[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
E-FENCING ENFORCEMENT ACT OF 2008, THE ORGANIZED RETAIL CRIME ACT OF
2008, AND THE COMBATING ORGANIZED RETAIL CRIME ACT OF 2008
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CRIME, TERRORISM,
AND HOMELAND SECURITY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
ON
H.R. 6713, H.R. 6491 and S. 3434
__________
SEPTEMBER 22, 2008
__________
Serial No. 110-210
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
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44-610 PDF WASHINGTON : 2009
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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
Sean McLaughlin, Minority Chief of Staff and General Counsel
------
Subcommittee on Crime, Terrorism, and Homeland Security
ROBERT C. ``BOBBY'' SCOTT, Virginia, Chairman
MAXINE WATERS, California LOUIE GOHMERT, Texas
WILLIAM D. DELAHUNT, Massachusetts J. RANDY FORBES, Virginia
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
Caroline Lynch, Minority Counsel
C O N T E N T S
----------
SEPTEMBER 22, 2008
Page
THE BILLS
H.R. 6713, the ``E-fencing Enforcement Act of 2008''............. 64
H.R. 6491, the ``Organized Retail Crime Act of 2008''............ 68
S. 3434, the ``Combating Organized Retail Crime Act of 2008''.... 83
OPENING STATEMENTS
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 Louie Gohmert, a Representative in Congress from
the State of Texas, and Ranking Member, Subcommittee on Crime,
Terrorism, and Homeland Security............................... 3
WITNESSES
The Honorable Brad Ellsworth, a Representative in Congress from
the State of Indiana
Oral Testimony................................................. 5
Prepared Statement............................................. 8
Mr. Frank Muscato, Organized Retail Crime Field Investigator,
Walgreens, Deerfield, IL
Oral Testimony................................................. 11
Prepared Statement............................................. 13
Mr. Grady Judd, Sheriff, Polk County Sheriff's Office, Bartow, FL
Oral Testimony................................................. 16
Prepared Statement............................................. 19
Mr. Steve DelBianco, Executive Director, NetCHOICE, Washington,
DC
Oral Testimony................................................. 22
Prepared Statement............................................. 24
Mr. Edward Torpoco, Senior Regulatory Counsel, eBAY, Inc.,
Washington, DC
Oral Testimony................................................. 27
Prepared Statement............................................. 29
Mr. Joseph J. LaRocca, Vice President, Loss Prevention, National
Retail Federation, Washington, DC
Oral Testimony................................................. 34
Prepared Statement............................................. 35
APPENDIX
Material Submitted for the Hearing Record........................ 53
E-FENCING ENFORCEMENT ACT OF 2008, THE ORGANIZED RETAIL CRIME ACT OF
2008, AND THE COMBATING ORGANIZED RETAIL CRIME ACT OF 2008
----------
MONDAY, SEPTEMBER 22, 2008
House of Representatives,
Subcommittee on Crime, Terrorism,
and Homeland Security
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 4:03 p.m., in
room 2141, Rayburn House Office Building, the Honorable Robert
C. ``Bobby'' Scott (Chairman of the Subcommittee) presiding.
Present: Representatives Scott, Gohmert, Coble, Chabot, and
Lungren.
Also Present: Representative Putnam.
Staff Present: Bobby Vassar, Majority Chief Counsel; Ameer
Gopalani, Majority Counsel; Mario Dispenza, Fellow, BATFE
Detailee; Karen Wilkinson, Fellow, Federal Public Office
Detailee; Veronica Eligan, Majority Professional Staff Member;
Caroline Lynch, Minority Counsel; and Kelsey Whitlock, Minority
Staff Assistant.
Mr. Scott. The Subcommittee will now come to order.
I am pleased to welcome you to today's hearing on
legislative proposals in the 110th Congress for curbing
organized retail theft, which by some estimates has become a
$30 billion illicit industry that not only affects legitimate
interstate commerce, but poses a significant public safety risk
to consumers.
Theft of merchandise is nothing new and has traditionally
been handled effectively through State criminal laws. In my
home State of Virginia, for example, any theft in excess of
$200 is grand larceny with a maximum penalty of 20 years. A
third offense of petty larceny is, by law, treated the same as
grand larceny.
With diligent enforcement activities, such measures are
ordinarily adequate to keep the problem of merchandise theft
sufficiently in check. However, organized theft rings, or OTRs,
have become more sophisticated, learning to reduce their risks
of penalty and capture. For example, to avoid the grand larceny
threshold, they operate across the State lines, and using this
tactic, they can shoplift with acceptable risk by remaining
under the grand larceny threshold for each incident while
stealing thousands of dollars worth of merchandise.
OTRs have reduced their risk of capture by exploiting the--
being anonymous on the Internet. Traditionally, thieves who
dispose of stolen goods locally through flea markets,
pawnshops, swap meets or shady storefront operations where
State and local police can investigate and make arrests, as the
thieves have to physically stand behind the stolen goods. But
without having to identify themselves or their contact
information to consumers or others who seek information about
them, OTRs that operate online evade identification much easier
than traditional thieves, and they put themselves beyond the
reach of local law enforcement.
In fact, OTRs now use the Internet to fence stolen goods to
such a large extent that a new term has been coined for it.
They call it ``e-fencing.''
But the volume of organized theft and its impact on
commerce is not the only problem prompting congressional
action. Purchasing stolen, consumable products online or in the
physical world exposes consumers, often unwittingly, to serious
safety and health risks. The products most frequently targeted
by theft--by OTRs include FDA-regulated items like over-the-
counter drug products or infant formula. Once stolen, these
products are not kept under appropriate storage conditions, and
we have reports that OTRs actually may be changing expiration
dates on their labels.
These practices not only threaten the integrity of the
products, but endanger the safety of consumers. They may
believe that the vendor is selling products in conformance with
consumer safety guidelines when, in fact, the products may
actually be dangerous or even deadly.
Having risen to the point of affecting interstate commerce
and safety, we have three legislative proposals addressing
organized retail theft that will be discussed today.
H.R. 6713, the ``E-fencing Enforcement Act of 2008,'' which
I introduced, places requirements on online market providers.
The providers would identify high-volume sellers, those who
sell more than $12,000 of merchandise in 1 year or more than
$5,000 in a single transaction. Information regarding the
identity of such sellers and the transaction would be required
to be retained by the online market and made available to
aggrieved parties with specified standing to obtain the
information. The bill would also require the provider to
investigate an allegation of stolen property upon the request
of a person with such standing and to deny access to the
marketplace to the seller if the provider has good reason to
believe that the seller is using the market to sell stolen
goods.
H.R. 6491, introduced by the Representative Brad Ellsworth
of Indiana, who is with us as a witness today, and
Representative Jim Jordan of Ohio's Fourth District, defines
organized retail crime and provides for Federal criminal
penalties. The definition under the bill is illegally obtaining
merchandise in quantities beyond what would be normal for
personal consumption or recruiting persons to participate in
such activity.
The bill also defines online marketplace as an Internet
site where someone other than the site operator can enter into
transactions to sell goods or services. There is a search
engine on the site for the buyer to use to identify the
seller's goods, and the site operator has the right to
supervise the seller's activities or has a financial interest
in the goods sold.
That bill also criminalizes the failure of an online market
to investigate when credible evidence exists that a seller is
using the marketplace for selling stolen goods, to require a
merchant to post certain information about his product or to
keep identifying information about merchants who sell more than
$12,000 of merchandise in any given year.
S. 3434 is wider in scope than H.R. 6713 and 6491 in that
it addresses organized theft in physical as well as online
markets. The bill has similar provisions to 6491 in its
definitions and criminal penalties. However, the bill also
requires operators of physical retail locations to notify the
Attorney General if the operator reasonably determines that a
vendor is using that operator's space in selling stolen goods.
This is the second hearing we have had on organized retail
theft that the Subcommittee has held during this Congress. In
October 2007, we heard testimony from representatives from the
convenience retail industry, law enforcement and
representatives from the online retail industry hoping to
stimulate a discussion that would assist in developing mutually
agreed solutions among the retail and online industries to the
growing problem of organized retail theft. While there have
been some efforts to do so by affected parties, they have not
come to a final workable agreement, prompting the legislative
proposals before us in today's hearing. The size and complexity
of this problem clearly suggests the need for some
congressional attention but exactly what form any assistance
would take is what we are here to discuss.
It is now my pleasure to recognize the esteemed Ranking
Member of the Subcommittee, the gentleman from Texas, Judge
Gohmert.
Mr. Gohmert. Thank you, Mr. Chairman. I do also thank you
for holding this hearing. This is a very serious issue. I first
became aware of it back as a judge when we started hearing
about massive amounts of baby formula being stolen.
The problem of organized retail theft is not only growing,
but it involves the theft of large quantities of retail
merchandise. Organized retail theft is not a high-profile
crime--and that is one of the problems--but it certainly is
costly. 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 criminals 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 is not so low
cost for those that have bought any lately--but also things
like batteries, as well as expensive items like electronics or
appliances.
Organized retail thieves, commonly referred to as
``boosters,'' will sell the stolen merchandise at flea markets,
pawnshops, swap meets and increasingly on the Internet.
According to the FBI, organized retail theft accounts for
between $30 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 the 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 that
legislation is the Law Enforcement Retail Partnership Network,
which was launched in 2006. This national database allows
retailers to share information about suspected theft with each
other and with law enforcement officials.
In addition, the FBI has created the major Theft Task
Forces to identify and target multijurisdictional 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.
Although Federal agencies work to investigate the criminals
that engage in this conduct, retail organizations argue that
there is still too little prosecution of this crime. They would
seem to be right in their assertions. They argue that State
felony thresholds that stolen goods must amount to $500 or, in
some cases, $1,000 or $2,500 in order to be a felony are too
high to provide for prosecution of organized retail theft. The
Federal threshold for prosecution of a crime of transportation
of stolen goods and interstate commerce is also high, as the
amount of stolen goods must be in excess of $5,000 to trigger
Federal criminal liability.
Several bills have been introduced in this Congress to
prohibit organized retail theft and, in particular, e-fencing.
Auction sites such as eBay and other online marketplaces, such
as Amazon.com, have expressed concerns about the bills.
I have met with representatives from both industries and on
all sides. And I, like the Chairman, was hoping the groups
could come together to find a solution without congressional
action.
Several merchants have used the comparison of pawnshops
when discussing e-fencing with me. And I do think that there
are certain parallels that are worth noting. Pawnshops are
generally required to keep records of the merchandise available
for sale because it is known that they are frequently used by
criminals who have stolen merchandise. It seems reasonable to
ask online marketplaces to do the same. Pawnshop records, on
the other hand, are kept for law enforcement officials and not
made available to private third parties.
I would like to hear from witnesses during the course of
this hearing on their thoughts about imposing a duty to
maintain records on merchandise on the Web sites that are not
required of pawnshops, and whether this should be made
available just for law enforcement and not anyone else.
One bill before the Subcommittee would create a new Federal
crime of facilitation of organized retail theft. This provision
exposes online marketplaces to incarceration based on a lower
mental state than is traditionally required for criminal
penalties.
I very much appreciate a desire to craft legislation that
addresses innovative criminal conduct, but I am also wary of
legislation that deviates from the mens rea, or mental states,
of knowing or intentional that are commonly used in criminal
offenses. That is important because criminal offenses, which
lock people up in prison and take away so many of their
constitutional rights just to walk around, are intended to
impose penalties on those normally who consciously act to
commit a crime and consciously act in furtherance of a crime.
In fact, we have a group currently meeting to rein in some
of the overzealous laws that have been crafted and passed in
the past that have caused the incarceration of people for very
unreasonable reasons when they had no idea that they were
committing a crime as the law was later interpreted.
I also think it is helpful to note that civil penalties are
also a possibility when it comes to crafting legislation. It
doesn't require anybody to be locked up, and therefore, the
mental state can sometimes be much lower and the penalties be
career-ending for a business, so they do have a strong effect.
But I am very interested in hearing the testimony of our
witnesses on this legislation. I am still trying to come to
grips with what would be the best solution. And I am glad to
see my office neighbor, Congressman Ellsworth, here and look
forward to hearing him.
And I yield back the balance of my time.
Mr. Scott. Thank you.
We have been joined by the gentleman from North Carolina,
Mr. Coble.
Good to see you.
Our first panelist will be the Honorable Brad Ellsworth who
represents Indiana's Eighth District. He is serving his first
term in the United States Congress after serving 24 years as
the Vanderburgh County sheriff in the county sheriff's office,
serving two terms as the Vanderburgh sheriff.
He was twice decorated for heroism in the line of duty and
graduated from the FBI Academy. He also has a bachelor's degree
in sociology and a master's degree in criminology from Indiana
State University.
Mr. Brad Ellsworth, you are familiar with the lights. We
have your entire statement for the record. So if you would like
to summarize your testimony in 5 minutes or less, we would be
happy to hear from you.
Mr. Ellsworth. Thank you.
TESTIMONY OF THE HONORABLE BRAD ELLSWORTH, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF INDIANA
Mr. Ellsworth. Thank you.
Thank you, Mr. Chairman, Ranking Member Gohmert and the
rest of the Committee. I appreciate you letting me come and
testify in front of the Committee today about this bill that--
again, as Mr. Gohmert said, our purpose here is not to penalize
entrepreneurs and online sites or--it is to take criminals off
the streets and stop crime. That is my sole purpose here.
I appreciate this opportunity to testify before your
Committee in support of my bill, knowing that as we work
together, we can craft good legislation that gets to the bottom
of this problem, the Organized Retail Crime Act of 2008.
I also want to thank you for your leadership in the area of
e-fencing and organized retail crime. To both of you and this
entire Committee, I look forward to working with you to craft
legislation that gets to the problem.
As the Chairman said, before I came to Congress, I spent
nearly 25 years in law enforcement with the Vanderburgh County
sheriff's office. I can remember, when I was talking about this
legislation, a particular incident. We made what we thought was
a routine shoplifting run until we opened this gentleman's
trunk, and in the trunk was a copy machine that had been
rewired to 12 volt and was full of electric drills, the same
particular electric drill out of this store.
What we found out through our investigation was that these
gentlemen would go in and buy one drill, go out, take the
legitimate receipt, go out to the trunk, turn on the car, run
copies of that, go in and steal more drills. And they would
actually have receipts for those drills, for as many as they
wanted, on that particular day and have legitimate receipts.
That was one of my first real brushes with what I thought
was organized retail crime, when someone puts a copy machine in
their trunk and rewires that. Using fraudulent copied receipts,
the thieves would then return that, like I said.
I share this story as an example of the length that these
thieves will go to. And like Ranking Member Gohmert said, they
are hijacking trucks of baby formula out of the Bristol-Myers,
MeadJohnson Enfamil--it happens quite often--to take advantage
and to make a quick profit.
Today, criminals with the same motives are using the
Internet with increasing frequency to sell stolen merchandise.
It is taking a heavy toll on our communities throughout the
country. According to the Food Marketing Institute, a study in
2006 alone, retailers in my State of Indiana lost $662 million
in stolen merchandise. Indiana has a 6 percent sales tax, so
these stolen goods account for close to $40 million in lost
sales tax to the revenue of my State. This is a major problem,
as you know.
Not only does organized retail crime result in substantial
losses for retailers, it also has significant negative
consequences for consumers. As you said, they steal baby
formula, diabetic test strips, over-the-counter drugs from
retailers. Needless to say, criminals are not interested in the
proper storage of these sensitive health products, and as a
result, the health and safety of consumers who unknowingly
purchase these stolen products is often jeopardized.
ORC rings also negatively impact the bottom line for
consumers because leading American retailers are forced to
spend millions of dollars each year conducting loss prevention
efforts. Organized retail crime currently accounts for tens of
billions of dollars in retail loss annually.
The criminals who operate these organized crime rings are
becoming more sophisticated in the ways they sell their goods
to an often-unsuspecting public. ORC rings have expanded their
base of operation from the streets--like you said, flea
markets, pawnshops--to the online marketplace where they can
break the law with anonymity.
For these reasons, I felt compelled to introduce H.R. 6491,
the Organized Retail Crime Act of 2008. This legislation cracks
down on ORC by amending the Federal Criminal Code to include
activities such as stealing, embezzlement, obtaining by fraud
or false pretenses retail merchandise in quantities that are
not purchased for personal use or consumption for the purpose
of reselling such retail merchandise in commerce.
By criminalizing facilitation, organized retail crime,
Federal, State and local law enforcement will be better
equipped to crack down on illegal activity as this takes place
offline at pawnshops, flea markets. And, Judge, like you said,
the definition of facilitation will be defined as we move down
the road with this.
In addition to amending the Federal Criminal Code, H.R.
6491 requires specific and narrow obligations for the online
marketplace used by high-volume dollars, $12,000 or more.
Specifically, H.R. 6491 requires online auction sites to
expeditiously assist with an investigation of the sale of
stolen goods on its site where incredible evidence comes to its
attention and remove or disable access to the material when
there is reasonable cause to believe the goods or services were
acquired through organized retail crime. These sites are also
to maintain a record of all investigations for a minimum of 3
years.
The legislation also requires the online auction site to
maintain the name, telephone number, e-mail address and a
legitimate physical address of any user identification company
name and transactions conducted by these high-volume sellers.
And as I said, high-volume is someone selling more than $12,000
in merchandise annually.
