Black Market Billions: How Organized Retail Crime Funds Global Terrorists (Gal Zentner's Library) (9 page)

It’s hard for me not to wonder what the impact on the stores would be. Consumers thought they benefitted from purchasing lower priced items, but the benefit came to a screeching halt when retailers realized how much revenue they were losing from ORC. Someone had to make up the cost and it wasn’t coming from the bottom lines of the retailer’s balance sheets.

3. The Cost to the Stores

It happened again.

During a routine investigation in 2008 of a reported shoplifting incident at the Arden Fair Mall in Sacramento, California, Captain Daniel Hahn noticed there was more to the reported rip-off. The theft was part of a series of thefts carried out over a nine-month period by a group, not an individual. As Hahn delved deeper into the situation, he realized that what was deemed by store security as “a minor shoplifting infraction” executed by one person was actually part of a larger ring of people. They could steal an estimated $46,000 worth of merchandise in three months, making the grand total $138,000.
¹

“This wasn’t the first time I’ve seen something like this happen with retailers,” Hahn told me,
²
shaking his head in disbelief. “Store security, loss prevention executives, even store management think one-off ‘shoplifting’ situations aren’t part of a larger organizational scheme and end up getting swindled for millions of dollars.”

When Hahn totaled all the estimated losses from theft at the store in a year, he realized the store had lost nearly $3 million to ORC from this ring alone.

“In this recession, that kind of loss can be the difference between a store staying open and closing down,” he explains.

The lack of communication between government agencies, law enforcement, and retailers is one of the main reasons profit loss occurs. This scenario benefits, in part, an underground network of terrorist financing. The problem starts at the foundation. Internal,
external, and operational theft combine with a failure to exchange information between employees and managers. As well, retail loss prevention managers don’t share information with law enforcement.

The Blame Game

According to an NRF (National Retail Federation) survey from 2010, retailers lost $33.5 billion to “shrinkage”
³
—a term that refers to losses from internal theft, shoplifting, and other external criminal activity. What’s more, only 49% of senior management in retailers have a firm grasp of how much is being stolen—the who, what, where, and when, as well as the seriousness of this issue—despite the billions in losses due to theft. The blame game goes on, with agencies such as the FBI, for example, blaming cargo fleets (such as semi-trucks and other shippers) for “not cleaning up their own businesses” when it comes to who is responsible for internal and external theft in addition to cargo theft.
⁴
Private fleet companies in turn blame law enforcement for not taking a more active role in identifying and prosecuting criminals. The circle of blame not only leads to losses, it also allows dangerous loopholes to exist where terrorist financing becomes easier to accomplish and nearly impossible to trace.

In many instances, a lapse in due diligence by retail companies leads to the establishment of crime rings and funding of potential terrorist organizations. According to the Department of Commerce, 75% of employee theft goes unnoticed.
⁵

And I couldn’t believe how widespread the problem has become.

Insider Information: Employee Theft and ORC

Let’s go back to the instant message I got late in the afternoon of December 26, 2007 from a former colleague. When he asked if I wanted to purchase designer handbags for $300 and $400 that his
friend had stolen from Barneys, I started to think about how these rings are run. His admitting to me that his friend was part of a larger ring at a high-end department store like Barneys was a story—and one that I planned on delving into. What struck me most about the conversation was that he said, “It happens all the time.” If it was such a common occurrence, how much were stores losing in terms of revenue unbeknownst to them? “Rings are created within stores among friends,” my former colleague explained. His friend happened to be the leader of the ring and had three or four people, all employees of Barneys, working with him. Like most ORC rings, this one was based on trust. The head of the ring recruited people with whom he had worked for at least a year. All members worked in different departments and hardly spoke to each other while they were working to give the illusion that they didn’t really know each other. Outside the store, however, it was a different story. The group spoke daily through instant messaging (IM) chats or conference calls to talk about how many bags they’d sold that week and, most importantly, when the new shipments were coming in. Between the five of them, they were making $20,000 a week.

