[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


                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
94-005                      WASHINGTON : DC
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001

                     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

                              ----------                              
                                                                   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

                              ----------                              


                       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:]

    [GRAPHIC] [TIFF OMITTED] T4005.001
    
    [GRAPHIC] [TIFF OMITTED] T4005.002
    
    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:]

    [GRAPHIC] [TIFF OMITTED] T4005.003
    
    [GRAPHIC] [TIFF OMITTED] T4005.004
    
    [GRAPHIC] [TIFF OMITTED] T4005.005
    
    [GRAPHIC] [TIFF OMITTED] T4005.006
    
    [GRAPHIC] [TIFF OMITTED] T4005.007
    
    [GRAPHIC] [TIFF OMITTED] T4005.008
    
    [GRAPHIC] [TIFF OMITTED] T4005.009
    
    [GRAPHIC] [TIFF OMITTED] T4005.010
    
    [GRAPHIC] [TIFF OMITTED] T4005.011
    
    [GRAPHIC] [TIFF OMITTED] T4005.012
    
    [GRAPHIC] [TIFF OMITTED] T4005.013
    
    [GRAPHIC] [TIFF OMITTED] T4005.014
    
    [GRAPHIC] [TIFF OMITTED] T4005.015
    
    [GRAPHIC] [TIFF OMITTED] T4005.016
    
    [GRAPHIC] [TIFF OMITTED] T4005.017
    
    [GRAPHIC] [TIFF OMITTED] T4005.018
    
    [GRAPHIC] [TIFF OMITTED] T4005.019
    
    [GRAPHIC] [TIFF OMITTED] T4005.020
    
    [GRAPHIC] [TIFF OMITTED] T4005.021
    
    [GRAPHIC] [TIFF OMITTED] T4005.022
    
    [GRAPHIC] [TIFF OMITTED] T4005.023
    
    [GRAPHIC] [TIFF OMITTED] T4005.024
    
    [GRAPHIC] [TIFF OMITTED] T4005.025
    
    [GRAPHIC] [TIFF OMITTED] T4005.026
    
    [GRAPHIC] [TIFF OMITTED] T4005.027
    
    [GRAPHIC] [TIFF OMITTED] T4005.028
    
    [GRAPHIC] [TIFF OMITTED] T4005.029
    
    [GRAPHIC] [TIFF OMITTED] T4005.030
    
    [GRAPHIC] [TIFF OMITTED] T4005.031
    
    [GRAPHIC] [TIFF OMITTED] T4005.032
    
    [GRAPHIC] [TIFF OMITTED] T4005.033
    
    [GRAPHIC] [TIFF OMITTED] T4005.034
    
    [GRAPHIC] [TIFF OMITTED] T4005.035
    
    [GRAPHIC] [TIFF OMITTED] T4005.036
    
    [GRAPHIC] [TIFF OMITTED] T4005.037
    
    [GRAPHIC] [TIFF OMITTED] T4005.038
    
    [GRAPHIC] [TIFF OMITTED] T4005.039
    
    [GRAPHIC] [TIFF OMITTED] T4005.040
    
    [GRAPHIC] [TIFF OMITTED] T4005.041
    
    [GRAPHIC] [TIFF OMITTED] T4005.042
    
    [GRAPHIC] [TIFF OMITTED] T4005.043
    
    [GRAPHIC] [TIFF OMITTED] T4005.044
    
    [GRAPHIC] [TIFF OMITTED] T4005.045
    
    [GRAPHIC] [TIFF OMITTED] T4005.046
    
    [GRAPHIC] [TIFF OMITTED] T4005.047
    
    [GRAPHIC] [TIFF OMITTED] T4005.048
    
    [GRAPHIC] [TIFF OMITTED] T4005.049
    
    [GRAPHIC] [TIFF OMITTED] T4005.050
    
    [GRAPHIC] [TIFF OMITTED] T4005.051
    
    [GRAPHIC] [TIFF OMITTED] T4005.052
    
    [GRAPHIC] [TIFF OMITTED] T4005.053
    
    [GRAPHIC] [TIFF OMITTED] T4005.054
    
    [GRAPHIC] [TIFF OMITTED] T4005.055
    
    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:]