Opponents to this legislation might say it unfairly targets
online auction sites. I would like to reiterate the fact that
the legislation criminalizes facilitation of organized retail
crime. Facilitation includes criminal activity that takes place
offline as well as online. The proposed record-keeping
obligation for online marketplaces is far less burdensome than
regulations in place for pawnshop brokers, for example. In the
pawnbroker industry, many States require that these records are
kept and provided to law enforcement. Some require
fingerprinting and the presentation of valid government-issued
IDs before any transaction is approved.
I want to acknowledge the efforts by some in the online
marketplaces to police their own sites for criminal activity.
These efforts are certainly beneficial toward deterring the
resale of stolen merchandise. But I firmly believe these
efforts do not go far enough.
ORC is a growing problem that must be addressed through a
robust effort of cooperation between retailers, the online
marketplace and law enforcement. I believe we can put in place
a legal framework to make this happen. My goal is very simple:
The online marketplace should be fair and protect consumers,
producers and a free market when goods are traded.
I want online auction sites to prosper in a marketplace
that has rules that are enforceable. It is important that the
State and local law enforcement retailers have the tools
necessary to pursue and stop crime where it exists. This
legislation is important, and it defines organized retail crime
in the Federal Criminal Code and requires online auction sites
to perform the necessary record keeping of high-volume sellers
so that criminals are prevented from exploiting the online
marketplace.
I would also like to note that this legislation will not
place an undue burden on users who play by the rules. The
obligation is on the online marketplace to keep transparent
records and assist with law enforcement when criminal activity
is suspected.
Mr. Chairman, H.R. 6491, the Organized Retail Crime Act of
2008, is not intrusive. It is a commonsense bill that aims to
dry up avenues for the organized retail crime criminals to sell
their stolen merchandise at the expense of retailers and
consumers.
I look forward to hearing the expert testimony today, and I
urge colleagues to join Congressman Jim Jordan and myself in
supporting this important legislation as a first step toward
cracking down on ORC.
And just in closing, Mr. Chairman, I agree with Ranking
Member Gohmert in that with--how much Federal law enforcement
FBI has committed to this; but obviously, in just my State
alone, with the tens of billions that are being lost in my
State alone, the millions that are being lost, obviously the
job is not getting done with law enforcement alone.
So I appreciate any questions. I would be willing to answer
any questions, and I will offer this for the record. Thank you.
[The prepared statement of Mr. Ellsworth follows:]
Prepared Statement of the Honorable Brad Ellsworth, a Representative in
Congress from the State of Indiana
Mr. Chairman, I appreciate the opportunity to testify before your
committee in support of my bill--the Organized Retail Crime Act of
2008. I also want to thank you for your leadership in the area of e-
fencing and organized retail crime. I look forward to working with you
and our colleagues on this committee in the coming days and weeks on
legislation that will address the emerging issue of e-fencing.
Together, we can craft legislation that cracks down on organized retail
crime and protects consumers.
Before I came to Congress, I spent a career fighting crime in the
Vanderburgh County Sheriff's Department. I remember a particular
instance where we arrested two thieves who were running a sophisticated
criminal enterprise from the trunk of their car. At a hardware retailer
that had several Evansville locations, these two thieves would pay cash
for one drill, make copies of the receipt using a copier that they had
in the trunk of their car, and then shoplift the same drills in bulk.
Using the fraudulent copied receipts, the thieves would then return the
stolen merchandise and receive cash back multiple times over. I share
this story as an example of the lengths criminals will go to
fraudulently take advantage of businesses to make a quick profit.
Today, criminals with the same motives are using the internet with
increasing frequency to sell stolen merchandise, and it's taking a
heavy toll on retailers throughout the country. According to a Food
Marketing Institute study, in 2006 alone, retailers in my state,
Indiana, lost $662 million in stolen merchandise. Indiana has a six
percentage sales tax so these stolen goods account for close to $40
million in lost sales tax revenue to the state. This is a major
problem.
Not only does organized retail crime result in substantial losses
for retailers, it also has significant, negative consequences for
consumers. These criminals often steal products like baby formula,
diabetic test strips, and over-the-counter drugs from retailers.
Needless to say, criminals are not interested in properly storing these
sensitive health products, and as a result, the health and safety of
consumers, who unknowingly purchase these stolen products, is often
jeopardized. ORC rings also negatively impact the bottom line for
consumers because leading American retailers are forced to spend
millions of dollars each year conducting loss prevention efforts.
The Federal Bureau of Investigation estimates that organized retail
crime currently accounts for $30 billion in retail losses annually. The
criminals who form and operate these organized crime rings are becoming
more sophisticated in the ways they sell their stolen goods to an often
unsuspecting public. ORC rings have expanded their base of operation
from the streets, flea markets, and pawn shops to the online
marketplace where they can break the law with anonymity.
For these reasons I felt compelled to introduced H.R. 6491, the
Organized Retail Crime Act of 2008. This legislation cracks down on ORC
by amending the federal criminal code to include activities such as the
stealing, embezzlement, obtaining by fraud or false pretenses retail
merchandise in quantities that are not purchased for personal use or
consumption for the purpose of reselling such retail merchandise in
commerce. By criminalizing the facilitation of organized retail crime,
federal, state, and local law enforcement will be better equipped to
crack down on illegal activity that takes place offline--at pawnshops
and flea markets--as well as online.
In addition to amending the federal criminal code, H.R. 6491
requires specific and narrow obligations for the online marketplace
used by high-volume sellers. Specifically, H.R. 6491 requires online
auction sites to expeditiously assist with an investigation of the sale
of stolen goods on its site when credible evidence comes to its
attention, and remove or disable access to the material when there is
reasonable cause to believe the goods or services were acquired through
organized retail crime. These sites are to maintain a record of all
investigations for a minimum of three years.
The legislation also requires the online auction site to maintain
the name, telephone number, email address, legitimate physical address,
any user identification, company name, and transactions conducted of
each high-volume seller. A high-volume seller is defined as someone
selling more than $12,000 in merchandise annually.
Opponents of this legislation say it unfairly targets online
auction sites. I would like to reiterate the fact that this legislation
criminalizes the facilitation of organized retail crime. Facilitation
includes criminal activity that takes place offline as well as online.
The proposed recordkeeping obligation for online marketplaces is
far less burdensome than regulations in place for pawnshop owners, for
example. In the pawnbroker industry, many states require fingerprinting
and the presentation of valid government issued IDs before a
transaction.
I want to acknowledge efforts by some online marketplaces to police
their own sites for criminal activity. These efforts are certainly
beneficial towards deterring the resale of stolen merchandise but I
firmly believe these efforts do not go far enough. ORC is a growing
problem that must be addressed through a robust effort of cooperation
between retailers, the online marketplace, and law enforcement. I
believe we can put in place a legal framework to make this happen.
My goal is simple. The online marketplace should be fair and
protect consumers, producers, and the free market where goods are
traded. I want online auction sites to prosper in a marketplace that
has rules that are enforceable. It is important that state and local
law enforcement have the tools necessary to pursue and stop crime where
it exists. This legislation is important in that it defines organized
retail crime in the federal criminal code and requires online auction
sites to perform the necessary recordkeeping of high-volume sellers so
that criminals are prevented from exploiting the online marketplace.
I'd also like to note that this legislation will not place an undue
burden on users who play by the rules. The obligation is on the online
marketplace to keep transparent records and assist with law enforcement
when criminal activity is suspected.
Mr. Chairman, H.R. 6491, the Organized Retail Crime Act of 2008, is
a non-intrusive, common sense bill that aims to dry up avenues for
organized retail criminals to sell their stolen merchandise at the
expense of retailers and consumers. I look forward to hearing the
expert testimony today and I urge my colleagues to join Congressman Jim
Jordan and me in supporting this important legislation as a first step
toward cracking down on organized retail crime.
Mr. Scott. Thank you very much. I have no questions.
The gentleman from Texas, the gentleman from North
Carolina, and the gentleman from Ohio; we have been joined by
Mr. Chabot.
Thank you.
Mr. Ellsworth. Thank you very much.
Mr. Scott. If the next panel will come forward.
As you are being seated, I will begin to introduce the
witnesses.
Our first witness will be Frank Muscato, Organized Retail
Crime Field Investigator for Walgreens pharmacies. In addition
to investigating retail crime, his duties include assisting in
legislative issues that pertain to loss prevention; and he has
helped draft more than 17 loss prevention proposals for State
legislatures.
Before joining Walgreens, he spent 25 years at the Dallas
Police Department's Intelligence Division as a Case Supervisor.
Upon his retirement in 1994, he was recruited by Walgreens to
assist in creating the first Organized Retail Crime
Investigative Division and supervise its loss prevention team.
Our second witness will be introduced by the distinguished
gentleman from Florida, Mr. Putnam.
Mr. Putnam. Thank you, Mr. Chairman. And I want to thank
the Ranking Member, Mr. Gohmert, for the privilege of
temporarily joining the Judiciary Committee's Subcommittee on
Crime long enough to introduce a terrific witness.
As a Representative of Florida's 12th District, I am
honored to introduce my sheriff, Sheriff Grady Judd, to your
Subcommittee. Sheriff Judd is a leading force in the Nation
when it comes to combating organized retail crime. In the past
year, he added to his long record of accomplishment one of the
largest organized retail crime busts to date.
In January this year, after months of working across a
number of jurisdictions, partnering with the private sector and
tracking the perpetrators, the Polk County sheriff's office
arrested 18 people with ties to a crime ring that was
responsible for an estimated loss of $100 million to retailers.
That is just in Polk County, Florida. He was joined in that
effort by Detective Ostojic, who was just recognized as Law
Enforcement Officer of the Year by the Florida Retail
Federation.
Organized retail crime threatens the very soundness of
commerce in our communities. The criminals and the tactics they
use to steal consumer products generally fly under the radar of
law enforcement at a significant cost to retailers and,
therefore, to consumers. The FBI has reported that such
organized crime costs retailers $30 billion every year. You
don't have to be in law enforcement to know that the funds
generated from these crimes are used to proliferate additional
criminal activity, possibly gang related.
Law enforcement and retailers need the support of Congress
to pursue organized retail criminals with the proper tools to
close down their operations. I am pleased to join Mr. Ellsworth
as a cosponsor of his Organized Retail Crime Act, and I support
my sheriff's efforts to go after these illusive criminals and
to make the public more aware about the pervasive effects of
organized retail crime.
Our sheriff is a dynamic leader in central Florida, and his
efforts and his accomplishments are a testament to his
commitment to the safety and security of our community. I know
that his testimony would be enlightening to your Subcommittee
as you attempt to prepare the best possible legislative remedy
to this problem.
I applaud you, Mr. Chairman, for bringing in our local
experts who are on the front lines of this battle. And I thank
you for the privilege of introducing him.
Mr. Scott. Well, thank you.
And welcome, Sheriff.
Our next witness will be Steve DelBianco, the Executive
Director for NetChoice, a coalition of trade associations and
e-commerce leaders. He is a well-known expert on Internet
governance, online consumer protection and Internet taxation.
He has testified several times before the United States
Congress and is a frequent witness in State legislatures and
represents NetChoice in Internet governance meetings around the
world.
Before joining NetChoice, he founded and was President of
Financial Dynamics, an information technology consulting firm
delivering financial and marketing solutions. He has degrees in
engineering and economics from the University of Pennsylvania,
and an MBA from the Wharton School of Business.
Our next witness will be Ed Torpoco, a Senior Regulatory
Counsel for eBay. He provides legal counsel to eBay's
policymakers regarding the company's efforts to keep the eBay
marketplace a safe place for consumers.
Prior to joining eBay in 2006, he was a State and Federal
prosecutor for 7 years, having worked in the Los Angeles
District Attorney's Office, U.S. Department of Justice and U.S.
Attorney's Office in northern California. He has a bachelor's
degree from Georgetown University and Juris Doctorate from
Harvard Law School.
Our final witness will be Joseph LaRocca, Vice President of
the National Retail Federation. He has over 20 years of retail
loss prevention security and operations experience. In January
2005, he joined the National Retail Federation as Vice
President for Loss Prevention, working with retailers, small
developers and government agencies to develop programs and
content.
He serves on several U.S. Department of Homeland Security
committees, is a member of the International Association of
Chiefs of Police and works closely with Federal, State and
local law enforcement agencies.
Mr. Scott. Each of our witnesses' written statements will
be made a part of the record in its entirety.
I would ask each of our witnesses to summarize your
testimony in 5 minutes or less. And to help you stay within
that time, there is a timing device that is right behind your
display on that side. It is back there. The timing light will
start off green, will go to yellow when 1 minute is remaining,
and to red when 5 minutes are up.
We begin with Mr. Muscato.
TESTIMONY OF FRANK MUSCATO, ORGANIZED RETAIL CRIME FIELD
INVESTIGATOR, WALGREENS, DEERFIELD, IL
Mr. Muscato. Good afternoon, Chairman Scott and Ranking
Member Gohmert and Members of the Subcommittee. My name is
Frank Muscato. I am an Organized Retail Crime Investigations
Supervisor with Walgreens, and I thank you for the opportunity
to appear here at the Subcommittee as it examines the
significant problem of organized retail crime, we refer to as
ORC.
Walgreens operates over 6,300 drugstores in 49 States, the
District of Columbia and Puerto Rico and serves 1.8 billion
customers nationwide annually. I am here today to testify on
behalf of Walgreens and the Coalition Against Organized Retail
Crime. I thank you for your interest in this issue and for
introducing H.R. 6713. I would also like to thank Congressmen
Ellsworth and Jordan for their work on H.R. 6491.
I realize my time is limited so I will refer you to my
written testimony for a more detailed discussion.
ORC is a significant problem that victimizes diverse
segments of the retail community from supermarkets to
drugstores to department stores and specialty shops. Unlike
shoplifters, ORC gangs are sophisticated criminal enterprises
that steal large quantities of merchandise with the intent of
reselling those goods for profit.
ORC is not what is commonly known as shoplifting. It is not
an opportunistic theft where merchandise like food and clothing
are stolen for personal use. Rather, ORC is an extremely
sophisticated and coordinated crime. It involves highly
structured organizations and gangs that hire and control teams
of thieves to steal merchandise in large quantities. These
teams move from store to store, city to city and State to
State, employing sophisticated tactics and methods to allude
store security, fraud prevention tools and law enforcement.
This is a Federal problem with all the multijurisdictional law
enforcement challenges that come with it.
Walgreens has been a leader in advocating ORC legislation
in States and supports making ORC a Federal criminal offense.
We understand the first line of defense against ORC is in our
stores and within our distribution channels. For this reason,
Walgreens in 2003 created an Organized Retail Crime Division
that is devoted to working both State and Federal ORC cases in
collaboration with law enforcement. Our 6,300 stores operate
under a comprehensive loss prevention program.
I would like to briefly outline one example where the
Federal law would have helped in the prosecution of a case. It
involves a grocery store up in Chicago. In collaboration with
the Cook County Sheriff's Department, we observed more than 52
boosters in a 2-hour period enter the grocery store, carrying
what appeared to be stolen property and many leaving, counting
money as they walked out. We discovered the store owner was
selling these stolen goods to other businesses there in Chicago
and out of State.
Because of the limited resources and jurisdictional issues,
the out-of-State case were not pursued. If ORC was identified
as a specific crime in Title 18 of the Criminal Code, a Federal
agency may have been more inclined to pursue that case. H.R.
6491 focuses the theft and sale of stolen goods obtained
through ORC.
There are several provisions Walgreens believes would be
particularly impactful on combating this crime. The bill would
explicitly criminalize the transportation, sale and receipt of
stolen goods through ORC for the first time under Title 18. The
bill would also criminalize its facilitation of ORC, including
the facilitation through the operation of an online
marketplace.
Additionally, as I understand it, the bill will impose
stronger criminal penalties and sentences for ORC. It is
organized crime and should be treated as such with stronger
penalties and enforcement.
H.R. 6713 focuses on the serious problem of e-fencing. This
bill requires certain information about high-volume sellers to
be available for criminal investigations. Similarly, the online
marketplace would be required to take down items where there is
good--that they know were obtained unlawfully.
In summary, ORC poses harm to consumers, retailers of every
kind and deprives local and State governments of valuable and
needed tax revenue. Walgreens supports legislation that makes
ORC a Federal crime and targets the facilitator and the tools
used to conduct these unlawful activities. Walgreens supports
efforts to reduce ORC and all the various channels used to
dispose of this illegally acquired merchandise.
I thank you for the time, the opportunity to speak before
your Subcommittee; and I look forward to your questions and
working with the Subcommittee on this legislation. Thank you.
Mr. Scott. Thank you.
[The prepared statement of Mr. Muscato follows:]
Prepared Statement of Frank Muscato
i. introduction
Good afternoon Chairman Scott and members of the Subcommittee. I am
Frank Muscato, Organized Retail Crime Field Investigator with
Walgreens, and I thank you for the opportunity to appear before the
Subcommittee as it examines the significant problem of organized retail
crime (``ORC''). Walgreens operates over 6,300 drugstores in 49 states,
the District of Columbia and Puerto Rico and serves 1.8 billion
customers nationwide annually. I have spent the last 15 years working
ORC cases after retiring from a major metropolitan police department
following 25 years of service. I am here today testifying on behalf of
Walgreens, and the Coalition Against Organized Retail Crime. Mr.
Chairman, I thank you for your interest in this issue, for convening
this hearing to explore legislative means of addressing this growing
problem, and for introducing your bill, H.R. 6713, the ``E-fencing
Enforcement Act.'' I would also like to take this opportunity to
commend Congressmen Ellsworth and Jordan for their work on H.R. 6491,
the ``Organized Retail Crime Act.''
