[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
ORGANIZED RETAIL THEFT: CONDUIT OF MONEY LAUNDERING
=======================================================================
HEARING
before the
SUBCOMMITTEE ON CRIMINAL JUSTICE,
DRUG POLICY AND HUMAN RESOURCES
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
NOVEMBER 10, 2003
__________
Serial No. 108-147
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
______
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COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
DAN BURTON, Indiana HENRY A. WAXMAN, California
CHRISTOPHER SHAYS, Connecticut TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
DOUG OSE, California DENNIS J. KUCINICH, Ohio
RON LEWIS, Kentucky DANNY K. DAVIS, Illinois
JO ANN DAVIS, Virginia JOHN F. TIERNEY, Massachusetts
TODD RUSSELL PLATTS, Pennsylvania WM. LACY CLAY, Missouri
CHRIS CANNON, Utah DIANE E. WATSON, California
ADAM H. PUTNAM, Florida STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia CHRIS VAN HOLLEN, Maryland
JOHN J. DUNCAN, Jr., Tennessee LINDA T. SANCHEZ, California
JOHN SULLIVAN, Oklahoma C.A. ``DUTCH'' RUPPERSBERGER,
NATHAN DEAL, Georgia Maryland
CANDICE S. MILLER, Michigan ELEANOR HOLMES NORTON, District of
TIM MURPHY, Pennsylvania Columbia
MICHAEL R. TURNER, Ohio JIM COOPER, Tennessee
JOHN R. CARTER, Texas CHRIS BELL, Texas
WILLIAM J. JANKLOW, South Dakota ------
MARSHA BLACKBURN, Tennessee BERNARD SANDERS, Vermont
(Independent)
Peter Sirh, Staff Director
Melissa Wojciak, Deputy Staff Director
Rob Borden, Parliamentarian
Teresa Austin, Chief Clerk
Philip M. Schiliro, Minority Staff Director
Subcommittee on Criminal Justice, Drug Policy and Human Resources
MARK E. SOUDER, Indiana, Chairman
NATHAN DEAL, Georgia ELIJAH E. CUMMINGS, Maryland
JOHN M. McHUGH, New York DANNY K. DAVIS, Illinois
JOHN L. MICA, Florida WM. LACY CLAY, Missouri
DOUG OSE, California LINDA T. SANCHEZ, California
JO ANN DAVIS, Virginia C.A. ``DUTCH'' RUPPERSBERGER,
EDWARD L. SCHROCK, Virginia Maryland
JOHN R. CARTER, Texas ELEANOR HOLMES NORTON, District of
MARSHA BLACKBURN, Tennessee Columbia
CHRIS BELL, Texas
Ex Officio
TOM DAVIS, Virginia HENRY A. WAXMAN, California
J. Marc Wheat, Staff Director and Chief Counsel
Elizabeth Meyer, Counsel and Professional Staff Member
Nicole Garrett, Clerk
C O N T E N T S
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Page
Hearing held on November 10, 2003................................ 1
Statement of:
Merritt, Randy, detective, Pasadena Police Department,
Pasadena, TX, accompanied by Johnnie Jezierski, sergeant,
Texas Department of Public Safety; Alonzo Pena, Associate
Special Agent in Charge, Bureau of Immigration and Customs
Enforcement, U.S. Department of Homeland Security; Frank
Borden, assistant director, Manufactured Food Division,
Texas Department of Health; Don Clemmer, assistant attorney
general, Texas Attorney General's Office; and James Jacks,
first assistant U.S. attorney, northern district of Texas,
U.S. Department of Justice................................. 6
Williams, Joe, Gulf Coast Retailers Association; Darrell
Taylor, director of loss prevention, HEB Grocery Co.;
Deborah Brookshire, Texas Department of Health; and Frank
Muscato, investigative task force, Wal-Mart Stores, Inc.... 116
Letters, statements, etc., submitted for the record by:
Borden, Frank, assistant director, Manufactured Food
Division, Texas Department of Health, prepared statement of 95
Brookshire, Deborah, Texas Department of Health, prepared
statement of............................................... 135
Clemmer, Don, assistant attorney general, Texas Attorney
General's Office, prepared statement of.................... 100
Jezierski, Johnnie, sergeant, Texas Department of Public
Safety, prepared statement of.............................. 66
Merritt, Randy, detective, Pasadena Police Department,
Pasadena, TX, prepared statement of........................ 10
Muscato, Frank, investigative task force, Wal-Mart Stores,
Inc., prepared statement of................................ 140
Pena, Alonzo, Associate Special Agent in Charge, Bureau of
Immigration and Customs Enforcement, U.S. Department of
Homeland Security, prepared statement of................... 88
Souder, Hon. Mark E., a Representative in Congress from the
State of Indiana, prepared statement of.................... 3
Taylor, Darrell, director of loss prevention, HEB Grocery
Co., prepared statement of................................. 128
Williams, Joe, Gulf Coast Retailers Association, prepared
statement of............................................... 120
ORGANIZED RETAIL THEFT: CONDUIT OF MONEY LAUNDERING
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MONDAY, NOVEMBER 10, 2003
House of Representatives,
Subcommittee on Criminal Justice, Drug Policy and
Human Resources,
Committee on Government Reform,
Cypress, TX.
The subcommittee met, pursuant to notice, at 10 a.m., in
the Settlement House, Northwest Forest Conference Center, 12715
Tegle Road, Cypress, TX, Hon. Mark E. Souder (chairman of the
subcommittee) presiding.
Present: Representatives Souder and Carter.
Staff present: Elizabeth Meyer, counsel and professional
staff member; John Stanton, congressional fellow; and Nicole
Garrett, clerk.
Mr. Souder. Good morning and thank you all for coming this
morning. I also want to take the opportunity to recognize the
U.S. Marine Corps on its birthday, 228 years since 1775 to
today, so it's very fitting today on Veterans Day.
Today our subcommittee will address the status of
investigations, prosecutions and convictions relating to
organized retail theft rings in Texas and elsewhere. We'll
learn that organized retail theft is much more than petty
shoplifting. We'll also address the magnitude of the retail
theft problem with particular emphasis on what the retail
industry calls high price point products such as baby formula
and other consumer items.
A significant problem with organized retail theft is the
losses to American businesses which are invariably passed on to
the tax payer. This problem is widespread, affecting
supermarkets, drug stores, mass merchandisers and convenience
stores. In 2001, the Federal Bureau of Investigation's
Interstate Theft Task Force quantified the problem as over $30
billion in store level losses annually.
The next significant problem with organized retail theft is
the interruption of the product supply chain. Many products
must be stored and transported under prescribed conditions to
keep the product safe for consumption. The large quantities of
stolen high priced point merchandise creates storage challenges
for these rings. Climate control storage is not provided and
worse, merchandise may spoil or become tainted. You wouldn't
want to buy a gallon of milk which had been sitting around in
an 80 degree warehouse for a week before it got to the store
shelf.
The third significant problem with organized retail theft
is the gray market of resale. Stolen products are sold at flea
markets, swap meats, shady storefront operations, the trunks of
people's cars and worst of all, sometimes unwittingly at Mom
and Pop stores. Some of these secondary retailers know they are
buying stolen merchandise for retail. Some do not. Invariably,
the consumer never knows.
The fourth significant problem is money laundering. Once
stolen property is resold to secondary retailers, where do cash
proceeds from the chain of illegal activity go? You may be
surprised here today to learn that this problem extends far
beyond our own borders.
Unfortunately, this problem is not new nor is it limited to
the State of Texas. Operation Blackbird and the Pasadena
Community Defense Force Task Forces in Texas are premiere
examples of cooperation between law enforcement agencies and
prosecutors from all levels of government working together with
regulatory agencies and businesses to interrupt this crime.
These efforts will have to be duplicated across this great
country to eliminate these problems. Efforts to discover the
international money laundering component of this hearing must
be redoubled. Interagency cooperation must be at its best to
have any chance of identifying and ultimately convicting all
the members of these rings.
This hearing will address all these difficult issues as
well as legislative and other potential solutions. We're aware
of the lack of the Federal statute that specifically addresses
the crime of organized retail theft.
We are pleased to be joined by representatives of several
levels of law enforcement community. We also have both State
and Federal prosecutors to enlighten us about their roles.
To conclude, we have business representatives who will
share their concerns and solutions. I want to take time again
to thank everyone for coming, to take their time out of their
schedules to join us and I look forward to your testimony.
Now I'd like to yield to our gracious host and very active
member of our subcommittee, Judge Carter.
[The prepared statement of Hon. Mark E. Souder follows:]
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Mr. Carter. Thank you, Mr. Chairman, and I want to thank
everybody for coming here today. For me, this all started when
Johnnie Jezierski came to me at a town hall meeting here in the
south area of Houston to ask for 5 minutes of time to go back
in the back room and talk to me about stealing of baby formula.
I'm an old trial judge. I've been a district judge in Texas
for the last 20 years and don't tolerate a whole lot of
stealing, so I guess that was the reason they were picking on
me. But I was just shocked to understand the level because when
I went back, quite frankly, I was thinking about some
misdemeanor crime and didn't really understand why we were
going to talk about it, but when I found the level of what was
going on, just in the Pasadena County area, I immediately
became very concerned and wanted this issue brought out and
brought before the public and examined by the Congress.
As I said, the chairman was very gracious to hear me out
when I got back to Washington and to show great interest in
this whole operation that's going on and as a result we were
able to get this hearing here in Houston. I wanted to have the
chairman come in and hold this hearing and I'm looking forward
to hearing from all of the folks in government agencies and the
citizens who are here to testify to tell us about just exactly
the magnitude of this problem and help us learn what we can do
to seek better solutions for the problem.
With that, I'll yield back to you, Mr. Chairman.
Mr. Souder. I thank you. Before proceeding, I'd like to
take care of a couple of procedural matters. I ask unanimous
consent that all Members have 5 legislative days to submit
written statements, questions for the hearing record and that
any answers to written questions provided by the witnesses also
be included in the record. Without objection, it's so ordered.
I also ask unanimous consent that all Members present be
permitted to participate in the hearing. That's a technical
thing. If any other member would come in who's not a Member of
our subcommittee, to cover that.
Now it's been a longstanding congressional protocol rule
that government witnesses representing the administration
testify first, so our first panel consists of those witnesses
and we have on our first panel Detective Merritt of the
Pasadena Police Department. As I understand it, he began the
investigative effort here on this topic. He'll be followed by
Sergeant Jezierski of the Texas Department of Public Safety;
and the Associate Special Agent Alonzo Pena of the Department
of Homeland Security, Bureau of Immigration and Customs
Enforcement.
Then we'll hear from the Assistant Director, Frank Borden
of the Manufactured Food Division of the Texas Department of
Health and to conclude this panel, we'll then hear from our
prosecutor, witnesses and Assistant Attorney General for the
State of Texas, Mr. Clemmer and Mr. James Jacks, First
Assistant U.S. Attorney, Northern District of Texas.
We're a congressional oversight committee and it's the
standard practice of this committee to ask all of our witnesses
to testify under oath. So would you please stand, raise your
right hands.
[Witnesses sworn.]
Mr. Souder. Let the record show that each of the witnesses
responded in the affirmative.
When I first got elected to Congress in 1994, this
committee became immediately active, starting with the Travel
Office Investigations of the White House and we moved to ``Who
hired Craig Livingston'' and the FBI files, the Indian casinos,
White Water, Waco, everything. So you're now a distinguished
panel of being sworn under oath in the congressional
investigations committee.
I very much appreciate your coming and Detective Merritt,
we'll start with you.
STATEMENTS OF RANDY MERRITT, DETECTIVE, PASADENA POLICE
DEPARTMENT, PASADENA, TX, ACCOMPANIED BY JOHNNIE JEZIERSKI,
SERGEANT, TEXAS DEPARTMENT OF PUBLIC SAFETY; ALONZO PENA,
ASSOCIATE SPECIAL AGENT IN CHARGE, BUREAU OF IMMIGRATION AND
CUSTOMS ENFORCEMENT, U.S. DEPARTMENT OF HOMELAND SECURITY;
FRANK BORDEN, ASSISTANT DIRECTOR, MANUFACTURED FOOD DIVISION,
TEXAS DEPARTMENT OF HEALTH; DON CLEMMER, ASSISTANT ATTORNEY
GENERAL, TEXAS ATTORNEY GENERAL'S OFFICE; AND JAMES JACKS,
FIRST ASSISTANT U.S. ATTORNEY, NORTHERN DISTRICT OF TEXAS, U.S.
