[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
  ORGANIZED RETAIL THEFT PREVENTION: FOSTERING A COMPREHENSIVE PUBLIC-
                            PRIVATE RESPONSE

=======================================================================

                                HEARING

                               BEFORE THE

                   SUBCOMMITTEE ON CRIME, TERRORISM,
                         AND HOMELAND SECURITY

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 25, 2007

                               __________

                           Serial No. 110-122

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov



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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            STEVE CHABOT, Ohio
MAXINE WATERS, California            DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts   CHRIS CANNON, Utah
ROBERT WEXLER, Florida               RIC KELLER, Florida
LINDA T. SANCHEZ, California         DARRELL ISSA, California
STEVE COHEN, Tennessee               MIKE PENCE, Indiana
HANK JOHNSON, Georgia                J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio                   STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois          TOM FEENEY, Florida
BRAD SHERMAN, California             TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin             LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York          JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota

            Perry Apelbaum, Staff Director and Chief Counsel
                 Joseph Gibson, Minority Chief Counsel
                                 ------                                

        Subcommittee on Crime, Terrorism, and Homeland Security

             ROBERT C. ``BOBBY'' SCOTT, Virginia, Chairman

MAXINE WATERS, California            J. RANDY FORBES, Virginia
WILLIAM D. DELAHUNT, Massachusetts   LOUIE GOHMERT, Texas
JERROLD NADLER, New York             F. JAMES SENSENBRENNER, Jr., 
HANK JOHNSON, Georgia                Wisconsin
ANTHONY D. WEINER, New York          HOWARD COBLE, North Carolina
SHEILA JACKSON LEE, Texas            STEVE CHABOT, Ohio
ARTUR DAVIS, Alabama                 DANIEL E. LUNGREN, California
TAMMY BALDWIN, Wisconsin
BETTY SUTTON, Ohio

                      Bobby Vassar, Chief Counsel

                    Michael Volkov, Minority Counsel



                            C O N T E N T S

                              ----------                              

                            OCTOBER 25, 2007

                                                                   Page

                           OPENING STATEMENT

The Honorable Robert C. ``Bobby'' Scott, a Representative in 
  Congress from the State of Virginia, and Chairman, Subcommittee 
  on Crime, Terrorism, and Homeland Security.....................     1
The Honorable J. Randy Forbes, a Representative in Congress from 
  the State of Virginia, and Ranking Member, Subcommittee on 
  Crime, Terrorism, and Homeland Security........................     2

                               WITNESSES

Mr. Brad Brekke, Vice President--Assets Protection, Target 
  Corporation, TPS-20, Minneapolis, MN
  Oral Testimony.................................................     4
  Prepared Statement.............................................     7
Mr. David Hill, Detective, Montgomery County Police Department, 
  Rockville, MD
  Oral Testimony.................................................    14
  Prepared Statement.............................................    15
Mr. Karl F. Langhorst, CPP, Director, Loss Prevention, Randalls/
  Tom Thumb Food and Pharmacy, Houston, TX
  Oral Testimony.................................................    17
  Prepared Statement.............................................    19
Mr. Robert Chesnut, Senior Vice President, Rules, Trust and 
  Safety, eBay, Inc., Washington, DC
  Oral Testimony.................................................    21
  Prepared Statement.............................................    23

                                APPENDIX

Material Submitted for the Hearing Record........................    41


  ORGANIZED RETAIL THEFT PREVENTION: FOSTERING A COMPREHENSIVE PUBLIC-
                            PRIVATE RESPONSE

                              ----------                              


                       THURSDAY, OCTOBER 25, 2007

              House of Representatives,    
              Subcommittee on Crime, Terrorism,    
                              and Homeland Security
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 10:03 a.m., in 
Room 2141, Rayburn House Office Building, the Honorable Robert 
C. ``Bobby'' Scott (Chairman of the Subcommittee) presiding.
    Present: Representatives Scott, Johnson, Ellison, Forbes, 
Gohmert, and Coble.
    Staff present: Bobby Vassar, Subcommittee Chief Counsel; 
Gregory Barnes, Minority Counsel; Mario Dispenza, (Fellow) 
BATFE Detailee; Caroline Lynch, Minority Counsel; and Veronica 
Eligan, Professional Staff Member.
    Mr. Scott. Good morning. The Subcommittee will come to 
order.
    I am pleased to welcome you to today's hearing on organized 
retail theft prevention and the need to foster a comprehensive 
public-private response.
    For some time now, we have been hearing about the problem 
of organized retail theft, ORT, from business representatives 
in my congressional district and the problem is growing in 
dimension. Estimates indicate that the problem exceeds $30 
billion a year.
    Theft of merchandise through shoplifting from retail 
outlets and through other means is not new, and it has 
additionally been handled through the State criminal laws. In 
Virginia, for example, any theft in excess of $200 is grand 
larceny, with a maximum penalty of 20 years in prison and a 
third offense of even petty larceny is, by law, treated the 
same as grand larceny.
    With diligent enforcement efforts, such measures are 
ordinarily adequate to keep the problem of merchandise theft 
sufficiently in check. However, with organized theft rings 
employing numerous individuals, operating across State lines, 
ordinary enforcement approaches are inadequate.
    These individuals can shoplift taking acceptable risks by 
remaining under the grand larceny threshold for each incident 
and still steal thousands of dollars worth of merchandise for 
the ring.
    The types of products most frequently targeted for theft by 
ORT rings include over-the-counter drug products, cough and 
cold medicines, razor blades, batteries, CDs and DVDs, infant 
formula and electronic items. And after ORT rings obtain such 
products, they often turn right around and dispose of them 
through fencing operations, flea markets, pawn shops, swap 
meets and shady storefront operations.
    Now, we are seeing reports of indications that the Internet 
is now being used to fence stolen goods to the extent that a 
new term has been coined for it, ``e-fencing.'' Attempts to 
sell stolen consumable products online or in the physical world 
expose consumers to serious safety and health risks.
    In many cases, after the merchandise has been stolen, the 
products are not kept under ideal or required storage 
conditions and that can threaten the integrity of the product. 
For example, extreme heat or cold can affect the nutrient 
content or physical appearance in infant formula.
    Such practices also tend to drive up consumer prices. This 
is primarily true because retail establishments must cover 
their losses by passing on the expenses to other customers. 
Needless to say, those most affected by such increases often 
come from the lower economic, socioeconomic backgrounds, or the 
elderly.
    The size and complexity of this problem clearly suggests 
that the need for assistance from the Federal Government and I 
look forward to working with my colleagues and the industries 
affected to better address this problem.
    I now recognize my colleague from Virginia, the Ranking 
Member of the Subcommittee, Randy Forbes, for his statement.
    Mr. Forbes. Thank you, Mr. Chairman, and thank you for 
holding this hearing on the very important issue of organized 
retail theft.
    I wish to welcome our witnesses here today and thank you 
for taking time out of your busy schedules to be here and help 
enlighten us on this issue and hopefully forge a solution that 
will be workable to everyone.
    The problem of organized retail theft is growing and 
involves the theft of large quantities of retail merchandise, 
as the Chairman mentioned. Organized retail theft is not a high 
profile crime, but it is a costly one. Unlike shoplifters or 
small-time thieves who steal for their own personal use, 
organized retail thieves steal merchandise in order to sell it 
back into the marketplace.
    These thieves typically target merchandise that can be 
easily concealed and easily resold. The stolen items range from 
low-cost products such as razor blades, baby formula or 
batteries, to expensive products such as electronics or 
appliances.
    Organized retail thieves, commonly referred to as 
``boosters,'' will sell the stolen merchandise at flea markets, 
pawn shops, swap meets and, increasingly, on Internet Web 
sites.
    According to the FBI, organized retail theft accounts for 
between $30 billion and $37 billion in losses annually. The 
Coalition Against Organized Retail Crime estimates that States 
with sales tax annually suffer over $1.5 billion in lost tax 
revenue due to organized retail theft.
    In 2005, Congress directed the attorney general and FBI, in 
consultation with the retail community, to establish a task 
force to combat organized retail theft and create a national 
database or clearinghouse to track and identify organized 
retail thefts across the country.
    The result of this legislation is the law enforcement-
retail partnership network, LERPnet, which was launched on 
April 9 of this year. This national database allows retailers 
to share information with each other and law enforcement. To 
date, more than 32 retailers, representing 46,000 stores, have 
signed on.
    In addition, the FBI has created major theft task forces to 
identify and target multi-jurisdictional organized retail theft 
rings. There are currently nine FBI-led major theft task 
forces, staffed by FBI agents and State and local law 
enforcement officers located in FBI field offices across the 
country.
    These task forces and the LERPnet, launched earlier this 
year, are important first steps for combating organized retail 
crime. However, billions of dollars are still being lost each 
year.
    The inherent interstate nature of many of these crimes 
poses jurisdictional hurdles for prosecution at the State 
level, while limited Federal resources and low theft thresholds 
create a roadblock for Federal prosecution.
    I look forward to hearing from today's witnesses concerning 
the extent of the problem, practical limitations in the 
investigation and prosecution of these organizations, and 
possible solutions.
    I want to commend Congressman Goodlatte for his hard work 
in this area for so many years, and I also want to commit to 
working with Chairman Scott and Members of the Judiciary 
Committee, the retail community and the online marketplaces to 
create a common sense, practical solution to the problem.
    Mr. Chairman, I yield back the balance of my time.
    Mr. Scott. Thank you. Thank you.
    I will ask unanimous consent that other statements be 
placed in the record.
    We have the gentleman from North Carolina, Mr. Coble, with 
us today.
    Our first witness will be introduced, by unanimous, by the 
gentleman from Minnesota.
    Mr. Ellison. Thank you, Mr. Chairman. Let me start by 
thanking you and Ranking Member Forbes for holding this hearing 
on organized retail theft prevention.
    We have with us today Mr. Brad Brekke, the vice president 
of asset protection at Target, a well known general merchandise 
retailer headquartered in my home district of Minneapolis, 
Minnesota.
    Target operates over 1,600 stores throughout the United 
States and reports more than $60 billion in sales. As vice 
president of asset protection, Mr. Brekke oversees all aspects 
of the corporate security and the team of several thousands of 
asset protection professionals supporting Target stores, 
distribution centers, and its supply chain.
    Mr. Brekke also oversees Target's teams of criminal 
investigators, regional organized retail crime investigation 
centers, two forensic laboratories, and its cyber crime 
investigators.
    Prior to joining Target as the leader of its organized 
retail crime investigation team, Mr. Brekke served as a special 
agent with the Federal Bureau of Investigation, focusing on 
fraud schemes and other white-collar crimes.
    Mr. Brekke is both a graduate of University of Minnesota 
and University of Minnesota Law School and a member of the bar 
in the state of Minnesota.
    Thank you, Mr. Chairman.
    Welcome, Mr. Brekke.
    Mr. Scott. Thank you. Thank you for the introduction.
    Our next witness we will hear from will be Mr. David Hill, 
who currently serves as a detective for the Montgomery County 
Police Department. He has 16 years of law enforcement 
experience in the state of Maryland, and he is a Committee 
member of the National Association of Property Recovery 
Investigators.
    He also serves on the board of the Montgomery County Retail 
Security Loss Prevention Association. He has an associate's 
degree in electronic engineering from Montgomery College in 
Maryland.
    After he speaks, we will hear from Mr. Karl Langhorst, who 
currently serves as the director of loss prevention at Randalls 
and Tom Thumb Food and Pharmacy. He has over 25 years of 
experience in law enforcement and retail loss prevention.
    He is an author and frequent speaker on various loss 
prevention topics, including physical security and organized 
retail crime. He has a bachelor of political science from the 
University of Texas at Arlington.
    Our final witness will be Mr. Robert Chesnut, senior vice 
president and head of eBay's rules, trust and safety 
department. In this capacity, he directs over 2,000 eBay 
employees around the world in the areas of fraud detection, 
buyer protection, Web site rules and policies, and law 
enforcement relations.
    Prior to joining eBay, he spent 11 years working as a 
Federal prosecutor in the U.S. attorney's office in the eastern 
district of Virginia. He is a graduate of the University of 
Virginia and Harvard Law School.
    Now, each of the witness statements will be made part of 
the record in its entirety. We would ask each witness to 
summarize his or her testimony in 5 minutes or less. To help 
you stay within that time, there is a timing device on your 
table. When you have 1 minute left, the light will switch from 
green to yellow and then finally to red when 5 minutes are up.
    Prior to, as you have heard, we have just been called for 
very important, momentous situation on the floor.
    We will be back in approximately 5 or 10 minutes.
    [Recess.]
    Mr. Scott. The Committee will come to order. We will now 
receive testimony from Mr. Brekke.