My testimony today will cover three issues:
First, I will describe the nature and scope of the
problem of ORC;
Second, I will describe more specifically ORC's
impact on Walgreens and our customers, as well as set forth the
broad fraud prevention efforts we undertake; and
Finally, I will provide specific comments on the
proposed legislation.
ii. nature of organized retail crime
ORC is a significant problem that is victimizing diverse segments
of the retail community from supermarkets and drug stores to department
stores and specialty shops. Unlike shoplifters, ORC gangs are
sophisticated criminal enterprises that steal large quantities of
merchandise from retail stores with the intent to resell the goods for
a profit. Products most often stolen by professional rings include:
infant formula, over-the-counter medications, razor blades, batteries,
DVDs, and CDs. These criminals also target other retailers for higher-
end items such as designer clothes and accessories, household
appliances, and consumer electronics. The more sophisticated rings
often engage in identity theft, credit card fraud, gift card fraud, and
returns fraud that amount to millions in lost revenue. Equally alarming
are the possible health and safety consequences for consumers who
unknowingly purchase merchandise acquired through illegal means--
particularly over-the-counter medications and other consumables.
ORC rings frequently travel to a designated area and methodically
steal merchandise from a number of stores over a short period of time.
The stolen merchandise is then moved and sold through fencing
operations, flea markets, pawnshops, Internet auction sites and swap
meets. Merchandise also may be fed back through the supply chain by re-
packagers and illegitimate wholesalers who move the products into the
distribution system, rerouting the items to unsuspecting retailers and
consumers.
As you can see, ORC is not what is commonly known as shoplifting.
It is not opportunistic theft where merchandise like food, clothing,
sundries or music are stolen for personal use. Rather, ORC is an
extremely sophisticated and coordinated crime. It involves highly
structured organizations and gangs that hire and control teams of
thieves to steal merchandise in large quantities. These teams move from
store-to-store, city-to-city, and state-to-state employing
sophisticated tactics and methods to elude store security, fraud
prevention tools, and law enforcement. Make no mistake about it, ORC
rings have networks throughout the United States, and they distribute
their stolen goods through interstate commerce. This is a Federal
problem with all the multijurisdictional law enforcement challenges
that come with it.
The FBI estimates that ORC costs retailers $30 billion annually.
This type of crime also deprives state and local governments of
hundreds of millions in lost sales tax revenues. Losses resulting from
ORC also increase costs to consumers--every time a truckload worth of
over-the-counter medication or baby formula is stolen, our customers
ultimately incur the cost of products that must be replaced. Proceeds
from ORC are often used to finance other criminal enterprises such as
drug trafficking, terrorism, and gang activity. In fact, the low risk--
high return nature of this crime is attractive to street gangs. Many
gangs even finance the travel and expenses for illegal immigrants and
put them to work stealing from retailers. Some crime rings, in an
attempt to protect their interests, have resorted to murdering
witnesses and plotting to murder law enforcement agents and federal
prosecutors. ORC has evolved into serious, organized criminal activity
that impacts consumer welfare and our national economy as a whole.
Retailers have identified the hierarchy consisting of ``boosters''
and ``fences'' within the ORC rings. ``Boosters'' are those individuals
who actually steal the merchandise. There are three levels of boosters:
``level 1'' is a person who steals close to home, is typically
dependent on drugs or alcohol, and sells the goods the day they are
stolen to support a habit; ``level 2'' boosters are persons that work
with accomplices who travel to nearby states to steal and there is
usually a leader of the group who sells the goods to a ``fence'';
``level 3'' boosters travel in organized groups, cover large
geographical areas and can be on the road for weeks at a time--these
groups are often organized by a ``fence''. A ``fence'' buys stolen
goods from the boosters and is also identified in three distinct
levels. A ``level 1'' fence often controls the three levels of
boosters, they purchase goods for 20-30 percent of retail value and
often have small retail businesses where boosters brings the
merchandise; a ``level 2'' fence typically controls 10-20 different
``level 1'' fences and many ``level 2 and 3'' boosters--they often work
out of small warehouses where product is cleaned, stored and sold to
``level 3'' fences for 50-60 percent of the retail value; ``level 3''
fences redistribute stolen retail goods, they have several ``level 2''
fences working for them and buy millions of dollars worth of stolen
property every month--they operate large warehouses where stolen goods
are mixed with legitimate product and sold back to some retailers
through the supply chain.
I would like to share a few examples of recent large-scale ORC
cases reported in the press to illustrate the nature of this crime. As
you heard from Sherriff Grady Judd, in early 2008 authorities broke up
an enormous ORC ring in Polk County, Florida. What started as a single
shoplifting investigation led to an 18-member organized enterprise that
stole up to $100 million in over-the-counter medications and health and
beauty aids. This criminal enterprise operated for at least five years
under the control of ringleaders, which directed a sophisticated theft
ring that stole from convenience and grocery stores statewide.
Unfortunately, such incidents are all too common and not isolated. In
June of this year, state and federal law enforcement broke up two ORC
rings in the San Jose / San Francisco Bay area, arresting 17 members
and on the day of the bust, recovered over $5.5 million dollars worth
of stolen property. These rings employed hundreds of shoplifters to
steal razor blades, baby formula, tooth whitening strips, and over-the-
counter medications for sale through storefronts, flea markets, and the
Internet.
In Texas, Walgreens and other retailers collaborated with law
enforcement on a case that involved a fence who was buying $50,000 to
$100,000 worth of stolen baby formula, diabetic test strips and other
over-the-counter medications every single day. The stolen product was
being stored in a mini warehouse with no temperature controls in an
area where temperatures routinely exceed 100 degrees during the summer
months. The merchandise was being sold back to unsuspecting retailers
and fenced over the internet. This type of activity puts the public's
health and safety at risk as merchandise like baby formula and OTC
medications can easily degrade. The fence was selling this product to
an out of state fence that operated a distribution warehouse.
In 2002, Walgreens and other retailers were instrumental in
investigating one of the first groups identified by law enforcement as
an ORC ring, in this case members of the same family. They were
operating a large network of ORC repack and redistribution warehouses.
Members of this crime ring fenced more than $78 million dollars worth
of stolen property to and from Kentucky through Ohio, Texas, Utah,
California, Florida, New York, New Jersey and North Carolina. This
investigation led to a conviction. In 2004, the FBI investigated and
charged other members of the same family who continued to conduct the
same type of business.
Law enforcement was ultimately successful in these cases, but this
is the exception not the rule. Too often, cases are abandoned due to
lack of resources and jurisdictional challenges. The legislation
currently being considered would make ORC a federal criminal offense
which would be extremely helpful in prosecuting more of these large,
mulitjurisdictional cases.
iii. impact of organized retail crime
As previously mentioned, Walgreens operates over 6,300 community
pharmacies in 49 states, the District of Columbia and Puerto Rico. ORC
impacts us throughout the country and costs Walgreens in excess of $300
million dollars a year. Walgreens has been a leader in advocating for
ORC legislation in the states and supports making ORC a federal
criminal offense, including criminalizing those activities that clearly
facilitate the furtherance of ORC.
We understand the first line of defense against ORC is in our
stores and within our distribution channels. For this reason, in 2003
Walgreens created an Organized Retail Crime Division that currently
consists of six experienced investigators solely devoted to working
both state and federal ORC cases in collaboration with law enforcement.
We have a robust fraud prevention program that includes upgrading the
cameras in our stores to ``state of the art'' digital systems, in-store
security, anti-theft tagging, retail secure devices and employee
training. We developed a sophisticated ``computer dashboard'' which
helps our loss prevention personnel track stolen property using the
``top 25 stolen items list.'' This list is continually updated using
our perpetual inventory system. Although our fraud prevention program
has proven successful and effective, legislation is necessary to
supplement our efforts and target facets of the criminal activity
beyond our reach. Without this legislation, cases involving multiple
jurisdictions and facilitators will continue to be a challenge to
prosecute.
I would like to briefly outline two examples where this federal law
would have helped in the prosecution of the cases. The first involves a
small grocery store in Chicago. In collaboration with the Cook County
Sheriff's Department we observed more than 52 boosters enter the
grocery store with what appeared to be stolen property and leave
counting money as they walked out. An informant admitted on tape that
he would travel to Wisconsin, Indiana, Michigan, and Iowa to steal
property and sell thousands of dollars worth of goods to this grocery
store every day. We discovered the store owner was selling stolen goods
to other business in Chicago and out of state. Because of limited
resources and jurisdictional issues the out of state cases were not
pursued. If ORC was identified as a specific crime in Title 18 of the
criminal code, we could have taken the case to a federal agency to
pursue further investigation and/or prosecution.
The second case occurred this year in New York City. Three small
``mom & pop'' stores were identified by an informant as buying stolen
retail property. NYPD worked this case and was able to infiltrate the
businesses. After several months of investigation and surveillance the
stores were busted and proprietors arrested. At one of the stores,
police recovered more than $600,000 in stolen property that was boxed
up and ready for shipment to out of state locations. The Queens County
Attorney working this case said the department could not pursue the
case further because of budget and jurisdictional issues. Again, if ORC
was identified as a specific crime in the criminal code we could have
pursued the case federally.
iv. specific comments on proposed legislation
Mr. Chairman, as you know, there is no federal statute on the books
to specifically address ORC. We are hopeful that legislation in this
area will result in greater awareness of this crime by both law
enforcement and prosecutors alike. Today, ORC, like many property
crimes, goes unrecognized and unpunished. Those who are caught often
get away with only a ``slap on the wrist'' due to lagging investigative
resources and federal prosecutors who may be unwilling to take
complicated cases if high-dollar thresholds are not met. We are hopeful
provisions in the law will serve to reduce the transfer and sale of
stolen goods obtained through ORC by applying more scrutiny to those
who may facilitate this crime.
As you know, two bills, H.R. 6491 and H.R. 6713, are now pending
before this Subcommittee. H.R. 6491, the ``Organized Retail Crime
Act,'' focuses on ORC itself and the sale of stolen goods obtained
through ORC. There are several provisions Walgreens believes will be
particularly impactful on combating this crime. First, the bill would
explicitly criminalize the transportation, sale, and receipt of goods
and services through ORC for the fist time under Title 18. The bill
would also criminalize the facilitation of ORC, including facilitation
through the operation of an online marketplace. It is our strong belief
the facilitation provisions will help ensure both individuals and
entities are held accountable for perpetuating this criminal activity.
In the case of online marketplaces, this provision will require them to
take reasonable steps to gather information about sellers, assist
retailers in investigations, and affirmatively limit the sale of stolen
goods.
We also strongly support the provision in H.R. 6491 that amends the
existing ``access device'' fraud statute to include devices commonly
used to commit retail fraud such as gift cards, universal product codes
and radio frequency identification transponders. By specifically
enumerating these devices in the code, law enforcement will be able to
more efficiently prosecute crimes involving the unlawful production and
use of these devices. Additionally, as I understand it, the bill will
impose stronger criminal penalties and sentences for ORC. As indicated
earlier in my testimony, ORC is not garden variety shoplifting. It is
organized crime and should be treated as such with stronger penalties
and enforcement.
The second of the two bills, H.R. 6713, the ``E-fencing Enforcement
Act,'' focuses on the serious problem of ``e-fencing.'' We thank the
Chairman for his recognition that the problem of ``e-fencing'' is
getting worse, not better. We believe status quo will not solve the
problem and this bill takes the appropriate approach to limiting ``e-
fencing.'' Like H.R. 6491, this bill would require certain information
about high volume sellers be available to retailers for criminal
investigations. Similarly, an online marketplace would be required to
take down items where there is good reason to know they were not
acquired lawfully.
v. conclusion
In summary, ORC poses harm to consumers, retailers of every kind,
and deprives local and state governments of valuable and needed tax
revenue. Walgreens supports legislation that makes ORC a federal crime
and targets the facilitator and tools used to perpetrate these unlawful
activities. Walgreens supports efforts to reduce ORC in all of the
various channels used to dispose of the illegally acquired merchandise.
A significant portion of ORC continues to be furthered through physical
markets, such as flea markets, pawnshops, swap meets, and other large-
scale distribution networks. For this reason, we hope legislation
ultimately enacted by Congress includes provisions that go after all
the channels used to dispose of stolen merchandise, and addresses the
unique challenges of conducting investigations related to ``e-
fencing.''
__________
I thank you for your time and the opportunity to speak before your
Subcommittee. I look forward to your questions and working with the
Subcommittee on this legislation.
Mr. Scott. Sheriff Judd.
TESTIMONY OF GRADY JUDD, SHERIFF, POLK COUNTY SHERIFF'S OFFICE,
BARTOW, FL
Sheriff Judd. Good afternoon, Mr. Chairman and Members of
the Subcommittee. It is my pleasure to be with you today to
talk about the very serious and far-reaching ramifications of
organized retail crime.
I appreciate my Representative, Adam Putnam, introducing me
today.
As Sheriff of Polk County, my agency learned of a so-called
``simple shoplifting incident'' that occurred on June 22, 2007.
When the incident crossed Detective Jim Ostojic's desk, he
didn't dismiss it as just another retail theft, but took the
time to investigate.
Seven months, a task force involving over 100 local and
statewide law enforcement officers and retail loss crime
prevention specialists, multiple old-fashioned stakeouts,
several undercover purchases, numerous tracking devices, two
storage warehouses, four flea markets, two Internet sites, five
search warrants and one consent to search later, detectives
uncovered a 5-year-old organized crime ring which resulted in
approximately $100 million worth of stolen property.
Operation Beauty Stop culminated in the arrest of 18
individuals. For these criminals, the profits were high and the
risks were very low.
Retailers suffer hefty losses as a result of organized
retail crime. However, this crime does not affect retailers
alone. It has a major impact on consumers, our governments and
our society's quality of life. The quality of life we, as
Americans, enjoy is compromised by this alleged simple act of
theft because, you see, these insignificant shoplifters are all
too often connected to other crimes.
Fourteen of the 18 subjects charged in our recent operation
had extensive criminal histories. Along with their shoplifting
charges, their past charges included felony burglary, hit and
run, drug possession, carrying a concealed weapon, domestic
violence, aggravated battery with a deadly weapon, robbery,
lewd and lascivious conduct, resisting arrest with violence,
and battery on a law enforcement officer, just to name a few.
These are people who constantly live outside of society's
rules.
Progressive law enforcement agencies have experienced a
paradigm shift from the traditional reactive focus on crime.
Years ago the New York City Transit Police began to place the
focus on toll jumpers. At the time, some postulated it was
unconscionable that resources were going to be wasted on such
insignificant violations. However, this new focus proved very
beneficial and crime decreased considerably. You see, the
murders, the robbers, the thieves, the other violent criminals
haunting the subway systems were the very same ones committing
the minor violation of jumping the toll booths.
My agency is progressive in following a similar process
called ProCap, proactive community attacking problems, based on
zero tolerance for crime, even insignificant crime. Our
philosophy is to arrest all on arrestable offenses. We dig into
cases in order to prevent further crime and not enable it. As a
result to our paradigm shift, major crime has decreased 37
percent in unincorporated Polk County.
Operation Beauty Stop was so intensive it was a multiple
jurisdictional effort that even needed the Federal agencies to
become involved. As a matter of fact, the illicit criminal
organization uncovered during this investigation had tentacles
throughout other States to include North Carolina, South
Carolina and New York.
These criminals operate secure in the knowledge that local
and State law enforcement agencies have neither the resources
nor the jurisdiction to expose the full extent of their
operations. Criminals do not limit themselves to jurisdictional
lines for the convenience of law enforcement. Crimes
perpetrated in this operation crossed all city, county and
State lines.
This proposed legislation would assist with the ease of
prosecution for crimes that occur across jurisdictional lines
and ensure the significance of these crimes is realized through
standardized charges and sentencing across our great country.
For these reasons, I am in full support of the Organized Retail
Crime Act of 2008.
Those involved in organized retail crime use every means to
support their low-risk, high-profit criminal activity. The
Internet has helped facilitate this illegal activity. The
Internet adds a new dynamic to law enforcement; I liken it to
the Wild West with very little regulation or enforcement and
many prospects. Along with the vast benefits and endless
opportunities derived from the Internet come the endless
opportunities to perpetuate crimes and victimize our
constituents in new ways.
The Internet has indeed become the new frontier for crime.
As a result, we must be prepared with resources to combat the
new criminal tactics. I am in full support of the E-fencing
Enforcement Act of 2008, not for the sake of regulation, but to
require responsible business practices that protects consumers
and our governments.
I must tell you as I close today that organized retail
crime is a sinister crime, negatively impacting our economy and
directly tied to more violent and dangerous crimes. There is
every indication that some of these criminal groups are even
involved in funding terrorism. Please look beyond the tentacles
to the monster to which they are attached.
Thank you.
Mr. Scott. Thank you.
[The prepared statement of Sheriff Judd follows:]
Prepared Statement of Grady Judd
Mr. Scott. Mr. DelBianco.
TESTIMONY OF STEVE DelBIANCO, EXECUTIVE DIRECTOR, NetCHOICE,
WASHINGTON, DC
Mr. DelBianco. Thank you, Chairman Scott, Ranking Member
Gohmert and distinguished Members of the Subcommittee. And
thank you for holding this hearing on this important issue
today.
