[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