  TESTIMONY OF BRAD BREKKE, VICE PRESIDENT-ASSETS PROTECTION, 
          TARGET CORPORATION, TPS-20, MINNEAPOLIS, MN

    Mr. Brekke. Good morning, Chairman Scott, Ranking Member 
Forbes and Members of the Subcommittee.
    On behalf of Target and the Coalition Against Organized 
Retail Crime, we commend the Chairman and this Committee for 
recognizing this evolving problem.
    Organized retail crime, also known as ORC, costs the 
industry billions of dollars a year. Compounding this problem 
are an increasing number of Internet auction sites which 
facilitate the sale of stolen property and undermine the 
integrity of our interstate commerce.
    Today we will offer solutions that can drastically reduce 
these crimes and protect consumers without expending valuable 
criminal justice resources on more arrests and prosecutions.
    For years, retailers have vigorously worked to reduce ORC. 
As the problem has grown, our industry has invested more than 
$10 billion annually in measures including security staffing, 
employee background checks, secure packaging and technologies, 
such as video surveillance.
    At Target, we have even established two forensic 
laboratories to assist law enforcement.
    Retailers and law enforcement face an uphill battle now 
that the Internet marketplace has dramatically transformed the 
fencing of stolen property, as you will hear in this excerpt 
from ``CNBC.''
    [Begin video.]
    [End video.]
    Mr. Brekke. Fencing stolen goods used to be a local face-
to-face process in which buyers and sellers were limited and 
operations were only marginally profitable.
    Today, the Internet has created a worldwide market for 
stolen goods in which the sellers are anonymous and the buyers 
are unaware of the product source.
    The number of sellers and lack of transparency has left law 
enforcement grasping at the sheer scale of the problem. The 
enormous profits have fueled criminal activity, hurting our 
communities.
    The rapid growth of this issue requires a solution beyond 
investigating and apprehending individual criminals. To 
illustrate this, consider that the entire criminal case load of 
all U.S. attorneys is less than 60,000 a year.
    Even this entire Federal criminal docket would be 
insufficient to address the 75,000 annual apprehensions made by 
Target alone. But sending more people into the criminal justice 
system is not the answer and not what we are proposing.
    Mr. Chairman, we need to take a new approach to this 
challenge. We need Internet auction sites to make simple 
changes that deter the sale of stolen property. The simple step 
of requiring high volume Internet sellers to identify 
themselves and add a unique product identifier, such as serial 
numbers to their listings, would permit identification and 
tracing of stolen property.
    It would also effectively constrain the sale of stolen 
property without additional law enforcement involvement. These 
same requirements have already proven successful in the online 
auction context. In fact, every vehicle listed for sale on eBay 
motors is now accompanied by a VIN number. This has virtually 
eliminated the sale of stolen vehicles on eBay.
    Additionally, in the United Kingdom, eBay has identified 
high volume sellers for years. Seller identification and 
property tracings are also the foundation of traditional pawn 
shop regulations that deter the sale of stolen goods.
    These are the same State or local regulations that 
criminals evade when they move online.
    To protect the integrity of commerce in today's dynamic 
marketplace, these types of regulations must be extended to the 
online fencing market.
    Finally, we believe that the Federal Government must act, 
since this cannot be resolved at the State level due to the 
nature of the Internet marketplace, and it is important to act 
now, since this issue will continue to grow.
    We believe responsible Internet auction sites will support 
these measures, which will protect consumers and the integrity 
of the Internet commerce.
    On behalf of the coalition, I thank you for the opportunity 
to address the Subcommittee and I welcome your questions.
    [The prepared statement of Mr. Brekke follows:]

                   Prepared Statement of Brad Brekke















    Mr. Scott. Thank you.
    I would like to recognize the presence of the gentleman 
from Georgia, Mr. Johnson, who has joined the Committee.
    Mr. Hill?

 TESTIMONY OF DAVID HILL, DETECTIVE, MONTGOMERY COUNTY POLICE 
                   DEPARTMENT, ROCKVILLE, MD

    Mr. Hill. Good morning, Chairman Scott and Ranking Member 
Forbes. My name is Detective David Hill, and I am pleased to be 
testifying before the Subcommittee today for the growing 
problem of organized retail crime.
    By way of background, not only am I a detective with 
Montgomery County police, I am also a sworn special deputy of 
the United States Marshal Services and assigned to the metro 
area fraud task force of the United States Secret Service.
    To put my job in perspective, industry-wide retail fraud 
and theft losses amount to about $40 billion a year, according 
to one prominent study. That is more than double the losses of 
robbery, burglary, larceny and auto theft combined nationwide, 
which is $16.9 billion.
    In the metropolitan area, there are thousands of retail 
outlets and several major malls, with one being in Montgomery 
County, that being Montgomery Mall.
    As we have heard, organized retail crime, which I will 
refer to as ORC, is a real and growing trend and accounts for a 
large portion of overall industry losses. The term 
``organized'' can mean many things, from pairs of boosters who 
target retail stores with the intention of distracting a sales 
associate while the others steal merchandise from the shelves, 
to teams of five or more who stake out targets carefully and 
steal just discreetly undetected.
    In these cases, a member of the team will take the 
merchandise to a waiting vehicle, while in still other cases, 
members will act as lookouts to make sure that the team is not 
being followed by security.
    Some of the more sophisticated criminals engage in changing 
UPC barcodes on merchandise so that they ring up differently at 
checkout. This is commonly called ticket switching.
    Others use stolen or counterfeit credit cards to obtain 
merchandise. These criminals are working for bulk buyers or 
ring leaders who have shopping lists with specific products in 
mind. These lists target luxury clothes, accessories, perfumes, 
baby formula and expensive over-the-counter medications. Gift 
cards and electronics are very popular items, and let us not 
forget vacuum cleaners and power tools. Whatever is new and 
popular, that is what the buyer wants.
    We pick up on groups that travel the I-95 corridor from 
Maine to Miami, hitting numerous retailers along the way. They 
fill up trucks and vans with stolen merchandise and then drive 
the merchandise to their fences or have it shipped by way of 
plane.
    In one of our big cases, we recovered over $40,000 in 
merchandise that we witnessed the ring steal from over 12 
stores in less than 1 hour.
    What we see more and more is the stolen property showing up 
on sale on the Internet. The reason so-called e-fencing is 
becoming popular is the simple economics of risks and rewards. 
A typical fencing operation pays criminals $0.30 on a dollar, 
whereas online marketing and auction sites can bring closer to 
$0.70 on the dollar.
    Further, pawn shops tend to be regulated, requiring the 
disclosure of information about both the seller and the 
merchandise, which creates additional risks for the criminals. 
In contrast, online marketplaces provide an unregulated 
environment in which thieves can resell stolen property to 
customers on a national and even on an international level, 
with few or no questions asked.
    The Internet not only makes it easier for ORC rings to 
unload their merchandise at near retail price, it also enables 
sophisticated single operators to make huge profits off of 
their crimes, as well.
    On Christmas Eve 2005, in Montgomery County, we apprehended 
a college student who was the subject of a ``CNBC'' piece on e-
fencing earlier this year. By his own admission, the student 
made over $50,000 in just over 2 months auctioning off 
merchandise on eBay that he had switched the UPC codes on and 
paid a very small fraction of the retail price.
    Mr. Chairman, important investigations like this one rely 
upon the ongoing partnership between law enforcement and the 
retail sector. A large portion of my cases are initiated and 
reported to me by loss prevention investigators employed by 
retail companies.
    By requiring online auction sites to collect and disclose 
serial numbers of products being offered on a sale, when 
appropriate, and to provide additional seller information to 
retailers' loss prevention investigators will help our retail 
partnership build better cases that can then be turned over to 
detectives like myself.
    Increased seller disclosure should encourage and deter 
criminals from e-fencing stolen products online and should have 
little or no impact on legitimate sellers.
    Mr. Chairman, I commend the important work that you are 
doing to shed light on a very real problem, ORC. Too often, 
professional thieves are getting off with little more than a 
slap on the wrist because many jurisdictions are still treating 
ORC crimes as shoplifting cases.
    Some might say that this is a victimless crime, but ORC 
affects society because it increases prices and can compromise 
the quality and safety of consumer goods.
    As I have already stated, these are often multi-
jurisdictional crimes where professional thieves are crossing 
State lines. With the added component of e-fencing on the 
Internet, this is a natural area for Congress to get involved.
    Clearly, Federal legislation would serve as a powerful tool 
for law enforcement and a deterrent to would-be criminals.
    Mr. Chairman, I appreciate the invitation to address you 
and the Subcommittee Members. I welcome any questions or 
comments you may have.
    Thank you.
    [The prepared statement of Mr. Hill follows:]

