The Mechanics of Supply Chain Theft
Given an opportunity most people will steal something at some point in their lives. It could be from their employer, a business, or even a friend or neighbor. As abhorrent and cynical as it may sound, theft is a condition of life to which we have seemingly adapted. We have grown up in a culture of theft and theft-related events our entire lives. From television to movies and from to music to media, property theft is truly woven into the fabric of our lives. Children tend to adopt certain behaviors from what they see in the media and what they learn on the street. At times they act out criminal behavior as part of their learning and growing experience. Unfortunately these behaviors tend to remain with some individuals throughout adulthood and can manifest themselves at any time and place. It is only through ones personal morality or fears that these inclinations are suppressed.
Although many view stealing from an individual or a business as unconscionable, little thought is given to purchasing goods previously taken by others. Purchasing a stolen item is not a victimless act. Although the purchaser of stolen goods may not realize it, this act drives an underground criminal network. The scope of this network encompasses everything from the single theft of a retail item through the funding of terrorist organizations via cargo theft.
Engaging in this activity is commonplace for many people, primarily due to the prevailing lax prosecutorial remedies for property crime in the United States.
This chapter will deal with the issues surrounding theft and the distribution of stolen property. It will discuss who steals, buys, sells, distributes, and transports stolen goods and what their unique individual motivation is to be party to this type of illicit activity. Nowhere in the narrative do I discuss any particular person or event but rather the discussion is a culmination of years of supply chain theft experience and accumulated statistical data from sources such as insurance companies, investigators, law enforcement agencies, and documentary studies by industry-specific trade organizations and consultants.
There are less visible forms of theft that go beyond commonly stolen tangible goods such as computers, cell phones, and jewelry. The theft of energy, transportation services, or intellectual property account for additional billions of dollars lost to property owners. Another form of transparent theft is the replication of branded goods, more commonly referred to as counterfeiting. All of these criminal acts are defined as theft as they erode corporate profitability, put users at risk, and dramatically affect the economy.
Because of their inherent transparency, many types of theft become lost in an attempt to quantify them. There is no actual reporting mechanism to calculate theft-based losses or is there a repository for such data. Theft can have numerous categories and collaterally affect many more individuals than the brand owner, insurance company, or victim. Collateral losses due to theft cannot be assessed with any degree of accuracy. Even your neighbor who steals cable, water, or electricity commits a blatant act of invisible theft that goes undiscovered, unreported, and unaccounted for in theft calculations.
Who doesn’t know someone that got a great deal on something that fell off a truck? Who doesn’t know someone that has not gotten an equally great buy on branded merchandise on-line or at a flea market? If these scenarios are familiar, you probably have been touched by a theft-related event. The hidden economic impact of this condition is devastating. Its scope affects nearly every product brand, manufacturer, and retailer. The volume of financial loss and the negative economic impact it has on consumers is tremendous, but it is generally transparent. Few people know the level that theft recuperation plays in the retail price of goods. Product theft can impact jobs, employers, our economy, our way of life, and even our country’s well being. The nexus between terrorists being funded by product thieves is a risk to us all.
THE UNDERGROUND SUPPLY CHAIN
Our transportation industry serves as the pulse of commerce and the heart of our economy. Collectively, we move food, clothing, and most other essential goods by truck, rail, and air. The transparent nature of logistics makes for an invisible or, dark side, of an otherwise innocuous industry. The black side that no one sees is the illicit movement of stolen goods through a normal, legitimate transit process, and it is all happening right under our noses! Besides stolen commodities of every description, contraband drugs and illegal weapons are also commonly transported using commercial trucks and courier services.
The sheer volume of stolen goods handled by thieves, buyers, and fences requires a network of people far too encumbered for an illegal organization. Because of this dynamic, most movement of goods, even those stolen in trailers and on the highway, wind up moving by a legitimate carrier to their final destination. Of course, this is unbeknownst to the receivers. There are billions in counterfeits filling our stores and pharmacies that have been delivered seamlessly along side of legitimate cargo. Untold billions in illegal drugs and laundered currency take the same distribution channels to market as would any normal legitimate product.
How is this done? Who is responsible? Who makes it happen? Who profits and who looses? How long has this been going on?
Because of the need for speed in illicit logistics, impulse planning is almost never a consideration. Thieves plan and execute these moves as well as any logistic provider ever could. There are many truckers who inadvertently provide this service without knowing they carry stolen merchandise. Many hands touch the cargo, but most eyes look the other way. Transportation providers, eager to satisfy a client or attract new ones, will take on freight moves without ever recognizing or analyzing the facts surrounding the cargo. Even the FBI has a diminished interest in the interdiction of stolen cargo as their resources are now focused on more conventional counter terrorism. No one in our industry is immune and no one can be that vigilant all of the time or to see through these clever plans.
Regardless of the origin or ownership, freight will move through our normal logistic system and be delivered to markets throughout the country on a daily basis. Goods destined for export move in the same way. The underground supply chain is truly transparent to us all. It will continue to increase costs for shippers and put many innocent drivers at risk until controls are developed to reduce these incidents.
At one point after 9/11, the Department of Transportation began a program known as Highway Watch. This, now terminated program, was designed to make drivers and carriers aware of potential threats and terroristic activities. It helped create a security standard for drivers and became the eyes and ears of law enforcement. The program was just getting momentum when it was terminated for budgetary reasons. Had the program continued, many illicit cargo moves and suspect loads would have been discovered and the risk to thieves and terrorists multiplied many fold. Having a million savvy drivers on the street and looking for transit anomalies would have been a tremendous benefit to us all.