NetChoice, as was described earlier, is a coalition of e-
commerce leaders and includes the Electronic Retailing
Association, AOL, eBay, Overstock.com, Yahoo! and about 18,000
small retailers who use the Internet to reach customers; and at
State and Federal levels and at international venues NetChoice
advocates for the integrity in expansion of e-commerce. That is
why it is a NetChoice priority to improve consumer trust and
confidence in the online space; and we vigorously support
efforts to pursue and control and punish criminals who pollute
our online markets by selling stolen or counterfeit goods.
We fully support tougher Federal penalties and increased
resources and authority for law enforcement. The hearings held
and the record that has been built by this Subcommittee since
last October, I think they support exactly these kinds of
measures. As Detective David Hill said in October, quote,
``Professional thieves are getting off with little more than a
slap on the wrist because many jurisdictions are still treating
ORC crimes like shoplifting.''
But compare the committee's record with the rhetoric that
you hear from retailers today, particularly that from the
National Retail Federation. Their own data show that two-thirds
of the stuff that is stolen is stolen by a store's own
employees and their own suppliers.
We have heard so much--and you will hear it in the
testimony today--about the retailers' trouble with retail
theft. But it reminds me of the saying that when someone talks
so openly about their problems, they are fixing to blame
somebody else. And who do they want to blame? They like to
blame the Internet.
NRF's written testimony includes this: That selling online
has, quote, ``addictive qualities,'' and that the Internet is
causing people who have never stolen before to take up retail
theft. Mr. Chairman, that is like saying the back seat of cars
causes teenage sex. Retailers are using this extreme rhetoric
to justify what they really want in legislation, which we have
heard repeatedly over the last 3 years in States and even on
the Hill.
The retailers have one course of action and that is to take
law enforcement out of the loop by granting retailers their own
power to demand investigations and takedowns on the Web sites
of businesses they compete with; then, of course, to sue the
marketplace if they are not happy with the investigation that
occurred.
Now you know how it works today. EBay, Overstock and other
markets earn great marks from law enforcement for their quick
and thorough attention when law enforcement is involved in
asking for an investigation. Therefore, if a retailer has a
good reason to suspect that a listing includes a stolen item,
he need only get a law enforcement official to get on the
phone, send a fax, push ``send'' on their button, and eBay and
Overstock cooperate fully.
But all three of these bills would give retailers unique
new power to force an online marketplace to interrogate their
own customers about how they obtained the item they are listing
for sale. This has the effect of presuming that their customers
and sellers are selling stolen items unless they can prove
their ownership. How could a seller prove ownership of
something they have received as a gift, in a trade for cash or
something for which they have lost the receipts a long time
ago? The vast majority of online sellers are honest people
trying to find the highest bidder for something they have and
don't need or something they have acquired legally at a
discounted price.
Honest citizens are understandably going to resent having
to provide receipts and personal information to prove that they
are not involved in organized criminal activity. They will
protest, and it could be your in-boxes that get flooded with
angry complaints if this becomes law.
Now, to avoid this potential abuse that I am speaking of,
Congress should preserve the role of law enforcement in the
investigations that a retailer might demand from businesses
that they compete with. And it is frankly not quite enough
police involvement to just let a retailer use a police report
that they filed as much as a year ago and then use that over
and over again any time they see a listing for something of a
similar description. That leaves law enforcement out of the
loop between competitors. I think that someone from law
enforcement must review a listing and ask the marketplace to
investigate the way it works today.
Now, the retailers are understandably frustrated by their
ORC problems, but that is no reason to cut police out of the
loop when we are investigating criminal activity. So I have
tried here and in my written testimony to alert the
Subcommittee to the risks in this legislation, that is, the
risk of abuse and harassment of e-markets by competing
retailers.
And I guess I don't worry so much about loss prevention
professionals like Mr. Muscato here at the table. I don't think
he would abuse the law. But think for a moment about a small
retail store manager who is trying to maintain margins in a
declining economy, and he has got to be incredibly frustrated
about losses that are due to theft, in most cases by his own
employees and suppliers. So if a batch of items are stolen from
his store and he later sees the same items, similar items,
online, he is going to pull the trigger on the bill that you
are giving him and he is going to use that power to force the
online marketplace to interrogate its seller. And the retailer
has no cost, he has no downside at all, and he can actually
reuse the same investigation notice over and over again for
every listing he sees on the Internet.
The legislation could escalate the conflict--in closing
here, it could escalate the conflict between retailers and
online marketplaces. What is really needed right now is
cooperation, because these parties all want to reduce the
amount of crime and increase the integrity of what happens
online.
In your hearing last October Safeway's Karl Langhorst said
that Safeway was forming, quote, ``unprecedented alliances''
with other retailers to combat ORC. Well, Safeway should build
unprecedented alliances with online markets, too, instead of
blaming and battling them. I understand the frustrations the
retailers have but that doesn't justify the soliciting of
blame. These bills were designed for loss prevention, but they
include dangerous tools for competition prevention.
I close by thanking the Committee for considering
alternative views and I look forward to your questions.
Mr. Scott. Thank you.
[The prepared statement of Mr. DelBianco follows:]
Prepared Statement of Steve DelBianco
Chairman Scott, Ranking Member Gohmert, and distinguished members
of the Subcommittee: My name is Steve DelBianco, and I would like to
thank you for holding this important hearing on the e-Fencing
Enforcement Act and related legislation.
I serve as Executive Director of NetChoice, a coalition of trade
associations and e-commerce leaders such as AOL, eBay, IAC,
Overstock.com, and Yahoo!, plus 18,000 small online retailers. At the
state and federal level and in international venues, NetChoice
advocates against regulatory barriers to the expansion and integrity of
e-commerce.
It's a NetChoice priority to improve consumer trust and confidence
in e-commerce, so we naturally support efforts to pursue and punish
criminals who pollute online marketplaces by selling stolen or
counterfeit goods. Unfortunately, the measures proposed in HR 6491, HR
6713 and S 3434 go too far in two ways: imposing unprecedented
liability and unworkable burdens upon online marketplaces.
the hearing record does not justify imposing harsh liabilities and
burdens on online marketplaces.
We appreciate the chairman's efforts to gather substantial data and
testimony on the issue of organized retail crime (ORC). However,
nothing in the record thus far would justify imposing criminal
liability, civil lawsuits, and new burdens on online marketplaces,
especially when these impacts could be triggered by complaints from
competing retailers.
In October 2007, this subcommittee heard testimony on ORC, and all
witnesses made the case for enacting tougher federal penalties and
additional law enforcement attention. As Maryland Police Detective
David Hill told this subcommittee, ``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.''
In that same hearing, loss prevention officials from Safeway and
Target said they needed more information about sellers and listings so
they could convince law enforcement officials to investigate. During
Q&A, Target's Brad Brekke summed up with, ``We're just looking for
transparency.'' And Safeways's Mr. Langhorst said, ``We want eBay to
tell us who the seller is.''
It's therefore understandable why ORC legislation would include
tougher penalties for those convicted of crimes, and better
transparency and information exchange between retailers and online
marketplaces. However, these bills go much further, handing competing
retailers a blunt instrument to harass online marketplaces they compete
with. A stereo retailer, for instance, could tell Amazon or eBay,
``Those speakers are listed so cheap that I just KNOW they are
stolen.'' Never mind that big-box retailers fill our weekend newspapers
with ads offering deep discounts to draw shoppers into their stores,
too.
These bills threaten online marketplaces with criminal penalties
and even forfeiture of assets if they fail to interrogate people about
how they acquired an item they want to list for sale. Imposing criminal
penalties and asset seizure on an online marketplace is unprecedented
at the federal or state level, and would be the harshest anti e-
commerce law of any major industrialized country.
Specifically, HR 6713, the E-Fencing Enforcement Act, would require
marketplaces to conduct investigations if a retailer provides a police
report--dated anytime in the last year--claiming theft of goods
matching the description of items offered in an online listing. A big-
box chain could file a single police report for theft of an item, then
use this report all year long to force any online marketplace to
investigate every listing of similar items--without any involvement of
law enforcement officials.
All three ORC bills would give retailers the power to force online
marketplaces to interrogate sellers about where and how they obtained
an item they're listing for sale. This would have the effect of
presuming that sellers are listing stolen items--unless they can prove
their ownership. But how would a seller prove ownership of items
received as gifts, or something received in a trade? What about cash
transactions, or purchases where original receipts were lost long ago?
The vast majority of online sellers are honest people trying to
find the highest bidder for something they have legitimately acquired.
Honest citizens and businesses will naturally resent the presumption
that they acquired their goods through organized criminal activity.
When sellers protest about having to prove their innocence, online
marketplaces would surely reply that Congress passed a new law
requiring this unprecedented interrogation. Your inboxes could be
flooded with constituent complaints.
the cure for orc should not become a tool for authorized retail
harassment of online marketplaces.
Forcing online marketplace operators to interrogate innocent
sellers is just one aspect of what could become ``authorized retail
harassment.'' A flood of new lawsuits is another potential for abuse by
retailers.
Specifically, HR 6491 grants retailers the ability to sue online
marketplaces in any district court for failing to ``expeditiously
investigate'' a listing based on a retailer notification, even if no
law enforcement official ever reviewed the actual listing. After
challenging a seller's honesty and reviewing his reply, a marketplace
might reasonably conclude that the seller's listing has no connection
to organized retail crime. However, a retailer could still sue the
marketplace for failing to remove a listing, based only on the
retailer's belief that the marketplace had ``reasonable cause to know''
that an item involved organized retail crime.
These ORC bills contain a ``notice and take down'' regime that's
markedly different from what Congress included in another law designed
to help property owners stop online theft. The Digital Millennium
Copyright Act (DMCA) includes safeguards to prevent abuse of the powers
granted to content owners. DMCA notices are submitted under penalty of
perjury and must specifically identify the location of allegedly
illegal items. Neither of the two House ORC bills include any sanction
whatsoever on retailers who could 'game the system' by providing
incorrect notices.
The DMCA also includes a mechanism to contest incorrect
allegations. Again, these ORC bills provide no such mechanism for
online marketplaces to push-back on retailers who repeatedly use a
single police report to harass multiple sellers of similar goods.
Retailers can harass marketplaces with information requests about
sellers--based on undocumented suspicion or a year-old theft of similar
items.
The combined threat of legal action combined with customer data and
interrogation requirements are burdensome enough on large marketplaces,
but would effectively strangle small businesses. NetChoice member
Dawdle.com is a small online marketplace for new and used videogames,
with 5 employees operating out of Chicago. According to founder Sachin
Agarwal, ``I can't imagine how I could afford to stay in this business
if overzealous retailers swamped me with investigation and take-down
requests.'' Smaller companies simply do not have in-house attorneys or
financial resources to conduct legal investigations and answer to
multiple lawsuits.
Simply put, these ORC bills create too many opportunities for abuse
by retailers who compete with online marketplaces.
states have rejected legislation that would blame e-commerce for
retailers' orc problems.
Legislation imposing these kinds of obligations on online
marketplaces has been introduced in several state legislatures.
Colorado, Maryland, New Jersey, New York and Wisconsin have seen
retailer-backed bills targeting online resale of merchandise such as
baby food, cosmetics, drugs, infant formula and batteries. In spite of
intense lobbying by big-box chains, none of these states has passed any
version of the retailers' preferred legislation.
In addition, the bi-partisan National Conference of State
Legislatures (NCSL) has soundly rejected this approach. At its annual
meeting in August 2007, the National Retail Federation (NRF) attempted
to modify NCSL policy by adding language that effectively blamed online
markets for theft by suppliers, employees, and shoplifters: ``the
Internet also has become a tool of Organized Retail Crime gangs that
may sell stolen merchandise and gift cards online.'' The retailers'
attempt to blame e-commerce for their theft problems was overwhelmingly
rejected by state legislators at NCSL, by a vote of 45-0.
does congress really want to make websites liable for content and
conduct provided by third parties?
A law that creates legal liability for online marketplaces for the
wrongdoings of others violates the intent--if not the letter--of an
existing federal law, Section 230 of the Communications Decency Act.
Section 230(c) explicitly protects interactive computer services from
liability for content provided by third parties.
When Congress passed Section 230, it decided to promote the
continued development of the Internet and online services. Congress
also sought to ``preserve the vibrant and competitive free market that
presently exists for the Internet and other interactive computer
services, unfettered by Federal or State regulation.'' [47 U.S.C. Sect.
230(b)].
Legislation that creates new liabilities on Internet marketplaces
for the bad actions of third parties chips away at the goals expressed
by Congress in Section 230. The continued development of a competitive
marketplace for online commerce would be at risk, as would long-
established protections for ISPs, online services, and the entire
Internet community. The combined effect of new liabilities and
affirmative obligations would result in an unacceptable chilling of
online innovation and competition.
the house bills unfairly discriminate against online marketplaces.
Nobody doubts that shoplifting is a serious problem for retailers.
And nobody faults retailers for doing whatever they can to deal with
inventory losses. But trying to shift blame and burdens to online
marketplaces is the wrong approach. It may be true that thieves are
tempted to fence their stolen goods online, but shoplifting was a big
problem for retailers long before the Internet ever appeared on the
scene.
A witness in your October 2007 hearing quoted a 2005 report from
this Committee, finding that stolen goods are fenced through multiple
channels, including beauty shops, gas stations, flea markets, pawn
shops, truck stops, newspaper classified ads, overseas buyers, plus
several kinds of Internet sites. While the Senate bill applies to both
online and offline resellers, both House bills impose obligations and
liability only upon online marketplaces. Newspaper classifieds and the
many off-line resale marketplaces are not covered by the two House
bills.
While the two House bills discriminate against the online channel,
all three ORC bills would foster state laws that could create
compliance burdens on online businesses that usually serve customers in
all 50 states. Different--potentially conflicting--new state laws could
create impossibly complex investigation requests and a flood of
retailer lawsuits. In last October's hearing, several witnesses called
for a federal solution to the ORC problem, yet none of these bills
would preempt states from quilting a patchwork of different state laws.
there are better, less restrictive ways to stop online retail crime.
The National Retail Federation's own commissioned surveys,
conducted annually by the University of Florida, consistently show that
two-thirds of retailer inventory losses are directly attributable to
internal causes, including theft by their own employees and suppliers.
Year after year, about half of all retail inventory losses are the
result of employee theft. To put this in a national context, the
retailers' own study concluded that ``. . . there is no other form of
larceny that annually costs American citizens more money than employee
theft.''
These are the retailers' own employees, people who are hired,
managed, and paid by the retailers. With that kind of direct control,
retailers are in the position to stop employee theft where it starts.
In last October's hearing, Rep. Forbes asked Safeway what they
doing to prevent in-store theft, and Mr. Langhorst answered, ``our
associates are there to sell groceries, not to be police officers.''
Yet witnesses from both Target and Safeway stressed the importance of
limiting and deterring theft ``in the first place.'' The first place
that theft occurs is in their own stores, most often by their own
employees and suppliers. Rather than shifting blame and burdens to
online marketplaces, retailers should improve their employee screening,
inventory control measures, and store security systems.
Another essential step to combat ORC is to create better working
relationship between crime prevention professionals at retailers and
online marketplaces. In your hearing last October, Safeway's Karl
Langhorst said, ``In spite of Safeway's best efforts and unprecedented
alliances with other retailers to combat ORC, we continue to suffer
significant losses.'' Rather than continue to battle with eBay and
others, Safeway should build 'unprecedented alliances' with online
marketplaces, too. Working together, retailers and online marketplaces
can raise the effectiveness of the ``best efforts'' they are now making
individually.
conclusion
These three ORC bills would impose extraordinary and discriminatory
restrictions on Internet marketplaces that help millions of people to
legitimately buy and sell products every day.
I understand that retailers feel frustrated about their efforts to
stop ORC, but that does not justify shifting blame and burdens to
online marketplaces. These ORC bills are intended for loss prevention,
but they include dangerous tools for competition prevention--preventing
online marketplaces from competing with big retailers.
I close by thanking the Committee for considering alternative views
in this hearing, and I look forward to your questions.
Mr. Scott. Mr. Torpoco.
TESTIMONY OF EDWARD TORPOCO, SENIOR REGULATORY COUNSEL, eBAY,
INC., WASHINGTON, DC
Mr. Torpoco. Mr. Chairman, Ranking Member Gohmert and
Members of the Committee, 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 theft.
Prior to joining eBay in 2006, I was a State and Federal
prosecutor for 7 years. At eBay I work with the law enforcement
community, government regulators, private sector companies and
eBay's own policymakers to help keep the eBay marketplace a
safe site for eBay's community of consumers and small
businesses.
EBay recognizes that organized retail theft is a serious
challenge facing many retailers. When we appeared before this
Committee last year we made it clear that eBay does more than
any other Internet company to make sure that online consumers
have a safe and well-lit place to buy and sell goods, and that
includes stopping the sale of stolen goods.
EBay has strong policies in place that specifically
prohibit the sale of stolen and illegal items. We employ more
than 2,000 employees worldwide to enforce those policies, and
we work closely with law enforcement officials at all levels to
help them prosecute criminals. More than any other Internet
company, we work to put criminals and thieves behind bars.
But that is not all. In response to this Committee's calls
last year for greater cooperation in the fight against stolen
goods, we stepped up and we created a new program called the
PROACT program to foster evidence-sharing among victimized
parties. Retailers that have joined this voluntary program now
have an easy, streamlined mechanism to submit reports on eBay's
hotline, showing that an eBay member has sold or is attempting
to sell stolen items.