                    Prepared Statement of David Hill

    Good Morning Chairman Scott and Ranking Member Forbes, my name is 
Detective David Hill and I am pleased to be testifying before the 
subcommittee today on the growing problem of organized retail crime.
    By way of background, I am currently a detective with the 
Montgomery County Police Department's Retail Crimes Unit and have been 
in law enforcement for over 16 years. I am a sworn Deputy of the U.S. 
Marshall Service and assigned to the Metro Area Fraud Task Force of the 
United States Secret Service. I am the only detective in my department 
and one of the few in the region assigned exclusively to investigate 
retail theft and fraud.
    To put my job in perspective, industry-wide retail fraud and theft 
losses amount to almost $40 billion a year according to one prominent 
study. That is more than double the losses of robbery, burglary, 
larceny, and auto theft combined ($16.9 billion) nationwide. As you 
know, the Washington Metropolitan Area is the eighth largest in the 
nation, with thousands of retail outlets and several major malls just 
in Montgomery County alone. I am a busy man. I typically handle scores 
of cases each year.
    As we have heard, organized retail crime is a real and growing 
trend, and accounts for a large portion of overall retail losses. 
According to the National Retail Federation, 79 percent of retailers 
surveyed report being victims of ORC and 71 percent saw increases in 
ORC activity last year. The term ``organized'' can mean many things, 
from pairs of ``boosters'' who target retail stores with the intention 
of distracting a sales associate while the other sweeps merchandise 
from the shelf, to teams of five or more who stake out targets 
carefully and steal discreetly in crowded stores. In many cases, ORC 
teams are efficiently segmented into collectors, packers, and movers 
that take the stolen merchandise to a waiting car, and still others who 
serve as lookouts to make sure that the team is not being followed by 
security.
    Some of the more sophisticated criminals engage in changing the UPC 
bar codes on merchandise so they ring up differently at check-out, this 
is commonly called ``ticket switching.'' Others use stolen or cloned 
credit cards to obtain merchandise. Sophisticated or not, what all of 
these thieves have in common is that they are career criminals usually 
hired by bulk buyers or ring-leaders with specific products in mind. 
They have ``shopping lists,'' if you will. Some target luxury clothing, 
accessories, and perfume while others focus on baby formula and 
expensive over-the-counter medications or beauty aids. Gift cards and 
electronics are other popular targets. Believe it or not, these 
criminals are even stealing vacuum cleaners and power tools. Whatever 
is new; whatever is hot, that's what the criminals want.
    Some of these ORC groups travel important interstate corridors, 
like I-95, from Miami to Maine, hitting numerous retailers along the 
way and filling vans or trucks with stolen merchandise. In one case, we 
recovered $40,000 in merchandise that was stolen in one hour. The booty 
ends up at underground bodegas, pawn shops and flea markets, some is 
repackaged and warehoused for re-distribution, and, in a growing trend, 
more and more of it is showing up for sale on the Internet.
    The reason so-called ``eFencing'' is becoming so popular is the 
simple economics of risk and reward. A typical fencing operation 
typically pays criminals $.30 cents on the dollar, whereas online 
marketplaces and auction sites can bring closer to $.70 cents on the 
dollar for ``new in box (NIB)'' merchandise, and gift cards pay even 
more. Further, local pawnshops tend to be regulated--requiring the 
disclosure of information about both sellers and the merchandise being 
sold--which creates additional risks for criminals. In contrast, Online 
marketplaces provide an unregulated environment in which thieves can 
re-sell stolen property to customers on an national or even 
international level with few or no questions asked.
    The Internet not only makes it easier for ORC rings to unload 
merchandise at near retail prices, it also enables sophisticated 
single-operators to realize a huge profit off of their crimes as well. 
On Christmas Eve 2005 the Montgomery County PD apprehended a college 
student who was the subject of a CNBC piece on eFencing earlier this 
year. By his own admission, the student made over $50,000 auctioning 
off stolen merchandise on e-Bay. These items were stolen from stores 
such as Best Buy, Target, and Wal-Mart and included high-end computer 
graphic cards, GPS navigation units, books, expensive iPod accessories, 
and many other items
    Mr. Chairman, important investigations like this one rely upon the 
ongoing partnership between law enforcement and the retail sector. 
While I work a regular investigative beat, cases are most often 
initiated and reported by the loss prevention investigators employed by 
retail companies. It is true that many companies like e-Bay will 
provide information to law enforcement when asked to do so, however, 
requiring Online auction sites to collect and disclose serial numbers 
of products being offered for sale when appropriate, and to provide 
additional seller information to retailers' loss prevention 
investigators will help our retail partners better understand and build 
cases that can then be turned over to detectives like myself.
    Additionally, as noted above, increased seller disclosures should 
discourage criminals from even attempting eFencing. Such transparency 
will likely disproportionately affect and deter criminals who are 
interested in fencing stolen product Online, with little or no impact 
on legitimate sellers.
    Mr Chairman, I commend the important work that you are doing to 
shed light on the very real problem of organized retail crime. Too 
often professional thieves are getting off with little more than a slap 
on the wrist because many jurisdictions are still treating ORC crimes 
as shoplifting cases. Some would say that this is a ``victimless'' 
crime, but ORC affects society because it increases prices and can 
compromise the quality and safety of consumer goods. As I have already 
described, these are often multi-jurisdictional crimes where 
professional thieves are regularly crossing state lines. With the added 
component of eFencing on the Internet, this is a natural area for 
Congress to get involved. Clearly, federal legislation would serve as a 
powerful tool for law enforcement and a deterrent to would-be 
criminals.
    Mr. Chairman, I appreciate the invitation to address you and the 
subcommittee members. I welcome any questions or comments you may have.
    Thank you.

    Mr. Scott. Thank you, Mr. Hill.
    Mr. Langhorst?

TESTIMONY OF KARL F. LANGHORST, CPP, DIRECTOR, LOSS PREVENTION, 
       RANDALLS/TOM THUMB FOOD AND PHARMACY, HOUSTON, TX

    Mr. Langhorst. Chairman Scott, Ranking Member Forbes and 
Members of the Committee, good morning. My name is Karl 
Langhorst, director of loss prevention for Randalls-Tom Thumb 
of Texas, a division of Safeway.
    Safeway is a Fortune 100 company, one of the largest food 
and drug retailers in North America.
    I have been invited here to share with you my experiences 
with the increasing problem of organized retail crime. 
Retailers have always had to deal with shoplifting as part of 
doing business, but let me be clear--ORC is not shoplifting. It 
is theft committed by professionals in large volume for resale. 
It is being committed against retailers of every type at an 
increasing rate.
    Safeway estimates a loss of $100 million annually due to 
ORC. In a typical scenario that repeats itself hundreds of 
times each day, teams of boosters, or hired thieves, come into 
the store with a shopping list of desired product provided by 
the fence, the person behind the organization.
    Typical items stolen from Safeway stores include over-the-
counter medicines, such as Prilosec, Tylenol, Abreva, Crest 
White Strips, Oil of Olay, diabetic test strips, and baby 
formula.
    Using well coordinated efforts and highly sophisticated 
methods to elude store security and management, they sweep the 
shelves clean of hundreds of dollars of product at a time. They 
are even out within a matter of 3 to 4 minutes.
    They often leave undetected and move on to other stores. 
Boosters will typically hit 10 to 15 retailers a day, often 
crisscrossing State lines and jurisdictions before going back 
to the fence to get payment for the goods they have stolen and 
to receive their marching orders for the next day.
    The fence then sells the items at traditional brick-and-
mortar stores, flea markets, or increasingly online. They have 
great incentive to sell online because they know that they can 
operate anonymously and are protected.
    They can move more merchandise more quickly and to a 
worldwide audience and they can receive the highest return for 
items sold online.
    Safeway has taken an unprecedented step in the grocery 
industry of creating a whole division to combat ORC, employing 
special investigators across the U.S. and Canada. Because of 
the prevalence of ORC in our stores, special teams of ORC 
undercover agents have been trained and deployed into the 
stores.
    These agents understand the difference in detecting and 
apprehending the boosters versus simple shoplifters. Safeway 
has implemented additional layers of security throughout the 
supply chain, from the warehouse to the shelves. State-of-the-
art digital camera systems are installed in all of our stores 
at a cost of millions of dollars in order to aid law 
enforcement and our own investigators and store management 
teams.
    In spite of our extraordinary efforts, our company 
continues to see a steady increase of merchandise sold online 
in high volume and offered below the wholesale cost to the 
retailers.
    Fences know that the anonymity of the Internet presents an 
extremely low risk way to sell stolen goods. Online 
marketplaces, such as Internets, are being used as Internet 
pawn shops and are largely unregulated.
    We have had some successes in fighting ORC. In 2001, the 
Portland Division of Safeway opened an investigation of three 
major fences and presented the information to the FBI. Safeway 
and the FBI continued the investigation and successfully broke 
up a multi-State ORC network operating from Oregon to Texas to 
Florida, that ultimately resulted in the seizure of over $3 
million in product, $950,000 in cash and criminal prosecution 
of 49 suspects.
    The suspects told investigators that they resold much of 
their stolen product on eBay because of the anonymity.
    Last year, in cooperation with Walgreen's, Wal-Mart and 
other retailers, our northern California division worked a case 
with ICE agents that resulted in the seizure of product valued 
at $5 million and the arrest and prosecution of Yemeni 
nationals. These individuals operated a warehouse containing 12 
tractor-trailers full of merchandise, approximately 850,000 
items, as well as a Web site.
    And just this week in Texas, agents from Department of 
Public Safety and Safeway ORC investigators completed a year 
long investigation and shut down a long time fence that was 
taking in an estimated $4 million annually in stolen HBC 
product and who employed over 100 boosters.
    The product was ultimately sold through an online 
marketplace. In this case, many of the boosters were known drug 
users, and the stolen product was stored under conditions that 
were not approved for these items.
    The need for a Federal solution to address the current 
free-for-all of electronic fencing is obvious. The information 
we are seeking from online marketplaces is no more cumbersome 
than is currently in place for brick-and-mortar providers of 
the same type operations.
    Legitimate retailers, both those operated online and as 
brick-and-mortar businesses, as well as consumers have the 
right to this type of protection.
    In spite of Safeway's best efforts and unprecedented 
alliances with other retailers to combat ORC, we continue to 
suffer significant losses. If we are to be successful in 
curtailing this enormous criminal enterprise that threatens the 
business of retailers across the country, millions of dollars 
in lost sales tax revenue and the impact to consumers through 
adulterated product, higher prices and lack of availability of 
merchandise, we must have strong Federal legislation that more 
clearly defines ORC and requires the same level of 
accountability on Internet sellers as that of traditional 
retail sites.
    I thank you very much for your attention and welcome any 
questions.
    [The prepared statement of Mr. Langhorst follows:]