Perception of value is the driving factor for most purchases. Little regard is given to the intrinsic value of a quality, authentic product over the low price of these knock-off products. There is a major market for aircraft, car, and truck parts throughout the world. In cases where such parts are just unavailable, sales are easily generated. However, in areas where legitimate parts are plentiful, the substandard, stolen or remanufactured parts businesses still thrive. Besides the significant level of lost opportunities for the sales of these goods by their rightful owners or resellers, the commercial supply chain is flooded with suspect products causing unjustified claims against the original manufacturer. These claims have to be vigorously defended in courts causing further economic harm to the original product owner. Discovery of most counterfeit goods in the field, whether stolen, diverted, or substandard is next to impossible. This is due to the sheer volume of products and the lack of track and trace capabilities of governing authorities.
Factors that affect risk are: the timing of the shipment of certain goods from the manufacturer, their availability in the market place or in transit, level of protection given to the products when unattended, the level of market demand, and the profit associated with the sale of that commodity. These components round out the characteristics of what I call the product risk factor. The greater the product risk factor, the greater the need to address protection of that product while in transit and at the retail level. Rarely do organized thieves play in the speculative theft arena because their marketing and supply chain just do not support this platform. The smaller the organization the more random the theft and product base, however, the larger the organization the more item-specific their targets are.
THE CRIMINAL ENTERPRISE AND ITS UNDERGROUND ECONOMY
The term underground economy defines the entire scope of illicit operations which involve the theft of physical and intangible products and some types of product-associated fraud. The term criminal enterprise describes the organized groups who engage in stealing and distributing stolen goods and whose efforts perpetuate the problem internationally.
Looking at theft from the monetary rewards prospective is generally easy to comprehend. You steal goods, you sell them, and you make money. The risk is low, the opportunity is pretty consistent, and the demand is high. But what about other motivations that drive industrial, personal, and supply chain theft? How do these areas of concern go far beyond the simple theft, sale, and subsequent purchase of stolen goods? Is the criminal thief on a par with the buyer of stolen merchandise?
Criminal motivation seems to inherently stem from greed, but based on current events, one can make the argument that theft is a direct result of our tenuous economic times. The thief, who claims to steal for survival, appears to be a basis for the problem at the lowest (street) level, where supply chain theft is a totally different condition. Most psychologists say that theft is a subculture -- a way of life and even a turn-on to some. It provides a rush through the need for risk in certain personality types. While other more liberal interpretations of lower-level industrial theft motives rationalize theft based on grudges with employers, personal debt, dissatisfaction with their socio-economic level, or salary but many investigations show that greed was the driving force. Some people seem to get a primal satisfaction from beating the system but bottom line, they are still turning the product into cash. The ease with which goods are available to take, and the lack of risk when taken, remains an underlying factor in most industrial thefts. Some other theft motivational factors can include excessive gambling, high personal debts, financial losses, living far beyond ones means, extramarital involvement, blackmail, excessive use of alcohol or drugs, resentment of management, frustration with the job, the threat of job loss, greed, and peer-group pressures. Any of a variety of circumstances can impact a person’s life to a serious enough of a degree where the person’s long standing attitudes, morality, and values may be changed. This change does not necessarily mean they will steal, but it does open the door to that possibility. Therefore companies need to defend their assets at all times. In many companies, theft in small volumes has been on-going for years. This type of theft is at an almost unrecognizable level and dismissed or written off and rarely investigated. It is not until the level escalates does the company realize the impact of what has been going on and takes action. Embezzlement is just as common an act of theft as stealing tangible products. In many cases the most trusted employee of a company is found culpable for these behaviors. No one is above theft, and no one should be overlooked in any investigation. Cargo, cash, or data does not disappear on its own.
Criminal behavior at an industrial level is a learned skill yet somewhat latent in everyone. It applies to both the thief and the buyer at different levels although unsuspecting buyers hardly ever see the inherent risks. Both morality and rationalization seem to be easier on the part of the buyer as he feels he has done nothing wrong.
The lack of corporate risk awareness and the use of security processes and controls within an organization can bring out this behavior or create it. When people begin to steal successfully they invite others to emulate the behavior which subsequently exacerbates the condition until it becomes a part of the landscape. The snowball effect costs victim companies millions of dollars in losses before they can react. A report prepared by Donald Cressey in 1998 on industrial and supply chain theft identified three conditions which must be met in order to allow theft to grow within a business. These conditions were motivation, opportunity, and rationalization.
Motivation speaks to the issue of simple greed which supersedes any rational thinking in new criminals and sets the stage for rationalization of the theft. People are very complex. The ease that one can extract goods from a business provides ample opportunity for everyone to get in on the action. Since people are uniquely motivated by different conditions in different environments, opportunity driven by motivation yields costly results to victim companies. By being able to steal easily without risk and to self-rationalize your actions, even the generally honest person will steal. Some exit interviews with common industrial thieves imply that they were just simply emulating what others did, and that they felt justified in that they thought the business ‘could afford the loss’.
Larger product thefts are typically attached to a criminal enterprise. These criminal groups can be large or small, simple or sophisticated, and organized or randomly formed. Most groups use trusted personnel with certain skills which are germane to the particular targeted product, supply chain, region, location, modality, or theft category. Regardless of the scale of the enterprise, the focus is consistent and the goals are clearly defined. Their focus is stealing targeted products of all types and descriptions and not getting caught. Like any business their motivation is the creation of profit. Their individual skill and success is commensurate with their rewards. The broader the base of operations and the more dynamic the enterprise, the greater their profits become. Size of the operation or targeted category of goods does not correlate directly to profitability.
Many lower level thefts which include home invasions, break-ins, some type of ship-lifting, and smash-and-grab street thefts are typically done by drug users or unsophisticated criminals and do not account for any significant percentage of the billions lost to property thefts. These thieves tend to be more brazen, and the thefts random and rarely organized. These potentially violent criminals basically steal and fence items in order to generate cash or to support their habits. When these criminals escalate their scope of targets beyond petty theft they become a public risk. Law enforcement is more apt to focus in on these crimes rather than simple product disappearance.
