Authors: Hitha Prabhakar
Frank Muscato of the organized retail crime division at Walgreens says that Walgreens’ losses due to ORC were more than $300 million in 2010. Walgreens is one of the main retailers that criminals target. Despite being a major advocate of ORC legislation and investing tens of millions of dollars in loss prevention products, such as state-of-the-art digital systems, in-store security, antitheft tagging, merchandise tracking, retail-secure devices, and employee training,
26
Walgreens merchandise is still stolen and sold to smaller stores.
In his testimony to the Subcommittee on Crime, Terrorism, and Homeland Security, Muscato described how he observed more than 52 boosters enter a small, unassuming grocery store in Chicago with stolen property and come out counting money. In an interview, an informant admitted to traveling to Wisconsin, Indiana, Michigan, and Iowa. He sold thousands of dollars worth of merchandise, which included OTC drugs, diabetes test strips, and other health aids, to the grocery store daily. The store’s owner would then sell the merchandise to other businesses in Chicago and out of state. Muscato noted that because of jurisdictional issues, out-of-state cases were not pursued, and the case was eventually dropped. Another case occurred in New York City, where three mom-and-pop grocery stores were identified by an informant as purchasing stolen property. With the NYPD’s help, Muscato and Walgreens were able to uncover more
than $600,000 worth of stolen property, including health aid merchandise, that was about to be shipped to out-of-state locations.
27
However, because of limited resources and a lack of federal jurisdiction, the Queens County Attorney working on the case decided not to pursue it. “Again, if ORC was identified as a specific crime in a criminal code, we could have pursued the case federally,” says Muscato.
Legal Issues: Defining ORC Versus Shoplifting and Shrinkage
Other reasons why ORC often flies under the radar is that federal law provides no uniform definition for this type of crime, making it difficult to track. Although the size and scope of ORC are hard to pin down, 92% of respondents to an NRF survey in 2009 reported that their companies had been a victim of ORC incidents in the past 12 months.
28
Challenges arise when a potential ORC suspect is apprehended and charged. Law enforcement defines the type of theft in different ways. For example, ORC is loosely defined as criminals fraudulently obtaining goods in quantities beyond what would normally be intended for personal consumption; reselling these ill-gotten goods; receiving, concealing, transporting, or disposing of these goods; or coordinating individuals to commit these retail crimes.
29
The issue involves agreeing on how law enforcement categorizes the act of ORC. For example, cargo theft, which often plays an integral role in ORC with the sheer volumes of merchandise being stolen and sold, is categorized as a completely different and separate crime. Boosters who steal a couple of items that total $250 in most cases are prosecuted as petty thieves if the state they are stealing from doesn’t have a high value threshold for felony theft. Their cases are dropped because they are small compared to the cases in the major crimes unit. Law enforcement can currently pursue these cases under the Racketeer
Influenced and Corrupt Organizations Act (RICO), but the standards can be difficult to meet in some ORC cases.
“When a criminal goes out and steals [as part of a boosting crew], he or she doesn’t always meet the felony threshold per theft incident, and RICO is looking for that felony threshold,” says Millie Kresevich, a senior loss prevention manager at Luxottica Retail, a luxury and sport eyewear company.
30
Because of the separate classification, law enforcement doesn’t realize that all of these criminal acts are in some way associated with an ORC ring. Congress has defined ORC in terms of the following:
• Violating a state ban against shoplifting or retail merchandise theft—if the quantities of items stolen are of the amount that would not normally be purchased for personal use or consumption—and stealing for the purposes of reselling the items or re-entering them into commerce
• Receiving, possessing, concealing, bartering, selling, transporting, or disposing of any property that is known to have been taken in the violation just outlined
• Receiving, possessing, concealing, bartering, selling, transporting, or disposing of any property that is known to have been taken in the violation just outlined, or coordinating, organizing, or recruiting persons to undertake either of the two violations just outlined
31
Regulating the Resale Market
Despite Congress’s passing of legislation to create an ORC unit at the Justice Department, no federal or congressional amendments amend U.S. Code to criminalize ORC or regulate resale markets such as online retailers, auction sites, flea markets, and other resale marketplaces where fences sell their items. As a result, all the time and
effort retailers expend investigating boosters, placing surveillance on potential ORC rings, and gathering evidence ends up being irrelevant if the case doesn’t meet the congressional definition of ORC or does not fall under the RICO statute.
“Federal law agencies don’t count the amount of investigative time, resources, and manpower a retailer spends in trying to build a case to put these guys away,” says Jerry Biggs of Walgreens. “There are cases that have taken three or four years to build, gone to great lengths in order to prove what we are losing and have lost, and because it doesn’t fall under the proper state statute, or there is an agent change, we have to start all over again. The only one that gets anything out of this is the government. Everyone else is losing money.”
32
With so many resources, you would think preventing ORC would be easy—that is, until retailers start looking to the government to help them put away longtime ORC rings and their kingpins for good. Federal and state laws make things much more complicated than they have to be. It starts with a little law called the RICO statute.
11. Letting the Bad Guy Get Away
The morning after Faisal Shahzad was indicted, the term
hawala
was the third most searched term on Yahoo! and brought up 214,000 results on Google. Katie Couric was talking about it on CBS. MSNBC dedicated an entire segment to the term. Even the evening news on all major networks discussed it. Why the sudden interest in a money practice that had been around for 2,000 years? And how did this unknown man create so much media buzz?