The Barneys New York ring was stealing primarily from the warehouses. In most cases, ORC is more prevalent in some stores than in others because of physical factors, such as type of merchandise, location of the store, and how the store is laid out. Items that can be easily lifted, concealed, sold, and repackaged are more likely to be stolen. Bigger items, such as furniture and large electronics, have low shoplifting rates. However, they tend to get lifted in cargo theft. Larger items that get lifted tend to follow the same pattern of demand as smaller items. “Hot products,” a term coined by Ronald V. Clarke, professor of criminal justice at Rutgers University, are products that spark mini-crime waves due to their popularity. In the case of the Barneys crime ring in 2007, the Lanvin Olga Sac and the Givenchy Grained Leather Bettina handbags were the “it” bags of the year. The following year, the Chanel 2.55 and Balenciaga motorcycle bag were the hot items.

Timothy Elliot, a former spokesperson from Barneys, said in an official statement, “Barneys does not comment on matters having to do with LP,”
⁶
but longtime employees confirmed ORC has been going on for years. “The store [Barneys] is one of the easiest places to steal from because they don’t have proper checks in the warehouses as well as on the floor,” says my source. “Tags can easily be removed and discarded in a matter of seconds, and merchandise can be put in bags or even carried out of the store without anyone in security or management noticing.”

Apart from Barneys, everyday retailers also stock items that have good resale value. For example, designer clothing, Benadryl, Crest White Strips, Prilosec, gift cards, electronics, DVDs, CDs, razor blades, over-the-counter medicines, beauty care items, and Similac baby formula
⁷
are often stolen by theft rings.

If a retailer is near a major highway or port, this allows ORC criminals easy access to get into the store, steal the merchandise, and make a quick escape within minutes. The store’s layout also is a factor. If a store has multiple exits, without an employee or security guard nearby, or has many items on shelves in blind spots that help conceal boosters, theft increases. Without even realizing it, stores end up losing millions of dollars in merchandise a month.

Human Resources Fail: Hiring the Wrong People

Stores rarely hire the right talent to prevent loss, especially during a down economy. Store management, from human resources to the managerial level, does not do adequate research when it comes to the hiring process. Despite having established human resources departments, extensive interviewing processes, and background checks, retailers with the highest levels of internal theft still can miss crucial signals that they are hiring criminals. Most of the time, members of
internal ORC rings have seemingly spotless resumes. But in reality, these retailers often hire illegal immigrants, employees with criminal records, or people who have been fired from other companies for theft. Longer and varying store hours, business fluctuations, and wage and benefit costs lead retailers to employ more part-time than full-time associates, resulting in more theft. That, combined with liberal return policies, allows ORC members to steal merchandise, return it without a receipt, and receive store credit, merchandise gift cards, or cash refunds.
⁸

“You want to believe that when someone says they are who they are on a resume or in an interview, that is who you are going to get when they come to work for your company,” says a human resources representative at Bloomingdale’s in New York City who asked to remain anonymous. “But that’s not always the case, and that’s unfortunate. Likewise, with pressure to do more with little or no resources to hire the best talent, sometimes you end up meeting with and hiring people that, in a different situation, you may have outright rejected.”
⁹

A 23-year-old Saks Fifth Avenue sales clerk was caught ringing up $130,000 in false merchandise returns and siphoning the money onto a gift card. A 20-year-old cashier at Best Buy on Staten Island was arrested in December of 2009 for fraudulently ringing up gift cards totaling $600. In early 2009, a 20-year-old worker at Sears in Milford, Conn., was charged with manipulating the store’s computers to divert more than $35,000 onto gift cards that were fraudulently activated.
¹⁰
But gift card fraud isn’t specific to 20-something, associate-level employees. Tom Coughlin was a former Wal-Mart Stores vice chairman who rose through the ranks of the retail juggernaut by starting his career in the security division and becoming vice president of loss prevention. He pled guilty in a U.S. District Court in Arkansas in 2006 to fraud and tax charges while admitting that he stole money, gift cards, and merchandise from the company. The estimated loss was $500,000.
¹¹