Petty thieves can find immediate buyers for almost any commodity. Recently car jackings, theft of copper wire and metals, manhole covers and fire hydrants, guardrails and construction truck theft have become more common and visible. As these targeted products become more in demand, the public becomes an active participant in the commission of crime and tend to become collateral victims.
The risks in property crime theft cannot be minimized. Stolen trucks can be driven into crowds, circuitry and wire theft can cause critical infra-structure electronic systems to malfunction, such as in the case or traffic lights and rail signals, stolen valves can open pipes and create costly or dangerous spills, and when manhole covers are removed from streets, drivers and passengers are unnecessarily at risk. Most of these types of criminal acts encumber law enforcement’s time and erode their limited resources.
The so called non-traceable events of industrial pilferage include items such as meat and liquor which are distributed to restaurants and barrio stores where the evidence is quickly consumed. The duplication of movies and their distribution here and abroad is a common untraceable practice. Software and toy replication and resale using inferior components and even book reproductions are just some of the other notable non-traceable product events that occur each and every day.
Because the volume of these losses is totally conjecture, industry estimates are the only way to get a theoretic dollar loss volume. Organizations such as The National Retail Federation (NRF), various insurance groups, the music and recording industry, and even consumer protection groups maintain theories on the financial impact of these events but cannot quantify them with any tangible data.
These losses have a cumulative effect and cannot be attributed to any one single event, entity, market, or product. Even manufacturers who are being targeted cannot precisely quantify the impact supply chain theft has on their bottom line. In some cases brand owners research certain international and domestic markets to find that more of their goods seem to have been sold than what they feel were actually manufactured. This discrepancy is due to the blending of stolen goods with replications and diverted goods and the re-introduction of previously stolen goods into the market over time.
The resources needed by law enforcement and local governments to combat, investigate, and prosecute these offenders is also a cost of loss that is most often ignored or overlooked when considering the general impact of inconsequential property theft.
OPERATIONAL FACTORS
The black market which operates to resell stolen products is arguably its own free market economy. The world of distribution of stolen goods is made up of a number of ‘businesses’, all of which have the key elements of any ‘for-profit company’ but without any manufacturing, administrative or marketing costs. They have no liability or tax responsibility. They do not positively contribute to any local or national economy and additionally, they employ few workers, pay no benefits, and typically have no permanent facilities. These criminal enterprises have no appreciable overhead, although they do have some inherent storage, transportation, and distribution expenses. The companies offer nothing to bolster commerce or create national wealth, but rather drain local resources and erode commercial brand integrity and confidence.
In certain areas of the country many of these criminal enterprises employ and harbor illegal immigrants and gang members. Their identities are transparent to law enforcement and their backgrounds are unknown. Factors such as this can lead to unpredictable and uncharacteristic violent behavior in the commission of thefts. Most property-oriented crime is nonviolent and occurs while goods are unattended. Some larger, more organized groups are made up of active criminals and operate on a national scale.
We do know that theft-based transportation is frequently masked by clever thieves who move these goods with reputable carriers in normal distribution channels. For example, a truck might be followed from its distribution center and then stolen at a truck stop. The goods are rushed to a public warehouse, and they are quickly off loaded. A fictitious company account is set up in advance for the arrival and short term storage of these goods at a public warehouse or distribution center. That location is now used as the transship point and the new shipper (the thief) becomes the carrier client. In this loosely termed cross-dock operation, goods are never repackaged, but rather quickly reshipped as a full truckload to a port of debarkation, or to another break bulk facility on a clean bill of lading but under another shipper’s name. Carriers have no reliable way to vet new clients, but rather accept the goods, move the freight and are paid by the phantom new shipper, at times in advance. In the case of counterfeits or in more sophisticated criminal enterprises, goods may be further broken down and possibly blended with legitimate goods to mask any chance at traceability prior to re-shipping. In either instance, goods may be trucked to any where in the United States, Canada, or even Mexico. Some export goods are either taken through Miami on the east Coast and Long Beach on the west coast, then loaded on containers destined for South America, Russia, India, or other foreign ports in the world for further distribution.
By now, the picture should be getting pretty clear. Stolen goods have suddenly assumed another identity and appear to belong to someone else. This makes those goods the newest members of the underground economy. At the same time, counterfeit goods, posing as legitimate products, are moving to U.S. markets from foreign ports to be blended with prime product. This new dimension further complicates any chance to unmask the stolen shipments. Upon arrival they are distributed by otherwise authorized resellers to retailers or manufacturers just as if they were legitimate, thus becoming a second element of the underground economy.
In the case of stolen meats, produce, fish, and other temperature sensitive commodities, the speed with which they are repacked for a quick sale is remarkable. Unless they are sped off to market they will be worthless. These time or temperature sensitive goods give a new meaning to “custom critical” deliveries. Few cases are made by law enforcement after the evidence is consumed! If you cannot catch thieves in the act, or dissuade them from taking the loads in the first place, these goods are long gone. Many of the products are ethically purchased drugs that may have been removed from proper storage conditions for a period of time and potentially cause great public harm when resold. Additionally, many of these drugs loose their efficacy and when used in hospitals or by patients, either offer no relief or benefit or harm the users significantly.
Distribution channels for some goods such as designer clothes, over- the-counter pharmaceuticals (OTC), prescription drugs, fragrances, beer, cigarettes, shoes, sneakers, jewelry, and electronics of all types have very specific brand sensitive outlets. These are painstakingly chosen by the brand owner and monitored by them regularly. Investigators on the staffs of most brand holders consistently research the market, web, and trade associations for unknown and unauthorized distributors. In certain cases the same companies distributing stolen, diverted, or even counterfeit goods can be authorized resellers. This makes flushing out a bad apple from a trusted source a difficult process. Since access to private records is impossible, investigators find it hard to determine anomalies such as volumes of certain goods sold versus those legitimate goods purchased by the vendor for resale.