We investigate all evidence-based reports, and when we find
proof of wrongdoing, we restrict or suspend the account and we
will forward proof of criminality to law enforcement for
prosecution. We want criminals arrested and prosecuted because
criminal behavior on eBay undermines trust in the eBay brand.
So with all eBay has done to combat nefarious activity on
our platform, why are we here today to debate legislative
proposals that almost exclusively target one Internet business
model, that of online marketplaces like eBay, for liability in
the context of organized retail theft?
Our site is the most transparent. Our antifraud teams are
the biggest and most active and we work most closely with law
enforcement. Rather than work with us to prosecute criminals,
some retail giants are actively promoting proposals to restrict
online marketplaces that primarily serve small retail
competitors and provide consumers low prices. To be honest, we
believe that the focus of some giant retailers on large and
popular Internet marketplaces is colored by competition.
The Internet, including eBay, has empowered consumers and
small businesses. It is a revolutionary tool that drives down
prices by increasing competition, including through a
completely legal gray market, closeout and end-of-cycle goods.
Many big brick-and-mortar retailers who are themselves online
want to dominate Internet retail the same way they dominate in
store retail. They like the Internet, but they don't like
Internet-based competition from small sellers who drive down
prices and give consumers more choices. One way to attack pesky
secondary market competitors that sell at low prices is to
suggest that there is something shady about them.
By our estimates, there are roughly 750,000 honest,
hardworking Americans who make all or a significant share of
their income actively selling items on eBay. They will be
directly impacted by the legislative proposals that the big
retailers are asking you to consider.
If this Committee is going to legislate on the issue of
organized retail theft, we believe such legislation should
recognize that efforts to stop organized retail theft must be
built on deterring criminals from stealing in the first place,
through adequate investment in inventory control and antitheft
technologies. Recognize that any solutions must be technology
neutral and business model neutral.
Impose tougher penalties, including mandatory sentences, on
the actual criminals who are selling stolen goods rather than
scapegoat the Internet service provider for such conduct in a
way that would undermine Internet growth. Protect the privacy
interests of consumers and small businesses who provide their
personal data to Internet service providers and trust that
their personal data won't be disclosed to retailers or
government agencies based on unsupported accusations of
wrongdoing. Protect legitimate gray markets that expand
consumer choice and purchasing power.
In conclusion, we continue to be committed to working with
this Committee on ways to effectively empower law enforcement
to fight the problem of retail theft. We stand ready to work on
balanced and responsible solutions. We are committed to
protecting the privacy and rights of law-abiding Americans and
small business people. And we hope that this Committee will
work with us to ensure that the Internet continues to thrive as
a place that benefits consumers, especially in these
challenging economic times, and allow small businesses to
compete on a level playing field with even the biggest retail
giants.
Thank you. And I am happy to answer questions.
Mr. Scott. Thank you.
[The prepared statement of Mr. Torpoco follows:]
Prepared Statement of Edward Torpoco
Mr. Scott. Mr. LaRocca.
TESTIMONY OF JOSEPH J. LaROCCA, VICE PRESIDENT, LOSS
PREVENTION, NATIONAL RETAIL FEDERATION, WASHINGTON, DC
Mr. LaRocca. Thank you, Mr. Chairman, Ranking Member
Gohmert, Members of the Subcommittee. Good afternoon. Thank you
for the opportunity to testify before you on organized retail
crime.
My name is Joseph LaRocca, and I am the Vice President of
Loss Prevention with the National Retail Federation. Today, we
are testifying on behalf of the larger Coalition Against
Organized Retail Crime in support of H.R. 6713 and H.R. 6491.
As we have heard, organized retail crime refers to
professional shoplifters who engage in illegally obtaining
substantial quantities of retail merchandise and gift cards as
part of a criminal enterprise. Stolen merchandise is then
resold through illegal street vendors, pawnshops, flea markets
and large-scale distribution networks and the Internet. Due to
these black market operations, State and local sales tax is not
collected, and in the case of returns fraud, actually takes
money out of State funds. This type of criminal activity can
even put consumers' health and safety at risk, particularly
when items such as infant formula and over-the-counter
medications are mislabeled and stored improperly.
According to the NRF's 2008 ORC survey, 85 percent of
retailers nationwide reported being a victim of organized
retail crime. Precise measurements and the true scope of this
problem are difficult to determine given the inherent secretive
nature of these criminal operators. However, according to one
prominent study, retail losses amount to over $30 billion a
year.
FBI Director Mueller also testified before Congress that
ORC losses are estimated between $15 and $30 billion annually.
When compared to other retail crimes across the country, retail
losses are double those of property crimes nationwide, robbery,
burglary, larceny and auto thefts combined, as reported in the
FBI's 2006 Uniform Crime Report.
People have quickly learned that the Internet presents a
low-risk way to sell stolen goods, primarily due to its
anonymous nature. More disturbing, however, is, the Internet
seems to be contributing to the creation of a brand-new retail
thief, people who have never stolen before but are lured by the
convenience and anonymity of the Internet. Internet auction
sites have been blaming retailers for security lapses in order
to justify the conduct of some of the biggest sellers on their
site.
Mr. Chairman, retailers take this issue very, very
seriously and spend an estimated $11 billion each year on loss
prevention. Our industry relies heavily on external theft
controls such as electronic article surveillance, external
theft training and closed circuit television systems in many
stores. You may have noticed that more and more product is
being placed under lock and key in your neighborhood pharmacy
and other retailers. This comes at great inconvenience to
honest customers. But these controls are no match for
professional shoplifters determined to steal. Criminals will
always find a way to get the product out of our stores.
One of the biggest obstacles in apprehending thieves who
sell and resell through online marketplaces is the lack of
resources available to law enforcement and the lack of
cooperation offered by Internet providers. EBay, for example,
will only provide assistance on a case-by-case basis and only
to law enforcement.
Due to the lack of manpower and resources, law enforcement
will typically not undertake a suspected Internet fraud case
unless there is irrefutable evidence or a written statement of
theft. Then most State and local police departments run into
jurisdictional issues since most online cases encompass
multiple stores in multiple jurisdictions in multiple States.
Recently eBay unveiled a new program called PROACT.
Although, on the surface, it may seem like a good start, the
burden is still on retailers. It requires retailers to
investigate, identify and determine that the product online may
be stolen. This is why a vast majority of retailers eBay
approached have declined to participate.
With over a million auctions on any given day, we need to
proactively change criminal behavior, Mr. Chairman; we cannot
keep addressing this issue by investigating and apprehending
one seller at a time. We need a new approach to this problem.
We need responsible Internet auction sites to make modest
changes to help reduce the sale of stolen property in the first
place, and thieves need to know when they try and fence their
wares on a site like eBay, for example, they will be taking a
huge risk and likely be caught.
Organized retail crime is a serious issue affecting
retailers, consumers and law enforcement officials nationwide.
This criminal activity can put consumers' health and safety at
risk, particularly when items such as infant formula and over-
the-counter medicines are mislabeled and stored improperly. ORC
creates enormous financial losses and negatively impacts
revenue for businesses and States.
I wish to commend you, Chairman Scott and Ranking Member
Gohmert, for today's hearing. The focus on this very serious
issue is a timely and appropriate response to a problem that is
victimizing practically every segment of the retail industry.
Thank you for your time and attention.
Mr. Scott. Thank you.
[The prepared statement of Mr. LaRocca follows:]
Prepared Statement of Joseph L. LaRocca
introduction
Chairman Scott, Ranking Member Gohmert, and members of the
Subcommittee, good afternoon. Thank you for the opportunity to testify
before you today on the growing problem of organized retail crime. My
name is Joseph LaRocca and I am the Vice President of Loss Prevention
with the National Retail Federation. Based in Washington D.C., our
membership comprises all retail formats and channels of distribution.
As the industry umbrella group, NRF also represents more than 100
state, national and international retail associations. I work closely
with retail organizations, as well federal, state, and local law
enforcement officials across the country. Prior to joining the
Federation in 2005, I spent 18 years working in retail loss prevention
witnessing these crimes and their impact first hand. I am here today
testifying on behalf of the National Retail Federation and the larger
Coalition Against Organized Retail Crime in support of H.R. 6713, the
``E-fencing Enforcement Act of 2008'' and H.R. 6491, the ``Organized
Retail Crime Act of 2008.''
As we have heard, Organized Retail Crime refers to the growing
problem of professional shoplifters who engage in illegally obtaining
retail merchandise or gift cards through both theft and fraud in
substantial quantities and as part of a criminal commercial enterprise.
Some of the more sophisticated criminals even 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 and gift cards to obtain merchandise. Yet others
steal merchandise with the express intent of returning it to stores for
cash or credit (most often in the form of gift cards). Stolen
merchandise is resold through illegal street vendors, pawn shops, flea
markets, the Internet, and even large scale distribution networks. Due
to these black-market operations, state and local sales tax is not
collected and, in the case of returns fraud, can actually diminish
general fund holdings.
high-profile cases illustrate the serious nature of orc
In 2005, Operation Blackbird, as Texas investigators dubbed their
multi-state baby-formula investigation, led to felony charges against
more than 40 suspects; about half of those were illegal immigrants.
Authorities seized some $2.7 million in stolen assets, including $1
million worth of formula.
Sherriff Grady Judd from Polk County Florida will discuss his case,
announced in January, in which $60-100 million in product was stolen
from retailers and resold, primarily through the Internet.
This May (2008) in New Jersey, one of the highest-ranking officers
in the Gambino crime family was arrested and indicted along with 23
reputed crime family members and associates. A 30-count indictment that
was unsealed in Newark alleges a variety of schemes, including forging
bar codes to obtain electronics equipment from big box stores at
extremely low prices, and making those purchases with credit cards
obtained using stolen identities.
In June, a joint task force of federal agents and the San Jose
Police Department conducted a series of raids and arrested 17 members
of two crime families they say employed hundreds of shoplifters to
steal from stores, including Safeway, Wal-Mart, Walgreens, Longs Drugs,
Save-Mart and Target. The stolen loot was resold for millions of
dollars from homes, store fronts and flea markets, authorities said.
These important investigations rely upon the ongoing partnership
between law enforcement and the retail sector. The successful take down
and prosecution of these theft rings is a positive development, but
more needs to be done on the federal level because the problem is
growing and these theft rings are becoming more aggressive and violent
in their behavior. In fact, in the Texas case, hits were put out on the
federal investigators involved in the infiltration of that gang. To
bring it to an even more troubling conclusion, the proceeds from the
crime were eventually traced back to the terrorist group Hamas. To put
it succinctly, baby formula theft was funding assassination plots and
international terrorism.
These are just a few extreme examples. However according to NRF's
National ORC Survey released on June 4, 85 percent of retailers
surveyed report being victims of ORC and 66 percent saw increases in
ORC activity last year. Precise measurements of the true scope of this
problem are difficult to determine given the inherently secretive
nature of these criminal operators. However, according to one prominent
study, industry-wide retail fraud and theft losses amount to over $30
billion a year. When compared to other property crimes across the
country, according to the FBI's Uniform Crime Report in 2006, retail
losses are double those from robbery, burglary, larceny, and auto
thefts combined ($16.9 billion) nationwide.
Most disturbing is the fact this type of criminal activity can put
consumer's health and safety at risk. For example, consumers are
potentially at risk when professional shoplifting rings steal
consumable products, such as over-the-counter medications and infant
formula. Pilfered products may not be kept under ideal or required
storage conditions which can threaten the product's integrity. And
often times these organized thieves will repackage and re-label stolen
products to falsely extend the product's expiration date or to disguise
the fact that the merchandise has been stolen.
the increased use of internet auctions to dispose of stolen goods
Dishonest people have quickly learned the Internet presents a low
risk way to sell stolen goods, primarily due to its anonymous nature.
They are surfing the web and learning about the limitless opportunities
offered by auction sites. Criminals are even setting up their own sites
and enabling ``secure'' customer payments through tools offered by
companies such as PayPal and Yahoo! Checkout. In the past, these same
people were selling at flea markets and pawnshops, but not in 2008.
Online marketplaces are being used as the Internet equivalent of
pawnshops, but, unlike pawnshops, they are largely unregulated. More
disturbing, however, is the fact that the Internet seems to be
contributing to the creation of a brand new type of retail thief--
people who have never stolen before, but are lured in by the
convenience and anonymity of the Internet.
Sophisticated ``professionals'' or not, what all of these thieves
have in common is that they often are--or become--career criminals.
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. 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.
In videotaped admissions of people who have stolen from retail
stores and resold the product on e-Bay, for example, thieves often tell
the same disturbing story: they begin legitimately selling product on
e-Bay and then become ``hooked'' by its addictive qualities, the
anonymity it provides, and the ease with which they gain exposure to
millions of customers. When they run out of ``legitimate merchandise,''
they begin to steal intermittently, many times for the first time in
their life, so they can continue selling online. The thefts then begin
to spiral out of control and, before they know it, they quit their
jobs, are recruiting accomplices (some are even hiring ``boosters''),
and are crossing state lines to steal--all so they can support and
perpetuate their online selling habit. At least one major retailer has
reported that 80 percent of thieves interviewed in their e-Bay theft
cases admit that selling stolen property on e-Bay is their sole source
of income. In fact, many of the e-Bay sellers have used those proceeds
to obtain mortgages, new cars, and even boats.
To give you a clear example of the high-dollar figures involved, in
February of this year the Kansas City Police Department, FBI and U.S.
Postal Inspection Service, charged 7 suspects with $1.2 million of
theft and resale of stolen items online. According to court records,
boosters were hired to steal merchandise and then paid a percentage of
the booty and given gas cards for their expenses. The ring leader sold
the product on e-Bay and used part of the money to bail the boosters
out of jail when they were arrested!
As a Loss Prevention professional a question I am often asked is
why we don't just catch the thieves in stores before the thieves have
the opportunity to sell the product online. In meetings, we have also
heard from folks representing the Internet auction sites who have taken
the tack here on Capitol Hill to blame retailers for security lapses in
order to justify, or obviate scrutiny of, the conduct of the sellers on
their site. Mr. Chairman, retailers take loss prevention very, very
seriously. Our industry relies heavily on external theft controls such
electronic article surveillance (EAS), external theft training, and
closed circuit television systems (CCTV) in many stores. You may also
have noticed that more and more retail product is being placed under
lock and key in your neighborhood pharmacy, department stores and other
specialty retailers--at great inconvenience to honest customers. But,
as we have learned, these controls are no match for professional or
habitual shoplifters determined to steal. As you have heard today and
in previous hearings, committed criminals will always find a way to get
the product out of retail stores. Some of these thieves are masters at
fraud or concealment, others are bold and brazen and potentially put
employees and consumers at risk.
the challenges of law enforcement and failure of online marketplaces to
adequately assist retailers
One of the biggest obstacles in investigating and apprehending the
thieves who steal and resell through online marketplaces is the lack of
resources available to local, state, and even federal law enforcement
to investigate these crimes and the lack of cooperation offered by
Internet auction providers themselves.
e-Bay, for example, will only provide assistance and information on
a case-by-case basis, and only when requested by law enforcement.
However, law enforcement, due to lack of manpower and resources, will
typically not undertake a suspected Internet fraud case unless there is
irrefutable evidence or a written statement of theft. Even then, most
state and local police departments run into ``jurisdictional'' issues
since, in most online cases, the thefts encompass multiple stores, in
multiple states, in multiple jurisdictions. Further, even when
retailers provide law enforcement with a written statement and
videotaped admission, they are reluctant to take the case because the
company investigator did not observe the actual theft, nor provide
proof that a specific item came from a unique store.
Recently, e-Bay unveiled a new program called PROACT. Although on
the surface it may seem like a good start, it still requires retailers
to investigate, identify, and determine that the product being sold
online may be stolen. Thus the burden is still placed on retailers to
identify each discrete seller that may be selling stolen product on
their site. That is why the vast majority of retailers that they
approached with the program declined to participate. With over a
million auctions on any given day, we need to proactively try to change
criminal behavior in partnership with the Internet auction companies.
Mr. Chairman, we can't keep addressing this issue by investigating and
apprehending one seller at a time; we need a new approach to this
problem.
Mr. Chairman, we need to have responsible Internet auction sites
make modest changes to their businesses to help reduce the sale of
stolen property in the first place. In other words, we need to create
affirmative deterrents to this illicit behavior. Thieves need to know
that if they try to fence their wares on a site like e-Bay, for
example, they will be taking a huge risk and will likely be caught. We
can do this by applying traditional models of stolen property
regulation to the Internet and inject some much-needed transparency to
these transactions. These are the type of approaches taken in the bills
we are discussing today.
H.R. 6491 imposes specific obligations on online marketplaces.
Specifically, the requirement that an online marketplace investigate
certain goods when a retailer provides ``credible evidence'' that the
goods are stolen is essential. Such an obligation does not exist today.
Similarly, if after investigation the online marketplace determines
that in fact the goods are stolen, the marketplace would be required to
remove them from sale from the marketplace. This is common sense. Goods
that are known by an online marketplace to be stolen should no longer
be sold on the site and, if they are, the marketplace should be liable
for such behavior.
The bill would also require that information about merchandise that
is otherwise only offered for sale exclusively by a retail source be
posted conspicuously. There are many instances where goods that are
known to only be sold by a particular retailer are available for sale
by third parties in large quantities on an online marketplace. Many
times these sales warrant additional investigation by retailers due to
the exclusive nature of the product. Finally, we strongly support the
provision that would require high-volume sellers to make contact
information available online. Retailers have difficulty obtaining
seller contact information from the online marketplaces even though
that information is vital to conduct a preliminary investigation.
