

Glossary

Endnotes

Index

Acknowledgments

Like many large projects, writing a book takes the support of many great people.
Black Market Billions
could not have been written without the indefatigable help and support of many people in the public sector, including the Los Angeles Police Department, Albuquerque Police Department, Immigration and Customs Enforcement, the Federal Bureau of Investigation, the National Retail Federation, the Secret Service, and the Retail Industry Leaders Association. Captain Bill Williams and Detective Kent Oda of the Commercial Crimes Division put their trust in me based on a quick in-person conversation and a lengthy e-mail. They gave me unprecedented access to people, places, and divisions for days on end. Thanks to Kevin Tyrrell at Immigration and Customs Enforcement and to Cori Bassett, who took the time and had the patience to set up meetings, explain every little detail about money laundering instruments, and advise me on overseas travel to undisclosed locations. Karen Fischer and Commander Harold Prudencio also allowed me to come behind the doors of the APD, letting me ask questions about cases, incidents, and people who had never been discussed with outside sources.

This book started out as an idea based on an instant-message conversation I had with a former colleague. But the foundation of the research came from Joe LaRocca and Kathy Grannis at the National Retail Federation, as well as Elizabeth Jennings at the Retail Industry Leaders Association. These retail industry stars helped me sort through piles of documents, countless reports, and congressional testimony to get to the right sources. From the private sector, I cannot thank Jerry Biggs and Gary Weisbecker from the loss prevention team at Walgreens enough. The number of hours spent on the phone discussing, strategizing, and helping me understand how an organized retail crime group works, from the psychology of a Level 1 booster and
fence to a Level 3 shell warehouse owner, was instrumental in creating the foundation for this book. Likewise, I owe a large amount of gratitude to the public relations and loss prevention teams at LVMH, Deckers, eBay, Target, and Limited Brands for fielding questions and requests for interviews and making sure every fact was correct.

I interviewed hundreds of sources, many on background, who helped me “follow the money,” so to speak. Although the majority of them requested anonymity, I would like to thank Professor Willam Martel at the Fletcher School of Law and Diplomacy for reviewing chapters, adding input, and convincing me “not to bury the lede.” Likewise, Kris Buckner’s input and wealth of information on the counterfeiting industry was insurmountable. And to my anonymous sources, thank you for your help.

Behind every good author is a great editor, and Jeanne Glasser is the best. The book would not have happened if it weren’t for her editorial advice, foresight, and direction. Through Jeanne I not only gained inspiration, but I made a friend for life. Thank you to the editorial and production team at Pearson North America: Tim Moore, Russ Hall, Jess DeGabriele, and Jovana Shirley. Their hard work in the last stages of the book got us to the finish line. I was lucky enough to have Molly Novero agree to be my research assistant even though she was a full-time law student. Words cannot express how grateful I am for her dedication and hours spent going through thousands of court documents, tracking down the names of attorneys, and interpreting Supreme Court decisions for me. Thank you to Adam Kirschner, Nik Deogun, and Nick Dunn for having the faith in me that I could be on television, run a research company, and write a book at the same time. And, I wanted to give an extra special thank you to my colleagues at Bloomberg Television, especially to Mark White, Dan Colarusso, Andrew Morse, and Andy Lack for their support.

Last, but not least, I want to thank my friends and family for their love and support. To my parents, Sonia, Giri and Betsy, Michele P. and Nathan B., Andrew T., Sarah Mary, Stacey S., RKB, Lori, Meena,
Shane, Megan A., Alexis R., Ernest, and Fero, thank you for being there at all hours of the night and day to listen to my ideas, offer advice, make me laugh, and, when needed, offer a shoulder to cry on. To my teachers Jon B., Liz M., and Kim N. for imparting your writing wisdom on me throughout the years. And to Seth. This book happened because you are my rock, love, and light. Thank you.

About the Author

Hitha Prabhakar
is a New York-based reporter for Bloomberg Television, covering business news and financial markets with a particular focus on retail. Before joining Bloomberg Television in 2011, Prabhakar was founder and principal of The Stylefile Group, a retail consulting firm based in New York City, where she served as an advisor to hedge funds and other clients with long-term holdings in retail companies. Prior to that, Prabhakar served as a retail reporter for Forbes Media, covering the luxury industry as well as men’s fashion. She has written for
Time
,
People
, MSNBC.com,
ELLE India
, and Metro newspapers, among other publications. Prabhakar was formerly a contributor on CNBC and has had numerous television appearances as a retail analyst on networks including CBS, CNN, Fox News, Sky News, and Bravo. She holds degrees in philosophy and economics from Smith College and a master’s degree from Columbia University Graduate School of Journalism. She also studied at the London School of Economics.

Introduction

Was he kidding?