OUTLETS
The National Retail Federation is quoted as saying “People have quickly learned that the internet presents a low-risk way to sell stolen goods. …More disturbing, however, is that the internet seems to be contributing to the creation of a brand-new retail thief. These are people who have never stolen before but are lured by the convenience and anonymity of the internet.” eBay currently has about 2000 paid employees whose job it is to investigate reports of stolen goods, fraud, and other illicit activities that may be using their good name and brand as a sales vehicle. Interestingly enough, many retailers and few buyers would seek this information out. A good deal is simply a good deal and investigating the lineage of a product is unnecessary.
In many cases recovery after a loss may not be desirable to the affected party. This is due to a number of factors besides the possible compensation received from insurance. In cases where manufacturers have dated items such as current fashion styles in clothing and shoes, or if the item has an expiration date, the recovery of such goods months after the theft puts the owner and retailer in a tough spot. The goods have either gone out-of-season, style, or they have missed the advertising window. Hence, the goods are more valuable to them if they remain stolen rather than recovered. In the case of electronics, the rapid change in technology advancements in any one area such as cell phones or cameras can literally make a device undesirable. Software can be outdated months after its initial release and copies of competitors can make such recovery unwelcome for those already compensated for the theft. Because of these factors, some stolen property is best left unrecovered.
Efforts by law enforcement and some corporate investigations meet with resistance when and if the goods are found. In many cases the retailer, who may have owned the goods in transit reject the recovery and defers them back to the original manufacturer. The ability of law enforcement to sort out the rightful owner, or at minimum the party willing to take the goods, can be costly. These products, once recovered as evidence, must be stored and such expenses revert back to the product owner if he is found. Because of the issues with ownership, many such goods are sold at police auctions on eBay. Law enforcement has the right to sell for a profit any articles recovered by them in the course of an investigation that have not been identified as the property of a specific person or entity. The municipality recovering the goods is also obliged to store these products and make an effort (in accordance with their specific ordinances on stolen goods) to find the rightful owner. If the rightful owner cannot be located in that period of time the goods are sold.
The proceeds of stolen and recovered items benefit the law enforcement agency selling them. The dichotomy is that the original theft, now sold twice and paid for twice, has both positively and negatively affected all parties who have come in contact with the cargo. Most recovered property is discovered during routine investigations and is not typically tied to any one crime, therefore finding the owner becomes complex.
ASSESSMENT
Theft is arguably one of the oldest crimes. When the risk is low enough and the reward great enough, theft will always take place. Whether in the workplace, at school, or at home in your neighborhood, some form of theft is consistently present. Theft has been a human condition since the beginning of time, but affects us all more now than in the past and not just the victim. Supply chain theft is no longer the stepchild of corporate losses, but a prime factor in reducing business profits at every level. This otherwise transparent condition goes far beyond tangible monetary losses. The relationship of many types of theft to drug smuggling, terrorism, and money laundering will become clear.
Most attempts to statistically quantify the volume of property theft in terms of dollars lost, the types of products stolen or the resulting costs to industry is conjecture. The enormity of the negative affect that supply chain theft has on our economy is catastrophic.Yet industry studies are inconclusive and specific loss data is both hard to come by and difficult to validate. Collected data from insurance losses, law enforcement recoveries, and public information sources is suspect because it is impossible to interpret or verify. Since most industrial and supply chain theft is unreported, specific data does not exist.
Industry associations such as the National Retail Federation (NRF), American Trucking Association (ATA), pawnshop associations, jewelry and electronic vendor groups, governmental agencies such as the Drug Enforcement Agency (DEA), Customs, and the Federal Bureau of Investigation (FBI) do try to maintain theft data when reported to them. Most law enforcement data is not available to the public. However, that data is only a small portion of actual theft losses and its impact theoretic and unsubstantiated. Since the vast majority of supply chain theft is not reported, the collected data cannot be audited. Because of these factors, the impetus of law makers to enact more severe remedies to property crime fails to gain the support it needs to be passed. Most states are considering supply chain theft laws, but few have enacted them with the teeth needed to make an impact on the criminals. Lack of remedy creates a positive and virtually risk-free environment for thieves.
There are accurate data resources to quantify shoplifting losses, including basic retail frauds such as credit card and other white collar retail crimes because this data is consistently reported and meticulously maintained by retailers and their credit card processors. Supply chain theft, which is the larger problem, remains obscure. Because retail theft data is well known, industry and government do more to address these conditions. Retailers spend millions to create in-store risk of loss but little to protect their supply chain.
In the transportation industry, data on cargo theft loss is extremely hard to come by as it adversely affects the logistics company’s reputation as well as that of the brand owner. No one wants to air their dirty laundry. Industry associations such as the Eastern and Western States Cargo theft task forces as well as the ATA try to quantify loss data to help member companies understand the risks and advise them on suitable best practices for cargo protection. Most of that data is client specific and unavailable for sharing. Few carriers actually do much to protect cargo in their care.
The Government Accounting Office (GAO), the Inland Marine Underwriters Association (IMUA) for insurance data, and law enforcement at the state and federal levels, also track and document reported losses in the supply chain. These organizations only collect data on about 10 percent of the reported losses and do not interface with one another. Collectively, all of these groups are privy to different data, both reported and secret, and in their own way try to couch the problem in a manner that best ‘sugar coats’ their respective risk. No one wants to ship with a carrier who has been a target for thieves and no carrier wants to accept loads of potentially targeted goods in certain high risk shipping lanes.