Oftentimes, the identity of the seller leads to a quick confirmation
that the sales are in fact legitimate and the investigation can be
closed.
The second of the two bills, H.R. 6713, the ``E-fencing Enforcement
Act,'' focuses exclusively on the E-fencing problem just described. We
thank the Chairman for his recognition that this is a problem that is
getting worse, not better. We believe that the status quo will not
solve the problem and that this bill takes the appropriate approach to
limiting e-fencing. Like H.R. 6491, this bill would require that
certain information about high volume sellers be available to
retailers. Similarly, an online marketplace would be required to take
down goods where there is good reason to know that they were not
acquired lawfully.
NRF feels strongly that companies like e-Bay should also no longer
be able to hide behind the assertion that they are ``merely a
platform'' with little responsibility to supervise sellers on their
site when they earn listing fees and commissions from each and every
sale on their site. That is a fee for both stolen and legitimate goods.
In the case of e-Bay these fees and commissions have earned them
billions of dollars in profits and made them one of the fastest growing
companies in American history. Isn't there some greater responsibility
here to take some simple, and quite frankly, commonsense steps like
those outlined in H.R. 6713, H.R. 6491, and S. 3434? It seems like a
no-brainer to me.
conclusion
While retailers will continue to invest billions of dollars in
trying to prevent organized retail crime and apprehend and prosecute
the perpetrators, it is clear that the problem cannot be solved by
fighting these cases one-by-one and only in the shopping aisles.
Without new Federal laws in place, such crimes are far too often
treated as petty theft or a misdemeanor. As a result, organized retail
crime cases are rarely appropriately prosecuted, and when they are,
individuals who are convicted usually see limited jail time or are
placed on probation if they have no prior arrests.
Organized Retail Crime is a serious priority for large and small
retailers nationwide. Locking everything behind glass may reduce sales,
dramatically impacting the revenue for businesses and tax revenues for
states. Expenditures against retail theft have become part of
construction budgets, merchandising budgets and information technology
and staffing budgets. This is an enormously important and expensive
effort for the retail industry. The continuing growth of retail crime
and the damage it causes to communities dictates something needs to be
done to control the theft and resale market for stolen goods. Further,
at the rate the Internet is growing and the constantly and rapidly
escalating scale at which any criminal is now able to operate, it is
clear that there is an immediate need to update the law to cover these
21st century criminal operations.
I wish to commend Chairman Scott and Ranking Member Gohmert for
scheduling today's hearing. The focus on this very serious issue is a
timely and appropriate response to the problem of organized retail
crime and Internet auction fraud that is victimizing practically every
segment of the retail community. Thank you for your time and attention.
Mr. Scott. And we thank all of our witnesses for your
testimony.
We will now direct questions to you under the 5-minute
rule. And I will recognize myself to begin with for 5 minutes.
Mr. DelBianco and Mr. Torpoco, we know that some of the
stuff online is stolen. What chance is there that there would
be legal sales of consumer products in the amount of $5,000 in
one sale or $12,000 over the course of a year? How often would
that be actually legal?
Mr. Torpoco. Mr. Chairman, on eBay it is quite common for a
seller to sell, for example, an automobile. And so the language
is currently drafted to define ``small seller'' as somebody,
for example, who has over $5,000 in sale, which would sweep in
a large number of individuals who are not selling very
frequently, but who are selling items that are high-ticket,
big-priced items. And that is one of the concerns that we have
with the legislation as drafted, that in reality there are
actually many, many thousands, if not tens of thousands, of
sellers on eBay who don't sell all that frequently, but sell
big-ticket items.
Mr. Scott. How often does somebody sell small-ticket items
in the $5,000 to $12,000 level that would be actually legal,
that could not immediately produce some records to show where
they got the product from?
Mr. Torpoco. I imagine, Mr. Chairman, that there are
thousands of small retailers that are using eBay that probably
exceed the $5,000 level threshold and which are selling
commonly marketed goods, such as the goods that you would find
in a brick-and-mortar retailer or a pharmacy.
What we see on eBay is that a lot of small businesses have
used eBay to sell perfectly legitimate and legal gray-market
goods that are the result of exceptions in the supply chain, as
well as out of season, oversupplied, liquidated sorts of goods
that are looking for a secondary market to be sold; and there
is nothing illegitimate with that conduct.
But unfortunately, some of the legislative proposals that
we are hearing really assume that anybody who is selling goods
at a substantial discount and in a large quantity on an online
marketplace must be a thief. And the presumption is, let's put
the blame and burden on the seller that is using the eBay
marketplace to prove that they are innocent by providing
records before there is actually any specific evidence
indicating that they have done anything wrong.
Mr. Scott. Mr. Muscato, what happens when you make a
complaint to police if you notice some suspicious activity.
Mr. Muscato. When we contact the police on these cases,
they will get the information that we need, if that is what
they are going to do. The problem is when we take cases to the
police, we need to take the case to the police, not just
suspicion. They have a thousand things to do--been there, done
that--thousand things to do, and if we go and say, ``Would you
call eBay to find out why this guy is selling these test strips
for $50 when they are $100 in the store, you just can't do it
unless there is something wrong with this,'' they are going to
say, ``Frank, put it together for me and bring it to me.'' They
are not going to just call out.
Now, I am lucky enough that I have friends that I can call
and ask to do that because I work with. But I won't do that; I
wouldn't take advantage of them like that. But that is what
makes it difficult to do that.
And to call eBay, even under PROACT, the program they had,
was too hard for us to do, because by giving them the
information and giving that, we are giving the case away. We
have no control in what they do with it. So we are not going to
reach out and give them that information without some kind of
guarantee on the side.
And when they talk about working together, gosh, there is
no two bigger competitors in the Nation than Walgreens and CVS.
Stand at almost any Walgreens in the Nation and look across the
street and you will see a CVS. But we work side by side. We
purchase radios with the same channels, so when we do
surveillance together we can talk to each other. And other
retailers are doing that.
And if eBay would come over here with us or open their
doors and let us go over there with them and work together on
these cases--I don't know, them send us stuff or we send them
stuff--work together on these cases, wow, there would be giant
steps ahead. We wouldn't need legislation.
Mr. Scott. Well, Mr. Torpoco, you have indicated that you
have been working. What have you offered to do?
Mr. Torpoco. Well, Mr. Chairman, under the PROACT program,
what eBay intended to do and what eBay has done in response to
the Committee's statements last year was to create an easy
mechanism for retail partners to send us any evidence or
intelligence they have of wrongdoing by an eBay member. And,
frankly, I am stunned by the notion that a company would not
join that program because they are concerned about losing
control. I mean, the pledge that we have made under the PROACT
program is, if you have evidence, provide it to eBay. We will
do the right thing. We want to suspend individuals who are
violating our user agreement by selling stolen goods.
And if you have trouble getting law enforcement involved on
your end, well, eBay is going to leverage its connections to
call up the detective and say, ``There is a case of somebody
who is selling goods stolen goods on eBay, and we want you to
prosecute them.'' It is absolutely in eBay's business interest
to make sure that there are not individuals on eBay who are
breaking the law and undermining the integrity of the eBay
brand.
And I am certainly surprised to hear that a retailer would
not join in eBay's efforts to prosecute an individual out of
concern about losing control. I think this issue is serious
enough that we need to put aside such irrational fears and
really work in a spirit of partnership and cooperation to make
sure that the right thing is done.
Mr. Scott. Now, what does eBay--I understand that, in Great
Britain, eBay has an agreement that puts most of the burden of
this problem on the seller so that eBay is not burdened by
cooperating; is that right?
Mr. Torpoco. That is not correct, Mr. Chairman. Under the
PROACT program, what we want to do is create an invitation for
the retailers who have well-established loss-prevention teams
to share their evidence that somebody is misbehaving or to
share their intelligence with us so that we can, in turn, look
at the data that eBay and PayPal retain and see if there is
anything there that would cause us suspicion.
And what we have pledged to do is, once we marry that sort
of intelligence both in the retail end and within eBay, and if
we find something wrong, we have absolutely no hesitancy about
taking action against a member's account and, if necessary, if
there is evidence of criminality, referring that case out to
law enforcement.
So the intent behind the PROACT program is not to put a
burden on any retailer to actually invest in the area. What we
want to do is create an invitation for partnership. And of
course that is going to require some investment on the retail
end, not just eBay's end, to make sure that the right thing is
done to further an investigation.
Mr. Scott. Now, how is what you do in retail theft
different from what you do in trademark and copyright
suspicious cases?
Mr. Torpoco. Mr. Chairman, the liability regimes are vastly
different. And what we need to do in the copyright and
counterfeiting context is we rely on the expertise that brand
owners and right owners have about whether or not a product is
genuine and invite them to submit sworn affidavits to us
letting us know that something that they see, for example on
the eBay marketplace, is not a genuine product. And that sort
of regime certainly makes sense when you are talking about the
authenticity of goods.
But our concern in this particular context is we are not
talking about whether or not an item is authentic on eBay. The
issue that is presented to us in any reporting regime where a
retailer could submit a report to eBay and demand that it be
taken down is a question of where that item came from, I mean,
what was the ownership history. And whereas in the motor
vehicle context we have a very well-developed program under the
VIN number system to be able to track the ownership of an item
through its life, in the retail context we don't have that for
things like razor blades or baby formula or Crest White Strips.
The reality is there is no adequate inventory tracking of
those sorts of items that would enable a police officer, for
example, who finds a suspicious amount of quantity of these
goods in the back of a van to look at item by looking at the
box or the code on it or the SKU number and say, ``Aha, that is
an item that came from Target and was stolen.'' That sort of
tracking does not exist in the retail system for commonly
shoplifted goods.
The only effective tracking system that exists for goods is
really in the motor vehicle context. And that is why, in the
motor vehicle context, we require of all eBay members who are
listing an item for sale, an automobile, to list the VIN number
on the listing. If we had any such sort of airtight tracking
system for commonly shoplifted goods, such a regime might make
sense. But that sort of regime has not been developed by the
retail industry. It certainly does not exist to the extent that
having that sort of information would enable us to know the
history of the item, where it was purchased, was it given as a
gift, was there a receipt for it. I mean, that sort of tracking
just does not exist.
Mr. Scott. My time has expired.
Mr. DelBianco, did you want to comment?
Mr. DelBianco. Thank you, Mr. Chairman.
In response to your question, Mr. Muscato said that there
are times it is difficult to get law enforcement to pay enough
attention to the cases. And I would point out that two of the
three bills here actually dramatically increase the penalties
and minimum sentencing guidelines that explicitly spell out
what is the ORC crime. And the hope of all of us would be that
that will increase the attention that law enforcement will pay
to an interstate crime.
But at the same time we have this notion of a PROACT
program, it is a voluntary program of cooperation between the
parties along here. And retailers would understandably say, we
are not ready to sign up for a voluntary program if someone is
dangling in front of us legislation that creates a club, a club
they can use against their competing retailers and online
marketplaces. And that club comes in the form of being able to
demand the interrogation of customers without any law
enforcement being involved.
Mr. Scott. Thank you.
Mr. Gohmert?
Mr. Gohmert. Thank you, Mr. Chairman.
And I do appreciate all of your testimony.
Mr. Scott. I recognize, in fact, the gentleman from
California, Mr. Lungren, has joined us. Thank you.
Mr. Gohmert?
Mr. Gohmert. Okay, thank you.
First of all, Mr. Muscato, I see you have some Rogaine. Why
would anybody ever want Rogaine? [Laughter.]
But there are a number of problems, and you all do a good
job of pointing out the various difficulties here.
But, Mr. DelBianco, you mentioned the backseat of the car.
I actually heard a similar reference from a pawn shop owner
about, ``Hey, why should we be responsible for theft of things?
We are just a legitimate business.'' So it does go deeper than
that.
And, again, as I mentioned previously, there are some
parallels. There are pawn shop owners that are completely--I
think the vast majority are legitimate businesses, and it is a
great source for people to come in, get money, get rid of
things they don't need and get some cash back from it. But it
does facilitate some theft. So the issue is, how do we go about
merging these different interests?
Mr. LaRocca, you mentioned that putting products under lock
and key comes at great inconvenience to customers. You are
talking to Congress. As I have seen in my 3\1/2\ years here,
not a lot of people care about great inconvenience. While we
were in the majority, my friends passed a bill that makes it
extremely difficult for me to just go get Sudafed. It is the
only thing that clears up my head. So I couldn't convince my
friends not to make my life more difficult and at great
inconvenience to me. So sometimes those things are going to
happen if it is for the greater good.
But, Sheriff Judd, you know, Mr. DelBianco, Mr. Torpoco--is
that how you pronounce it?
Mr. Torpoco. That is right.
Mr. Gohmert. Okay. They bring up a point, you know, whether
it is blades or some of those things, how do you identify if
those items are stolen? If you went in a pawn shop and saw a
bunch of new things like this, is there any way you can
identify if they are stolen?
Sheriff Judd. He brings up a good point. It is a challenge.
In fact, we have gone to the industry and suggested to them
that there needs to be a way to identify those, because once it
comes out of whatever industry--it may go to South Florida, and
then that lot number is divided up from there.
But in addition to that, which would be a wonderful help
for us, we need to understand that the criminal justice system
was not created and currently doesn't have the infrastructure
to deal with the speed and the quantity of people we are having
to deal with that are into crime on the Internet. We are back
riding horses, and the Internet is jet planes. And that is the
problem.
So we all need to work together for this to be proactive
systems and a proactive approach, so that we can let our
colleagues that are doing organized retail theft investigations
for eBay, for big industry, to come together and do some of
this work for us. And if they will be proactive with that
approach, then they can certainly make this a manageable
problem.
As I testified to a minute ago, the problem is this is
extremely low-risk and extremely high-profit, and the system we
have in place today doesn't allow us to change that.
Mr. Gohmert. Yeah, that is what we are trying to figure
out. And my friends in law enforcement that I came to know so
well as a judge, they told me that they also started having
lots and lots of juveniles that are actually hired to go in and
do the theft, because they know, if they are caught, they are
probably going to go to a juvenile procedure and it is going to
be very easy and they are going to get a wrist slap. So these
are very sophisticated people, and they are finding ways to
beat the system all the time.
One of them I was wondering about, Mr. Torpoco, is the
value of $12,000. How difficult would it be for people to
change their e-mail address or change the address and just keep
skirting under the $12,000 limit?
Mr. Torpoco. Sir, on eBay we actually retain detailed
records of membership information. So when somebody registers
on eBay or changes their e-mail address or changes their
physical address----
Mr. Gohmert. No, but I mean would register with a different
e-mail address, the same person. I mean, are you able to track
to the same computer or laptop and say, uh oh, this is the same
guy that used these four other e-mail addresses?
Mr. Torpoco. Yes, we are, absolutely. And we have a
powerful incentive to do so, because we want to make sure that
individuals who are selling on the eBay marketplace are not bad
actors. And if we suspend them, we want to make sure that they
don't come back to eBay.
So, in addition to tracking the sort of information that
you noted, we actually have internal risk models that predict
or note when an individual is trying to change their
registration information or other individual account
information in a way that would cause us suspicion. That would
include, for example, having their account suspended and coming
back trying to register with a different telephone number or
with maybe the same IP address, which is a good telltale sign
that the individual we kicked off previously is trying to come
back.
So those sorts of internal safeguards to make sure that bad
actors are not trying to game the system by changing their
contact information is something we have invested heavily in as
a company, because we want to make sure that we know the----
Mr. Gohmert. When you see those indicators, who do you
tell?
Mr. Torpoco. In addition to taking action on those
accounts, for example, if somebody tries----
Mr. Gohmert. I understand you would take action, but do you
know anyone else that----
Mr. Torpoco. Certainly. If it is a criminal actor, we would
notify law enforcement. But obviously----
Mr. Gohmert. And who with the law enforcement would you
notify, local or fed or who?
Mr. Torpoco. All of them. As a company, we like to say we
have a Rolodex full of tens of thousands of law enforcement
officials that not only have we trained across the country in
how to do eBay investigations but with whom we have worked
actual cases.
So I oftentimes hear from the retail industry that they, in
an individual case, might have a hard time getting law
enforcement interested to take the case. We, as a company, have
a really good track record of picking up the phone and calling
the detective or somebody with the FBI with whom we have worked
a prior case and saying, ``Hey, we have a good case for you.''
And, by and large, if it is a sizable case, law enforcement has
been really receptive to our call.
Mr. Gohmert. So you don't notify them unless you have a
good case?
Mr. Torpoco. As a former prosecutor, I recognize that there
are certain thresholds that have to be met before, for example,
a Federal agency is going to institute criminal proceedings
against somebody.
So what we try to do is try to tailor the loss or the fraud
in a particular case to the appropriate jurisdiction. If it is
a small petty loss, we might refer it to a local DA's office or
a local police department. If it is a massive fraud that we are
investigating, we would probably go with a Federal agency. But
what we want to do is thoroughly investigate the case and then
decide how big is it and who is the appropriate law enforcement
agency to refer it to.
And we have a great track within the Internet industry of
being one of the most proactive companies in actually making
those sorts of referrals to law enforcement. Because we, as a
company, decided early on that if the eBay marketplace is going
to be a safe place for consumers to shop with confidence, we
need to make law enforcement our allies in going after the
criminals.