                Prepared Statement of Karl F. Langhorst

    Chairman Conyers, Chairman Scott, Congressmen Smith and Forbes, and 
members of the committee, good morning. Thank you for the opportunity 
to testify before the Crime Subcommittee today on the growing problem 
of organized retail crime. My name is Karl Langhorst, Director of Loss 
Prevention for Randall's/Tom Thumb of Texas, a Safeway company. Safeway 
Inc. is a Fortune 100 company and one of the largest food and drug 
retailers in North America. The company operates 1,755 stores in the 
United States and western Canada and had annual sales of $40.2 billion 
in 2006.
    I have been invited here to share with you our experience with the 
increasing problem of organized retail crime (ORC). Retailers have 
always had to deal with shoplifting as part of doing business, but let 
me be clear, ORC is not shoplifting. It is theft committed by 
professionals, in large volume, for resale. It is being committed 
against retailers of every type at an increasing rate. Safeway 
estimates a loss of $100 million dollars annually due to ORC. According 
to the FBI, the national estimate is between $15-30 billion annually.
    Let me describe for you how sophisticated and organized these 
enterprises are. In a typical scenario that repeats itself hundreds of 
times each day, teams of boosters, or hired thieves, come into the 
store with a shopping list of desired product provided by the fence--
the person behind the organization. Typical items stolen from Safeway 
stores include over the counter medicines such as Prilosec, Tylenol, 
and Abreva, razor blades, Crest White Strips, Oil of Olay and other 
beauty products, diabetic test strips, and baby formula. Using well 
coordinated efforts and highly sophisticated methods to elude store 
security and law enforcement, they sweep the shelves clean of hundreds 
of dollars of product at a time. They are in and out within a matter of 
3 to 4 minutes. They often leave undetected and move on to other 
stores. Typically, boosters will hit 10 to 15 retailers a day, in many 
areas criss-crossing state lines and jurisdictions, before going back 
to the fence to get payment for the goods they have stolen and to 
receive their marching orders for the next day. Their payment usually 
amounts to about twenty cents on the dollar. The fence then sells the 
items at traditional brick and mortar stores, flea markets, or-- 
increasingly-- online. They have great incentives to sell online 
because they know that they can operate anonymously and are protected, 
they can move more merchandise more quickly and to a broader audience, 
and they can receive the highest return for items sold online.
    You may ask what Safeway is doing to prevent ORC at the store 
level--why don't we just hire a few more guards? The simple answer is 
that guards posted at store entrances provide only so much protection. 
In addition, Safeway has taken a step unprecedented in the grocery 
industry, of creating a whole division to combat ORC, employing special 
investigators across the US and Canada. This is in addition to the loss 
prevention teams based in each of our divisions. Because of the 
prevalence of ORC in our stores, special teams of ORC undercover agents 
have been trained and deployed into the stores. These agents understand 
the difference in detecting and apprehending the boosters versus simple 
shoplifters. Additionally, store personnel are trained and spend 
significant time in the store performing additional steps to prevent 
ORC at store level. There are special markings on high theft items to 
help deter theft. We limit quantities of this merchandise on the shelf 
to try and minimize losses, and we have invested in specialized 
shelving and display fixtures to thwart theft within the store. 
Unfortunately, these measures also make it difficult for customers to 
shop as easily as we would like and severely restricts the sale of 
these items. Safeway has implemented additional layers of security 
throughout the supply chain--from warehouse, to the loading dock, to 
the shelves. We have spent a tremendous amount of money in training and 
awareness campaigns among other retailers and law enforcement. Further, 
state of the art digital camera systems are installed in all of our 
stores at a cost of millions of dollars in order to aid law enforcement 
and our own investigators and store management teams in identifying the 
boosters who repeatedly steal from our stores.
    In spite of our extraordinary efforts, our company continues to see 
a steady increase of our health, beauty and cosmetic goods sold on the 
internet in high volume and offered below cost of what retailers can 
obtain it directly from the manufacturer. Fences have quickly learned 
that the anonymity of the internet presents an extremely low risk way 
to sell stolen goods and are abandoning the previous model of brick and 
mortar locations and flea markets that were once used to dispose of 
this type product. Online marketplaces such as eBay are being used as 
internet pawn shops, and are largely unregulated.
    We have has some successes in fighting ORC. In 2001 the Portland 
division of Safeway opened an investigation of three major fences and 
presented the information to the FBI. Over the course of the next three 
years Safeway and the FBI continued the investigation and successfully 
broke up a multistate ORC network operating from Oregon to Texas to 
Florida that ultimately resulted in the seizure of over $3 million in 
product, $950,000 in cash and federal criminal prosecution of 49 
suspects. The suspects told federal investigators that they resold much 
of the stolen product on eBay because of the anonymity assured by the 
site.
    Last year, in cooperation with Walgreens, Wal Mart and other 
retailers, our Northern California division worked a case with ICE 
agents that resulted in the seizure of product valued at $5 million 
dollars and the arrest and prosecution of Yemeni nationals. These 
individuals operated a warehouse containing 12 tractor trailers full of 
merchandise--850,000 pieces of HBC product, as well as a website for 
internet sales.
    Just this week, state agents in Texas and Safeway ORC investigators 
completed an over year long investigation and shut down a long time 
fence that was taking in an estimated 4 million dollars in stolen HBC 
product and who employed over 100 boosters. The fence was selling to 
another individual who was marketing it over the internet on both his 
own web site and eBay. In this case, many of the boosters were known 
drug users and the stolen product was stored under conditions that were 
not approved for these items. Storing these items in unregulated 
conditions can render the products ineffective, or in the worst case 
actually harm unsuspecting consumers, as in the case of baby formula.
    In each of these cases, we could have had quicker, more thorough 
investigations and clearer rules under which the suspects could be 
prosecuted if we had a federal law in place specifically to address 
ORC. Federal law enforcement and prosecutors are interested in 
prosecuting ORC cases, but they lack the tools and resources necessary 
to bring these cases to bear. Investigation of these types of cases is 
extremely difficult. A federal ORC bill would establish a definition of 
ORC in statute, help eliminate the state to state jurisdictional cherry 
picking by thieves, and would be especially helpful in making efencing 
a less attractive option for criminals to sell stolen property. 
Operators of sites such as eBay have historically failed to provide any 
meaningful information to retail investigators. Without this 
cooperation, we are severely hampered in securing the evidence needed 
by federal investigators to even open an investigation.
    The need for a federal solution to address the current ``free for 
all'' of electronic fencing is obvious. The information we are seeking 
from online marketplaces is no more cumbersome than is currently in 
place for brick and mortar providers of the same type operations. In 
many states sellers of product such as HBC must have proof upon demand 
of where they acquired the product and if they are pawning it they must 
have valid identification and serial numbers of the product, if any, 
are noted. Legitimate retailers--both those operating online and as 
brick and mortar businesses--as well as consumers have a right to this 
type of protection.
    As I am sure you are aware, retail is an extremely competitive 
environment and the grocery industry is no exception. In spite of that 
competitiveness, retailers understand that without cooperating with 
each other and working together on the investigations of boosters and 
fences we will not be able to effectively combat this problem. Because 
of the complexity of ORC cases and the many obstacles that stand in the 
way of investigating fences, especially internet based fences, it is 
not unusual for ORC investigators from several different retailers to 
work together to help gather evidence for law enforcement so that a 
fence can be shut down.
    In spite of Safeway's best efforts and unprecedented alliances with 
other retailers to combat ORC, we continue to suffer significant 
losses. If we are to be successful in curtailing this enormous criminal 
enterprise that threatens the businesses of retailers across the 
country, costs millions of dollars in lost sales tax revenue and 
impacts consumers through adulterated product, higher prices and lack 
of availability of merchandise, we must have strong federal legislation 
that more clearly defines ORC and requires the same level of 
accountability on internet sellers as that of traditional retail sites.
    I thank you very much for your attention and I look forward to 
answering any questions you may have.

    Mr. Scott. Thank you.
    Mr. Chesnut?

  TESTIMONY OF ROBERT CHESNUT, SENIOR VICE PRESIDENT, RULES, 
          TRUST AND SAFETY, eBAY, INC., WASHINGTON, DC

    Mr. Chesnut. Chairman Scott, Ranking Member Forbes, Members 
of the Committee, good morning. I would like to thank the 
Committee for giving eBay the opportunity to discuss the 
important issue of fostering real and effective solutions to 
the problem of organized retail crime.
    I ask that my full statement be entered into the Committee 
record.
    Prior to joining eBay in 1999, I was an assistant United 
States attorney over in the eastern district of Virginia for 11 
years. Five of those years, I served as the chief of the 
office's major crimes unit, prosecuted myself organized retail 
crime cases under Federal interstate transportation of stolen 
property statutes.
    My career at eBay has been focused on keeping the site safe 
for our community by working with law enforcement, the private 
sector, policymakers, the consumer protection agencies, State 
and Federal legislators.
    eBay recognizes that organized retail theft is a serious 
challenge that is facing many retailers. This Committee has 
compiled clear evidence that the problem stretches back many 
years and occurs at a disturbingly large scale.
    We share the view that this issue deserves serious 
attention by lawmakers, law enforcement, and all aspects of the 
retail businesses impacted and eBay stands ready to work with 
the other stakeholders on balanced and thoughtful responses, 
including taking account of the Internet as one of the many 
ways that criminals do reach consumers.
    And let me be clear that the eBay takes the problem of 
stolen goods and all forms of illegal activity that can impact 
our users very seriously. The delivery of stolen goods, 
counterfeit goods, or no goods at all is a horrible experience 
for our buyers.
    In the relatively rare circumstances where this does take 
place, buyers who get stolen property or get property that is 
not as described, they don't come back to our Web site and they 
spread the word and say bad things about eBay. And by spreading 
the bad word about eBay and having a bad experience like this, 
it hurts our business.
    So it is not only the right thing to do, but it is also 
good for our business by fighting fraud and keeping bad sellers 
off our Web site, vital to our success.
    eBay has the most proactive policy to combat fraud and 
illegal activity of all major Internet commerce companies. We 
have over 2,000 employees working around the world full-time, 
24 hours a day, 7 days a week to combat all forms of online 
fraudulent activity, including the sale of stolen property.
    Our fraud investigation team works closely with law 
enforcement officials at the State, Federal, local levels, 
including Detective Hill right here on our committee. We have 
worked with Detective Hill and other members of his staff.
    We have got dedicated hotlines, fax numbers, e-mail 
addresses for law enforcement to reach us quickly and 
efficiently and our fraud investigation team has trained over 
3,000 law enforcement officials around the United States to 
help combat online crime.
    Our policies and commitment to fighting stolen goods are 
pretty straightforward. When a retailer has concrete evidence 
to the effect that stolen property is on our site, we work with 
them and we work with law enforcement to address the problem 
quickly and efficiently. This process exists and we believe 
that it works well.
    What does working well mean? It means that criminals are 
arrested and they are put in jail. The reality is that eBay is 
the dumbest way for a criminal to try to sell stolen property. 
Our site is actually quite transparent, with detailed 
recordkeeping, very open privacy policy with respect to working 
with law enforcement and providing information quickly, and 
tying these sorts of records directly to financial transactions 
and financial institutions through our PayPal payment service.
    I would like to spend a moment to comment on the broader 
ORC problem. This committee has done significant work 
developing a record of this troubling issue. Just in terms of 
the distribution of stolen goods, this committee's 2005 report 
lists the following major venues for the sale of stolen 
property: small shops, flea markets, pawn shops, local fences, 
truck stops, newspaper ads, overseas buyers, and, yes, the 
Internet, through all different types of Web sites and chat 
forums.
    The committee report also describes how unscrupulous 
middlemen sell significant volumes of stolen goods right back 
to the traditional retailers, blended in with legitimate 
products.
    My point in mentioning the breadth of the process of 
turning stolen goods into money is that there are many avenues. 
Most of them are low tech and, actually, most of them are 
relatively anonymous compared to a site that is very open and 
transparent like eBay.
    And, yes, there are some tech savvy criminals that are 
finding ways to use Internet technologies. In terms of the 
Internet, if our eBay experience in working with law 
enforcement offers any insight, it would be that there are just 
as many varied schemes among Internet-enabled criminals as 
there are in the offline world.
    Similar to their offline counterparts, Internet criminals 
innovate to develop methods that are the least transparent and 
most fluid so that they can stay hidden in the darkest corners 
of the Internet.
    We look forward to working with the Committee on ways to 
effectively empower law enforcement to right the problem of 
organized retail crime. We supported legislation in a number of 
States calling for tougher penalties, mandatory sentences and 
higher priority prosecution of these criminals, and support the 
same at the Federal level.
    Thank you very much. I will be happy to answer any further 
questions.
    [The prepared statement of Mr. Chesnut follows:]