DEPARTMENT OF JUSTICE
Mr. Merritt. Good morning, Mr. Chairman and distinguished
members of the subcommittee. My name is Detective Randy Merritt
and I'm assigned to the Pasadena Police Department's Community
Defense Unit. I'll refer to it as the CDU. It is a privilege
and honor to appear before you to discuss my investigation of
the activities of an organization engaged in large scale theft
and fencing of consumer products and a wide variety of other
crimes in Pasadena, TX, throughout the United States and abroad
generating millions, if not billions, in illicit profits.
For background purposes, Pasadena's population is about
150,000. The city is located along the southern bank of the
Houston Ship Channel posting 41 chemical refineries out of the
110 in the Houston area. Pasadena is also bordered by NASA's
Johnson Space Department. Its police department has about 270
officers and I've been a Pasadena officer for 12 years with
about 6 years as Detective, specializing in organized crime and
career criminal investigations.
CDU is a task force consisting of eight investigators from
local, State and Federal agencies. It was formed in October
2002 to investigate crimes identified as key terrorist
financing and facilitation crimes after Pasadena investigations
uncovered significant amounts of such activity in Pasadena and
the Houston area. The CDU works closely with the FBI's Joint
Terrorism Task Force.
The bread and butter of the organization I'm here to
discuss is the theft and resale of consumer products. This is
not the sole crime of the organization's crimes or legion. A
few examples are narcotics trafficking, alien smuggling and
other immigration violations, motor vehicles theft and
plundering of a variety of government programs. A few examples
of targeted products are infant formula, cigarettes and over-
the-counter medications.
For simplicity, I have divided the organization into two
groups, thieves and fences. Group 1, the thieves are primarily
Central American illegal immigrants. They operate in teams
stealing consumer merchandise through a variety of methods.
There appears to be 600 to 1,000 members of this group
operating out of the Houston area committing crimes across the
United States. The criminal gang, Mara Salvatrucha, commonly
known in the United States as MS-13 appears to play a
significant role in the activities of this group. MS-13
operates throughout the United States and Central America. Gang
resources characterize MS-13 for its extreme violence and level
of sophistication exceeding that of many U.S. criminal street
gangs. Members were reported to have executed three Federal
agents and shot numerous law enforcement officers across the
country.
Group 2, the fences are primarily found to be Middle
Eastern immigrants who own a variety of businesses and
immigrated from countries such as Egypt, Jordan, Israel,
Lebanon and Pakistan. The common convenience store appears to
play a key role or play an important role with this group. This
group buys and resells the product stolen by the Central
American thieves. Evidence collected in our investigation found
long-term relationships often existed between the fences and
the thieves. Many of the Middle Eastern fences are under
investigation by Federal authorities for possibly supporting
terrorist organizations.
The incident initiating my investigation was a night time
burglary of a Pasadena business in May 2001 where approximately
$137,000 in cigarettes were stolen. The burglary investigation
identified several burglary teams and a number of shoplifting
teams made up of Central American illegal immigrants based in
the Houston area. The burglars and shoplifters were found to
work with Middle Eastern businessmen who bought the stolen
property. In November or December 2001, Pasadena's Direct
Action Response Team conducted a surveillance operation over
several weeks resulting in the in-progress arrest of eight
members of two burglary teams. Detectives videotaped the teams
stealing approximately $608,000 in clothing and tools from two
Houston businesses. The investigation declared dozens of
similar burglaries resulting in millions of dollars in losses
in Texas and other States. It was discovered that these
burglary teams were part of a large organization working for
the Middle Eastern fences since 1997.
In 2003, I was involved in CDU cases where several three-
person shoplifting teams in the same organization were arrested
and charged for shoplifting infant formula and medications from
Pasadena area grocery stores. CDU began pooling resources from
several State, local and Federal agencies into an ad hoc
informal work group called Operation Blackbird which meets
regularly at the Houston FBI Field Office.
The results of Operation Blackbird are 40 suspects, over
half illegal aliens, were arrested and charged with Federal and
State felony crimes; 14 civil suits were filed by the Texas
Attorney General's Office against 21 members of the
organization, and approximately $2.7 million is suspected
stolen products and assets were seized, of which almost $1
million worth was infant formula. Blackbird has impacted the
organization on national level. The FBI and retailers report a
significant decrease of infant formula thefts, however, thefts
of other products increased dramatically indicating a shift in
operations by the organization.
Blackbird has temporarily wounded this network which has
found a gaping hole in the system to operate with virtual
impunity. A person caught with $25,000 in cocaine faces years
in prison. Another caught with $25,000 in stolen jeans or baby
milk may never see the inside of a prison cell. The Pasadena
Police Department did not accomplish this alone. It occurred by
leveraging resources through nontraditional means between
local, State and Federal agencies and unprecedented cooperation
and information sharing.
I attribute success more to the efforts of rank and file
officers, special agents and prosecutors persevering against
institutional inertia than to culture changes in our respective
agencies, although significantly improving the old problem of
bitter agency rivalry, bureaucracy and poor communications
still exists. What is needed to fight this organization is
legislative changes, training and tools for all levels of the
justice system with more emphasis on interaction between local,
State and Federal agencies and the private sector.
In Houston, we found the State laws were more effective
against this organization, but it required the tools and
resources of Federal agencies to successfully enforce them.
Improving cooperation appears to be focused on improvements
between Federal agencies. A small fraction of the 700,000 law
enforcement officers in the United States are Federal agents.
Federal agencies have the tools to fight organized crime. The
local agencies, having the bulk of manpower, deal with its
effects daily in the front lines, usually flying blind. To
manage this insidious threat, we must revolutionize the
integration of local, State and Federal resources along with
the listing of private section in the fight.
This criminal organization is cellular in structure with
membership and methods insulated by cultural barriers. The
organization cannot be neatly charted like an Army division or
a Fortune 500 corporation. Its business plan is a state of
mine, not a formal mission statement. The commonality of
crimes, methods and suspects between so many different
investigations around the country cannot be coincidental.
Suspects and dozens of investigations around the United States
have been linked to Blackbird targets. Many suspects in other
cases have been charged with supporting terrorism or on watch
lists as being terrorist organization members. I believe most
organization members are not terrorists in the traditional
sense, however, their schemes may cause more damage to our
country in the long haul.
I strongly suspect what I have summarized as part of a
greater plan executing over a decade ago to attack the United
States like a cancer from within. I believe this organization
is a national threat at a grassroots level by corrupting our
food distribution industry, plundering government programs and
encouraging street crime and edging honest businesses out of
the marketplace, due to the inability to compete with
organizations inherently lowering costs of buying stolen goods
while facing additional expense of replacing inventory stolen
by the organization's thieves.
I strongly suspect the attacks on the United States by the
terror network are part of the same diabolical plan embodied by
this organization, that is, more philosophy than written orders
or directives. I am reminded by the words shouted by Nikita
Khrushchev at the U.N. to the U.S. Delegation 40 years ago,
``we will bury you from within,'' as he pounded his shoe on the
table.
As a student of history, I learned the Soviet Union was the
largest sponsor of terrorism before its collapse. The terror
network trained and built by the Soviet Union survived. Without
Soviet control, it has run amok. It took our government more
than 30 years to recognize and admit the existence of the
Mafia. We may not have the luxury of decades to address this
problem.
I hope my statement is not taken as an attack on any ethnic
group or religion. It is intended to expose the nefarious
activities of a minute portion of our society.
In conclusion, I would like to thank the distinguished
members of the subcommittee for the opportunity to testify
before you today. It will be my pleasure and honor to answer
any questions.
[The prepared statement of Mr. Merritt follows:]
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Mr. Souder. Thank you very much and I should have noted in
the beginning that written testimony and any additional
documents that you believe need to be entered into the record
after any questions from us or things that you may think of,
you'll have a certain number of days to do that. So we'll put
the full statements in. It's a frustrating process for every
individual to try to keep it within the 5 minutes. It gives you
warning. We'll be a little more lenient this morning. We know
you have prepared statements. It's a field hearing. It's a
little bit different than in Washington, but if you can put any
written statements, you can always add to the record and we'll
draw some out in additional questions and that may also lead to
some additional questions after the hearing.
Sergeant Jezierski, thank you for being here this morning
to give your testimony.
Mr. Jezierski. Good morning, Mr. Chairman, and distinguish
member of the subcommittee. It's a privilege to appear before
you today. I'm Sergeant Johnnie Jezierski of the Texas
Department of Public Safety, Special Crimes Service.
On September 11, 2001, terrorists attacked the United
States. I believe attacks on our government and business
programs began many years earlier and those largely unnoticed
attacks may have been aimed at acquiring assets to be used
against the United States.
The State Department has issued a reward poster that states
``Stopping Terrorism Starts With Stopping the Money.'' We've
brought a copy of the poster with us today. It's on the left.
One of the illicit sources of funding for terrorism listed
on the posted is the theft, adulteration and resale of infant
formula. On September 11, 2001, a DPS Trooper stopped a vehicle
after a citizen reported that a Middle Eastern male was driving
toward Houston in a rental truck. One can assume that the
citizen believed the driver of the vehicle may have been
involved in the attack on our country and I believe that
citizen was correct. The truck was not loaded with explosives.
It contained infant formula. The driver of the rental truck
told investigators that he was not a terrorist.
Today, the FBI recognizes him as a member of a terrorist
organization. The driver was part of a nationwide theft ring
operating in the United States who send proceeds from their
illegal activities back to the Middle East. Professional theft
teams of illegal Honduran and El Salvadorean immigrants from
Houston steal infant formula around the country and sell it to
the Middle Eastern fences who distribute it through a
nationwide network of trading companies.
The organization has been operating largely unnoticed for
years and much of the stolen formula is sold to WIC vendors.
Infant formula is one of the most prevalent items stolen from
retailers around the country, with the most popular formula
stolen being the brand and type of formula distributed in the
WIC program. In Texas, that would be Enfamil With Iron.
Investigators believe that WIC had something to do with the
problem. WIC began as a $10.4 million program in 1974 and has
grown to a $6 billion program in 2003 that provides benefits to
47 percent of all babies born in the United States. The USDA
funds the Federal program with additional funding derived from
a rebate program.
I contacted the USDA with my concerns and I was told that
the Department of Health administered the WIC program in Texas.
I contacted the Texas Department of Health and informed them
that the WIC program appeared to have left doors open and that
criminals and possibly terrorists were exploiting those open
doors.
The Texas Department of Health was concerned and an
advisory committee was created to identify problems and
determine what measures could be taken to correct them. The
committee consisted of representatives from government
agencies, retail businesses and manufacturers. Mead Johnson's
representative indicated that the cooperation and business and
government was unprecedented. The committee determined that
inadequate policies controlling the WIC program had allowed
criminals and some WIC vendors to exploit the program and
changes were recommended. WIC vendor contracts were changed
that required WIC vendors obtain their formula from licensed
Texas wholesalers or the manufacturer.
The Manufactured Food Division of Texas Department of
Health began an aggressive inspection campaign targeting the
fences and seized over $1 million in product from the fences.
The Texas Attorney General sued and obtained injunctions
against the fences, and penalties for violations of the Texas
Food, Drug and Cosmetic Act were increased. After the changes,
Texas retailers reported a significant decrease in theft of
infant formula.
Sources in a Federal law enforcement agency also reported
that the changes have been the subject of chatter and
conversations monitored overseas.
Some members of the USDA voice concerns about negative
publicity. The USDA does not appear to be taking any quick
action nationally and the market for stolen formula outside of
Texas remains available. This criminal organization has a
pattern of committing nonviolent property crimes that are taken
lightly. When law enforcement encounters infant formula, it is
difficult, if not impossible to prove that the formula is
stolen, therefore it is necessary to conduct undercover
operations in which purported stolen infant formula is sold to
the fences and those types of criminal investigations are
lengthy, costly and require significant manpower.
Most agencies having limited resources, see the
investigations required as being too difficult and too costly.
Only a small number of criminal investigations are targeting
this activity around the country. One of the investigations in
the Houston area involves a small group of local, State and
Federal officers operating out of the Pasadena Police
Department.
The Pasadena Working Group, confronted with the funding and
manpower issues, has significantly impacted the operations of
this criminal organization in Pasadena and around Texas.
Federal resources are being expended conducting terrorism
investigations attempting to identify terrorist operatives, but
the organized criminal infrastructure that is believed to be
funding terrorism is being largely ignored. Business records
obtained by search warrants show that members of this group
report millions in sales while claiming checks written through
sales business expenses, having paid no income tax they receive
IRS refunds after claiming the earned income credit. This
information has been forwarded to the IRS and should be acted
upon.