Sitting at my computer on December 26, 2007, I couldn’t believe what I was reading in my instant message window. I was checking my e-mail when a bizarre series of messages
¹
from a former colleague and friend appeared like a flashing For Sale sign in the middle of my screen. (I’ve changed my contact’s name and IM address to protect his identity, as well as that of the retailer in question.)

HermCGC: Did i ever tell you i have hook ups sometimes with bags?

I had no idea what that meant. Did Herman have a direct connection to Marc Jacobs? Did he lose his job in the IT department of my former company and get a job at Neiman Marcus? Did he have some inside track to a sample sale unknown to fashion insiders? I had to find out.

Having covered the retail and fashion industry the majority of my career, I had heard of fashionistas acquiring merchandise through less-than-legitimate sources. There was always a friend of a friend who worked at a luxury designer who had a glut of last year’s “it” handbag that didn’t sell well and who was trying to get rid of them so that she didn’t have 20 of the same handbag in her closet. I’d also heard of “handbag parties,” usually hosted by a middle-aged mom in a fancy apartment or home. She would somehow get ahold of 40 or 50 real Fendi, Coach, or Louis Vuitton handbags, or in some cases fakes, and sell them to her friends while they ate paté topped Wasa crackers and drank Dom Perignon. I never inquired where these bags came from because, quite frankly, I wasn’t interested in buying them. But, for some reason, I had to know what Herman meant when he said, “when i need a hookup its there for me.”

When Herman confirmed that stealing from a luxury retailer was not uncommon and that the entire staff was stealing from the store, I knew there was more to the story. This wasn’t a minor case of petty employee theft. Clearly a theft ring was at work. I had to find out who was behind it, why it was so easy to steal the merchandise, and, more importantly, what they were doing with the proceeds once the merchandise was sold. I couldn’t understand how a retailer that had such high-end clientele was skimping on the most basic fixed cost a retailer could have: good security.

“Stores literally go out of business because of theft,” says Alan Herbach, president at American Theft Prevention Products, in an interview with me. “And the more technology you add [to the item], the more expensive it is. Someone is not going to put a $10 security tag on a $50 coat and pass the price hike on to the customer. They would rather have the merchandise sit out unprotected than put on an additional cost.”

I found out two facts as I did more research. First, it wasn’t just the store where Herman’s hookup worked that was having a security problem. It was retailers from Walgreens to Bloomingdale’s. Second, this kind of theft had a name: organized retail crime (ORC).

Organized crime has been a part of the American and global landscape for centuries. Back in the 1800s, Italian crime families started to surface and weave their way into the global economic fabric.
Although extortion, bootlegging alcohol, and having shell businesses fronting for illegal activity are often affiliated with crime rings, ORC has started gaining traction. On the surface, ORC looks like your average petty theft, often equated with shoplifting. However, this brand of crime costs retailers nearly $30 billion a year. And states lose billions more in sales taxes. (Ohio, for example, recently reported $61 billion in lost sales taxes due to retail theft.
²
) This is a lot more damaging than just a couple items being lifted from a store.

Since 9/11, ORC has grown exponentially, with the global recession as a catalyst. Crime ring members realized (like Herman and his criminal cohorts) that unsuspecting women like me hadn’t lost the desire to carry around an expensive handbag just because the economy was tanking. On a different level, these crime rings also realized that parents who were losing their jobs and being forced to cut back on staples such as baby formula were seeking deals on over-the-counter drugs and beauty items as mundane as Crest White Strips and Prilosec OTC.

“Why would anyone care if people are buying stolen merchandise at cheaper prices?” asked a friend over lunch one day.

She admitted purchasing makeup at a local makeup wholesaler in midtown Manhattan, and she didn’t see anything wrong with doing so. It was true: the American consumer’s purchasing psyche had changed as stock prices dropped and unemployment rates hit their highest levels since the Great Depression. During the recession, it was every person for himself. Uncertainty dominated how people spent. Most importantly, it was all about saving as much as you could. So why would anyone care when the objective was conserving dollars? But while the consumer was busy pinching pennies, something more sinister was going on that would have a significant impact on the economy at a global, national, and individual level.

Retailers and consumers were being duped by sophisticated schemes created by ORC rings. These rings were communicating via the Internet, disposable cell phones, and social media to move stolen
merchandise from the store to a warehouse and back to another seemingly legitimate retailer within hours. These schemes had opened the floodgates for international criminals based in the U.S. to steal upwards of $2 million in merchandise in one hit alone. The worst part was that these crime rings were funding terrorist cells such as Hezbollah, the IRA, Hamas, Harkat-ul-Mujahideen, and al Qaeda. That’s right—the discounted designer handbags, soap, and baby formula that people were buying to save a buck were funding terrorism. To prove it, I decided to follow the money trail.