                  Prepared Statement of Robert Chesnut

    Mr. Chairman, Ranking Member Forbes and members of the Committee,
    My name is Robert Chesnut, and I am the Senior Vice President for 
Rules, Trust and Safety for eBay Inc. I would like to thank the 
committee for giving eBay this opportunity to discuss the importance of 
fostering real and effective solutions to the problem of Organized 
Retail Crime, and I ask that my full statement be entered into the 
committee record.
    Prior to joining eBay in 1999, I was an Assistant United States 
Attorney in the Eastern District of Virginia for 11 years. For 5 of 
those years I served as Chief of the Major Crimes Unit. My career at 
eBay has been focused on keeping our site safe for our community by 
working with the law enforcement community, the private sector, 
policymakers, consumer protection agencies and state and federal 
legislatures, so I very much appreciate the opportunity to speak with 
you today on behalf of eBay about this important topic.
    eBay recognizes that organized retail theft is a serious problem 
facing many retailers in this country. This Committee should be 
applauded for the commitment it has shown to addressing this problem, 
compiling clear evidence that this is a problem that stretches back 
many years and occurs at a disturbingly large scale. We believe that it 
is a problem that deserves serious attention by lawmakers, law 
enforcement and all aspects of the retail businesses impacted. eBay 
stands ready to work with all stakeholders on balanced and thoughtful 
responses, including responses that account for the internet as one 
among many and varied ways that criminals attempt to sell stolen goods 
to unsuspecting consumers.
    Let me be clear, eBay takes the problem of stolen goods, and all 
forms of illegal activity that can impact our users, very seriously. We 
have the most pro-active policies and tools to combat fraud and illegal 
activity of all the major internet commerce companies. There are over 
2000 eBay Inc. employees around the world working to combat all forms 
of on-line fraud, including the sale of stolen goods. As we have grown 
as a business over the last 12 years, we have dedicated more and more 
resources to the fight against criminal activity that harms our users.
    When eBay first emerged as a dynamic way for people to buy and sell 
items online back in 1995, there were really no rules in place for our 
users to follow. We established the feedback system which gave each 
member a rating for each transaction that any user could see, and for 
the most part all of the trust between buyers and sellers was based on 
that system in the early years of eBay. But the company realized in 
those early years that in order to become a truly safe and trusted e-
commerce site we needed to put policies and tools in place to make sure 
that illegal items and harmful sellers were quickly identified and 
removed from our platform. We created clear policies about what is 
allowed and not allowed to be listed on the site and built state-of-the 
art tools to enforce those policies. We developed advanced anti-fraud 
tools to identify suspicious behavior, remove members who engaged in 
harmful practices and take steps to keep them from coming back on the 
site. And we established a global Fraud Investigations Team to partner 
with law enforcement to make sure that criminals who seek to abuse our 
community of users get prosecuted to the fullest extent of the law. 
Largely as a result of these efforts, we now have trading platforms in 
38 countries with over 240 million registered users. At any one time 
around 100 million items are listed for sale on eBay around the world. 
Millions of transactions take place everyday on eBay where both the 
buyer and seller walk away totally satisfied. Here in the United 
States, over 750,000 Americans make all or a large percentage of their 
income selling items on eBay.
    Our acquisition of the online payment provider PayPal in 2002 only 
enhanced our ability to keep our users safe. PayPal offers our members 
a safe way to pay online, and in the last 5 years we have merged 
PayPal's anti-fraud experts with the engineers, statisticians and fraud 
modelists at eBay to create an industry-leading team of experts 
dedicated to keeping our sites and our community of users secure and 
safe. We dedicate significant resources toward cooperating with law 
enforcement agencies around the world. I am one of 8 former law 
enforcement officials that work at eBay and PayPal, and the fact that 
we have a fairly large internal contingent of folks from that community 
helps us understand the challenges faced by enforcement agencies and 
how we can help those folks do their jobs and keep our users safe.
    Our Fraud Investigations Team works closely with law enforcement 
officials at the federal, state and local levels, and we have teams in 
San Jose and Salt Lake City to serve enforcement agencies throughout 
North America. Because we operate a truly global marketplace, we also 
have Fraud Investigation Teams in Dublin, Ireland and Dreilinden, 
Germany to serve law enforcement in Europe and Asia. Earlier this week, 
two of our law enforcement liaisons were in Romania working with 
officials there to combat fraudulent activity based in that country. 
This is the 6th time that our US-based staff has traveled to Romania in 
the last three years, and we have an attorney based in Eastern Europe 
who is dedicated full-time to working with police and prosecutors in 
that region. We make it easy for law enforcement officials to find us--
we have dedicated hotlines, fax numbers and email addresses for law 
enforcement to be able to reach us quickly and efficiently. When 
agencies request records from us to support their enforcement actions, 
they receive those records in days--not weeks or months, as can be the 
case with other companies.
    In addition to providing the records necessary to bring cases, our 
Fraud Investigations Team trains law enforcement officials around the 
United States and globally on the best way to combat crime online. My 
colleagues and I have spent a lot of time on the road in the last 
several years building relationships with enforcement agencies and 
teaching them how to investigate eBay and PayPal cases. In 2006 alone, 
we trained over 3000 law enforcement personnel in North America about 
online fraud in the eBay/PayPal context and how we can help them 
prosecute criminals who attempt to abuse our users. The assistance that 
our teams provide to law enforcement agencies around the world lead to 
an average of two arrests every single day. Our Fraud Investigations 
has worked on numerous cases with both law enforcement and loss 
prevention staff from the large retailers to make sure that thieves get 
prosecuted.
    Our policies and commitment to combating the sale of stolen goods 
on eBay are straightforward. eBay is no place for the sale of stolen 
goods, and the transparency of our site combined with our commitment to 
working with law enforcement makes it an unwelcome venue for 
``fencing.'' The reality is that eBay is the riskiest way for a 
criminal to try to sell stolen products over the internet. We work both 
reactively and proactively with law enforcement, often referring cases 
out to the appropriate agency where we detect fraudulent behavior by 
one of our sellers, including the listing of stolen goods. When any 
retailer has concrete evidence to the effect that stolen property is on 
our site, we will work with them and law enforcement to address the 
problem, including sharing information about a targeted seller with the 
appropriate enforcement agency. This process already exists and we 
believe it works well.
    In addition to our work with the law enforcement community, we have 
been engaging the retail industry for many years now to strengthen our 
relationships with retailer trade associations as well as individual 
companies to find ways we can work together to combat the sale of 
stolen property on eBay. We have held meetings with retailers all over 
the U.S. to hear their concerns and to explain how we can work with 
them on these issues. We have provided training to loss prevention 
teams about how to use the eBay website to investigate suspicious 
listings and gather information that can be used to bring a case to law 
enforcement. The manager of our Fraud Investigation Team in San Jose is 
presenting today at a joint law enforcement/retailer conference on 
Organized Retail Theft in Seattle, where over 400 officials from the 
retailer loss prevention community will be in attendance along with 
folks from local, state and federal law enforcement communities.
    In addition to our outreach to the law enforcement and retailer 
communities, we have also taken additional steps internally over the 
last year to keep bad sellers off of eBay before they have a chance to 
harm our buyers. All new sellers on eBay.com must register a credit 
card with us and they must accept PayPal as a payment option. By 
requiring new sellers to take these steps we lower the chances of a 
criminal attempting to use our trading platform to commit fraud, as 
criminals don't generally like to provide financial information and use 
payment systems that make it easy to track them down once their illegal 
behavior becomes apparent. We have revamped our feedback system to 
allow buyers to provide much more detailed ratings of a seller's 
transactional performance. We have put higher standards in place for 
seller performance and suspend sellers who to a significant extent fail 
to satisfy their buyers. Sellers who fail to deliver the goods at all 
get referred out to law enforcement for prosecution. Let me reiterate 
that the delivery of stolen goods, counterfeit goods, or no goods at 
all is a horrible buyer experience for our customers. In the relatively 
rare circumstances where these activities take place, the buyer 
generally leaves our site and never comes back. And probably tells 
everyone he or she knows to never buy anything on eBay. Fighting fraud 
and keeping bad sellers off of our site are vital to our success as a 
business.
    Regarding the broader ORC problem, this Committee has done 
significant work developing a record of this troubling issue. In terms 
of the distribution of stolen goods, your March 2005 Committee Report 
lists the following major venues: small shops (including beauty shops, 
gas stations, music stores, bars and gyms), flea markets, pawn shops, 
local fences, truck stops, newspaper ads, overseas buyers, and yes, the 
Internet through all types of web sites and chat forums. The Committee 
report also described how unscrupulous middlemen sell significant 
volumes of stolen goods back to traditional retailers blended in with 
legitimate products.
    My point in mentioning the breadth of the process of turning stolen 
goods into money is that there are many avenues for this illicit 
process. Most of them are decidedly low tech in nature. While some tech 
savvy criminals are finding ways to use internet technologies, sensible 
solutions should address the entire range of distribution methods and 
not place disproportionate focus on less popular methods. Many large 
manufacturers and retailers have a negative view of the eBay 
marketplace because we provide an incredibly efficient secondary market 
for their goods. Our sellers are perceived by some as their 
competition, and one way to attack efficient secondary market 
competitors that sell goods at low prices is to suggest that there is 
something shady about those sales, when in reality those sales are 
completely legitimate.
    This past summer there was a story in USA Today about the disdain 
that many large retailers have for individual entrepreneurs who use the 
Internet, usually eBay, to resell their products. A spokesperson from 
Gymboree, the popular children's clothing chain, explained their 5-
item-per-customer limit by stating that ``we need to protect our image 
. . . we don't want people to think we're selling things on eBay.'' A 
colleague of mine at eBay sells her kids' Gymboree clothes on eBay once 
they grow out of them. Those clothes are then worn by the buyer's kids, 
and my colleague uses the money to buy new clothes for her growing 
children. This is a truly efficient use of consumer goods, but Gymboree 
does not like it, as they seem to feel that the only place you should 
be able to buy Gymboree clothes is at the Gymboree store.
    One approach to a legislative solution to the problem of organized 
retail theft is simple: increase the criminal penalties for this 
conduct. If these crimes are currently classified as misdemeanors, 
upgrade them to felonies. If the jail sentences tied to these crimes 
are too short, lengthen them. We have supported legislation in a number 
of states calling for tougher penalties, mandatory sentences and higher 
priority prosecutions of these criminals. We would support the same at 
the federal level. These steps will make these cases more attractive to 
law enforcement and will make judges more likely to put these criminals 
in jail rather than giving them probation. If these thieves make the 
unwise choice to use eBay to try and sell their stolen goods, we don't 
just want them off of eBay, we want them to see the inside of jail 
cell.
    eBay has always been committed to providing a safe, well-lit 
marketplace. We believe that this commitment to our community has been 
key to growing eBay into the world's largest global online marketplace. 
Working in a cooperative relationship with business partners and law 
enforcement has been central to this effort, and we will continue in 
that manner going forward.
    We look forward to working with this Committee on ways to 
effectively empower law enforcement to fight the problem of Organized 
Retail Crime. We stand ready to do our part to combat the long-term 
problem of retail theft in a balanced and responsible way. We believe 
that law enforcement is crucial to solutions regarding illegal 
activity, and we believe it is crucial across the board to protect the 
privacy and rights of the law-abiding citizens and small business 
people.