Realizing that some members of this criminal organization
are suspected to be members of or supporters of terrorist
organizations, one cannot help but be concerned. Some of the
positive steps that I believe could be taken include (1) take
the lucrative WIC market for stolen formula that is being
exploited by this group away by requiring that WIC vendors in
all States purchase their formula from approved sources.
Two, education. One needs to recognize that there is a
primarily Middle Eastern organized criminal group that is
operating largely unnoticed in the United States.
Three, create law enforcement task forces to combat this
criminal organization and provide those task forces with
adequate funding.
Stopping terrorism starts with stopping the money. Thank
you for the opportunity to testify before you today on this
very important issue. I'd be glad to answer any questions you
might have.
[The prepared statement of Mr. Jezierski follows:]
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Mr. Souder. Thank you very much.
Mr. Pena, I believe you're next.
Mr. Pena. Good morning, Mr. Chairman, Mr. Souder,
Congressman Carter. It's a privilege to appear before you to
discuss the Bureau of Immigration and Customs Enforcement
Investigations into organized retail theft and money laundering
violations.
For the past 5 years the Special Agents assigned to the
Special Agent in Charge, Houston, TX, have conducted
investigations into the activities of a loosely joined
confederation of individuals involved in the theft, repackaging
and resale of consumer goods. These consumer goods primarily
consist of infant formula, over-the-counter medical goods, and
other health and beauty aids. ICE special agents have also been
investigating the money laundering aspects of these criminal
activities.
The targets of these investigations are predominantly
individuals from Latin America or the Middle East, including
Egypt, Jordan and Lebanon. These individuals operate as
grocers, dry good wholesalers, buying and selling goods on the
gray market or secondary side of the industry. The wholesalers
are supported by groups of shoplifters operating around the
United States.
ICE investigations have identified approximately 60 groups
of organized shoplifters plus a multitude of independent
individuals. For the most part, these individuals are residing
and operating in the United States in violation of our
immigration laws and travel the country stealing merchandise
from legitimate retailers and wholesalers.
The shoplifting scheme background. ICE special agents have
interviewed a number of shoplifters and identified a method of
their operation. The shoplifting group is comprised of five or
six women and younger men. An experienced man is established as
a team leader and is subsequently responsible for making the
travel arrangements, providing transportation, food and lodging
for the group.
Once the group is assembled, they travel to a target city,
obtain a hotel room, and spend the next 7 to 10 days
shoplifting from major stores in the area. Each day the stolen
goods are stored in a self-service storage unit that is rented
by the team leader. Upon conclusion of the operation, the
stolen goods are removed from the storage units, loaded into
rental trucks and returned to their home city and sold to
buyers. If there is an exceptionally large amount of stolen
goods, the teams have occasionally shopped them via legitimate
trucking companies back to the buyers.
Most team members are equipped with several false names and
dates of birth in the event they are arrested. If a member is a
minor, they provide identification purporting them to be an
adult in order to avoid State laws requiring parental
notification and they can be released on bond.
The buyers. The buyers generally identify themselves as
grocery wholesalers in an effort to establish an air of
legitimacy. These companies file corporate charters with the
Secretary of the State of Texas and obtain a local ``doing
business as'' license. Very few of these individuals operate
out of a normal business location. Most operate out of their
residence or from a storage unit where the stolen goods are
stored. ICE, working in conjunction with the IRS and the FBI,
have shut down large-scale theft operations throughout the
United States.
In Lexington, KY, the Shalash Organization was dismantled
and three leaders were arrested and subsequently convicted. In
Arizona, 12 members of the Jamal Organization were arrested. In
Dallas, TX, 23 members of the Ghali Organization were arrested.
ICE is currently conducting investigations in Florida,
California, North Carolina, South Carolina, Virginia and
Kentucky. Here in Houston, the activities of the combined
Federal, State and local law enforcement agencies have forced
these criminal organizations to change from theft of infant
formula to other products to avoid civil and criminal
sanctions.
Five years ago, several subjects were repackaging stolen
infant formula and placing them in counterfeit cardboard boxes.
The purpose of the counterfeit boxes was to deceive the buyers
into thinking the formula was from the actual manufacturers. In
the words of one subject, ``if you are going to sell a Rolex
watch it has to be in a Rolex box.'' The repackaging operations
took place in warehouses or storage units. After the goods were
repackaged, the cases were placed on pallets, shrink-wrapped
and shipped to local or out-of-state buyers. Investigators
efforts resulted in dismantling of the company identified as a
manufacturer of the counterfeit boxes.
The secondary market. To conceal the origin of the product,
false purchase orders are produced alleging that Company A sold
the merchandise to Company B who sold it back to Company A or
C. Payments for these shipments are usually structured in order
to avoid Federal monetary reporting requirements. Several
checks are written in amounts less than $10,000 and are
addressed to different subjects on different dates, all within
the same company. Wire transfers are used when a company sells
to a large-scale buyer or to an unsuspecting legitimate buyer.
Each company is able to claim and show receipts indicating that
it had purchased the product from the other company, without
knowledge that the merchandise was stolen. If the stolen goods
are over the counter medical goods or health and beauty aids,
they are typically sold to ``mom and pop'' type convenience
stores. Frequently, the stolen merchandise is sold in the
convenience stores that are actually owned and operated by the
organization.
Some criminal organizations are also involved in the large-
scale burglary of tobacco, jewelry, and clothing warehouses.
Most of the stolen tobacco products are sold in stores owned or
operated by these organizations. The loss of taxes on this
merchandise has a financial impact on each State. Typically,
stolen jewelry, perfume and clothing are mixed with legitimate
shipments and exported overseas. Other times, these items are
shipped by falsely manifesting the goods.
Investigation has also revealed that some commercial
burglaries involving merchandise in excess of hundreds of
thousands of dollars have been shipped to the Middle East,
where it can be resold for three times the value. The
investigation into the money laundering aspect of these
proceeds have revealed individuals involved in the exportation
of motor vehicles suspected of being purchased with money
derived from these illegal activities. The vehicles can be sold
overseas for three times the value. The proceeds of this
illegal activity are subsequently returned to the United
States.
To prosecute members of these criminal organizations for
Interstate Transportation of Stolen Property, the government
must show that each can of infant formula or over the counter
was stolen or obtained by fraudulent means. This is difficult,
as individual items are not marked in a unique way, such as
currency, to aid in tracking of these items.
Women, Infant and Children Stores. In addition to the
convenience stores, some of thee criminal organizations also
own and operate Women, Infant and Children [WIC] stores where
they can sell their stolen goods. The WIC program is a
federally funded, State operated program to aid lower income
citizens. There are many forms of WIC fraud both by the vendor
and by the recipient. I will explain a few of them today. By
purchasing stolen infant formula for $5 per can and selling it
for $10 per can, the WIC store profits are generally greatly
increased. Each month, a WIC store submits all the WIC vouchers
used to purchase food from the store. Investigations have
revealed that some stores are marking the WIC vouchers to
indicate that food was sold which was never sold and/or cash
was given to the persons instead of food. At this time there is
no Federal regulatory requirement that the WIC stores buy the
food sold at their stores from controlled sources. The State of
Texas has recently enacted requirements that WIC stores buy
directly from the manufacturer or from a regulated source.
Following the money. Profits generated by the sale of
stolen goods are used for the purchase of additional goods,
thus repeating the cycle, and to further the wealth of the
criminals involved. Investigations around the country have
determined that large amounts of money are being shipped out of
the United States to the Middle East. Investigations have
revealed that the money is smuggled out of the country by
concealment on individual travelers, wire transfers through
European banks, express-type mail shipments containing currency
or monetary instruments, and unlicensed money remitter
services. Many banks in the Middle East do not cooperate with
the U.S. law enforcement and the funds cannot be traced.
In conclusion, I would like to thank the chairman,
Congressman Carter for your continued support and interest in
ICE. It is an honor to serve as a Bureau of Immigration of
Customs Enforcement agent. I thank you for the opportunity to
appear before you today and to discuss some of our
investigative efforts and it would be a pleasure to answer any
questions you may have.
[The prepared statement of Mr. Pena follows:]
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Mr. Souder. Thank you.
I'd now like to recognize Mr. Borden on behalf of the
Department of Health, State of Texas.
Mr. Borden. Thank you. My name is Frank Borden. I'm the
assistant director of the manufactured foods division, Bureau
of Food and Drug Safety with the Texas Department of Health
[TDH]. TDH is mandated by the Texas Health and Safety Code,
Chapter 431, Texas Food, Drug and Cosmetic Act to license and
inspect all firms in Texas that are engaged in the manufacture
and distribution of foods, drugs, medical devices and cosmetic
products. The act provides authority for inspections,
detentions, condemnations, record verification, enforcement,
which includes civil, criminal and administrative penalties.
The Act also allows TDH access to copy and verify all records
pertaining to infant formula.
On December 4, 2002, Texas Governor Rick Perry asked the
Bureau of Food and Drug Safety, to attend the WIC Advisory
Committee meeting concerning theft of powdered infant formula
and other high priced consumer products in Texas. The committee
is comprised of Federal, State and local law enforcement
agencies and industry. The committee attempted for several
months to curb the theft and illegal redistribution and
repacking of these high priced consumer products such as infant
formula, prescription drugs and over the counter drugs and
medical devices back into commerce. At the December meeting,
the Bureau presented to the committee the authorities granted
to TDH by our act and offered our assistance to the WIC
Committee. As a result, TDH began coordinating with various
local, State, and Federal law enforcement agencies throughout
Texas.
Since then, TDH has been working closely with law
enforcement on the unlicensed distributors. Our main concern is
the possible contamination, adulteration, tampering and
misbranding of the stolen infant formula that could affect the
safety of Texas children who are enrolled in the WIC program.
One child injured is one too many.
Law enforcement develops leads and identifies unlicensed
distributors for TDH. TDH staff accompanied by law enforcement
officers then inspects these distribution facilities. There are
many organized infant formula theft operations. We have found
formulas throughout Texas stored in filthy garages, mini
storage facilities, vehicles, and bars. Products are repacked
and lot numbers are changed or removed. In some cases, the
products are contaminated with insects and/or are out of date.
To date, over $1 million of adulterated infant formula is now
in secure locations under the protection of TDH.
TDH has spent thousands of hours investigating these
distributors. Of the firms identified by law enforcement, none
were licensed and none could provide product records that would
verify the source of the infant formula. Evidence indicates
that the distributors were making up to $1 million or more a
year. Many of them were enrolled in State welfare programs such
as Medicaid and the food stamp program and were declaring
incomes to the IRS of less than $10,000 a year. In addition,
some had visas that were expired for up to 10 years while
collecting government benefits.
As of November 2003, TDH has referred about 40 cases to the
Texas Attorney General's Office for civil prosecution. Civil
penalties for violations of the act are up to $25,000 a day per
violation. The Texas Attorney General, John Abbott, has
appointed three special prosecutors to file these cases on
behalf of TDH.
In 2003, the 78th Texas Legislative Session increased the
criminal penalties for violations of the act from a misdemeanor
for the first time conviction to a State jail felony for the
second conviction. However, District Attorneys are reluctant to
prosecute these violations.
Since TDH started conducting these inspections with law
enforcement, we have seen a decrease in the distribution of the
stolen infant formula back into commerce in Texas through
unlicensed distributors. However, the thefts continue. Thieves
are now selling the infant formula, high-priced drugs and
device items at flea markets. In 1999, an act, Chapter 35 of
the Business and Commerce Code became law. It states that
infant formula, drugs which include over the counter and
prescription, and contact lenses cannot be distributed at flea
markets. Due to the extraordinary number of flea markets
throughout the State, TDH does not have the resources to
conduct investigations at all flea markets. In addition, TDH is
now investigating pawnshops that are buying infant formula and
over the counter drugs from thieves and selling the products at
flea markets. A more recent development is the discovery of
infant formula for sale in the classified sections of local
newspapers.
Our investigations have also revealed that stolen infant
formula is going to unlicensed distributors who have moved from
Texas and set up their operations in other States. In addition,
the product is readily available through Internet auction
sites. This is a national problem. There is a need for strict
consistent legislation concerning the distribution of infant
formula, drugs and medical devices in all States.
Thank you.
[The prepared statement of Mr. Borden follows:]
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Mr. Souder. Thank you very much.
I'd like to recognize Mr. Clemmer on behalf of the Texas
Attorney General.
Mr. Clemmer. Thank you, Chairman Souder and Congressman
Carter. Again, my name is Don Clemmer, I'm the Associate Deputy
Attorney General for Criminal Justice. I work under Attorney
General Greg Abbott and it's a pleasure to be here today. We
appreciate the invitation.