And that is why, I think, when you compare us with the
other companies that have invested in this area, you will see
that eBay really has an unmatched track record in working in a
spirit of cooperation and partnership with law enforcement.
Which is why it is so surprising to us that the regulation that
has been proposed targets the player in the industry that is
actually doing the most to work with law enforcement in a
proactive and cooperative posture.
Mr. Gohmert. Well, I guess that was my point. Sometimes it
helps to get outside looks. You are talking about basically
getting a case put together yourselves, and sometimes maybe you
miss an indicator. I mean, as a judge, I have had psychiatrists
say, if you hear somebody say the words, as you did earlier,
``to be honest,'' then it may mean that you were not honest up
to that point, and so you need to watch that witness. And I am
sure that is not the case in your situation.
Mr. Torpoco. Maybe I should have said ``to be direct.''
Mr. Gohmert. All right. Anyway, well, thank you for your
testimony.
Mr. Torpoco. Thank you.
Mr. Scott. The gentleman from California?
Mr. Lungren. We have to watch our language around Judge
Gohmert here.
This is one of those interesting things where we all know
there is a problem; the question is, how do you solve it?
I remember when I was Attorney General of California, even
though eBay existed, we didn't have this as the means by which
these goods would be fenced. We had problems basically with
swap meets, which we still have. And we used to have task
forces that worked with local law enforcement to attempt to try
and identify counterfeit and stolen property. But it was very
difficult and very time-consuming, and it was really sort of a
rifle-shot approach. You would try and have enough presence
there that you would have the bad guys worried about what you
were doing, but you knew you really couldn't cover the
waterfront here.
Mr. Torpoco--Torpoco?
Mr. Torpoco. That is close enough.
Mr. Lungren. What is it?
Mr. Torpoco. ``Torpoco.''
Mr. LaRocca. To be honest.
Mr. Lungren. Honestly speaking.
Mr. Torpoco, you have talked about everything that eBay
does, and it is very impressive. Can you tell me how many cases
you have referred to law enforcement for prosecution over the
last year or so?
Mr. Torpoco. By my understanding, in 2007, for example, we
assisted law enforcement in roughly 7,800 cases, criminal
cases. And I don't know----
Mr. Lungren. In the United States?
Mr. Torpoco. That is in North America, so that would
include the United States and Canada.
Now, I don't know the specific breakdown of how many cases
involved reactive responses to requests for information versus
proactive responses. But I do know that we have assisted in
approximately 7,800 stolen property cases specifically.
And we believe that that sort of figure demonstrates the
extent of not only the transparency on eBay, which enables
these individuals who misbehave on the eBay Web site to get
caught and prosecuted, but the level of our commitment to make
sure that individuals who abuse our marketplace are prosecuted
to the fullest extent of the law.
Mr. Lungren. Mr. LaRocca, that sounds like a pretty
impressive record from eBay. Why is that insufficient?
Mr. LaRocca. Well, Mr. Lungren, as a resident of
California, thank you for representing our great State.
And let me say that we are not impressed by that number.
Retailers have consistently tried to work with the online
marketplaces like eBay on theft cases taking place across the
country and in the State of California. And, unfortunately,
these terms, PROACT and proactive, when you really cut through
all of the fluff, what we are looking at are programs that, if
the retailer conducts the investigation and if the retailer
contacts eBay and if eBay in their opinion believes that a
theft or a crime has taken place, they will contact law
enforcement on your behalf.
Retailers, if they can go that far in the investigative
process, are perfectly capable of making that call directly.
And that is why a majority of retailers have said PROACT for
eBay is a good first step, but it doesn't go nearly far enough
to prevent or put an affirmative responsibility on eBay to do
the work.
And in listening to Mr. Torpoco's answer, he said that they
have assisted law enforcement in 7,800 cases. Well, ``assisted
law enforcement'' doesn't recognize the work that went into the
sting operations, the surveillance by detectives, and all of
the calls that were originated by retailers and law enforcement
to eBay for the purpose of assisting in those investigations.
So the number really does need to be parsed out in what is
truly assisting versus eBay, with all of these tools that they
have available in tracking identification and tracing e-mail
addresses and monitoring sellers through eBay and PayPal,
taking that information and then using that information to
conduct the investigation and coming back to retailers with a
notification that a crime has been committed, to file a police
report, et cetera.
Mr. Lungren. Well, let me ask it this way then: We have
noted in this Subcommittee and full Committee that the Federal
Justice Department has a lot on its plate. After 9/11, we saw
the FBI turning to counterterrorism as its major objective. And
there are a number of other things that have been within their
bailiwick that they are still responsible for, but, admittedly,
they don't have as much time and attention there. The same
thing with U.S. attorneys and so forth.
So we can pass Federal legislation which would make the
assumption that the obligations we place on eBay and the
Federal penalties and the Federal laws would be enhanced over
what the situation is today, but I am not certain that, in
fact, you would have the attention of the Justice Department in
many of these matters of U.S. attorneys. So I am trying to
figure out how to get better cooperation among all of you here.
So here is my question. You say eBay should be doing more.
And eBay turns around and says, look, the retailers don't have
a tracking system for some of the goods that they are
complaining that you can find available on eBay. So it is
almost as if I am hearing both sides. And you are all trying to
make jobs for people and make some money and enhance commerce
in the United States, and you are the victims of the bad guys
here.
So the question is, how do you say that eBay ought to do
more when eBay turns around and says you guys ought to do more?
And I assume your answer to me would be, well, it costs too
much for us to have a tracking system for all of our blades and
baby formula and other things. And eBay says, well, wait a
second, it costs us too much to do these additional things you
are asking for, which suggests to me that what I am hearing is
it is an acceptable level of loss that we take because it would
be too expensive for us to go further.
And if that is the case, we are not going to have
additional information, additional evidence being brought
forward to law enforcement to prosecute the cases that would be
allowed under the laws you wish us to pass.
So I wish both of the two of you at the end would comment
on the fact that you both seem to be saying, ``Yes, we are
doing something, but for us to do more would be too costly for
our enterprise.'' And I am hearing it from both sides. How do
you respond to that?
Mr. Torpoco. If I may, Mr. Chairman, eBay absolutely agrees
that that one prong to the solution in this situation has to be
to get law enforcement involved, to get them adequate funding,
to get them enhanced prosecutorial powers, to elevate the
priority of these prosecutions, and, frankly, to increase the
cost for the criminal, from a deterrent perspective, by raising
the sentencing exposure that these criminals face for abusing
online marketplaces and selling stolen goods.
But that is not enough. And that is why eBay, in response
to this Committee's hearing back in October of 2007, stepped up
and created a specific program specifically designed to get
retailers involved in sharing evidence of theft with eBay's
investigators on a team-level basis, so that not only could we
refer cases to law enforcement, so that as an internal matter
eBay could shut off accounts when there was evidence of their
misbehavior, irrespective of whatever happens in terms of
referrals to law enforcement.
And on that point, I have to correct the record on one
important point, and that is something that Mr. LaRocca has
represented to the Committee in his written activity and
verbally before you today. And he has suggested that the
overwhelming majority of retailers that we have approached to
join in this PROACT program have rejected eBay's invitation,
and that is flatly false--flatly false. I know that it is
false, because I am the individual within eBay who has, kind
of, overseen our enrollment efforts, trying to reach out to
retailers to work with us in a cooperative spirit.
And we have approached roughly, I would say, 30 retailers
in the pilot phase of this program to enlist with us in a
cooperative basis. And of those 30, roughly six retailers have
rejected that invitation, choosing to pursue politics or
whatever else rather than work with us on a case-by-case basis.
To this day----
Mr. Lungren. Does that mean 24 cooperated, or you just
haven't heard from the rest of them?
Mr. Torpoco. No. As a matter of fact, our goal was to
enroll during the pilot phase of this program only six to 12
retailers until we could assess the cost and effectiveness of
the program. But to date, we have roughly 21 or 22 retailers
that have said yes to us, that they want to work cases with us.
And, unfortunately, what we have seen in this debate is
that, say, the six hardest critics have hijacked the debate and
accused eBay of being unwilling to work with the retail
community, when the reality is that most retailers recognize
that it is an insufficient approach to combating organized
retail theft to just scapegoat the marketplace and refuse to
work us with on a cooperative basis.
So, actually, I want to make clear to this Committee that
many retailers, in fact, have been willing to put aside
politics and work with us since this Committee last heard
testimony on this subject back in 2007.
Mr. Lungren. Mr. Chairman, with your indulgence, could I
hear from Mr. LaRocca?
Mr. LaRocca. Thank you for the question, Mr. Lungren.
To answer your question, about Federal legislation
wholistically, the first goal, obviously, for us, is to prevent
these losses from occurring in the first place. Retailers spent
$11 billion last year in loss prevention. So, ideally, we would
like to prevent these losses from occurring. And if we send a
strong message to criminals and tell them this is a Federal
offense, there are stiffer penalties, we believe that will
happen.
The second part is that, by defining organized retail crime
specifically, we believe that we can get Federal investigators
and assistant U.S. Attorneys more interested in this topic. It
is not just a property crime, but it is a serious Federal
offense called out to them to investigate.
And you made a point about terrorism and linking that in,
and let me just say that in several of the very large cases
around the country now there have been illegal immigrants
involved in those cases. In one case several years ago, there
were funds that were shipped overseas to groups like Hamas and
involved some very bad people that put out hits on Federal
agents involved in that investigation. So this is absolutely,
in some ways, linked to terrorism. And a very big concern for
retailers, but we should be concerned as U.S. citizens.
And let me just--I just should ask this question, because I
did make the comment about PROACT. With the retailers that have
responded, what have the results been? Because we--and we have
asked this question of our coalition members--have heard
nothing about the results of PROACT, and it has been in
operation now for several months.
Thank you.
Mr. Scott. Let me ask one additional question to Mr.
Torpoco.
One of the things that the retailers are looking for is
information on the seller. Does the seller on eBay have an
expectation of privacy for their name and address?
Mr. Torpoco. Yes, absolutely. Most Americans are perfectly
law-abiding. We have millions that are using eBay, and most of
them absolutely have a privacy interest in making sure that
their personal member data that they provided to eBay isn't
provided to our competitors, the retailers.
We obviously don't have any problem disclosing information
to law enforcement, to the government, in connection with a
criminal investigation, which is why eBay took, really, the
unique step of creating a privacy policy that is posted on the
eBay Web site which says that eBay will provide certain member
data to law enforcement and government entities in connection
with a criminal investigation, not with the need for a
subpoena, not with the need for a court order, but based on a
simple letterhead request stating that the agency is
investigating criminal conduct.
Very few companies can say that, but we took that
extraordinary step because our members expect the eBay
marketplace to be a safe place, and they understand that we
need to do something like that to make sure that we are not
standing in the way of law enforcement investing a case but we
are actually viewing them as an ally.
But that is a very different situation than creating a
regime where a competitor, like another retailer, can submit
some sort of report to eBay and all of a sudden demand, under
the threat of liability, that eBay hand over that member data
to the competitor.
And I think most Americans when confronted with that
situation would say, hold on, we are not talking about giving
my personal data, on the basis of this suspicion, to the
government in connection with a criminal case; you are talking
about handing over my personal member information to a
competitor that could potentially use that information to
harass and try to curtail the business of a small retailer that
is using the eBay marketplace to compete with the big-time
retailers.
Mr. Scott. You don't make that information available in the
United Kingdom?
Mr. Torpoco. I don't counsel the United Kingdom, so I don't
know their specific policies.
But one thing I would also note is that any party on eBay,
using the contact eBay member functionality, anybody who is a
party to a transaction on eBay like somebody who is a bidder or
who has bought an item--and that would include a retailer who
creates an undercover account--can actually swap member contact
information using the eBay service. It is an automatic swap if
you are a party to a transaction.
So oftentimes, you know, eBay is asked to go talk to retail
loss-prevention teams or criminal investigators in law
enforcement about using the eBay tools that exist on the eBay
Web site to facilitate a criminal investigation. And we talk
about this functionality that exists that is available to
anybody----
Mr. Scott. Are you saying that if Walgreens wanted the
information, all they would have to do would be to buy one of
those razer blades----
Mr. Torpoco. To do a controlled purchase, for example, or--
--
Mr. Scott.--and they could get that information?
Mr. Torpoco. Yes, they could use that functionality. If
they created an undercover account and they bid on an item or
purchased an item, using that functionality they could swap
member information with that other member. And it is an
automatic swap.
Mr. Scott. Thank you.
Mr. LaRocca, do you have a final comment?
Mr. LaRocca. Thank you, Mr. Chairman. Two very quick
comments.
One, eBay does currently release that information to the
private sector upon request under a program for intellectual
property rights violation called VeRO, the Verified Rights
Owner program. So there is also a precedent established by
their organization to do exactly what we are asking for. Today
it just applies to the intellectual-property-rights side versus
stolen or fraudulently obtained merchandise.
And one other quick comment. You asked about the United
Kingdom, posting the seller information when a company lists
themselves as a business, and this information is required if
they are a business seller and it is posted up on their site
for consumers to authenticate or to verify who they are and
conduct business with them.
Thank you.
Mr. Scott. Thank you.
My time has expired. There are a couple who want to make
their final comments, but I will recognize the gentleman from
Texas.
Mr. Gohmert. Just a follow-up. In response to Mr. LaRocca's
question, do we have results on PROACT?
Mr. Torpoco. We don't have any systematic results that I
could report to the Committee.
Mr. Gohmert. How about any nonsystematic results?
Mr. Torpoco. Honestly, the program was launched in April,
and I would say that it has been within the past 8 weeks or so
that we have actually reached a critical mass of participation
to actually make the tracking of reports possible.
What our intent has been all along, after the 6-month trial
period, which would be roughly in October, to actually look
back at the program, see where it is working, where it is not
working, what kind of reports we are getting, how many accounts
we suspended, how many referrals we made to law enforcement.
But that sort of examination hasn't taken place because----
Mr. Gohmert. Could you provide those results to our
Committee when you get them?
Mr. Torpoco. Yes.
Mr. Gohmert. Thank you.
Mr. Scott. Mr. Muscato?
Mr. Muscato. Thank you, Mr. Chairman. I just wanted to make
a comment. And I have heard Mr. Torpoco say this several times,
about the competition, that we think they are competing with
us. We are a neighborhood drug store. We don't compete with
eBay. If someone has eaten a big ol' bowl of chili, they are
not going to get on eBay to order some Pepcid AC. They are
going to go to our store and get it. We don't compete with
them.
The only thing we are trying to do is to keep our property
from leaving our stores illegally and being sold on those e-
commerce. That is all we are trying to do. That is why we want
to work as partners with them, but not by sending them
information to see what they do with it. Let's work together.
Mr. Torpoco. Mr. Chairman, may I comment on that?
Mr. Scott. Wait a minute.
Mr. DelBianco?
Mr. DelBianco. Thank you, Mr. Chairman.
I just wanted to mention that, in your opening statement,
you talked about the anonymity issue, and then Ranking Member
Gohmert talked about the comparison with pawn shops. And I
think it is relevant to, sort of, bridge that right now.
And one has to remember that Amazon, eBay, Overstock, they
all know exactly who the sellers are behind those user names
that show up on the Internet. It is only anonymous to the folks
who might want to invade the privacy of that seller.
However, the men at law enforcement, so much as phone call,
fax, or e-mail, asks them eBay, Amazon, Overstock always reveal
that information to law enforcement. They have all that
information in there.
And I would contrast that with a pawn shop, where somebody
walks in the door and walks out with a fist full of cash. Their
identity then has to be captured, whether it is a fingerprint
or a photocopy of a license. It is a fundamentally different
transaction than the marketplaces which actually know the
identity and the location of the individuals that list long
after the sale was closed.
And on the table in front of you, drawing a parallel to
pawn shops, none of these items that you see on this table are
going to wind up in a pawn shop. Pawn shops are used items that
are hocked or sold. These are new items, and they are precisely
the kind of new items that legitimate small businesses can get
hold of at discount prices through freight liquidators, through
businesses that are going out of business, through overstock,
hence the name Overstock.com. These are legitimate owners who
seek to sell it at big discounts.
And I know, as Mr. Muscato says, that when I have an
emergency, I am unlikely to buy it. But if I have to take this
stuff every day for the rest of my life, you bet I will go
online to try to buy these items at the lowest price I can get
from a legitimate source.
Thank you.
Mr. Scott. Thank you.
And final comment, Mr. Torpoco?
Mr. Torpoco. Yes, Mr. Chairman. I have to reiterate what
Mr. DelBianco said. I mean, eBay as a marketplace is just so
vast that we have moved on from the days of being the site
where people could find and collect Beanie Babies, for example,
to a site where you can find just about anything. And our
policies allow just about anything to be sold, provided that it
is legal.
So I would hazard a guess to say that, of the sorts of
items that you see displayed on this table, you could probably
find all or most of them on this site, provided it is not,
like, a prescription item that we don't allow.
So it is not the case to say that a company like Walgreens
doesn't compete with the small retailers that are on eBay. You
bet Walgreens does compete with them, because those small
retailers, as Mr. DelBianco indicated, have obtained a lot of
this perfectly legitimate product and are selling it at deeply
discounted prices.
The other thing I would just briefly note is, since we do
have a sheriff here who did a massive takedown of a big case,
is to kind of put some perspective on what we are talking about
when we talk about organized retail theft and the significant--
or the share of the loss that is actually attributable to eBay,
for example, as a fencing site as opposed to other channels.