The collected data is rarely made public as that could seriously affect any national brand or transportation provider. Revealing general facts to the public about certain product theft can cause panic and therefore unnecessary risk to the general public. In certain instances where stolen ingestibles such as foods and pharmaceuticals are immediate risks, brand owners can do a product recall rather than identify the root cause of the problem. Additionally reporting theft data associated with a public company could adversely affect their stock price and ultimately their investors.
Although you would think law enforcement would be more focused on this problem, they are not. Federal law enforcement has all they can do to address terrorist and cross border issues. Most states’ limited resources are primarily focused on local violent crimes. Property crime, as described to me by a prosecutor is “just not sexy.” The question most prosecutors ask is, “where would you better use resources, in a rape or murder case or a pallet of stolen cell phones?” Because most states, and especially municipalities, have limited funds to prosecute and incarcerate offenders, many of these property criminals fail to serve any appreciable jail time.
THEFT HAS A COST TO ALL OF US
Let there be no confusion on the magnitude and devastating economic effect property crime has on our Gross National Product. The numbers rival the largest economic downturn possible but on a consistent annual basis. No bailout can address the unknown factor of the loss of jobs, profits, and taxes that are the direct result of theft. The federal focus today is on antiterrorism and protecting infra-structure such as water supplies, ports, bridges, tunnels, rail, highway, and inner cities from acts of terrorism. We have lost focus on the bigger picture of how these terrorists are funded. The Federal Bureau of Investigation (FBI) dissolved all of their cargo theft task forces shortly after 9/11. No one there seemed to understand the overall problem! We must realize just how the activities of cargo thieves facilitate their terrorist activities both here and abroad.
Ideologically terrorists look to harm their enemy either physically or economically. Economic terrorists can impact the fiscal well being of a country by eroding business and negatively impacting a tax base. Although most of the annualized dollar volume data of product theft is conjecture and ‘guesstimates’, its significance is no less compelling.This consistent growth of product theft losses for the past fifteen years is the basis for evaluating this threat as the largest single economic risk to legitimate business that exists today. In short, the perceived sanctity of the commercial supply chain is all but nonexistent and has been replaced by a level of risk which must be accounted for and paid for in any logistical, retail, or manufacturing operation. You and I pay for theft losses with each item we buy and from each service we use from manufacturing to insurance and from transportation to retail goods. Each costs a bit more because of theft.
THEFT ARCHITECTURE
In many cases those who hijack trucks and cargo watch these vehicles from where they originate and throughout their routes in order to better study the practices of drivers and to assure themselves that the trucks are not being escorted. Many warehouses are unmarked and thieves must survey these buildings in order to assess the cargo coming and going from these centers before deciding on a target.
Most truck drivers are creatures of habit and stop to eat and sleep in the same places. Because of gas contracts they often get fuel from the same vendors and stay at the same predictable truck stops, thereby making surveillance easy. Given that information, taking a vehicle at a fuel island or when the driver is eating or showering becomes far easier than you would think. Almost all hijacked trucks and trailers are taken when the rigs are unattended. Most thieves avoid contact to avoid identification and resistance by the driver.
A driver moving a load may purposely discuss the nature of the goods with someone who offers him cash for leaving his vehicle unattended. Many warehouse workers offer up information on their jobs and products at bars or restaurants, where this information is overheard and gathered by thieves.
A driver giving up his load in route may agree to be tied up or in some way delayed by the thief who takes his truck and load. At times even these trucks are stripped and broken down for parts or shipped outside the country, however it is usually the cargo in the trailer that is the ultimate target. Most often the cargo is removed, and the truck and trailer are returned to the street to be discovered by law enforcement in another state or county and returned to the owner.
This theft category does illicit both an internal investigation by the owners of the cargo and the trucking company and also triggers a law enforcement property case. Many times the driver is identified as the conduit to the theft ring and becomes legally culpable for the crime. Because of the employee infidelity clause in most carrier insurance contracts, insurance will not cover such product losses for the owner of the freight, the trucking company, or pay for the stolen equipment and downtime. Further the limits of liability on stolen goods may, absent specific coverages, revert to the Carmack amendment where freight is rated at $.50 per pound, making stolen computer chips and diamonds equal in value, by weight, to wood or steel. This inequity provides little remedy for victims of cargo theft.
Most cargo theft is litigated. Much of this litigation turns into subrogation because few carriers were alone in handling the goods. Many interline with other carriers, break bulk in warehouses, drop ship to multiple locations, and, as in the case of less than a truckload (LTL) of freight, have multiple loads on board each of which is owned by a separate party.
The Carmack Amendment governs the manner in which interstate cargo claims are handled by law 49 U.S.C §14706. Carmack controls and limits the liability of common carriers for in-transit cargo losses and absent specific peril insurance, preempts state law remedies that increase the carri¬er’s liability beyond the actual loss or injury to the property. In many cases cargo theft and liability issues are settled using the standards of this law which relate to weight rather than commodity value and are always detrimental to the owner of the cargo.
LOGISTICS
Stolen goods have to be moved after they are taken. In the past when goods were distributed locally, the supply chain requirements of thieves and fences were manageable at the street level. Today things are radically different. Even at the lowest levels of theft, items are distributed anywhere they are needed. In many cases a fence or middleman facilitates the movement of goods from party to party until they reach a market. This could be regional or international. Buyers or end-use clients can be anywhere in the world. A fence’s response time must rival his legitimate ‘competitors’ to reach the market so that the products can be turned back into cash.
During their travels stolen goods must be appropriately stored and in some cases repackaged before they can be reshipped. Certain goods are large and must be concealed or reduced to avoid detection. Items such as trucks themselves are stripped and sold for parts. Pharmaceuticals are broken into smaller packages for distribution and shipped to multiple locations. The network for the resale of stolen goods is as extensive as the legitimate supply chain in that it involves shippers, carriers, warehousemen, jobbers, and sales representatives commonly referred to as fences, media, internet, bulk buyers and direct clients. It must work under the radar of law enforcement and private investigative services from the intellectual property holder and insurance providers. None of this could happen without the inherent sophistication of skilled and educated thieves. The point is that most people engaging in the distribution and resale of stolen goods are highly intelligent and capable. The ‘on-the-ground’ thieves who actually effectuate the theft are street smart and capable adversaries for business and law enforcement.