My role is to supervise the work of our Criminal Justice
Divisions which include a number of Assistant Attorneys
General, three of whom are with me here today, Kent Richardson,
Joe Sherlock and Harry White. They are the attorneys who have
been assigned by Attorney General Abbott to handle what we call
the infant formula theft cases.
I'd like to confine my remarks just to their work. I think
the Pasadena Police Department and DPS representatives summed
up what the facts are in these criminal schemes. In October
2002, we met with Pasadena Police Department representatives to
discuss what was going on. They brought this to our attention
and it was quickly recognized that this was not something that
was being handled particularly well in the criminal justice
system. But in our discussions we recognize that there was
something we could do in working with the Texas Department of
Health in dealing with these criminal organizations because
they were dealing with adulterated food products and that type
of activity was something that the code, the Health and Safety
Code, had provisions that we could work with.
Commissioner Borden has described some of those provisions,
but basically a person who's involved in selling food,
wholesaling food, retailing food, they're required to keep that
food in a certain safe and unadulterated manner. If they
violate those regulations, they're subject to certain penalties
that are set out in the code and so we saw an opportunity there
to deal with these organizations on a civil level rather than a
criminal level. What we did was we started working with the TDH
inspectors who would go in to these different so-called
wholesaling operations and look for violations. They would then
bring those violations to us and at that point our attorneys
would go into court and file for civil injunctions against
these operators which is kind of unusual, I think, you'll
recognize, to use a civil injunction against a criminal
organization, but based on the laws that we have on our books,
this looks like the best way to actually substantially impact
these organizations.
Part of that was because, as was already mentioned, the
criminal penalties for this type of activity, it's Class A
misdemeanor to State jail felonies, neither of which is a
particularly strong deterrent who's involved in this type of
activity. The profits are just too large. This type of penalty
doesn't scare them off. However, the civil penalty that's
involved, the $25,000 per violation really becomes a penalty
that they begin to fear. They begin to take that into account
when they're conducting these businesses, so we proceeded with
a civil injunction remedy. And I think we've had fairly good
results with that. One of the interesting things about the
cases themselves though is, as you might imagine, when you're
in a civil lawsuit and you're requesting discovery from the
other side, typically, you're dealing with a legitimate
business or legitimate defendant and they're going to provide
you with discovery, but in these cases almost in every
instance, the people we were filing cases against refused to
provide any discovery. They took the fifth amendment to all of
our discovery for the most part which again tells you what type
of people we're dealing with.
Our client in these cases is the Department of Health.
We're there to enforce their regulations that are set out in
the Health and Safety Code. Again, it's kind of unusual. We're
using a regulatory scheme to try to combat what is essentially
a criminal organization, but again it's something that we found
was more effective than trying to pursue the criminal laws that
are currently on the books.
Since beginning this effort, we filed lawsuits against 15
individuals and 11 corporations. Those suits have alleged over
200 individual violations of the code, more than 10,000 cans
and 1,000 case of infant formula have been seized. The value of
those seizures is put at almost $1 million.
We've also been told and I think you'll hear later that the
retailers have reported that there has been a reduction in--
actually there's been an increase in the demand for legitimate
wholesalers to provide infant formula which indicates that the
illegitimate wholesalers are being put out of the picture to
some extent.
Again, I'd be happy to answer any questions you might have,
but to conclude, I'd just like to state that Attorney General
Abbott and his staff are anxious to continue this effort and
they appreciate your interest in this and we'd be grateful for
any continued support and any support you can give us in any
way in dealing with this very serious matter. if there are any
questions, I'd be happy to answer them.
[The prepared statement of Mr. Clemmer follows:]
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Mr. Souder. Mr. Jacks, we're going to let you close the
first panel and I appreciate your coming this morning.
Mr. Jacks. Thank you, Mr. Chairman and Congressman Carter,
thank you for extending the invitation to our office and I did
not have any prepared comments that I've presented, but just
let me begin by giving a little bit of background.
As mentioned, my name is Jim Jacks. I'm the first assistant
U.S. attorney in the northern district of Texas. Our office has
been involved in investigating and prosecuting these types of
cases for several years now. One of the first cases that was
brought in this area was brought by our office. The case
originally involved strictly infant formula and the difference
in that particular case or the facts surrounding that
particular case concerned the fact that at that time many
retailers were using infant formula as a loss leader and
basically selling it for quite a discounted price, offered
rebates and a great deal of that product in that case was being
acquired legitimately or it was not stolen. But at such a price
that it could be repackaged and sold for great profit for those
people that were obtaining it.
So our case originally involved actually conspiracy to
traffick goods with counterfeit marks as Mr. Pena alluded to in
his comments. That case was indicted and prosecuted. The
defendants were convicted and after the jury's verdict, the
Judge granted the Rule 29 motion to set aside the conviction
based upon the defendants' motion that the goods were
actually--that there was no counterfeit mark. The counterfeit
mark which was the subject of that particular indictment was
actually, as Mr. Pena alluded to, the defendants were making or
having made by a printer new boxes which bore the mark of the
manufacturer and the formula containers then were repackaged.
The court ruled that because it was legitimate formula, it was
not counterfeit formula, that did not fall within the statute.
The Department of Justice appealed that case and the Fifth
Circuit reached the same conclusion as the court did that while
there may be a civil violation for trafficking in a counterfeit
mark, the criminal violation of the evidence was not there to
support that because, in fact, it was legitimate formula.
Since that time, as has been mentioned by other members of
the panel, it appears that persons involved in this crime have
shifted their tactics and are now resorting to out and out
theft either through shoplifting or burglarizing businesses. We
do have another case that has been indicted. It's set for trial
and that case is probably going to go to trial some time
between now and the end of the year. I can tell you that the
Department has focused on these types of activities. There are
several investigations going on all around the country. The
agents involved in those investigations have met. The
prosecutors involved in those investigations have met. They are
in touch with one another. They know each other very well and
they keep in contact in terms of sharing information and
suggestions about how to address the problem. So it's something
that the Department of Justice is aware of and the U.S.
Attorneys Offices around the country are very actively involved
in investigating these types of crimes.
If the committee has any questions, I'll be happy to answer
any questions I can.
Mr. Souder. I'd first like to deal to Congressman Carter,
to open the question.
Mr. Carter. I'd like to start off by saying thank you to
all of you for testifying here today and thank you for the
efforts that all of you are putting forward in this, what I
consider a very serious situation.
The fact that we're talking about baby formula ought to
offend every mother in the United States, as far as I'm
concerned, that somebody would be illegally trafficking
something that we would give to innocents. I want to
particularly commend the Pasadena Police Force and DPS for
doing a great job bringing this to light.
A couple of things were mentioned and first, I don't know,
maybe Johnnie, you want to answer this. How closely are we able
to tie this to Middle East terrorists right now, the FBI,
you've been working with the FBI on this also, is my
understanding, is that correct?
Mr. Jezierski. Yes. We've been providing information to
them, but that would really be something they'd have to answer.
I can't say that there's any prosecutable evidence that
connects this group to terrorist organizations.
Mr. Carter. Now Mr. Pena, you mentioned that these 60 some
odd groups of shoplifters, most of those people are in
violation of immigration laws right now?
Mr. Pena. From my understanding, often many of these
individuals are in some type of violation. They either
overstayed. They came in as students and they're not students
and/or they illegally enter the United States.
Mr. Carter. What's the general procedures when we catch a
group of these people? When we catch a group of these people,
because I know we are catching some of these groups, are they
being deported?
Mr. Pena. Yes, prosecuted and deported. If we can prosecute
them for a criminal violation, if they had been deported
previously and then they re-entered, we're going to prosecute
them for that violation and try to get additional jail time and
then deport them and keep them out of the country.
Mr. Carter. One of the things that I'm curious about, that
I think I understand from the U.S. attorney's unfortunate
situation with their first prosecution, but the DA's reluctant
to prosecute, State jail felonies. My DA certainly wasn't
reluctant to prosecute State felonies. Does anybody want to
comment on why people are reluctant to prosecute State jail
felonies?
Mr. Clemmer.
Mr. Clemmer. Congressman Carter, I don't know if it's so
much a reluctance to prosecute the case as it is knowing that
the potential punishment is so low that it's--I just don't see
a lot of local DAs being able to de bono for resources to this
type of case versus something that they would view as more
serious violation.
The cases certainly can be prosecuted, but from what we're
hearing, and again, this is something the local DAs handle, as
you know, it's just prosecuting a shoplifting case, it doesn't
get as high up on their radar as something else.
Mr. Carter. It's not as glamorous anyway.
Mr. Clemmer. Exactly.
Mr. Carter. But with the knowledge that we're now able to
tie this in to activities, both illegal activities
internationally and relating to drug laundering, drug money
laundering, a 2-year stay in the State jail the way we used to
have our probation/parole system in Texas would have been a
considerable sentence because you do State jail time day for
day. You'll get good time and you don't get parole.
Mr. Clemmer. Yes sir.
Mr. Carter. And so I don't rightly understand that
thinking, except it's not very glamorous and you don't make the
headlines for sending somebody to prison for shoplifting baby
formula. Unless we better educate the public as to what this
relates to, and the overall scope of what's going on, here in
this country because we've already heard from this testimony
that we're talking about millions of dollars. And when you
start talking about millions of dollars, it's pretty bad.
Does anyone know anything about electronic tagging system
that some people are proposing to tag this merchandise so we
catch a warehouser and make a bigger case? Has anyone heard
anything about--anything like that? You may need to talk to the
merchandisers about that.
Mr. Jezierski. I believe Joe Williams probably would be
able to give you more information on that in the last panel.
Mr. Carter. OK, thank you. Thank you, Mr. Chairman.
Mr. Souder. I'm missing one basic factor and it would help
if somebody could clarify, if I could do that. When they steal,
let me actually go off with Jack's last statement. When
companies are using it as a loss leader and then they're re-
selling it, in other words, they're buying it legitimately and
then re-selling because of the profit differential, my basic
struggle is where is the market to repurchase this? In other
words, if they can buy it in a legitimate store, at that price,
is there a distribution network that's missing, Mr. Merritt and
Mr. Jezierski?
Mr. Merritt. Yes, a very intensive distribution network.
There's various, I guess you'll call them fly by night export
companies or wholesale companies operating out of storage
buildings. We've got over 30 of them in Houston. The
convenience store, the neighborhood convenience store, is a
grass roots outlet for some products. Many of the members of
this organization----
Mr. Souder. What I'm trying to understand is, is the
selling price that they're selling it, higher or lower than
what you could get it in the legitimate store?
Mr. Merritt. It depends on where it's being sold at. The
cans cost in the store $10 or $12 a can. They buy it from a
shoplifter for $5. If they sell it--then they sell it, they
sell it to the WIC store and they are reimbursed from the U.S.
Government at a premium price in the rebate program, sometimes
up to $10 or more. We see this in California where the rebate
program is the highest in the country, they're getting $16 a
can. So the cheaper they can get the can, usually it's stolen,
the bigger the profit is when they get reimbursed by the U.S.
Government.
Mr. Souder. In understanding our basic concerns, that we
have the health concern about the storage and contamination. We
have the theft concern from legitimate retailers. We have theft
concern with the Federal Government. We have what these
organizations are doing with their money, but the consumers are
not necessarily paying a higher price?
Mr. Jezierski. When you have companies that are losing
money, they're going to pass those costs on to the consumer.
Mr. Souder. I have a retail background, but as far as the
infant formula, that's why there hasn't been a focus on whether
somebody who's buying infant formula in the street may not be
paying a higher price. That's why you haven't mentioned that as
the concern. The taxpayers are paying a higher price. The
companies have to cover their losses. But if they are selling
it as a loss leader, there are no losses.
Mr. Jezierski. In response to that, we got a call when we
aired this publicly in a crime stoppers program here in Houston
from a person who said that he took credit for beginning this
operation many years ago and said when it began then, it was a
legitimate operation. They did acquire their product legally by
buying in loss leader prices. He said that this group now has
changed every one in it to criminals. They all operate stealing
the formula now as opposed to the way they operated years ago.
Mr. Souder. There's been allusions to other things. What
would be some--do you view baby formula as the biggest part of
these kind of theft rings? What other products would they be
dealing in? Is baby formula the dominant problem?
Mr. Jezierski. It's dominant, but cigarettes are probably
right up there with the same, over the counter medicines. The
Health Department, in their program has some pictures of
products that have been seized. They include Zantac, Pepcid AC,
glucose test strips, and the glucose monitors. Basically they
target higher priced items that are available that they can
steal easily. And those are the items that we see them
marketing.