    Mr. Scott. Thank you. Thank you, Mr. Chesnut.
    We will now go to questions by Committee Members and I will 
recognize myself first for 5 minutes.
    Mr. Brekke and Mr. Langhorst, how do we know how much is 
being lost to organized crime as opposed to regular shoplifting 
and other kinds of I guess what is called shrinkage?
    Mr. Langhorst. Excellent question, Mr. Scott. In the last 
few years, we have been driven to have to document our 
organized retail crime cases now. So when store management has 
an incident of it, they have to document it immediately.
    They are able to determine to that it was an ORC incident 
and not a shoplift incident. In fact, we have had to alert our 
stores so quickly now, they fill out an online report of the 
loss and it is immediately broadcast to all other stores, as 
well as my loss prevention investigators.
    So they are very, very much aware that ORC is such a large 
problem in their stores, they are able to determine the 
difference.
    Additionally, we also have apprehensions in our stores by 
both store management and undercover agents. They fill out 
apprehension reports. We are able to look at those reports and 
immediately determine if it is an ORC case or a simple 
shoplifting case.
    Mr. Scott. Thank you.
    Mr. Brekke. Just to add to that, some of the actual 
shoplifting, describe it that way, may be tagged to ORC. You 
cannot always tell at the source in the store.
    You have to work it out in an investigation to determine 
where the goods go, how it may be fenced later. So there is 
always a challenge with that.
    That is part of the reason the LERPnet was created, working 
with the FBI, so we can begin to gather data and analyze it and 
get a better number.
    Mr. Scott. Thank you.
    Mr. Chesnut, what do you do when someone alerts you to the 
fact that stolen merchandise is for sale on eBay?
    Mr. Chesnut. First, we ask what is the evidence. So in 
other words, why do you believe that it is stolen, because we 
actually find in more than half of the reports that we get, 
when someone says to us that we believe that a particular item 
is stolen, investigation turns out that it is not stolen. There 
is a misunderstanding.
    Someone thinks that this particular guitar looks like a 
guitar that they lost a few months ago and, in fact, further 
investigation shows that it is not.
    So we ask for why do you believe it is stolen. We attempt 
to get law enforcement involved, because we think that the fact 
that there is a crime involved means that law enforcement ought 
to know about it and investigate it.
    If, from the evidence that we get, it appears that the item 
is stolen, we are taking the item down and we are suspending 
the seller, no matter what law enforcement does.
    We actually would hope that law enforcement would go 
further and investigate and do a prosecution and if they do, we 
fully support the prosecution.
    Mr. Scott. What do you do to protect from copyright 
infringement and sale of counterfeit goods?
    Mr. Chesnut. Well, sale of counterfeit goods is actually 
governed by a Federal statute, the Digital Millennium Copyright 
Act, and there is actually a scheme set out by law about what 
should be done in those circumstances.
    When we are notified that a particular item is counterfeit, 
we are notified by the intellectual property owner, someone 
that actually has knowledge of that product because it is their 
product, and often they are able to tell just by looking at the 
item on our site that it is counterfeit.
    When they certify to us, under penalty of perjury, that 
that item is counterfeit, we immediately remove the item from 
our Web site.
    Mr. Scott. Mr. Chesnut, you have pointed out that the 
transactions on eBay are transparent and there is a paper 
trail, because it is not like cash where you hand it and you 
don't know where it came from or where it went, there is a 
paper trail.
    And I guess I will ask Mr. Hill. If we had enough 
resources, it seems to me that we could solve many of these 
cases, but the reason people get away with it is that we don't 
actually pursue the cases because of lack of resources.
    If you had more resources, could you break up more of these 
major fence operations?
    Mr. Hill. That is for Mr. Chesnut and myself?
    Mr. Scott. Well, I am happy to get your perspective and 
Detective Hill may have a perspective, as well.
    Mr. Chesnut. We are probably going to be full agreement on 
this. I think the answer is more resources would certainly 
help.
    Mr. Scott. Because you have got a paper trail that you 
don't usually have in theft operations. Usually, the fence will 
give whoever gave it to him cash.
    In this case, you have to go through PayPal. If someone is 
running a big operation, you have got receipts. You know what 
they have sold, when they sold it, how many, and you can 
develop a pattern.
    I mean, where do you get all this stuff?
    Mr. Chesnut. When you compare a site like an eBay to flea 
markets, pawn shops, truck stops, newspaper ads and the like, 
the amount of data that is available on eBay is pretty 
remarkable.
    We have records stretching back for over 5 years. We will 
have frequently copies of the exact listing. We will know who 
the buyer is, so we can actually go to the buyer and get the 
item back for examination, if necessary.
    Through PayPal, we have the bank account of the seller that 
sold the item. So we can actually trace where the money went.
    So there is a lot of information that is available when 
something is sold through eBay that is not available through 
many of these other avenues, which makes it, I think, far 
easier in terms of an investigation to actually track something 
down.
    The problem is we hear from law enforcement that there are 
too many cases for them to handle. They are busy on a whole 
host of fronts.
    Mr. Scott. And if we had more resources, we could eliminate 
a lot of this, if we would go ahead investigate the case. It is 
labor intensive because there is a lot of work to be done.
    We have got the same problem with identity theft, that 
somebody steals your credit card, the bank writes it off, law 
enforcement doesn't check it out, and so people feel that they 
can steal people's identity and make money with pretty much 
impunity. There is not very much at risk.
    I am getting the same idea that people are selling stuff 
over eBay and if it is not going to be investigated, they are 
not much at risk.
    Mr. Hill. Yes, I agree.
    Mr. Scott. And the evidence is there. If somebody told you 
there was stuff being stolen, if you did all the work, you 
could get back to who stole it and where the money went.
    Mr. Hill. Yes.
    Mr. Chesnut. Often, we get calls from the retail 
organizations saying that we would like to know who is selling 
a particular item on eBay, can we get the name and address. 
That is information we can provide to law enforcement.
    At eBay, we provide it even without a subpoena. We just 
need to get a law enforcement official on the phone to give 
them the information and, unfortunately, frequently, law 
enforcement doesn't have the time to do it, because they are 
very stretched.
    Mr. Scott. Thank you.
    Mr. Langhorst. Mr. Chairman, if I could address that. To 
Mr. Chesnut's point, we will call and typically we will get 
that answer and response, please contact law enforcement. Law 
enforcement typically won't deal with us on that type of thing 
because unless we bring them a completed case well laid out, 
they simply don't have time to address it.
    That is why it would be nice to put some measures in place 
to try to slow down this type of activity so law enforcement 
can be focused on other things rather than eBay having to train 
3,000 law enforcement officers across the country.
    It would be nice to have some regulations in place to try 
to limit this activity to begin with, loss prevention rather 
than loss reaction.
    Mr. Scott. Thank you.
    Mr. Brekke. Mr. Chairman, I will also comment. What you are 
calling out is actually the challenge in front of us in the 
current model. The only resolution is a case by case basis.
    As the Internet continues to grow as a marketplace, which 
is a good thing, we see more and more bad guys taking advantage 
of that and shifting to us the Internet to fence.
    That means the number of cases continues to grow. The only 
resolution at this point is to go to law enforcement, ask them 
to intervene and try to fix this.
    We are looking for a solution that is more preventative or 
deterrent focused. We understand we can always investigate, but 
this is not a situation where we want to catch everyone. We 
want to prevent the loss to begin with.
    Mr. Scott. Thank you.
    Mr. Forbes?
    Mr. Forbes. Thank you, Mr. Chairman.
    First of all of you guys are wearing white hats. You are 
all doing good jobs. We appreciate you being here. We are just 
trying to forge a solution that is reasonable and everybody can 
work with to move the pile down the field.
    Mr. Brekke and Mr. Langhorst, for both of you, when we are 
talking about resources, we are talking about $37 billion that 
I assume that your industry is losing in some fashion or the 
other.
    One of the questions we oftentimes get is what are the 
security devices you could use that might help minimize that. I 
know that we look at--I have seen some big hardware warehouse 
operations that tell me they have lost six generators that are 
just pulled out and somebody walks out the door with them.
    I see other operations where, when somebody goes out, there 
is somebody there that is checking the receipts to make sure as 
they are going out.
    What additional things can retailers do that would help cut 
down the theft? I know you said some of this goes undetected, 
but the Chairman and I just watched this news clip where 
somebody is filming it and somebody is seeing it taking place.
    What additional steps could be done there from a resource 
point of view that retailers could do to slow it down or have 
you tried that and it just doesn't work?
    Mr. Langhorst. Representative Forbes, we have quite a few 
deterrents in our stores, but at the end of the day, if someone 
is so inclined to come in and steal something and they are 
brazen and bold enough, they certainly can do so, as you saw in 
that video.
    We obviously have cameras in our stores. We have undercover 
agents in our stores. We have uniformed guards in our stores. 
We have markings on our product, both covert and overt. We 
limit supplies of high theft product on the shelves.
    We have all of our associates, all of our associates are 
aware of what organized retail crime are and retailers across 
the country are now very much active on that, as well, 
educating their associates.
    But at the end of the day, if there is a demand for this 
product and boosters understand that and fences send them out 
to the stores, they are going to come in and get the product.
    Mr. Forbes. When they are detected, like we saw here, will 
you apprehend them?
    Mr. Langhorst. Our associates will try to apprehend them, 
our store management, but, again, at the end of the day, they 
are there to sell groceries, they are not there to be police 
officers, and we certainly don't want to put them in harm's 
way.
    Just this week, at one of our stores in Texas, we had an 
undercover agent assaulted and ended up with a broken ankle as 
a result of trying to stop a booster in the store.
    These people are very brazen. Many of them are drug addicts 
and, quite frankly, they don't care who gets hurt. They are 
there to get their product and get their drugs.
    Mr. Forbes. Lay out for me what, Mr. Brekke, you and Mr. 
Langhorst feels that Mr. Chesnut should advise eBay to do. What 
would your recommendations be that would be reasonable for him 
to do?
    Mr. Langhorst. Well, we would certainly like to be able, 
when we call eBay, to get an answer on our questions of who is 
selling this product. And when we say who is selling the 
product, we are looking for people that are selling multiple 
products or the same type product repeatedly, over and over and 
over again, below what we know that wholesalers can sell it to 
retailers for.
    Mr. Forbes. So you would like to find out who is selling 
the product. What else?
    Mr. Langhorst. Absolutely. We would like to have serial 
numbers recorded on product that is serial number capable, 
tools, things such as that. That should be something that 
should be posted on the eBay Web site, as well.
    To Mr. Brekke's point, that has worked well on the 
automotive side to help curtail some auto theft.
    Mr. Forbes. Now, you wouldn't say that Mr. Chesnut, though, 
should be treated differently than newspaper or print 
classifieds, should you? In others, if it is sauce for the 
goose, should it be sauce for the gander?
    In other words, if he has to do it online, would you 
require that newspaper classifieds do it?
    Mr. Langhorst. The thing with the newspaper classifies, 
sir, is that you have a phone number to contact an individual 
and a place to meet that individual it they are going to sell 
their product, more than likely. So you have a point of 
contact.
    And, again, this isn't--I think Mr. Brekke mentioned it, as 
well. This isn't just an eBay issue. This is an Internet issue.
    Mr. Forbes. I understand. We just have Mr. Chesnut here and 
I am just trying--Mr. Chesnut, let me give you a short, 
although I still can't understand why you would leave beautiful 
Charlottesville and go to Chairman's alma mater there.
    But tell us what your position is. Is that unreasonable for 
you to do? Why can't you do that?
    Mr. Chesnut. In terms of who is selling the product, the 
issue really is the privacy of the individual sellers. There 