At lower theft levels like simple shoplifting and other non-organized petty crimes, the use of simple techniques to move goods is common. These include returning stolen goods to stores for cash credits, internet, or street selling. These direct individual product sales are barely visible on the law enforcement radar screen. If apprehended, the thief rarely serves jail time. The problem is that the actual volumes of goods moved back into circulation becomes staggering when multiplied by the amount of these ‘street’ vendors.
Many cities have large areas where ‘black market’ goods are sold freely on the streets, in flea markets, and always in plain view of law enforcement. In most cases resources for the apprehension and prosecution of this type of criminal is miniscule and most plea out, pay a fine, or serve minimal jail time and are back at their craft in days. The volume of goods and the revenue generated amounts to millions in lost sales and taxes but happens in small enough quantities to be inconsequential in the larger scheme of theft.
Thieves move items quickly through the system. Fencing or reselling stolen goods is a quick, cash-based process. There is almost no track and trace of the goods once taken. It is only after the re-distribution of these goods that the possibility of discovery exists. In some cases warehouses are raided and massive amounts of stolen goods are seized, however this is the exception rather than the rule. Thieves and fences earmark stolen items for sale, prior to the theft, so that long term storage becomes unnecessary. Even when theft is random, and the product taken is not already promised, the fence network quickly responds to find appropriate buyers.
Empirical product marketing theory can be tested in both the legitimate and illegitimate markets The notion of supply and demand, profit, unit price, distribution costs and outlets, supplier consistency, and delivery all play a role in the sale of goods, even ones with no base cost. If we are able to understand which factors drive the markets for stolen goods, beyond price alone, we can quickly determine theft trends and risk to some products. With this data we can more easily predict both the level of protection needed for some commodities and the likelihood they will be targeted in the supply chain.
Once stolen, goods have to be off-loaded into a temporary warehouse until they need to be relocated to a buyer. Stolen goods cannot remain in the trailer unless the trailer itself is concealed in a building. The infrastructure for the movement of stolen goods is sophisticated and dynamic. The efficiency and speed with which these goods are moved defies even the best logisticians and distribution enterprises. In many cases the goods are then moved by legitimate carriers who are paid for their services in cash, or, in some cases, even on account through shell businesses.
Most trans-shipping becomes quickly untraceable. For the most part, domestic carriers have little interest in who provides their next load. To keep their equipment on the road, carriers accept loads from many sources such as internet dispatchers and consolidators. The fact that much of this freight is nondescript, palletized, and destined for major cities makes contracting a carrier easy. This further complicates the tracking process, even if law enforcement has intelligence as to where the load is ultimately going or who the buyer may be.
WHAT’S BEING DONE LEGISLATIVELY?
Legislatively, we do little to protect businesses and individuals from this known peril. Even if appropriate laws were followed, the impact to reduce the condition would be negligible. Our jails are overflowing with violent criminals. With limited state resources to house offenders, many property criminals are merely fined and never actually serve time in prison. That condition is frustrating to law enforcement officers who risk their lives in apprehending these criminals and subsequently see them back in operation.
Because cargo theft is becoming a recognized issue, three bills are now under consideration by the House Judiciary Committee’s Subcommittee on Crime, Terrorism, and Homeland Security. The legislative subcommittee hearing testimony in October 2008 heard from many retailers, e-tailer, and manufacturers exhausted in their collective efforts to stop the selling of stolen property in on-line auctions as well as in normal retail establishments. The bills HR 6713, also known as the “E-fencing Enforcement Act of 2008,” and two similar bills, S 3434 and HR 6491 will be evaluated and plan to propose harsh remedy for those caught selling stolen products. The legislation proposed and backed by bricks-and-mortar retailers such as Wal-Mart Stores and Target, would require that on-line marketplaces like eBay and Overstock.com promptly investigate and pull down listings when retailers or manufacturers provide “credible evidence” that merchandise is stolen. The bills also make it a felony to sell stolen items on-line and give retailers new rights to sue internet companies in federal court if they fail to respond or promptly take down stolen merchandise from their sites.
Surprisingly enough, Steve DelBianco, executive director of Net Choice, an industry trade group whose members include eBay, AOL, and Yahoo, plans to testify against the legislation. He said his group was amenable to more severe criminal penalties for thieves and sellers who are fencing stolen goods on-line, but he was against the legislation. His contention is that there are other provisions of these proposed bills that amount to a creation of an “elite club of retailers that want to use their influence to bash their online upstart competitors.” He felt that such legislation would enable traditional retailers to get information about their on-line competitors and this information could help to figure out where a competitor is getting his low-cost supply, or to harass that competitor by complaining their goods are stolen when they are not. No legislation is going to please everyone. However, without such remedy theft just gets worse because we are not addressing the outlets or the source of the goods. These laws are also weak in addressing the remedy against the actual thief as they only focus on the fencing and distribution components of supply chain theft.
The Organized Retail Crime Act focuses partly on creating penalties for organized retail crime by defining what it is. The bill also requires on-line marketplaces to “expeditiously investigate” reports of stolen goods and to maintain records of high-volume sellers. Both bills allow retailers to file civil lawsuits against the operators of on-line marketplaces that offer stolen goods for sale. These laws do not require victim companies to report their losses. Such reporting would further exacerbate the negative effect the original theft had on the brand owner. It does allow the retail industry to challenge the lineage of the goods for sale by e-tailers as previously stolen without connection to the original owner. For example, a retailer selling a product at $100 is competing with an on-line e-tailer on the same goods at $25. The retailer knows his base wholesale cost is $40 and yet his on-line competitor can sell it at retail way below his cost. His ability to challenge the e-tailer, as created by this proposed legislation, allows an investigation of the origins of these products without the involvement of the original brand owner. Since the original brand owner may have already been reimbursed by his insurance carrier, getting these goods back would not be desirable.