Baby formula, because of the efforts that we have done in
Texas, has slowed down. It hasn't stopped. We've impacted them,
but they're still operating, stealing formula. But they've
refocused a lot of their attention to the over the counter
medicines. Fortunately, the Health Department also regulates
those items and we think we'll be able to do something about
that problem also.
Mr. Souder. Mr. Pena, on the networks that are involved in
this, my understanding is that the financial tracking of
potential terrorist organizations is over at the FBI. In ICE,
do you still track this and what about if it's say a Guatemalan
group?
Mr. Pena. We're still heavily involved and committed to
financial investigations. It is a top priority of ICE about
money laundering, whether it be narcotics, money involved
through corruption and there is a big focus in ICE on money
laundering investigations. And if I understand your question
correctly, Mr. Chairman, the commitment is whether--the FBI is
lead agency now, financial terrorism. We will work closely with
them. We are looking at the vulnerabilities that exist that
offer those opportunities to either terrorists or smugglers or
whatever. That's the main focus now, the legacy of Customs and
legacy of INS are directed to those areas. They're our
cornerstone program which is identify infrastructures whether
it be wire remitters, the banking system that could facilitate
some of these activities to move the money throughout,
internationally, you can get the proceeds back to these.
Mr. Souder. If you could answer this or Mr. Jackson or Mr.
Clemmer, really anyone who could. In trying to distinguish
between--let me deal with the Central American groups because
that seems to be actually the greatest number according to the
statistics that you're dealing with. Do their remittances
factor their home countries for the most part? In other words,
one of the--I understood from the testimony that the
remittances of the Middle Eastern groups often goes back to the
Middle East. Is that also true of any of the other groups that
you've been able to identify?
Mr. Merritt. I think most of the Central Americans, the
illegal aliens, they're kind of nonentities as far as the
government is tracking their money. They don't have bank
accounts or if they do send money about--they don't have
established financial storage deposits to track it or subpoena
it. It's kind of hard to figure out----
Mr. Souder. So I think there's another thing that we need
to establish. In the testimony there were a number of arrests
and people involved in this and the numbers were greater in
Central American numbers than South American numbers, but
you're saying those cases weren't as organized? In other words,
do the Central American or Hispanic groups, do they have false
front warehouses with large networks or is it just the Middle
Eastern groups that are more organized.
Mr. Merritt. We know of two different groups in Houston.
The vast majority of the fencing level suspects were Middle
Eastern. We know a couple of Hispanic subjects that have
fencing operations that we were able to look at financially,
but the vast majority were Middle Eastern.
Mr. Jezierski. I'd say the higher level of the fences are
the Middle Eastern.
Mr. Souder. How do you determine, Mr. Pena, when something
is basically a group of crooks that need to be shutdown and
when they're terrorist suspects? How are ICE and FBI going to
make that tradeoff?
Mr. Pena. I think that the distinguishing factor now is
that the FBI will have the lead, as it is now, to the
Memorandum of Understanding that was signed recently on when we
had the Operation Green Quest. They'll have the lead on these
investigations and they're to be worked out of the Joint
Terrorism Task Force. If we've developed information
independently of the FBI, then we will bring it in to the Joint
Terrorism Task Force with our agents' participation, full
participation, but the leadership will be the FBI's through
this Memorandum of Understanding that was signed off on.
Mr. Souder. But if it was a Guatemalan fencing group?
Mr. Pena. Regardless of whether it was a Central American,
Mexican, Middle Eastern, it's the same protocol.
Mr. Souder. Because the FBI would have Financial Crimes and
not just terrorism?
Mr. Pena. I stand corrected. If it's tied to terrorism, if
the link is terror. If there's not a link to terrorism, then
the ICE will be the lead agency, will pursue that investigation
independently.
Mr. Souder. Like a traditional Customs case?
Mr. Pena. Like a traditional Customs case.
Mr. Souder. So if a case is transferred over to the FBI,
there's a reasonable doubt as to whether it should be
investigated as a terrorist case?
Mr. Pena. If it is transferred over?
Mr. Souder. In other words, it's not going to be
transferred over the FBI unless there's a possibility that they
think there's a terrorist link?
Mr. Pena. Correct and that is what was agreed upon in the
Memorandum of Understanding when they dissolved Green Quest,
was that only those cases that there was a link to terrorism
would be going over to be worked at the Joint Terrorism Task
Forces.
Mr. Souder. A link is the potential?
Mr. Pena. From my understanding of reading the agreement,
it has to be almost conclusive that says this organization is
involved in terrorism and at that point that case is going to
be controlled by the FBI.
Mr. Jacks. Mr. Chairman, maybe I can shed some light on
that. As Mr. Pena pointed out, these Joint Terrorism Task
Forces exist in every judicial district now in every FBI region
and U.S. Attorney's Office and what generally happens on the
ground is that as these names come up in the investigations,
Immigration or whoever--they have agents assigned to these task
forces and they will contact their representative on that task
force and say we've come across this name, does it show up in
your indices? So Immigration does have access. The Immigration
agent assigned to that Joint Terrorism Task Force has access to
these FBI indices and they can run that name and say yes, it
does or no, it doesn't or it has a different spelling. It's
something like that, so there is that flow of communication
back and forth. And just because it doesn't show up the first
time the Bureau and the Terrorism Task Force, that is not the
end of the discussion at that time.
They continue to monitor, but those agents investigating
the infant formula or the organized theft, will continue to
proceed. But their information as it comes across, for example,
they'll say we found out that this subject we're looking at is
sending money to Jordan and it's going this route. If we give
you that information, does that change your answer?
So that information continues to flow back and forth. All
of us in Federal law enforcement and State law enforcement are
always looking for that connection and our antenna are up all
the time to see if any of this is related to potential
terrorist activity or support for terrorism overseas.
Mr. Souder. Mr. Carter.
Mr. Carter. Just to clarify something. I've misunderstood
and I want to make sure--this relationship between the Central
American shoplifting team and the Middle East is that almost an
employer/employee relationship? The Middle Eastern
organizations more or less contract with these guys and they go
out and steal for these Middle Eastern operations? Is that the
way it works?
Mr. Merritt. In many cases, yes. In many cases it could be
described as a regular vendor they deal with. Like if you were
Mr. Smith, this is a guy that he buys his regular stuff from,
but we've been able to establish in some cases these people
have lived with Middle Eastern fences from time to time, travel
with them. When theft suspects are in prison, we get Middle
Eastern fences visiting them in prison, putting money in their
commissary, taking care of them.
Mr. Carter. Do you feel like that they may, in fact, have
recruited these illegals to do this work for them?
Mr. Jezierski. I found it interesting that on some loan
applications, the Middle Eastern folks were signing off as
employers to some of these people for them to get their loans.
Mr. Carter. So it's an employer/employee relationship that
they've developed?
Mr. Jezierski. Yes.
Mr. Carter. There seems to be a little bit of confusion and
so they really wouldn't have a storage operation as much as
just taking the stuff to the Middle Eastern store?
Mr. Jezierski. That's correct.
Mr. Souder. Mr. Borden, have you seen much response at the
Federal level or investigations further up the system? I kind
of gathered from your testimony that there's a general
awareness, but how much because the numbers that you have here
in Texas, once you got into it, were fairly staggering?
Mr. Borden. I see quite a bit of response from Customs,
FBI. I haven't seen a whole lot from FDA at this point. I may
not be aware of everything that they're doing.
Mr. Souder. You've not seen any additional things come
through the WIC program that suggests that they understand that
this problem could exist elsewhere?
Mr. Borden. I haven't dealt with WIC people. I've not dealt
with the Federal WIC people. I think there's a willingness at
the State level for funding for positions to give us just
strictly to do WIC stores and we're currently working on that
to try to get that position. Those moneys will ultimately come
from the Federal source.
Does that answer your question?
Mr. Souder. Let me just make a couple of statement that
were behind some of my earlier questions. The jurisdiction of
this committee is very broad in oversight. The overall
jurisdiction is narcotics and we work with narcotics issues
very closely. But among other things we have the Department of
Justice, Department of HHS, Department of HUD, Department of
Education, Commerce Department, basically because when we first
looked at narcotics we combined a lot of the different
agencies.
In addition to narcotics, I'm also on Homeland Security and
the Committee on Homeland Security and part of our dilemma as
we tackle these often separate, but potentially inter-related
questions is all the jurisdictions of the Federal Government,
State government, local government, different agencies, and
different initials. It's like once you get in one category of
human services, you have a whole number of initials just inside
the Department of Health and Human Services and then WIC and
food stamps come actually under Ag, but they're interrelated
with Human Services side which is just baffling. I have an MBA
and I get confused and I've been doing this stuff for years as
a staffer and as a Member.
No wonder on the street when actual people are trying to
get services for the poor, who are trying to get government
services they can't figure it out because we in government
can't figure it out. How in the world can they possibly figure
it out?
It leads to opportunities for all kinds of other people
through convenience stores and all sorts of distribution
networks because we're kind of all cockamamie in the Federal
Government as to how we're doing a lot of this stuff and trying
to get it organized.
Now in the Homeland Security question, it's ironic here
because the ICE is in Homeland Security. FBI is not. FBI is
under the Department of Justice. We have, in this committee,
subcommittee, jurisdiction over FBI; in any narcotics that's in
Homeland Security. And it shows the difficulty even in how
Congress is set up to try to figure out the oversight transfer
of these different type of programs.
Now we have all the local task forces which has everybody
in it, but I have this great fear that we're going to have, if
we actually did a flow chart some time with the Federal
Government that 60 percent of your little date planner would be
meetings and 40 percent would be going out and getting
criminals because we have so many different overlapping
jurisdictions. We're trying to address that because I think
hearings like this are helpful for us as Members of Congress
and the general public and you all to see the challenge here.
What looks like a common theft ring, just a bunch of people
stealing, could be just a bunch of people stealing. But when,
right now if you said what's the biggest challenge, No. 1, or
anybody who forgets that jobs is a No. 1 issue won't be a
Congressman for very long, unless, of course, there's a
terrorist attack and then they go well, why don't you pay
attention to terrorist attacks? So those obviously safety in
the country and jobs are the two big issues. And this is an
example of them convening even if it was just a security and
theft issue, we would have to be concerned about, not to
mention a health risk to the individuals. We would have to be
concerned about it. But we're all watching because as we know,
as we get better in the government of shutting down
illegitimate ways to launder money, that are above ground, for
example, fake foundations, we drive it underground and just
like as you close down legitimate opportunities or quasi-
legitimate opportunities to take the infant formula at a markup
price then move to theft. As they move to theft, and they get
hooked up, we don't know what happens. It could be a bunch of
people enriching themselves and selling it to a higher market
because they have the connections. On the other hand, it is
potentially going to be a terrorist nexus. And just like
narcotics are, just like trafficking in human beings are, and
we have to be increasingly vigilant at the State, local and
Federal level to watch for how the criminal organizations are
going to work because ultimately they're going to interconnect
and it's very interesting for me ever since Judge Carter first
raised it, because I hadn't really thought, nor have most
American people thought kind of conventional theft/fencing/flea
market/convenience store type of ripoffs, feeding into
terrorist movements. We don't know that, but the fact is from
what I understand from the testimony if the FBI thought there
was a potential terrorist connection, they don't have
jurisdiction on this case.
Is that correct?
Mr. Merritt. That's correct.
Mr. Souder. It would suggest that at least some of the
names were showing up as potential risk people which is very
hard since we all know the difficulty of cell groups, until
there's an action committed, you don't know for sure whether
the person has committed it, but it means some of the suspects
had either ties to certain mosques or ties to certain groups
that suggested that they were on a watch list. And this is a
very controversial question in the United States, but it's one
we have in narcotics. We have it in other terrorist groups. If
you show up and you're the police department, if somebody has
been somehow picked up in three different raids on another
subject, whatever it is, stealing cars and you see them around
that, you've got them on a watch list and they show up in the
fourth one, you're going to assume they might have something to
do with the car thefts. Same thing here.
Does anyone else want to add anything? I wanted to try to
make a connection because it's been interesting to try to do
that and see at our level how we're trying to look at it too,
but it's very difficult because as the cross jurisdictions hit,
and as we try to figure out how to do this intelligence, there
is no clear cut answer for the American people because a
terrorist doesn't check in at a border and say I'm part of a
terrorist network. We don't know what we basically get, so we
have to figure out how to work through the process in between.
Mr. Merritt.
Mr. Merritt. I've submitted a copy of the same binder with
my written statement. I've included articles we've been
collecting throughout the United States for different
investigations. Many of these articles referencing cases while
suspects have been indicted with the people in these articles
in other States. One article here, although I'm sure there's
any connection in reference to our suspects, but Dr. Al-Arian
from Florida, several businesses he owned are Russian-related
businesses or stores. They've just indicted most of these
businesses owned by him for trafficking in stolen infant
formula. He's been identified by the FBI as the leader of the
Palestinian Al Jahar group as a key fundraiser by the Secretary
of the United States. That's just an example.