Overall theft, estimated to be $36 billion a year in the industry, constitutes 1.5% of overall retail sales according to a 2008 National Retail Security survey conducted by the NRF. The national study, based on information obtained from 106 retail chains that responded to a questionnaire, said employees were responsible for 43% of stores’ unexplained losses versus 36% for shoplifting. Employee theft constituted $15.5 billion in losses for the industry.
¹²

According to Dr. Richard Hollinger, professor of Criminology, Law and Society at the University of Florida, retailers that experience high employee turnover run the greatest risk of internal employee theft. Retailers that employ a large number of part-time workers—who have less access to pensions, 401(k)s, promotional opportunities, and health insurance—tend to see less allegiance to the company.
¹³

While hiring the wrong employees can lead to the possibility of staffing criminals in a retailer, inadequate employee training can have an equally devastating effect. The inability to identify ORC boosters, along with fraud concerning gift cards, returns, coupons, and receipts, results in another way retailers lose profits that fund terrorist rings. For example, most employees are unable to spot gift and cash card fraud and do not ask the proper questions, says Paul Cogswell, Vice President of Risk Management at Stored Value Systems. Employees aren’t trained to ask the right questions from the beginning of the transaction, so suspicious activity goes undetected.
¹⁴

“Retailers who buy and sell used items are what I like to call ‘the blessedly ignorant,’” Jack Gee, founder of the Coalition of Law Enforcement and Retail (CLEAR), told me. “The blessedly ignorant includes secondhand dealers and pawn shops or, for example, retailers like GameStop and Cash for Gold that notoriously take in stolen property. Some of the employees and salespeople will actually take the merchandise and ask a couple extra questions to vet a potential thief, but most are happily ignorant—blessedly ignorant. If some of these salespeople were trained to ask the proper questions, I doubt we would see so much merchandise being stolen.”
¹⁵

In 2009, GameStop had an estimated 18,000 full-time employees and hired 15,000 to 21,000 temporary/seasonal employees nationwide, which was slightly down from 2008. The company invested $20–30 million in training its employees, an amount that was down by about 5%, according to a GameStop spokesperson. During its busiest few days Black Friday weekend, GameStop increased staff by only 30% compared to years past and, as a consequence, experienced its highest incidence of shrinkage. Revenues are made by selling new games, but GameStop also has a program in which it buys back used games, gaming consoles, and parts. Because GameStop sales staff don’t undergo formal training on how to check whether these items came from a legitimate source or whether they were stolen, new employees made buybacks with no questions asked. In 2008, eight GameStop employees pled guilty to “theft of property” charges when an investigation uncovered they were purchasing stolen games. Sites such as online retailer Cash 4 Gold have encountered similar problems with identifying stolen merchandise.

Luxury stores such as Chanel, Tod’s, and Coach saw staff cuts directly correlate to shrinkage in 2009 alone. Saks Fifth Avenue reported an estimated $20 million in employee theft. This happened at a time when bottom-line growth was being monitored carefully by Wall Street and investors.
¹⁶

Not all ORC rings start inside stores. External rings account for the majority of shrinkage costs to retailers and are why 60% of terrorist funding comes from retail crime, according to Immigrations and Customs Enforcement (ICE).
¹⁷

Post-9/11, several ORC rings were busted by the FBI’s Joint Terrorism Task Force. One of the most well-known cases was Operation Blackbird, in which the FBI uncovered an ORC that specialized in reselling infant formula to warehouses. The proceeds were wired back to countries in the Middle East where the Hezbollah and Hamas were active. The FBI seized almost $3 million in stolen assets.
¹⁸
Then Operation Greenquest was set up to target financiers of al Qaeda and
other international terrorist groups.
¹⁹
In May of 2003, federal authorities arrested nine individuals suspected of stealing baby formula and sending the proceeds to Jordan, Egypt, and Palestinian areas close to Israel.