According to Security Management magazine, “Theft costs retailers around $104 billion a year”, based on their annual Global Retail Theft Barometer. US retail theft in 2007-8 amounted to almost $45 Billion, or the lion’s share of retail shrink. Retailers reported that stolen merchandise accounted for 38.4 percent, or $14.6 billion, of internal fraud, while 23.8 percent of internal losses were in the form of stolen cash, coupons, vouchers, or gift cards comprising more than $9 billion. The Global Retail Theft Barometer is based on a survey of 920 large retailers around the world and is comprised of only reported data, both verifiable and unsubstantiated.
Employee theft is the leading cause of “shrinkage,” or stock lost from crime in North America. Authorities caught around 5.3 million people stealing from retail stores between July 1, 2007, and June 30, 2008. This includes anything from diamonds to chewing gum. It also includes goods recovered and those actually taken. Though 84.6 percent of the thefts were perpetrated by customers, the average employee who was caught stole much more and more often. Warehouse and general supply chain theft as well as higher bulk theft are not reported as part of this data and remain at a speculative level. The value of these employee losses far exceed the more voluminous but petty thefts.
The most popular products for retail thieves included cosmetics, alcohol, electronics, and watches; shaving products, cosmetics, meat, seafood, infant formula, CDs, DVDs, fashions, printer cartridges, shoes, computers, cell phones, mp3 players, computer games, and OTC drugs account for many other favorite targeted goods. Retailers estimated that they lost, on average, between two percent and five percent of new in-store product lines, while such popular products as Harry Potter books, electronic video games and recent music CD’s and DVDs collectively reached loss levels of up to eight percent of stocked items.
Some, but not all, products that are sold on-line, in auctions, and by phantom e-tailers are in fact stolen goods. Police auctions, which legitimately remarket recovered products (previously stolen) and some brand owners who sell their own diverted products do so legitimately and through many of the same sources used by criminals. Bulk buyers who purchase goods recovered from insurance carriers and truckers are legally selling branded products (some of which were previously stolen) on-line at drastic savings. Even abandoned goods, resold by warehouseman to recover storage costs, find their way to on-line auctions and become great consumer deals. It becomes very difficult to differentiate between these legal business transactions and those done by thieves. It seems unfair to collectively conclude that auction “great deal” sales are all suspect and compound the problem of legally enforcing on-line criminal activities.
Interestingly enough, there are means by which individuals and corporations can recover stolen property. Web sites and companies such as JustStolen.net and Propertyroom.com provide a novel service. For a price, they will return recovered goods to their rightful owners. The mechanics of this operation are that one need only register the goods initially and then prove the goods were theirs by either a preregistration listing, or by providing the company’s credible records to establish ownership which include police reports and transportation documentation.
The selling price of most legitimate products using this type of service incorporates the registration cost as well as insurance before items are even out for consumer sale.This increases the selling costs as a direct result of the perception of theft and inherent risk of supply chain loss but provides the buyer a sense of security that seems worth the cost.
As was previously mentioned, such recoveries en-mass can be detrimental to the original owner because he may have already been paid for these goods by his insurance provider. This makes their return, in whatever condition they may be, an act of futility and even results in a greater loss to the original owner thereby doubling his theft exposure. Because of this fact, many companies abandon their rights to the recovered property and allow them to be remarketed. The dichotomy is that the market wants laws to protect them and when they have them fail to use them because it is not in their best interest.
Despite the existence of viable legal remedies on the state and federal levels to ward off these conditions of theft, there has been no improvement in theft reduction over the last ten years. Property crime has in fact grown appreciably and diversified significantly to a point where even determining the economic scale is conjecture. Property crime is both lucrative and participants are less apt to be prosecuted than violent criminals who use a weapon or force. The lack of quantifiability of the actual theft-related losses, in terms of dollars, product volumes, and recovery costs is what makes law enforcement and law makers reluctant to address these matters more aggressively.
Most crimes are evaluated on an individual basis and not as a national economic threat. The futility of locating stolen goods is truly a waste of resources for most police departments and federal agencies. Recovery is typically the result of luck or as part of another criminal investigation. Goods such as food, drugs, refrigerated items, and many other types of time-sensitive materials are rarely if ever reported stolen and almost never recovered. Many of the victims basically accept the loss and move forward. The reason here again is that if you are lucky enough to be paid by insurance for the loss, recovery would mean that you would have to repay those funds and destroy the product anyway. If a food or an ingestible drug is out of the care and control of the owner, carrier or recipient, if recovered, it legally must be destroyed. When such goods are inadvertently found and attempts are made at returning them to the rightful owners, most law enforcement agencies find corporate victims reluctant to accept their return because of these ramifications. Most of us will never know if we are eating evidence or watching a bootlegged film because the event is basically victimless and not viewed by the public as serious.
A COMPLIATION OF FACTS
Kroll Associates is a large New York based security and risk consulting company that provides investigative, security, and technology services. A recent analysis by Kroll outlined the risks companies face with their global supply chains and the amount of fraud, product tampering, and theft theoretically taking place today. The report dealt with a worldwide analysis of most forms of supply chain theft and included retail fraud in that calculation. The bottom line, as reported, showed that these vulnerabilities are equally as common here in the United States, Mexico, and Canada as they are in the EU and in Asia. According to the report, “The scale of supply chain fraud is difficult to measure and too broad in scope to estimate meaningfully.” The Kroll report, as do other studies, failed to state with any specificity the precise dollar value of theft and fraud, but rather established the vulnerability of this form of loss to retailers, brand owners, and other supply chain components in terms of overall risk. Kroll data from its 2007/2008 “Global Fraud Report,” which surveyed 892 global executives, showed just how large an issue it is. The report stated that that 42 percent of companies worldwide had suffered from at least one incident of supplier fraud or the theft of physical assets; and while these are just two of the many ways to abuse supply chains, nine percent of companies had suffered both types of loss.