Also, we have the Hizbollah cell that was taken down in
North Carolina in 1998 that was trafficking in cigarettes and
operating identically, we almost have matching photographs of
suspects, personal photos of subjects, the name is just
different. It's the same exact MOs, it's the cell they had out
in North Carolina and that was shown to be a terrorist cell for
Hizbollah.
I can tell you from a street officer's perspective what
we're seeing in our communities, these stores are connected to
the organizations we're investigating. There's a very
disturbing pattern. Many of these stores they now own anywhere
from 20 to 30 properties, residential properties surrounding
their stores. We're seeing street crime increasing dramatically
around these stores. They're selling narcotics over the
counter. They're bringing the neighborhood around them down.
We've got narcotics transactions and we're trying to follow--
they're running full-blown pawn shops, buying items stolen from
house burglaries, car burglaries and thefts. These stores are
running full blown pawn shops in the back, keeping track of who
they're loaning money to, buying stolen property off the
street. I've personally recovered stolen property from several
of these stores.
Mr. Souder. Mr. Clemmer, is there any law holding that pawn
shops and flea market owners are themselves accountable?
Mr. Clemmer. There are laws on the book. I can't give you a
real clear answer on how it would apply in this case. We're
looking at that, but I'd be happy to look into that and give
you an answer on that question.
Mr. Jezierski. I'd like to say if you think of terrorism as
a state of mind, a mindset that these people have, many of
these suspects have that same mindset that extremists view of
America as their enemy. One of the subjects that we had in our
office interviewing said that if he was younger, he would blow
something up. That's a mindset. Is he a terrorist? He has
similar beliefs. Several of the people who got arrested in the
Dallas area indicated that same mindset.
In Arizona, there was an article that I submitted that
connects Hani Hanjour to some of the suspects in the Arizona
case. Does that make them terrorists? They have associations
that connected them to a known terrorist who flew into the
Pentagon. How do you define a terrorist is the question.
Mr. Souder. There are those that define it as those who
commit acts of terrorism, and those who harbor them or fund
them. It's pretty clear.
Mr. Merritt. One of the big problems, you get intelligence
about these guys and the problem is you sometimes never let
that cross into the public sector, so somebody may know
something about a guy, but he cannot be on the list of his own
and it's just--it's frustrating because once the money gets
over there, you can't track where it goes.
Mr. Souder. This is not going to be easy, but none of your
jobs have ever been easy. You have to be able to prove it and
we have to be very careful. We're on a fine line here because
most of us, quite frankly, I say this all the time, up in my
area we have--because of our proximity to Detroit, I have one
rural high school in northeast Indiana that up until a few
years ago, the only other foreign language was German because
we were mostly German, but now they have teachers of Farsi, 23
languages in the school and there's 800 kids. It is a different
challenge, but you know what? Most people like me do not know
who the strangers at the mosque are. And the truth is is that
we have to be very careful as we profile and make general
statements because our best defense right now are the many
people of Middle East descent who come in and who can identify
those within who are the strangers. I often have heard and I'm
sure it's true in Texas too, people come up to me and say
there's all these drug problems and I know this person is
dealing drugs and the police won't do anything about it and the
courts won't do anything about it. That's because you have to
have hard evidence, not a suspicion or rumor. It's difficult,
it's higher risk here in terrorism and we're all worried about
it because weapons of mass destruction, while they aren't
killing as many people as narcotics because we have like 20,000
deaths a year because of narcotics and we've had 3,000 over the
last 2 years from terrorism directly on our soil. Never the
less, the fear that people have is a bag of anthrax this big
can take out 3 million people in Washington, DC, is a different
level of fear and we have to be systematic. We have to do the
type of thing we're doing today that you all are doing, taking
apart their means of financing. Fortunately, we seem to be
ahead of them. They've been saying they're going to kill us for
2 years and they haven't executed on our soil. On the other
hand, they're aren't looking for short term. This is like a 100
year or 200 year project. So we have time to work with it, but
we can't let our guard down at all.
Thank you very much for coming today. If you have
additional statements, we'll make sure we get the different
articles submitted and your full statement in the record.
The second panel can now come forward. The second panel
consists of Joe Williams, Gulf Coast Retailers Association;
Darrell Taylor, HEB Grocery Chains; Deborah Brookshire, Texas
Department of Health; and Frank Muscato, Investigative Task
Force, Wal-Mart Stores.
As you come up, if you can remain standing I'll give you
your oath. Please raise your right hands.
[Witnesses sworn.]
Mr. Souder. Let the record show that each of the witnesses
responded in the affirmative.
Let's again, we thank all of you for coming, for being part
of our hearing today. We're going to start with Mr. Williams.
STATEMENTS OF JOE WILLIAMS, GULF COAST RETAILERS ASSOCIATION;
DARRELL TAYLOR, DIRECTOR OF LOSS PREVENTION, HEB GROCERY CO.;
DEBORAH BROOKSHIRE, TEXAS DEPARTMENT OF HEALTH; AND FRANK
MUSCATO, INVESTIGATIVE TASK FORCE, WAL-MART STORES, INC.
Mr. Williams. Thank you, Chairman Souder and members of the
subcommittee. My name is Joe Williams. I am president of a
retail trade association called Gulf Coast Retailers. I also
serve on USDA's National Advisory Council on Maternal, Infant
and Fetal Nutrition and I'm a member of the Food Marketing
Institutes WIC Task Force.
Our trade association has approximately 600 member
companies representing over 1,000 locations and a diverse group
of members from furniture retailers to drug stores to
supermarkets.
A lot of the background information has been given so I'm
going to get to the point. Retail theft results in consumers
having to pay higher prices for the products they purchase as
retail establishments attempt to cover their losses. From
infant formula theft, Texas currently serves over 800,000
households who participate in the Women, Infant and Children
WIC Program. This means that approximately 200,000 of that
800,000 householders are babies. Close to 50 percent of the
infants born in Texas last year are enrolled in the WIC
program.
There is compelling evidence that theft of infant formula
and subsequent repackaging, altercation, falsification of
labeling to change expiration dates, storage of formula at
improper temperatures in trucks and warehouses and finally sale
to unsuspecting WIC retailers or laundering of product through
storefronts posed as legitimate WIC retailers, flea markets or
over the Internet through sites like eBay poses a health hazard
to every infant in Texas and in the Nation who is dependent
upon this product for their sole source of nutrition.
A majority of the infant formula products stolen and then
illegally distributed back into the marketplace contribute to
funding of organized crime rings and in some cases, links to
funding terrorist organizations.
Let's talk about the scope of the Texas problem. There are
approximately 400,000 infants on infant formula in Texas at any
given point in time. Less than 2 percent of that population is
breastfed. A baby normally needs 32 ounces of fluid formula a
day. One can of infant formula powder will normally sustain one
baby for 3 days. This means that on any given day in Texas,
Texas infants would consumer 133,000 cans of powdered infant
formula assuming this was the only type of infant formula
available.
Infant formula is one of the top 10 items targeted and most
frequently shoplifted. As a product category, contract infant
formula and that's the brand that the State negotiates and
contracts for, represents over 75 percent of the brand targeted
for theft. In March 2003, and I'm only looking at that 1 month,
we estimated the amount of infant formula products shoplifted
in Texas at $2.5 million or approximately 120,000 cans of
infant formula powder. This is 1 day's complete nutritional
needs for approximately 354,000 babies in Texas or nearly a 1-
day supply.
In Texas, we organized a task force through our State WIC
Advisory Board to address this growing problem. The task force
is comprised of local, State and Federal agency personnel,
client advocates, local, State and Federal law enforcement,
retailers and retailer associations, and manufacturers. We
started meeting in December 2002. We came up with a list, a set
of recommendations that we wanted to pursue. These were: One,
we sought legislation strengthening penalties in the State's
Food and Drug Code. It was signed into law, Senate bill 1826,
signed by Governor Perry, effective September 1, 2003.
We wanted to develop contract provisions that would require
WIC vendor retailers, grocery stores, to only purchase infant
formula through State licensed, inspected and regulated
wholesalers. The Department of Health WIC program through the
blessing of the USDA has now put that in place and that was
effective with the contracts signed effective October 1st.
We wanted to work with the national infant formula
manufacturers to develop product packaging that will accept
security tags. As of this date that's going through the
research and development departments.
We were seeking to raise industry, law enforcement and
State and Federal legislators of the awareness of the issue and
its dangerous health concerns without creating a Tylenol panic.
If you remember back to the 1980's, with Tylenol, four bottles
of Tylenol were tainted and we're talking about thousands of
cans of infant formula.
As part of our efforts we have visited with Under Secretary
of Agriculture, Commissioner Bows. We've also visited with the
Food and Drug Administration Commissioner, Commissioner
McClure.
One of our earliest issues was to work to develop
legislation at the State level forbidding the sale of
consumable food items, infant formula and baby food, usually
consumed by children younger than 2 years of age. This bill
actually was House bill 749, was signed into law by then
Governor Bush, effective September 1, 1999. As you've heard
Frank Borden talk about, they don't have the staff right now to
really followup with that legislation. In Texas, we have
legislation concerning flea markets, but now we're working to
get them an enforcement agency so we can have that in force.
This year, we're also sponsoring and looking for support of
Senate bill 1553 sponsored by Senator Larry Craig of Idaho and
the title of the legislation is ``Organized Retail Theft Act of
2003.''
Another point, we were working to seek legislation or
regulation of the sale of consumable food items to children 2
years and younger and other items like prescription drugs via
the Internet through on-line flea markets like eBay. I'm
talking about Federal.
To give you some concrete results that you can look at, we
talked to our wholesaler members and we also talked to our
retail members. I've got a major wholesaler that operates here
in the Houston area, serves over 1,000 supermarkets from
independents to multi-chain operator. When he went and looked
at his sales information for March 2003 which was kind of the
starting point for us and then re-looked at his sales for
September 2003 which was about approximately 6 months down the
road, his overall business was up 6 percent across the board
through the market.
When he looked at infant formula category, this category
itself, the volume there was up 12.5 percent, not related
strictly to new business, but the fact that he found that when
he visited with his retailers, a lot of the retailers were
buying most of their goods and services through his company,
except for infant formula. They were buying infant formula
through a specialty distributor, if you will, who later was
indicted here in our State for being part of organized crime.
To retail that additional 6.5 percent, this wholesaler,
that's an additional 2,200 case of product per month or another
way to look at that, that's enough infant formula to feed
40,000 babies.
We also looked at a smaller wholesaler that operated in the
rural area and much the same thing, specifically, I can tell
you we looked at our contract formula, Enfamil Powder, his
distribution in sales of March 2003 were 2,763 cases for the
month of March. For the month of September, it was 4,201.
If you look at retailers, and I won't go into all of that
in the interest of time, let me mention a couple. Company B:
infant formula loss in March 2003, $220,000. Infant formula
loss in September 2003 after we enacted some of the solutions
that had been suggested, $70,000. That's a 68 percent
improvement.
Company C lost $375,000 just for the month of March. These
are just companies operating in Texas. I mean these are just
Texas numbers. Their loss in September after some of the
solutions that had been in place, $55,000. This is an 85
percent improvement and that's great and we're thrilled to
death with the response from that, but the losses still
represent for this particular retailer, enough to feed 8,250
babies.
Based on retailers participating in a market share they
enjoy in Texas, we estimate that September 2003 amount of
infant formula products shoplifted or stolen in Texas to still
be valued at $1.1 million. This is a reduction of 56 percent
since March since some of the recommendations by the Task Force
were put into place. That $1.1 million is still enough to feed
165,000 babies.
Next steps. We would like to see as WIC goes through the
reauthorization process, that USDA requires States, territories
and Tribal Councils develop a structure that licenses and
inspects all entities involved in the distribution of
authorized WIC products, including formula products from the
manufacturer to the authorized WIC retailer.
We would like FDA be requested to formally host a series of
feedback sessions with retailers, manufacturers of infant
formula products, State WIC agencies and security specialists
to research all kinds of packaging conducive to source tagging
devices or labels like the EPC, electronic product code.
We would like for the Federal Government to require States
to mandate that retailers who choose to participate as a WIC
retail vendor must meet both WIC and food stamp eligibility
qualifications for WIC vendors as recommended by the National
WIC Association.
We would like to see legislation developed prohibiting the
sale of consumable food products, usually consumed by children
2 years and younger through the Internet, eBay or other similar
on-line flea markets.