We’ve covered hawalas in this book. As a review, hawalas, also known as informal funds transfers (IFTs), are not illegal if they are registered with the U.S. government and used properly. But the way in which Shahzad used a hawala included secret transfers of large sums of cash (nearly $7,000 in total was transferred from Pakistan to the U.S.) among three different people, located in New York, Massachusetts, and New Jersey. There wasn’t a paper trail, which made Shahzad’s use highly suspicious and illegal. Suddenly the term
hawala
became synonymous with money laundering and illegal money transfers to wage terrorist acts against the U.S.
According to the United Nations International Convention for the Suppression of Financing of Terrorism, the definition of terrorist financing is “the act of providing financial support to terrorists or terrorist organizations to enable them to carry out terrorist acts.” This is exactly what Shahzad was doing by transferring funds via a hawala.
Although $7,000 might not seem like much in terms of money being transferred at one time, the World Bank estimates that the annual flow of transactions through informal banking systems ranges
from tens of billions to $200 billion
1
and, of that, 3–5% is used to fund terrorism.
As it turns out, Shahzad wasn’t the only homegrown terrorist using IFTs to fund terrorist plots. According to Loretta Napoleoni, author of
Modern Jihad: Tracing the Dollars Behind the Terror Networks
, jihadist terrorists have a remarkable ability to mutate their funding mechanisms to sidestep U.S. antiterrorism legislation created after 9/11.
2
Policies for terror watch lists and the establishment of the Patriot Act and Financial Action Task Force (FATF) recommendations only forced potential terrorists to think outside the box—to fund their attacks using IFTs and make them less costly and more effective.
For $7,000, Shahzad and his cohorts were able to create chaos in a central part of New York City, garnering him and his jihadist cause untold publicity. Close to $2 million in city and NYPD resources was needed to close certain streets and remove the bomb. 9/11 cost al Qaeda close to $500,000 and generated billions of dollars worth of damage. Now, homegrown terrorists are spending only a couple thousand and having just as much impact. The implementation of U.S. antiterrorism policies designed to cut off large terrorist groups at their financial source has had the opposite effect and has fueled the homegrown terrorism movement.
“On one hand, tracking terrorist income, expenditures, and financial transfers is the most powerful mechanism in the intelligence arsenal for penetrating terrorist cells and organizations,” says Brig. Gen. (ret.) Russell D. Howard. “But when it comes down to enforcing established statutes and acts specifically designed to cut off terrorism right at their financial sources, they end up being totally ineffective.”
3
Terror watch lists were supposed to register people and companies suspected of bankrolling terror organizations, but such lists weren’t implemented globally.
4
Countries such as France, for example, didn’t use the lists because their constitutions deemed them illegal. Other countries, such as Malaysia and Saudi Arabia, failed to comply with the list altogether.
Likewise, the Patriot Act did not address terrorist financing internationally because the law was established to protect banking systems using U.S. currency within the U.S. Although it made money laundering and the use of U.S. currency more difficult, it did not address money generated by legitimate businesses funding terrorism. According to Napoleoni, the fund-raising epicenter shifted from the U.S. to Europe.
5
The GDP of the “New Economy of Terror” generated by all armed terror organizations around the world was denoted in dollars ($500 billion pre-9/11). But since the attacks, the euro has been the currency of choice. This has given rise to international criminal and terror-funding schemes such as smuggling stolen merchandise overseas.
6
Internationally, leadership in the FATF has brought the issue of IFTs to the forefront, resulting in the implementation of FATF Special Recommendation VI. It required all FATF countries to ensure that individuals and entities providing money transmission services must be licensed and registered and subject to the international standards set out by the FATF.
7
As the U.S. government tried to apply stricter oversight of and control over banks, it ended up causing damage (both monetarily and by being a focal point of terrorist threat) to countries in Europe, South America, Africa, and South Asia without reducing the financing of global terrorism. With such stringent regulations, fees, and bureaucracy, people (especially those who didn’t have the money to pay for all the extra costs) finally got fed up and reverted to old-world ways of transferring funds. In addition, statutes within the Patriot Act failed to innovatively keep up as money-transferring instruments became more sophisticated. As a result, a great number of loopholes and deflecting the terrorist financing problem off U.S. soil resulted in a mere $200 million in terrorist assets frozen out of an estimated $850 billion.
8
Even worse, as more terrorist groups turned to product smuggling and IFTs, retailers lost an estimated billions in revenues for 2007–2010.
Regulation Epic Fail: How Banking BSAs and AML Programs Let Terrorist Funding Slip Through the Cracks
In the past, the primary objective of terrorist groups was non-financial.
9
But as the recession took hold, organizations realized that they had to get funding from other means. They needed to pay for the escalating costs of recruitment, training camps and bases, housing and food, equipment, explosives, conventional and unconventional weapons, intelligence gathering, forged identity and travel documents, and day-to-day maintenance expenses. When selling counterfeit and smuggled items, they turned to money laundering to transfer their funds.
The Patriot Act, which amended the Bank Secrecy Act (BSA), required financial institutions to establish anti-money laundering (AML) programs. These included developing internal policies, procedures, and controls; designating a compliance officer; creating an ongoing employee training program; and conducting an independent audit function to test programs.
10
The types of financial organizations required by law to have AML programs included mutual funds, operators of credit card systems, money service businesses, broker-dealer members of the Financial Industry Regulatory Authority (FINRA), broker-dealer members of the New York Stock Exchange, insurance companies, and dealers in precious metals, stones, or jewels.
11
But the AMLs were futile. For example, financial institutions are required to file a report concerning a transaction or series of related transactions in excess of $10,000 in currency. However, terrorist organizations such as the Tehreek-e-Taliban Pakistan (TTP) (the organization Shahzad was working with) transferred funds via hawalas, which is one of the most difficult IFTs to monitor and regulate.