    [GRAPHIC] [TIFF OMITTED] T4005.056
    
    [GRAPHIC] [TIFF OMITTED] T4005.057
    
    [GRAPHIC] [TIFF OMITTED] T4005.058
    
    [GRAPHIC] [TIFF OMITTED] T4005.059
    
    [GRAPHIC] [TIFF OMITTED] T4005.060
    
    [GRAPHIC] [TIFF OMITTED] T4005.061
    
    [GRAPHIC] [TIFF OMITTED] T4005.062
    
    [GRAPHIC] [TIFF OMITTED] T4005.063
    
    [GRAPHIC] [TIFF OMITTED] T4005.064
    
    [GRAPHIC] [TIFF OMITTED] T4005.065
    
    [GRAPHIC] [TIFF OMITTED] T4005.066
    
    [GRAPHIC] [TIFF OMITTED] T4005.067
    
    [GRAPHIC] [TIFF OMITTED] T4005.068
    
    [GRAPHIC] [TIFF OMITTED] T4005.069
    
    [GRAPHIC] [TIFF OMITTED] T4005.070
    
    [GRAPHIC] [TIFF OMITTED] T4005.071
    
    [GRAPHIC] [TIFF OMITTED] T4005.072
    
    [GRAPHIC] [TIFF OMITTED] T4005.073
    
    [GRAPHIC] [TIFF OMITTED] T4005.074
    
    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:]

    [GRAPHIC] [TIFF OMITTED] T4005.075
    
    [GRAPHIC] [TIFF OMITTED] T4005.076
    
    [GRAPHIC] [TIFF OMITTED] T4005.077
    
    [GRAPHIC] [TIFF OMITTED] T4005.078
    
    [GRAPHIC] [TIFF OMITTED] T4005.079
    
    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:]

    [GRAPHIC] [TIFF OMITTED] T4005.080
    
    [GRAPHIC] [TIFF OMITTED] T4005.081
    
    [GRAPHIC] [TIFF OMITTED] T4005.082
    
    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:]

    [GRAPHIC] [TIFF OMITTED] T4005.083
    
    [GRAPHIC] [TIFF OMITTED] T4005.084
    
    [GRAPHIC] [TIFF OMITTED] T4005.085
    
    [GRAPHIC] [TIFF OMITTED] T4005.086
    
    [GRAPHIC] [TIFF OMITTED] T4005.087
    
    [GRAPHIC] [TIFF OMITTED] T4005.088
    
    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:]

    [GRAPHIC] [TIFF OMITTED] T4005.089
    
    [GRAPHIC] [TIFF OMITTED] T4005.090
    
    [GRAPHIC] [TIFF OMITTED] T4005.091
    
    [GRAPHIC] [TIFF OMITTED] T4005.092
    
    [GRAPHIC] [TIFF OMITTED] T4005.093
    
    [GRAPHIC] [TIFF OMITTED] T4005.094
    
    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:]

    [GRAPHIC] [TIFF OMITTED] T4005.095
    
    [GRAPHIC] [TIFF OMITTED] T4005.096
    
    [GRAPHIC] [TIFF OMITTED] T4005.097
    
    [GRAPHIC] [TIFF OMITTED] T4005.098
    
    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:]

    [GRAPHIC] [TIFF OMITTED] T4005.099
    
    [GRAPHIC] [TIFF OMITTED] T4005.100
    
    [GRAPHIC] [TIFF OMITTED] T4005.101
    
    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:]

    [GRAPHIC] [TIFF OMITTED] T4005.102
    
    [GRAPHIC] [TIFF OMITTED] T4005.103
    
    [GRAPHIC] [TIFF OMITTED] T4005.104
    
    [GRAPHIC] [TIFF OMITTED] T4005.105
    
    [GRAPHIC] [TIFF OMITTED] T4005.106
    
    [GRAPHIC] [TIFF OMITTED] T4005.107
    
    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.]

                                 