We are looking for support for Senate bill 1553 as I
mentioned, ``Organized Retail Theft Act of 2003'' sponsored by
Senator Larry Craig and my friend Thomas McClure has already
agreed that he would look at that and we really appreciate
that.
I've enclosed copies of articles from several States that
indicate this is much bigger than a Texas problem and photos
from several sting operations that we've had here in the area.
Thank you for the opportunity to testify before you today
on this very important topic. I appreciate both your
involvement and your dedication to us. And I'd be glad to
answer any questions that you may have. Thank you.
[The prepared statement of Mr. Williams follows:]
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Mr. Souder. Thank you.
Mr. Taylor.
Mr. Taylor. Good morning, Mr. Chairman, and members of the
subcommittee. I'm pleased to have this opportunity to discuss
the problem of organized retail theft in the supermarket
industry. My name is Darrell Taylor and I'm currently the
director of loss prevention for HEB Grocery Co.
HEB, just to give you some background, is one of the
Nation's largest privately owned grocery chains and has over
$10 billion in sales in our fiscal year 2003. HEB was founded
in Kerrville, TX in 1905 and will be celebrating our 100-year
anniversary in 2005. HEB currently employees approximately
58,000 employees and operates over 300 stores throughout Texas
and internationally in Mexico.
We estimate that HEB is losing approximately $8 million
annually in merchandise through organized retail theft and
obviously this is one of HEB's most pressing security problems.
Separate and distinct from petty shoplifting, organized retail
theft involves professionals who target specific items for
resale and then reintroduce these items into the legitimate
marketplace.
As discussed earlier today, they typically target household
commodities and consumer items that can be easily sold through
fencing operations, flea markets and swap meets. Even the
Internet is being used to sell these products now. In fact, a
simple search on eBay will list page after page of household
commodities ``in never-used, mint condition and in unopened
packages.'' These ``new'' products many times are often
significantly below the fair market value.
By analyzing our invoices in our stores, I've discovered
that variances exist that suggest that HEB is also being
victimized by organized retail theft. Specific products which
are being targeted include formula, razor blades, cough and
cold medications, batteries, film, cigarettes and cosmetic
items. In comparing these with professionals in other
industries, we have found that these items are also being
targeted throughout the retail industry.
Of particular concern to HEB is the organized retail theft
of consumable items such as infant formula. An analysis of our
numbers suggests that HEB lost an estimated 314,000 cans of
infant formula in our fiscal year 2003. Obviously, this is a
significant financial impact to the company.
However, more important to us is the potential health risk
that this poses for young babies. We believe that the organized
retail theft of 314,000 cans of infant formula last year
created 314,000 chances that somewhere in the United States a
mother could be feeding her child infant formula which was
purchased outside the normal and established distribution chain
and which could prove unsafe. This number increases
dramatically if you assume that other retailers in Texas and
throughout the country are suffering similar losses of infant
formula through organized retail theft.
As we talked about earlier, the reason why this occurs is
the unsafe storage conditions and temperature controls which
are not placed many times which can affect the integrity of the
product and the nutritional content and even the physical
appearance.
We believe that the organized retail theft rings target
infant formula for the same reasons that panel one discussed.
First is the demand, especially in the State of Texas,
which has one of the largest growing populations. We have
800,000 Texas families which currently purchase formula through
the WIC Program.
The profits which can be sustained through the illegitimate
or illegal market of formula. We can get $5 a can based on
bringing the formula to a fence.
There's also the risk. The risk to a shoplifter who engages
in this type of an act is seldom prosecuted and seldom
identified as being part of a larger criminal enterprise.
HEB has long supported efforts to ensure that all of our
customers have access to quality food products, whether it is
through the use of food stamps, food banks or other nutrition
programs. In fact, we provide millions of dollars in financial
support and food donations to food banks every year. HEB is
proud to partner with State and Federal Governments to ensure
that recipients of WIC are able to purchase unadulterated and
properly labeled infant formula at our stores. We therefore
support the initiatives of the WIC Task Force to combat the
organized retail theft problem involving infant formula
including the Task Force's proposal that a national law be
enacted to regulate the WIC products and make sure that they're
exclusively purchased from authorized product suppliers.
At this time, Mr. Chairman, I'd be happy to answer any
questions you may have.
[The prepared statement of Mr. Taylor follows:]
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Mr. Souder. Thank you.
Ms. Brookshire.
Ms. Brookshire. Good morning, Mr. Chairman, and Member
Carter. My name is Debbie Brookshire. I'm the director of the
WIC Vendor Operations Division which is housed within the Texas
Department of Health.
WIC provides nutrition services and supplemental foods to
pregnant and post-partum women and to children under the age of
5. The program is 100 percent funded by a combination of
Federal funds and rebates from infant formula and cereal
manufacturers. Rebates are dedicated general revenue for the
WIC program as required by Federal regulations.
Over 50 percent of the infants born in Texas receive WIC
benefits which include infant formula. An average of 117,183
babies each month are provided powdered infant formula through
issuance of a voucher which families redeem at authorized
grocers. Powdered infant formula represents an average of 60.7
percent of all formula issued to Texas WIC participants each
month. As we were mentioning earlier, it's the powdered formula
that's particularly in question here and it tends to be stolen
from frequently.
Grocers are authorized by the Texas Department of Health
Bureau of Nutrition Services under rules in 25 Texas
Administrative Code and as required by Federal regulations
governing the program.
In 2002, the Texas Department of Public Safety and other
local law enforcement officials alerted the TDH program to the
widespread problem of theft of infant formula both in Texas and
nationwide.
DPS evidence shows formula theft is organized crime, could
have ties to money laundering and financing of Middle Eastern
terrorism and the black market sale of formula to grocers for
resale could constitute a potential health hazard.
Both law enforcement and grocers confirm that the WIC
authorized formula under contract for rebate is the formula
stolen most often.
Health hazards can include direct tampering with the
formula before it is sold to unsuspecting retailers,
falsification of labeling to change expiration dates,
counterfeiting or cutting formula and storage of the formula at
improper temperatures in trucks and warehouses.
The Texas Department of Health, TDH Bureau of Food and Drug
Safety Manufactured Foods Division and the Texas WIC program
have been working together on several initiatives.
WIC developed new rules that require all grocers authorized
by WIC in Texas to purchase formula only from licensed
wholesaler distributors, licensed retailers or directly from
the manufacturer. These rules were adopted by the Texas Board
of Health and became effective October 1, 2003 which coincides
with our contract year.
The National WIC Association is using the rule language
developed by Texas WIC as a model for other States to adopt for
their own use.
SIC has revised its vendors agreement document or contract
to require grocers to provide the name and Central File Number
of the licensed wholesale distributor from whom they are
purchasing infant formula.
WIC has revised its policies and procedures to include
sanctions for WIC-authorized grocers who do not comply with the
new rules under the terms of their vendor agreements.
Bureau of Food and Drug Safety staff investigates
individuals who are suspected of violating Chapter 431 of the
Texas Health and Safety Code entitled the Texas Food, Drug and
Cosmetic Act.
The same division staff has the ability to use the
following enforcement tools: detention authority, civil and
criminal penalty authority, the ability to order or move
detained articles to a secure location, and the ability to
request condemnation of a product by court order. When infant
formula is confiscated, WIC helps fund the temperature-
controlled warehouses used to store the formula under
appropriate conditions pending outcome of the case.
For the 2004 Federal fiscal year, WIC did not renew vendor
agreements for specific grocers whose cases have been referred
to the Texas Attorney General's Office.
Updates regarding activities related to infant formula
theft are provided to WIC's Federal funding agency, the U.S.
Department of Agriculture on an ongoing basis.
Some of the retailer and formula manufacturer solutions. At
a December 2002 meeting of the Texas WIC Advisory Committee,
staff from the Texas Department of Health and the U.S.
Department of Agriculture, retailers, formula manufacturers,
committee members and law enforcement representatives endorsed
various measures to reduce incidents of infant formula theft.
In addition to the rule mentioned previously and eventually
adopted by the Board of Health, the group also developed these
recommendations for retailer and formula manufacturer action:
retailers should consider locking up formula and/or placing it
in a more visible part of the store to deter thieves; formula
manufacturers should meet and find solutions to packaging of
formula that will allow for security tagging. Current packaging
does not allow for sensors.
Some of our conclusions. There is compelling evidence that
theft of infant formula poses a health hazard to the most
vulnerable citizens of the State, contributes to funding
organized crime activities and funds terrorist organizations.
Texas WIC has taken swift, appropriate and effective
measures to assist investigators and law enforcement officials
in their efforts to deter the theft of infant formula and to
help ensure that there is no market for stolen infant formula.
Current reports indicate that stolen infant formula is being
shipped out of Texas for resale since Texas has become too
``hot'' for this business.
Infant formula is not the only item being stolen. Staff
report that over the counter medications, razors and other
consumer commodities are being stolen, warehoused and resold by
some of the same individuals.
Texas WIC is proud of what they've done to take steps to
deter this theft and resale of infant formula. At this point we
look to investigators, law enforcement officials and
legislators across the country to work jointly to eliminate
this problem.
If you have any questions, I'd be happy to answer them.
[The prepared statement of Ms. Brookshire follows:]
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Mr. Souder. Thank you.
Mr. Muscato.
Mr. Muscato. Good morning, Mr. Chairman, members of the
committee. My name is Frank Muscato and I am an investigator
for Wal-Mart Stores, Inc. A measurable part of my duties is
working organized crime as it relates to retail theft. I live
in Bloomington, IN and I work out of Bloomington. I believe to
the Wal-Mart Investigative Task Force [ITF]. It was formed in
1992 out of a growing concern over organized crime in retail
theft. We're made up of investigators who have been long-time
with Wal-Mart and law enforcement. In fact, I'm a retired
police officer out of Dallas, TX. We live in different parts of
the country.
With that $30 billion a year that the FBI estimates is lost
in retail theft, it comes out to about 4 cents on a dollar. For
every dollar we spend as consumers, 4 cents goes to cover
theft. The thefts are major, internal and external and cargo
theft.
On the external theft, it breaks down into two categories,
what we call in our business shoplifters are people who steal
products for personal use, whether it be a tube of lipstick or
some food or cosmetics. They steal it for their own use or
somebody in the family versus what we call professional thieves
or boosters. They steal property to move that property on to
make money. They move this property of course to property
fences, fences are those that knowingly buy stolen property.
They're sophisticated, they're professionals. They travel
city to city, State to State, committing these thefts and then
at the back of my testimony there's a little flow chart that
indicates the path of stolen merchandise. This is not theory.
These are cases we worked over and over, whether it be baby
formula, inkjet cartridges, over the counter medications, these
cases we worked all over the country involving this.
External theft in the retail industry appears to be growing
at an alarming rate. Through our apprehensions, we substantiate
retailers are experiencing an exorbitant amount of theft by
organized retail groups. In my testimony, I've listed several
of the cases we have going right now. This is just the tip of
the iceberg of the cases that we work throughout the country.
Because State laws are soft on retail theft and retail
crime, because there are very few Federal laws addressing the
issue, retail theft is a high profit/low risk type of crime.
Felony levels throughout the country vary in different States
from theft over $100 in Vermont is a felony up to the highest
in the country which is Wisconsin, theft under $2,500 in
Wisconsin is a misdemeanor. A person can't carry that much out
of a store. He'd have to make three or four trips before it
would become a felony. We're talking two or three computers,
four or five televisions before it becomes a felony.
Here in Texas, theft under $1,500 is a misdemeanor. Theft
over $1,500 becomes a State jail felony. In Texas, theft under
$200, an officer can just write a ticket, like a speeding
ticket for theft. So it's not looked at as any kind of a
serious crime and that's why these professionals are in this.
It's a high profit/low risk type crime.
Retails spend millions of dollars on systems, camera
systems, trying to stop this. We can control shoplifting.
That's easy to control. And retailers control the shoplifting.
What is so hard to control is the professional boosters. They
come up with ways to defeat the systems we put in. We've put in
the detection systems, the AES systems and the bad guys figure
out ways to defeat those. In fact, we worked bills around the
country trying to get laws to protect us against the things
they do to beat us. For instance, an EAS system, an alarm is
set up when you walk out of a store if you didn't pay for the
product. They figured out that if they put that inside of
aluminum, it defeats the alarm, so they'll get a bag and line
it with aluminum or a purchase, line it with aluminum and
they'll just that up and out the store they go. So we're
working laws that target that, that if you use these specific
devices to defeat these systems it's a law in itself.