are a lot of people who I think would be quite concerned that 
any retailer could call eBay and, without any standard of proof 
at all, get their name, address and phone number.
    Mr. Forbes. How about if it was a high volume? And I think 
what Mr. Brekke would suggest, and I don't know, I don't want 
to put words in your mouth, but maybe you don't do this for 
everybody, but there is a certain threshold of volumes that 
gives you a higher area of suspicion, which the Chairman 
suggested to me, which I think is right.
    Would that be more reasonable and less of an invasion of 
privacy? Because wouldn't it make a little bit of sense that if 
you got a guy that is really marketing a lot of products, that 
maybe that would just raise the threshold just a little bit?
    Mr. Chesnut. It might. In those situations, it is actually 
quite easy and they can simply buy one. Let us take razor 
blades, one of the issues that they have spoken about quite a 
bit.
    They can find out that information themselves and even they 
can get more information than what we could give them by buying 
a pack of razor blades. That way, they get the name, address, 
phone number, all the contact information of the seller 
directly themselves.
    Mr. Forbes. Mr. Brekke does make a good point, I mean, if 
we just throw out that--I don't think that we have enough 
resources to arrest and apprehend and prosecute everybody, 
because we are talking about police doing that, we are talking 
about judges involved and prosecutors involved, and then we are 
going to have a lot of people say we are apprehending too many 
people and putting too many people in jail.
    If there is some way to be a deterrent and to prevent it, 
that would seem to make sense to us, I would think.
    Do you feel it would be reasonable, at some tolerance 
level, to say this guy is such a high volume seller that we at 
least ought to think about what would be reasonable to require 
of him?
    Mr. Chesnut. It is certainly reasonable to think about 
different things that we could do for high volume sellers. I 
think that is fair. It is also there are a lot of people who 
are quite nervous about putting their name, address and phone 
number on the Internet, where obviously people, spammers and 
the like can steal that information and take it right off and 
put it in other places.
    Right now, it is a balance between the privacy of the 
individuals and concern about having that information on the 
Internet versus the need of the retailers.
    What we have tried to do at eBay is we have--the 
information is available to any law enforcement official who 
can simply ask for it by e-mail. Any other Internet company 
will require a subpoena. We know how hard it is for law 
enforcement in these cases.
    So what we have said is, look, all we have to do is get a 
law enforcement official involved by e-mail or a quick phone 
call, we will give the information directly to them. So that 
way we assure that there is not any abuse.
    Mr. Forbes. Thank you. I don't mean to cut you off, but we 
have got another vote, and we want to get Mr. Johnson's 
questions in, and maybe we can talk a little bit later to all 
of you on it.
    Mr. Scott. The gentleman from Georgia, Mr. Johnson.
    Mr. Johnson. Thank you, Mr. Chairman.
    eBay is pretty much the largest online platform of buying 
and selling in the world, is that correct?
    Mr. Chesnut. We are the largest online marketplace, right.
    Mr. Johnson. And at any one time, 100 million items are 
listed for sale, millions of transactions take place every day, 
240 million registered users on eBay, and here in the United 
States, according to your written testimony, over 750,000 
Americans make all or a large percentage of their incomes 
selling items on eBay. Is that correct?
    Mr. Chesnut. I believe that is correct.
    Mr. Johnson. And you keep records on all of these 
transactions stretching back for 5 years or so.
    Mr. Chesnut. Not only do we keep the records, we share with 
other organizations, like LeadsOnline, so that it can go into 
national databases to assist in these sorts of issues.
    Mr. Johnson. How many reports annually of stolen 
merchandise does eBay receive?
    Mr. Chesnut. In a typical year--by the way, this is not 
something that we have seen materially increase over the last 
several years. In a typical year, it will be approximately 
1,000 inquiries form law enforcement related to stolen 
property.
    That doesn't mean that all 1,000 are, in and of themselves, 
stolen property. It means that the inquiry is about stolen 
property.
    How many of those are actually stolen property cases, we 
don't know. Keeping it in context, we probably have about six 
to seven million items placed on our site every day.
    Mr. Johnson. How many reports from buyers do you get of 
stolen merchandise per year?
    Mr. Chesnut. I don't have the data on how many from buyers, 
but it is a very small number. It would certainly be less than 
the numbers from law enforcement.
    Mr. Johnson. How many referrals does eBay make to law 
enforcement annually of allegations of theft?
    Mr. Chesnut. We proactively make some. I don't have the 
data today as to how many we proactively--where we make phone 
calls to law enforcement versus they make calls to us.
    But, again, I think the number of law enforcement inquiries 
to us are in the neighborhood of 1,000 per year on the issue of 
the stolen property.
    Mr. Johnson. I would ask any of the other panelists, are 
you aware of any data regarding the scope of the problem of 
resale of stolen goods online? Has anyone done any statistical 
analysis or gathered any data regarding the share of stolen 
merchandise that ends up being resold on the Internet?
    Mr. Brekke. That is part of what we are trying to get at 
through the LERPnet. What we do have is the FBI's number of $30 
billion. We also internally know specific cases that we work 
with law enforcement tend to run in the million dollar ranges 
usually over the course of 6 months to 2 years.
    The most recent here in Baltimore area was a $4 million 
loss to Target involving an Internet auction site where the 
goods were sold online. That would be one case that we worked 
with law enforcement.
    Mr. Johnson. Yes, sir.
    Mr. Langhorst. Representative Johnson, just a couple 
things. An example of fencing on eBay would be a case that the 
FBI worked in the last few years in Lexington, Kentucky, 
Mohammed Shalash, Unity Wholesale and Trading, where he was 
ending up fencing formula over the Internet, ended up $78 
million was sent from this country back to Ramallah that was 
verified by Federal agents, don't know what happened to the 
money after it ended up in Ramallah.
    Just as recently as yesterday, I pulled off two buyers on 
eBay selling quantities of baby formula far below wholesale 
cost. I can't tell you if that formula is stolen or not. I can 
just simply tell you that there is no way any legitimate 
retailer can get it at that cost and sell it out on the market.
    To your point as to how many cases are worked, to Mr. 
Brekke's point, as we work cases with law enforcement and we 
interview the fences, they are telling us that they do go to 
eBay or other Internet sites to fence their product.
    So it is on a case-by-case basis.
    Mr. Chesnut. I would like to talk a little bit and just 
mention price. In a case like the one that was just recently 
brought up, on eBay's site, many of these are auction prices. 
So they will put out as a starting bid of $1, knowing that with 
millions of buyers, the price will actually get driven up to 
the market price.
    And I know there is some frustration with a number of the 
retailers because they will go to eBay and see some of the 
prices.
    Some are because of the auction format of eBay and some can 
be for a wide variety of reasons that are legitimate. We 
recently sat down with a major manufacturer who was concerned 
about ten sellers selling health and beauty aids, a particular 
product, at below the retail price and they were concerned that 
all ten of these sellers were involved in illegal activity.
    We sat down and we contacted all ten sellers. We asked for 
proof of where they were getting the merchandise and asked for 
the pricing information and it turned out that of the ten, four 
of them were actually getting the product from a different 
country where that manufacturer was making the goods available 
at a much lower price.
    These were entrepreneurs who were getting that inventory 
from one place in the country or one place in the world and 
reselling it somewhere else where the goods prices were higher 
and there was nothing improper or illegal with that.
    Three more had legitimate explanations showing where they 
were getting the merchandise and proving to us that there was 
not an issue.
    Two of the individuals we had already suspended for other 
reasons. And the tenth individual we looked at and we weren't 
comfortable ourselves and we suspended the individual and 
reported him to law enforcement.
    So when you see prices on eBay, the same thing with stolen 
property and with counterfeit goods, there are a number of 
legitimate reasons why goods are on eBay at prices that may be 
lower in the stores and I think that is quite appropriate.
    It doesn't mean that the goods are stolen, although in some 
cases they may be and those are situations we take seriously 
and want to investigate.
    Mr. Langhorst. Could I quickly respond to that, sir?
    Mr. Johnson. Yes.
    Mr. Langhorst. The prices that I am looking at are ``buy it 
now'' prices, those are not auction prices, and they are still 
far below the wholesale. And then, secondly, to Mr. Chesnut's 
point, product being brought in from outside the country and 
manufactured and brought in here for sale, for instance, 
diabetic test strips may not have the same standards in other 
countries for testing that we do here in the United States.
    And certainly you would have concern in that one product 
and several others that we could go into of whether they meet 
the same regulations and qualities that we demand here in our 
country, if it is being brought in from other countries and 
sold to consumers knowing that it is coming in from another 
country.
    Mr. Scott. Thank you. We are going to have to recess. We 
will be right back after this vote.
    [Recess.]
    Mr. Scott. The Subcommittee will come to order.
    I understand that Mr. Chesnut wanted to respond to the last 
question.
    Mr. Chesnut. Mr. Chairman, I believe there was a question 
about data on how much of the problem is on the Internet and I 
just wanted to emphasize that there is no data that I have seen 
or that I believe anyone is aware of about how much of this 
issue is on the Internet.
    We can say that over our time at eBay, we have not seen a 
significant increase over the last several years in terms of 
stolen property reports. That is not denying that some of this 
problem is moving on to the Internet and that there is stolen 
property being sold on the Internet.
    From all the data, though, it appears that this is a wide 
ranging issue where the stolen property is being sold in a wide 
number of places still, in the garage sales and the flea 
markets and the like, and that is primarily where most of the 
stolen property is still being sold.
    And I think that is because, again, the Internet has a 
great number of advantages of transparency and a number of 
advantages for law enforcement.
    I believe the Chairman asked a question earlier about 
getting data and how these companies could get data and I 
mentioned purchasing the property.
    The retailers themselves actually have had a lot of success 
on eBay simply purchasing the property themselves. When they 
see something suspicious on eBay, by purchasing the property, 
they then get the name, address, phone number and all the 
contact information on anyone who is selling on eBay. It is 
widely available to them simply by making a purchase and that 
way we don't--none of the privacy concerns that might 
traditionally be available because the information is posted 
somewhere come into play.
    Mr. Brekke. Mr. Chairman, may I make a couple of responses?
    Mr. Scott. Mr. Brekke, yes, sir.
    Mr. Brekke. One, the purchasing the property is, again, the 
one off solution, because you would have to visit many, many 
sites and purchase many, many products.
    We are looking for a solution that is more deterrent 
focused. That goes to transparency. What we are asking for is 
more transparency with a select group of sellers and select 
group of information regarding that.
    A parallel or an analogy is similar to--in the 1980's, I 
was part of the some of the task force involved in dealing with 
narcotic trafficking, the Colombian cartels. One of the issues 
was cocaine comes up, they generate a lot of cash, deposit it 
in U.S. banks, shipped it out of the country.
    One of the solutions that Congress passed was money 
laundering acts, which required banking institutions to do some 
due diligence or have the people, not all people, but a certain 
group of people disclose more information when they would 
deposit that cash.
    That became a tool for law enforcement and it also tended 
to deter that type of activity across the board once the bad 
guys realized that for those types of transactions, there would 
be transparency or visibility.
    Mr. Scott. Mr. Hill?
    Mr. Hill. Mr. Chairman, I would also like to agree with 
everyone here that we don't have stats either, but I believe I 
heard the number of 1,000 inquiries by law enforcement a year.
    I believe that that number would increase a whole lot if 
the description of the items being posted on the Internet were 