Now, one thing that I did prior to coming to this Committee
hearing was actually having one of our senior fraud
investigators pull up the account record of the account that
was used in that big Florida case to actually fence stolen
goods. And I wasn't surprised to see that, of the one account
that was used in that case, it had approximately $100,000 in
sales, $180,000. And we are talking about a takedown that
involved, according to the press that I have seen in the case,
between $60 million and $100 million of losses to the retail
industry.
So it is simply not fair to somehow equate eBay with the
Internet and suggest that somehow taking punitive or regulatory
actions against eBay is really going to get at the meat of
curtailing the problem of organized retail theft, when, in this
particular case, for example, the eBay account at issue
constituted maybe one-third of 1 percent of the goods that were
actually fenced in that case.
So we obviously want to see comprehensive approaches to
this problem, not approaches that just scapegoat online
marketplaces.
Mr. Scott. Well, we are going to try to get something done,
because obviously, with the amounts of money that are being
stolen, something has to be done.
But I would like to thank our witnesses for being with us
today. I would like to thank Mr. Putnam and Mr. Ellsworth for
their participation.
Members may have additional written questions for our
witnesses that we will forward to you and ask you to respond as
quickly as you can so it can be made part of the record.
Without objection, the statement from the senior Senator
from Illinois, Senator Durbin, will be made part of the record.
And, without objection, the hearing record will remain open
for 1 week for the submission of additional materials.
And, without objection, the Subcommittee stands adjourned.
[Whereupon, at 5:40 p.m., the Subcommittee was adjourned.]
A P P E N D I X
----------
Material Submitted for the Hearing Record
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, and Chairman, Committee on the
Judiciary
We all agree that our Nation's economy thrives on strong markets
that in a perfect world would operate with no need for oversight and
regulation. But, as was made painfully obvious to all of us over the
past week through our continuing financial crisis, our economy does not
operate in a perfect world and in the absence of appropriate oversight,
greed leads to dishonesty and even further to criminal activity.
Unregulated financial industries have brought us to the brink of
disaster and like banking and the financial markets, retailers whether
they be traditional brick and mortar stores or operating online must
have appropriate regulation.
The goal of the legislation before the subcommittee today, namely
to curb organized retail theft, is very important for three overall
reasons. First, organized retail theft costs retailers over $30 billion
dollars each year according to the FBI and this financial pinch is not
simply shouldered by the retailer. The costs to the retailer are
sometimes passed along to the honest consumer in higher prices that the
retailer must set to cover losses due to theft and in some instances
the retailer must lay off employees to cover costs.
Second, the $30 billion in losses each year translate in to $1.6
billion in lost tax revenue to state and local governments making it
increasingly difficult to provide necessary services. Salaries for
police officers, firefighters, teachers, sanitation workers, and many
others become stagnant as governments cannot raise their salaries even
to meet inflation. These workers are already underpaid and overworked
and their departments' budgets are stretched beyond their limits
hindering their ability to protect us, teach our children and to
provide basic quality of life services.
Third, consumer safety is compromised when thieves steal and to not
properly store products that are date sensitive or sensitive to
elements such as temperature and light and then sell those items to
unsuspecting consumers. Over the counter drugs are a favorite target of
organized retail thieves because they are easy to steal and easy to
sell. We have reports of thieves changing expiration dates on these
products and storing them in facilities that are not temperature
controlled. They sell these dangerous products with no notice to the
consumer and for over the counter medications, this is dangerous enough
but we even have evidence of thieves stealing baby formula and selling
it beyond its expiration date and not storing it appropriately. This is
particularly unconscionable.
Underlying all of these problems is that the poor and minorities
are most affected by the higher prices and lay offs more than any other
segment of society. Most of the retail stores that thieves target are
in less economically developed areas. Consequently, the higher prices
that the retailer must charge are passed on directly to that community
and any layoffs fuel the chronic unemployment in these areas. And the
reduced city services from the reduced revenue of course also hit the
poor areas the hardest. Moreover, the organized retail thief's target
market is the consumer having difficulty meeting retail prices making
the likely purchaser of the outdated medicine or tainted baby formula
someone who is poor, trying to find a way to make ends meet and is
trying thinks that he or she has simply found a bargain. How tragic
would it be for that purchase to be poisonous?
Whether we adopt one or a hybrid of all of these proposals, we must
fully address and do our best to curb organized retail theft. Our
economy depends on it, our well-functioning governments depend on it,
and the safety of our citizens depend on it. I thank the Chairman and I
yield back
Prepared Statement of the Honorable Louie Gohmert, a Representative in
Congress from the State of Texas, and Ranking Member, Subcommittee on
Crime, Terrorism, and Homeland Security
Thank you, Mr. Chairman.
I would like to thank you for holding this hearing on the very
important issue of organized retail theft. As you know, this is the
second hearing the Crime Subcommittee has had on this topic during this
Congress.
The problem of organized retail theft is growing and involves the
theft of large quantities of retail merchandise. 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 criminals 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 websites.
According to the FBI, organized retail theft accounts for between
$30 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 in 2006. This
national database allows retailers to share information about suspected
theft with each other and law enforcement officials.
In addition, the FBI has created Major Theft Task Forces to
identify and target multi-jurisdictional organized retail theft rings.
There are currently 9 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.
Although federal agencies work to investigate the criminals that
engage in this conduct, retail organizations argue that there is too
little prosecution of this crime. They argue that state felony
thresholds--that stolen goods must amount to $500, or in some states
$1000 for the offense to be a felony--are too high to provide for
prosecution of organized retail theft. The federal threshold for
prosecution for the crime of transportation of stolen goods in
interstate commerce is also high as the amount of stolen goods must be
in excess of $5000 to trigger federal criminal liability.
Several bills have been introduced this Congress to prohibit
organized retail theft and, in particular, ``e-fencing''--the sale of
stolen goods on online auction sites. Auction sites such as eBay and
other online marketplaces such as Amazon.com have expressed concerns
about these bills.
I've met with representatives from both industries and I would hope
that these groups could come together to find a solution without
Congressional action.
Several merchants have used the comparison of pawnshops when
discussing ``e-fencing'' with me. Pawnshops generally are required to
keep records of the merchandise available for sale. It seems reasonable
to ask online marketplaces to do the same. However, pawnshop records
are kept for law enforcement officials, not private third parties. With
that in mind, I would like to hear from our witnesses their thoughts on
imposing a limited duty to maintain records of merchandise on the
websites.
Further, one bill before this subcommittee would create a new
federal crime of facilitation of organized retail theft. This provision
exposes online marketplaces to incarceration based on a lower mental
state than is traditionally required for criminal penalties. Although I
appreciate a desire to craft legislation that addresses innovative
criminal conduct, I am wary of any legislation that deviates from using
the ``knowing'' or ``intentional'' mental states that are commonly used
in criminal offenses. That is important because criminal offenses are
intended to impose penalties against those who consciously act to
commit a crime or consciously act in furtherance of a crime.
I look forward to hearing the testimony of our witnesses on the
legislation before the subcommittee. I yield back the balance of my
time.
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
Thank you, Mr. Chairman, for convening today's very important
hearing addressing organized retail crime. Organized Retail Crime (ORC)
has gown in dimension and scope in recent years. It is contended that
the amount of ORC exceeds $38 billion per year. At today's hearing, we
will explore the problem and consider three bills that present markedly
different legislative approaches aimed at addressing the problem. I
look forward to hearing from and questioning Representative Brad
Ellsworth, the sponsor of HR 6491; Mr. Frank Muscato, an investigator
at Walgreens; Sheriff Judd; Mr. Steve DelBianco, Executive Director,
Net Choice; Mr. Edward Torpoco, Senior Regulatory Counsel of eBay; and
Mr. Joseph LaRocca, Vice President, Loss Prevention of the National
Retail Federation. I welcome these distinguished witnesses.
Organized retail crime is not new. Stolen goods have been sold at
swap meets, flea markets, pawn shops, and a myriad of other venues for
many years. Recently, organized retail crime has found a home on the
internet, and on-line marketplaces have provided a haven for
individuals to trade and sell in stolen goods. This practicing of
selling and trading in stolen goods is known as ``E-fencing.'' By some
estimates, the loses suffered by these retail industries and
governments is in the billions of dollars. The products stolen and sold
on the internet range from items stolen from stores and includes such
products as sensitive U.S. military items, baby-formula, and over-the-
counter medicines, etc.
The problem of stolen goods has historically been addressed at both
the State and Federal level. Existing Federal laws that criminalize the
transportation, sale and receipt of stolen goods transported in
interstate or foreign commerce have been used to convict organized
retail criminals, including those that have turned to the internet.
Because of increasing demands on the existing limited resources, very
few organized retail crime cases have been brought by the FBI, DOJ,
etc.
eBay contends that the laws that we are discussing today will
disproportionately affect it and its business. eBay claims that it
already has internal controls and regulations that address this issue.
We will explore these issues further in this hearing and consider three
bills aimed at addressing this practice: HR 6713, the ``E-fencing
Enforcement Act of 2008'', HR 6491, the ``Organized Retail Crime Act of
2008'', and S. 3434, the ``Combating Organized Retail Crime Act of
2008''. Each is discussed briefly below.
a. h.r. 6713, the ``e-fencing enforcement act of 2008''
H.R. 6713 recognizes that knowing participation in passing stolen
property by online marketplace providers is already a crime under 18
U.S.C. ? 2314. H.R. 6713, however, imposes new duties on online
marketplace providers with respect to high volume sellers, defined as
those who sell or offer goods or items of a value of $5,000 or more in
a single offering, or a value of $12,000 or more in one or more
offerings in the last year. Those duties include a duty to retain
contact information about high volume sellers and to disclose that
information to certain persons with standing when a report has been
made by or to law enforcement regarding theft by that seller. It also
imposes a duty to initiate an internal investigation, based on
available or easily obtained information, and to take-down a site when
there is good reason to believe the goods or items offered for sale
were unlawfully acquired. The Department of Justice should normally
consider compliance with these duties as a negation of culpability
under section 2314. The bill also creates a civil cause of action for
persons aggrieved by a provider's failure to comply with these duties.
b. h.r. 6491, the ``organized retail crime act of 2008''
H.R. 6491 amends existing federal code by expressly including
organized retail crime and the facilitation of organized retail crime
in existing criminal felony statutes. H.R. 6491 also makes it unlawful
for online marketplace operators to facilitate organized retail crime
by failing to conduct internal investigations and ``take-down''
suspected sites; by failing to maintain certain records; by failing to
require high volume sellers to publicly disclose certain identifying
information on the Internet; and by failing to provide certain contact
information to businesses who have a reasonable suspicion that online
products offered for sale were obtained by ORC.
The bill provides for civil forfeiture of property used or intended
to be used to commit or facilitate ORC or constituting proceeds of ORC.
It also provides a civil cause of action for injunctive relief or
damages against online marketplace operators. Finally, H.R. 5391
directs the United States Sentencing Commission to review and, if
appropriate, amend the sentencing
c. s. 3434, the ``combating organized retail crime act of 2008''
S. 3434 expands the reach of existing Federal crimes on stolen
goods by decreasing the value of goods that would trigger federal
jurisdiction from $5,000 to an aggregate value of $5,000 within any 12
month period. It directs the United States Sentencing Commission to
review and, if appropriate, amend the Federal sentencing guidelines as
they apply to ORC. It defines ``high volume seller'' as any user of an
online retail marketplace who, in any continuous 12-month period during
the previous 24 months, has entered into multiple discrete sales with
an aggregate total of $20,000 or more in gross revenues, or 200
discrete sales resulting in an aggregate total of $10,000 or more in
gross revenues.
S. 3434 imposes duties on both online retail marketplace operators
and operators of physical marketplaces. Upon presentation of
documentary evidence that a transient vendor at a physical marketplace
or a user on an online marketplace has used the marketplace to sell
stolen items, the operators must file a suspicious activity report to
the Attorney General. Upon clear and convincing evidence that a vendor
or user has used or is using the marketplace to sell stolen goods, the
operator must terminate the vendor or user's sales activities. In the
alternative, the operator may ask the vendor or user for evidence
showing that it is not engaging in illegal activity. Upon a clear and
convincing showing that the vendor or user is not engaging in illegal
conduct, the operator need not shut down the vendor or user. The
operator shall notify the Attorney General of its decision to shut-down
or allow the vendor or user to continue to sell.
Online marketplace operators must maintain, for three years,
contact information for all high volume sellers. They must require such
seller to display its contact information along with product
information. If the seller fails to do so, the operator must contact
the Attorney General, and file a suspicious activity report to the
Attorney General.
Any operator who knowingly fails to comply with these duties is
liable for a civil penalty of up to $10,000 for each violation. Any
person who knowingly makes a material false statement with the intent
to influence an operator to file a suspicious activity report is
subject to a civil penalty of not more than $10,000 per violation. The
bill grants a State Attorney General the authority to bring a civil
action on behalf of citizens of its State for injunctive relief,
damages, or civil penalties.
Thank you, Mr. Chairman. I welcome today's witnesses. I yield back
the balance of my time.
Prepared Statement of the Honorable Richard J. Durbin, a U.S. Senator
from the State of Illinois
Chairman Scott and Ranking Member Gohmert, thank you for holding
this hearing and thank you for the opportunity to address the issue of
organized retail crime and to discuss the Combating Organized Retail
Crime Act of 2008, which I introduced in the Senate on August 1, 2008.
Organized retail crime is a persistent and growing problem that
costs retailers billions of dollars and poses serious health and safety
risks for consumers. It involves the coordinated theft of large numbers
of items from retail stores with the intent to resell those items.
Typically, crime organizations hire teams of professional shoplifters
to steal over-the-counter drugs, health and beauty aids, designer
clothing, razor blades, baby formula, electronic devices and other
items from retail stores. Using sophisticated means for evading anti-
theft measures, and often the assistance of employees at stores, the
thieves target 10-15 stores per day. They steal thousands of dollars
worth of items from each store and deliver the items to a processing
and storage location. There, teams of workers sort the items, remove
anti-theft tracking devices, and remove labels that identify the items
with a particular store. In some instances, they change the expiration
date, replace the label with that of a more expensive product, or
dilute the product and repackage the modified contents in seemingly-
authentic packaging. The items are then stored in a warehouse, often
under poor conditions that result in the deterioration of the contents.
Organized retail crime rings typically sell their stolen
merchandise in different markets, including flea markets, swap-meets,
and online auction sites. Online sales are of particular concern, since
the internet reaches a worldwide market and allows sellers to operate
anonymously and maximize return. A growing number of multi-million
dollar organized retail crime cases involve internet sales. For
example, in Florida recently, law enforcement agents arrested 20 people
in a $100 million case involving the sale of stolen health and beauty
aids on an online auction site and at flea markets.
Organized retail crime has a variety of harmful effects. Retailers
and the FBI estimate that it costs retailers billions of dollars in
revenues and costs states hundreds of millions of dollars in sales tax
revenues. With respect to certain products, such as baby formula and
diabetic test strips, improper storage and handling by thieves creates
a serious public safety risk when the products are resold. And, the
proceeds of organized retail crime are often used to finance other
forms of criminal behavior, including gang activity and drug
trafficking.
The Combating Organized Retail Crime Act would address this problem
in several ways. First, it would toughen the criminal code's treatment
of organized retail crime by refining certain offenses to capture
conduct that is currently being committed by individuals engaged in
organized retail crime, and by requiring the U.S. Sentencing Commission
to consider relevant sentencing guideline enhancements.
Second, the bill would require physical retail marketplaces, such
as flea markets, and online retail marketplaces, such as auction
websites, to review the account of a seller and file a suspicious
activity report with the Justice Department when presented with
documentary evidence showing that the seller is selling items that were
illegally obtained. If the physical or online retail marketplace were
presented with clear and convincing evidence that the seller is engaged
in such illegal activity, it would be required to terminate the
activities of the seller. This requirement will lead to greater
cooperation between retail marketplaces, retailers and law enforcement,
and will result in an increased number of organized retail crime
prosecutions.
Third, the bill would require high-volume sellers on online auction
sites (meaning sellers that have obtained at least $10,000 in annual
gross revenues on the site) to display a physical address, post office
box, or private mail box registered with a commercial mail receiving
agency. This requirement will help online buyers get in touch with
sellers, and assist law enforcement agents who wish to identify people
who may be selling stolen goods online. It is analogous to a provision
in the federal CAN-SPAM Act, which also requires persons who send mass
emails to disclose their physical addresses.
This legislation has broad support in the retail industry in my
home state of Illinois and nationwide. It is supported by the Illinois
Retail Merchants Association, the National Retail Federation, the
Retail Industry Leaders Association, the Food Marketing Institute, the
National Association of Chain Drug Stores, and the Coalition to Stop
Organized Retail Crime, whose members include such retail giants as
Home Depot, Target, Wal-Mart, Safeway, Walgreens, and Macy's.
In summary, the Combating Organized Retail Crime Act addresses a
serious problem that hurts businesses that are struggling to survive in
a weak economy, and that harms consumers who unknowingly purchase
stolen items that have been subjected to tampering. It would heighten
the penalties for organized retail crime, shut down criminals who are
selling stolen goods, and place valuable information about illegal
activity into the hands of law enforcement. This bill is a big step
forward in the fight against a nationwide problem.
Thank you again for holding this hearing and for the opportunity to
submit this testimony. I look forward to working with you to enact
legislation to crack down on the growing problem of organized retail
crime.