Joe Williams and Johnny Jezierski, on this task force they
formed back in December is proof that if we work together and
bring these things together and attack this problem, it works.
They have solved a huge portion of the baby formula theft in
Texas. It's unbelievable. It's unheard of in law enforcement to
do what they did.
Now, of course, I'm not taking this away from the
Department of Health and if it wasn't for Dennis, it wouldn't
have been done, but Johnnie and Joe started this and it
actually works. If we can move this further and with this bill
1553 in Congress, if we can get that bill through, that would
give us a tremendous tool for law enforcement, for retailers to
put a crunch on this and save millions of dollars to the
consumers.
Thank you, and I'd be happy to answer any questions.
[The prepared statement of Mr. Muscato follows:]
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Mr. Souder. Thank you. Hopefully, this didn't just give a
big boost to the aluminum purse market. They also don't have to
worry in Bloomington about all the celebrations after football
wins very often, people going on a rampage unfortunately.
Mr. Carter.
Mr. Carter. Ms. Brookshire, you talked about what WIC is
doing here in Texas.
Ms. Brookshire. Yes sir.
Mr. Carter. What about the rest of the country?
Ms. Brookshire. Well, we do know that--we do have a
representative on our subcommittee on infant formula theft from
the U.S. Department of Agriculture and Federal Funding
Southwest Region. So he's out of Dallas. I know he communicates
with his boss who communicates with D.C. about all these
issues.
Right now, they're looking at the National WIC Association
which is not actually a Federal agency, as you know, it's a
private association, is looking at adopting the language that
we wrote for our rules across the country. So they're looking,
they're sharing that information with other States and hoping
that they will adopt some of the same language to help deter
the theft of infant formula as well.
Mr. Carter. California is the Mecca for every kind of--we
just heard $16 a can for WIC formula. If you got $5 in the
theft, it wouldn't be tough to rent a truck and haul it to
California, if California will take anything they can get,
that's a pretty good profit.
Ms. Brookshire. Yes.
Mr. Carter. Is this something you think we need to do at a
Federal level? Have Federal laws to regulate this?
Ms. Brookshire. I think if you're going to deter the theft
of infant formula across the country, it has to be concerted
Federal effort, yes. Where that language would go or what laws
would be enacted, I can't speak to that because I'm not really
sure what would be appropriate, but I do know that just by
strengthening the rules in Texas, we've really, it's been
helpful and the fact that we have an entity within the Health
Department that licenses the wholesale distributors and keeps a
data base on them is really helpful for us because we require
that now on their applications. So unless they put that on
their application, we don't approve one. I know that's sort of
a rinky-dink kind of thing compared to the country as a whole,
but sometimes just doing those little steps helps a lot.
Mr. Carter. Mr. Taylor, I told you nobody shops at HEB more
than I do and I know you move things around a lot because I
can't find them. But I will tell you that baby food is always
way off in the corner some place.
Mr. Taylor. Yes sir.
Mr. Carter. I've raised lots of babies. And we've heard
some comments about moving things up to the front and I'll
address this to both Wal-Mart and HEB. Is that what you're
doing internally to put this close to where people can watch
this stuff?
Mr. Taylor. Yes sir, we actually have gone through--it's a
case of recognition and response. Once you recognize these
problems, we now are re-merchandising our baby formula
categories and even changing the types of fixtures we use. You
can't take 15 or 20 cans in one sweep. You would have to take
one at a time and we're putting them up near the front of the
registers where there's more traffic.
Mr. Carter. Is Wal-Mart the same way?
Mr. Muscato. Yes sir. We have a lot of controls. I've never
worked inside of a Wal-Mart store, but we have continuous
controls, continuous counts on the product to see what's
happening to it.
Mr. Carter. Mr. Williams, do you think your bill 1553 is
going to fix the nationwide, or at least address the nationwide
problem?
Mr. Williams. I think it's a great start.
Mr. Carter. Are you able to get that to us so we can look
at it?
Mr. Williams. Yes sir. I think it's a great start. I just
want to comment a little bit. Certainly that was one of the
areas that we looked at at relocating, but retailers are also
on the other side that those are clients coming into the store
and we do not want to spotlight or discriminate against those
clients and so if you do like with infant formula like you do
with cigarettes that you lock them up and put them behind lock
and key, if I'm a mother and I'm on the program and I've got to
go to the front, I may not even be on the WIC program. I may
just be doing Enfamil because that's what my doctor recommended
and I've got to go to the front and ask a clerk to go across
the store to unlock it to get my infant formula, that's not
really customer-friendly and we have found that in a lot of
cases.
Certainly, where the losses in the store document that we
need to take some kind of drastic action, we can do that and we
have done that on a short-term basis. That's not a long-term
fix though.
Mr. Carter. As a group, do you feel like the law
enforcement agencies are prosecuting as effectively on this as
they should be?
Mr. Williams. I think, Congressman, I have never been
involved with a more team effort working toward a common goal
than with this group, whether it was an Office of Inspector
General with USDA or with Comptroller's Office or with DPS or
Customs. The agencies, both private and public sector, came
together and we all left our egos at the door to put together a
complete task force to say OK, we know that there's not one
quick fix out there, but what are some solutions that we can
start working on and then continue to come back together to
work together and we've changed since day one. There's
different areas that we're looking at, ways that we can kind of
all work together to move it forward. I'll tell you, that's
been the best part of it.
Our concern is even though we've had a substantial impact
on it, it's still $1.1 million in September and unfortunately
what we've seen, we've shut a lot of the fences and the places
that they laundered here, but it's moved over into Louisiana.
We know that they've opened storefronts in Arkansas, for
example. So we're still being--they're still stealing it here.
We've just cutoff most of the storefronts. We've cutoff a lot
of the laundering. We haven't prevented all of the theft yet,
but we're working toward that and we're going to continue.
Mr. Souder. I'm still trying to understand a couple of
basics. Mr. Taylor, your hypothetical example of $11.99 and you
get rebated from $12, the $12 is a fixed dollar?
Mr. Taylor. Correct.
Mr. Souder. The $11.99 isn't necessarily what you pay, it
isn't necessarily what you purchase it for?
Mr. Taylor. With the WIC program, there's a guaranteed
amount that if you were stealing it off the street, you would
get $5 as a booster to come and sell it off. In the WIC
program, they have a guaranteed max of the $12.99 establishing
that profit margin. I don't know if that helps.
Mr. Souder. So is the level of profit, knowing there's some
very--I'm still trying to figure out the lost leader thing from
earlier.
Mr. Williams. Can I explain that because it's hard to
understand. You have to realize that across the board generally
the wholesale cost or the price of that product, let's take a
hypothetical. Let's say it's $12. And under the WIC program--
the WIC program, their retail price is the same price if you
and I went and bought the product. Our retail on that product
may be $12.10 and we pay $12 for it. OK? A small retailer has
to buy generally from a wholesaler. He can't go out----
Mr. Souder. Like going to Sam's Club?
Mr. Williams. Yes, like going to Sam's Club. He may
actually pay $12.10 and sell it for $12.10.
Mr. Souder. He's trying to get traffic in the store.
Mr. Williams. Trying to get traffic in the store.
Mr. Souder. So there's really no profit?
Mr. Williams. Correct. Now a large retailer potentially
will buy from the manufacturer direct. He still may pay $12 for
it, but he's selling it for $12.10.
Mr. Souder. So at some point if it isn't addressed, the
bottom line is that you as a retailer, if I understand this,
you're basically going to be reluctant to give up front space
which is your highest profit margin, presumably, people coming
in and out, impulse items. That's where you want your highest
profit items, not your lowest profit items.
Mr. Williams. Right.
Mr. Souder. You don't particularly want to have to use the
labor cost which is one of your other major things to lock up
something. In addition, it's nice to talk about discouraging
customers, but that's another element. You don't want to
discourage them from coming in and actually may encourage
another market. Things that put the pressure on retail could
eventually have the retailer decide between the theft, the cost
of labor and where I have to put it, why should I carry it?
Mr. Williams. And we have some retailers that have dropped
out.
Mr. Souder. Which limits access to low income people. In
other words, it's potentially access.
Let me ask another question. Is there any legitimate
business that sells infant formula over the Internet? In other
words, do you have retailers that would sell this over the
Internet?
Mr. Williams. Not that I'm aware of.
Mr. Souder. Is there any kind of a wholesale market from
the manufacturers that if they have an overabundance of supply
that they cut the cost? Are there times when you get a bargain
at the rate of infant formula if somebody has overestimated
market and you can get that and that there could be other
places other than theft that people could buy low income baby
formula?
Mr. Williams. No. If I'm Wal-Mart and I'm buying from Lee
Johnson which is the contract--manufacturer for the State of
Texas, certainly I'm going to get a better price than if I'm at
Joe's neighborhood grocery store, just because of pure volume.
But those are the only discounts. In most cases, those
manufacturers, that's a specialty product and they don't have
runs on it that they then volume discount for one market to
another.
We've even seen those manufacturers run extremely short
with some of their contracted formula in some States and will
issue notes out. We had that happen to us in Louisiana 2 or 3
months ago, 4 months ago. I don't quite remember, but they were
running short on the formula, so we had to put a note out to
the WIC clients or to our WIC retailers, actually, stating that
formula was short and short throughout the State. Visit with
customers when they come, allow them to purchase, they can
purchase Enfamil instead of Simulax. Simulax is the rebated
formula, in that particular case.
Mr. Souder. Ms. Brookshire, there's an assumption there's a
health risk. Do you have actual cases of somebody who that get
sick from this?
Ms. Brookshire. I don't. I don't know that there have been
any to date. We're looking at this as a preventive, we're
taking preventive measures because we uphold the public trust
and we don't want anything to happen. But at this point I don't
know of any cases where a child has been hurt or harmed by
infant formula----
Mr. Souder. Is there any history of this? In other words,
there's a presumption that it needs to be cooler for what
reasons? What are the risks?
Ms. Brookshire. For powdered formula and that's what we're
primarily talking about because that's what's primarily stolen,
the formula itself has to be kept at a certain temperature in
order to uphold the integrity of the ingredients in that
formula.
Mr. Souder. In other words, it may not work? Or is it a
health risk?
Ms. Brookshire. I think it eventually becomes a health
risk, but basically the nutritional content is decreased.
Mr. Souder. So basically it would just be wasting the
money, taxpayers would be wasting money and an individual would
think that a child could have long-term subtle health damages,
but not necessarily immediate. They're not going to drop over
dead. They're not going to have to go to the emergency room.
Ms. Brookshire. Correct. That's my understanding. And
actually it's below, the cooler temperatures that are more of
the problem than the high temperatures, interestingly enough.
Mr. Souder. It's really interesting the concept of like
what we did with drug paraphernalia laws for shoplifting or
methods of distribution. When we did that law in the
paraphernalia laws and trying to address some of that kind of
thing, the presumption is if there is a legitimate use for a
certain distribution network, collection network, that may be
actually another way to crackdown on some of the cases. If
somebody is coming in with something that's going to come in
line with shoplifting because it is hard for somebody who has
worked in retailing, if you're working against an organized
ring, it is just about impossible. It is very frustrating to
try to do that. It's kind of the cost of doing business and
since business, I can make an ideologic statement, businesses
don't pay taxes, businesses are not an entity, they just pass
it through. So you either pay your people less, you reduce the
quality of your goods or you charge people more because there's
no entity there with which to absorb shoplifting losses, taxes
or other things. It's a pass through. The business is a pass
through institution. So if we don't address that, you're going
to have to deal with it one way or another. Do you have any
additional questions?
Mr. Carter. Just one. There's a special rebate for WIC, is
that right?
Ms. Brookshire. That's correct. We negotiate a contract
every few years with both formula companies and cereal, infant
cereal companies. And we can serve almost twice as many
participants because of the rebate contracts.
Mr. Carter. How exactly does that work? You take a retail
price and you add something on top of it?
Ms. Brookshire. No. Actually, frankly, it's complicated and
I'm not sure I understand it completely either, but basically
for every can of formula that we redeem in Texas on the WIC
program, the manufacturer pays a rebate back to the WIC
program.
Mr. Carter. To the big WIC program or does that go down to
the WIC merchant?
Ms. Brookshire. No, it goes back to the State of Texas WIC
program so that we can serve more participants.
Mr. Carter. Thank you. Thank you, Mr. Chairman.
Mr. Souder. Anything else any of you want to add? We thank
you very much for this input. It's been an interesting mix of
law enforcement, terrorism and the very infrequently heard
problems that retailers face. And I appreciate your coming
today and taking the time to testify.
With that, the subcommittee hearing stands adjourned.
[Whereupon, at 12 noon, the hearing was adjourned.]