more detailed and included serial numbers. That would allow us 
to make matches with the reports that we receive when stolen 
property is reported to us, whether it is a burglary or whether 
it is from a retailer.
    We can match that number with the number in the report and 
that would allow us to do that. It would also allow them and 
their investigators to match up the stolen property.
    Right now, we know, through informants and everyone, that 
this property is being sold on eBay, but we can't prove it. But 
that would be one of the tools that would allow us to prove it 
by matching up serial numbers.
    Mr. Langhorst. Mr. Chairman, if I could, just to remark on 
Mr. Chesnut's comments about the majority of product being sold 
in flea markets and garage sales.
    Again, their law enforcement officers can have a presence. 
They can walk out, they can see who is selling the product. Our 
retail investigators make those flea markets and occasionally 
garage sales, as well. We can see who is selling those 
products.
    And to say that the majority of products are being sold 
there just isn't correct. The one case alone that I have cited, 
the Unity Wholesale, where $78 million was sent to Ramallah, 
that is a lot of garage sales and that is only one case that we 
have that was used with the Internet.
    Mr. Chesnut. In that particular case, I don't believe $70 
million came from eBay sales.
    On the serial number issue, because that has been raised a 
couple of times, on its own, without any prompting or any 
legislation, eBay made the decision to require VIN numbers on 
all motor vehicles sold on the site. So eBay is not against 
doing it where it makes sense.
    The reason it makes sense in motor vehicles is really for 
three reasons. One, when someone gives us a VIN number, we can 
automatically determine whether it is a legitimate VIN number 
and whether it matches the car that is on the site, because 
there is a database we can check, whereas for serial numbers on 
electronics items, for example, there is no such database.
    Someone could make up a serial number and the individual 
entering it, if they were stolen property, would simply enter 
an incorrect serial number and we would have no way of knowing 
it. There would be no database to check against.
    Secondly, when someone lists a motor vehicle on eBay, we 
take that VIN number and we run it against a national database 
of stolen cars, flood damaged cars, title issue cars. And so we 
are able to proactively deal with the problem ourselves simply 
with that VIN number.
    Unfortunately, there is no such national database that we 
could run stolen property against and make that kind of a quick 
decision. So because it would be so easy for a criminal to 
simply alter a serial number or come up with a different serial 
number and enter it on eBay and because there is no national 
database, it wouldn't really solve the problem.
    And if you look at the sort of items that are being 
complained about here, the Crest White Strips, the health and 
beauty aids, the razor blades and the like, none of those 
things have serial numbers.
    We have no issue at all with introducing something like a 
serial number check where it is actually going to do some good, 
but unfortunately, for this sort of an issue, I am afraid that 
it really wouldn't help.
    Mr. Scott. The gentleman from North Carolina, Mr. Coble.
    Mr. Coble. Thank you, Mr. Chairman. Good to have you all 
with us today.
    Mr. Chairman, I am concerned about the scope of organized 
retail crime, as are most of us. The problem is growing and I 
feel perhaps it is ripe for legislative attention.
    With that being said, I think we need to be concerned that 
we take a level and pragmatic approach to address the problem.
    Mr. Brekke, have you experienced any difficulties working 
with merchants or eBay on allegations or investigations or 
prosecuting cases where you products have been stolen and 
allegedly sold on eBay?
    Mr. Brekke. We have worked numerous operations with 
merchants, other retailers. We have had mixed results with 
eBay, depending on the situation.
    Mr. Coble. Mr. Hill, when you investigate allegations of 
stolen merchandises being sold, how do you determine that the 
product is, in fact, stolen?
    Mr. Hill. Either by a confession or a match of the property 
description and the date and time that it was posted compared 
to when the theft took place.
    Mr. Coble. Would a pawn shop or eBay be able to make this 
determination without support from law enforcement?
    Mr. Hill. Can you ask the question again, please?
    Mr. Coble. Would eBay or other merchants be able to 
determine what you just said without support from law 
enforcement or input from law enforcement?
    Mr. Hill. Well, when we request something, we get an answer 
from them. Now, how they work with the retailers, I am not sure 
if they give them as much information as we do.
    But as Mr. Chesnut----
    Mr. Coble. I will get to Mr. Chesnut later on.
    Mr. Hill. He stated earlier we send an e-mail to them, 
without a subpoena, they provide that information to us. So we 
have no problems getting that information.
    Mr. Coble. I thank you, sir.
    Mr. Langhorst, what role, if any, does the FDA play in the 
investigation and prosecution of cases where pharmaceuticals 
are stolen and resold?
    Mr. Langhorst. With over-the-counter product or 
pharmaceuticals, we haven't dealt with the FDA directly. We 
have tended to deal with our local health agencies.
    I can speak directly to the state of Texas and the State 
health department that we have dealt with.
    Mr. Coble. Mr. Chesnut, I understand that you are deeply 
concerned that any legislative attempt to address retail crime 
does not create an undue burden on eBay's operations and I 
share that concern.
    Some feel that the reason that the seller should know a 
product being sold on eBay is, in fact, stolen and that eBay, 
therefore, should be responsible and should be held 
accountable.
    What do you say to that?
    Mr. Chesnut. Well, if an individual seller knows that it is 
stolen and they are trying to sell it on eBay, they should be 
held accountable. If eBay is given evidence, meaningful, 
concrete evidence that the property is stolen, then eBay would 
be held responsible, as well, under existing Federal law.
    If eBay had specific knowledge that something is stolen and 
did nothing about it, eBay would be responsible and that is 
fair.
    Mr. Coble. So let us assume the standard would be that eBay 
should have known. Do you think that is too nebulous?
    Mr. Chesnut. I think it is too nebulous. It is also not 
even the standard that individuals are held to under Federal 
law. Under Federal law, in order to be prosecuted under the 
interstate transportation of stolen property statute, they have 
to have specific knowledge. They have to actually know that the 
property is stolen in order to be prosecuted.
    So it wouldn't make any sense to put a more nebulous or a 
looser standard on a marketplace like an eBay than the person 
that actually is selling it themselves.
    Mr. Coble. Specific knowledge, of course, would make eBay 
or anyone else accountable.
    Mr. Chesnut. Absolutely and that is the law today.
    Mr. Coble. I thank you gentlemen.
    I yield back, Mr. Chairman.
    Mr. Scott. Thank you.
    The gentleman from Texas, Judge Gohmert.
    Mr. Gohmert. Thank you, Mr. Chairman. I apologize for being 
late. I was over at a meeting with the majority leader, hearing 
him explain why we could put off SCHIP for 2 weeks, but we 
can't put it off for a couple of days, now with a natural 
disaster going on. I was having trouble, and it took me a while 
to absorb the brilliance.
    But anyway, I do thank this panel here for being here and I 
know I have got a fellow Texan in Mr. Langhorst here from 
Randalls. And it is, obviously, a big problem.
    Of course, we are all products of where we came from and 
what experiences we have had and having been a prosecutor, a 
judge and chief justice in the State system, we dealt with this 
constantly with pawn shops.
    And so as this issue has arisen, I have tended to say, 
well, we do put some extra requirements on pawn shops in order 
to allow us to track down individuals who may take stolen goods 
and pawn them and we actually catch an awful lot of criminals 
and the pawn shops of which I am aware are always helpful back 
in my district and we catch a lot of folks that think they are 
going to get away with something.
    But in this bill, it appears that in the zeal to try to 
bring an end to this horrible retail theft problem, that maybe 
the bill does further than is actually necessary, as I 
understand, requiring an entity like eBay to provide 
information directly to the retailers.
    There is nothing analogous to that in what we do with pawn 
shops. I want law enforcement to catch the individuals who 
steal things, because as we know, so much of that is organized 
crime. But I am wondering if there isn't something short of 
that, whether it is developing a system that will allow us to 
track serial numbers or scan barcodes or whatever is being 
used, the radio transmitters that are coming in now, which I am 
not a big fan of.
    But whatever it is, if we could find a way to track that, 
have that information available and, like we do with pawn 
shops, have people routinely in law enforcement check that 
information and check that data.
    I would be interested in anyone's response about if we 
could do something to help the retailers with this terrible 
problem, because as many people don't realize, if it is a 
problem for retailers, whether it is Target or Randalls or 
Rocher's or anywhere else, then they are not the ones that pay. 
They have to charge higher prices. So all of us pay for that.
    Any comments or thoughts?
    Yes, sir, Mr. Brekke.
    Mr. Brekke. I think there is an initial solution to what 
you suggested in LERPnet going on right now with the retailers 
and the FBI.
    The idea is to create a database where you gather this 
information and you could include serial numbers, lot numbers, 
or other unique identifiers from the retail side and other 
areas.
    The issue then is transparency from the Internet auction 
sites and probably, at the end of the day, using a software 
solution to match up that type of information. Again, it 
requires cooperation from both parties, from both sides.
    Doing this is not that one is good and the other is bad, 
but working together to stop the bad guy, to share the 
information in the correct forum and, in this case, LERPnet is 
a step in that direction.
    Mr. Gohmert. Anyone else?
    Mr. Langhorst?
    Mr. Langhorst. Yes, sir. Well, again, I just want to get 
back to the basics, and I am using baby formula as an example, 
because Mr. Chesnut brought up earlier that some of their 
sellers bring in product from outside the country.
    And the nutritional value of baby formula outside of the 
country quite often isn't the same that we require under USDA 
standards here in the country and to have that place on the 
Internet, with no oversight whatsoever as far as quality 
control, where it came from, and no accountability on the part 
of the seller or eBay to tell the consumer where it is coming 
from and the unsuspecting consumers taking that and feeding it 
to their child, that is a significant concern.
    To Mr. Brekke's point, having lot numbers on there, things 
like that, those are things that are required. If you are 
selling that product, in the state of Texas, for example, you 
have to be licensed by the state of Texas to sell that product.
    We recently had a case in Texas where we worked with the 
health department, and they identified wholesalers of the 
product that they couldn't up with receipts for a couple 
million dollars worth of baby formula and that was seized.
    Again, these are laws in the state of Texas, but they may 
not be able to be enforced, obviously, over the Internet and 
that product is out there. It is just a free market with no 
controls.
    Mr. Gohmert. I see my time has expired. Could I allow Mr. 
Chesnut to respond?
    Mr. Scott. Certainly.
    Mr. Chesnut. I would just like to clarify for the record 
that I did not State that infant baby formula was coming in 
from outside the country. I was talking about another product, 
razor blades, coming in from outside the country and there is 
not an issue with an item like that coming in and being sold, 
manufactured outside of the country and coming in to the United 
States.
    I think it was probably a misunderstanding.
    Mr. Gohmert. I got nicked this morning. Maybe that came 
from outside.
    Mr. Scott. Thank you. The gentleman's time has expired.
    I want to thank our witnesses for their testimony. Members 
may have additional questions for the witnesses, which we will 
forward to you and ask that you respond as promptly as you can 
so that your answers may be made part of the record.
    Without objection, the hearing record will remain open for 
1 week for submission of additional materials.
    Without objection, the hearing is now adjourned.
    [Whereupon, at 11:43 a.m., the Subcommittee was adjourned.]

                            A P P E N D I X

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               Material Submitted for the Hearing Record

       Prepared Statement of the Honorable Sheila Jackson Lee, a 
    Representative in Congress from the State of Texas, and Member, 
        Subcommittee on Crime, Terrorism, and Homeland Security











                                




                                


                                


















                                




                                 
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