According to their analysis, the more complex the supply-chain of a company, the greater their risk of loss. “Fraud thrives on complexity,” notes the report. “Modern operational complexities make companies vulnerable to frauds committed many links back in the chain and beyond the scope of most internal controls.” Fraud can occur at any point in the shipment of goods including at the origin. Many companies use trust as the basis of imported shipments and fail to properly examine containers during stuffing or verify contents at delivery. Some companies become victims when goods are tendered to draymen and when these goods sit in unsecured yards prior to being loaded on to a ship. When inappropriate seals are used, domestic cargo can be removed easily by truckers from trailers and containers.
Once considered a mundane and victimless threat, cargo and supply chain theft has grown to a size that is almost one percent of the worlds GNP. Cargo theft has become increasingly well organized, sophisticated, efficient, and highly profitable. Few states have cargo theft specific laws and, therefore, cargo and supply chain thieves are rarely severely prosecuted, making the reward far greater than the associated risk.
According to the Kroll report, one additional area in supply chain theft and monetary loss does not specifically relate to cargo or product issues but rather occurs through document manipulation. Weaknesses in information technology, the lack of appropriate auditing for payments and analyzing billing processes are all areas ripe for theft. Unless a company is diligent in monitoring paperwork anomalies, it can easily fail to detect fraudulent payment patterns or phantom orders. “When controls around payment matching and approvals are weak, service providers will learn that a company does not notice when they are over billed, double billed, receive ghost bills, never receive product for bills received or they are billed for the wrong service or at the wrong price.” It continues, “Falsified invoices, however, rarely follow the same patterns as those from honest suppliers.” Most of these supply chain thefts are based on import or export operations of companies whose process controls and information systems are weak or poorly designed and monitored.
By its very nature, any freight conveyance, whether it is a truck, plane, railcar, barge, or ship is basically an unattended warehouse with one or no unarmed guards. It must be emphasized that most supply chain theft occurs when the cargo is unattended. The opportunity for thieves is almost overwhelming. The myriad of choices of different cargo is endless and the opportunities to take it plentiful. The risk of apprehension, much less prosecution for cargo thieves, is extremely low while the rewards are incredibly high. The notion of safety and security for most unattended goods in the international commercial supply chain is weak.
Regardless of shipped modality, the consistent lack of basic protection for the freight, both by the carriers and in the form of security procedures by the shipper, creates vulnerability. Shipped goods in the supply chain typically lack appropriate security measures. When these same goods are cross docked in distribution centers, carrier terminals, or public storage warehouses, they become even more vulnerable to theft or manipulation. The easier the access is to cargo the better the opportunity for thieves and employees of these facilities. The lack of recognition of the true threat of loss for cargo owners, warehousemen, and transportation providers causes little to be done by these supply chain components to protect goods when they are out of their care and control.
While the incentive and onus for cargo protection should rest with the owner of the freight, most shippers fail to apply appropriate security measures to the cargo. Most seek to meet minimum standards of security and fail to effectively contribute to the protection process. Carriers offer little to no effective remedy to theft as they are not only protected by liability laws such as the Carmack Amendment when it comes to freight claims, but the exclusions in the shippers own insurance coverage for theft losses make proactive security expenditures rare. Security countermeasures are typically the last expenditure carriers make to mitigate known risks of loss. Most even fail to adequately protect their own truck assets which in turn would benefit their clients and further secure their cargo.
Since cargo moves anonymously across the nation’s roads and highways, it is always passing through various state and local jurisdictions. Each state and local government has a different threshold for the investigation, apprehension, and ultimate prosecution of cargo thieves. Because of these known lax conditions, many cities and states become targets for thieves Areas like Atlanta, Georgia; Memphis, Tennessee; Los Angeles, California; Newark, New Jersey; New York City, New York; Miami, Florida; and Chicago, Illinois, are prime examples of targeted states for truck and cargo theft. The limited deterrent value of the threat from law enforcement to cargo thieves, mitigates cargo theft risk to them. In addition, there is an escape hatch created by federal value limitation legislation. This condition creates a base threshold for prosecutors to accept or plea cases. For example, Newark, New Jersey may have a threshold of $50,000 per incident while Memphis, Tennessee may be $150,000, making a theft in Memphis less likely to be actually prosecuted.
Insurance coverage is typically ambiguous on cargo theft and it creates a loophole for the nonpayment of claims. While most shippers believe that they have appropriate insurance coverage, many fail to recognize that in case of theft the claim may not be paid. Rarely if ever do shippers request a copy of the tariff of the carrier to determine his limits of liability, insurance coverage or any of the exclusions delineated in this document regarding freight liability claims.
TYPES OF THEFT CONDITIONS
Truck theft is by no means the only modality affected by cargo thieves. Air cargo theft, rail, and sea container loads are primary targets. In the late 1990s a famous band of rail criminals known as the Conrail Boyz, effectively stole millions of dollars worth of rail shipped goods (piggybacked trailers on flatcars) in both large and small events. Modern day criminals find that cargo theft represents easy money with little inherent risk of prosecution. The two-year Conrail Boyz investigation uncovered an extensive, well-coordinated, criminal cartel in the business of targeting freight trains carrying millions of dollars of consumer goods. These goods included designer clothing, electronics, cigarettes, and other merchandise. The investigation determined that members of the gang would leap onto the piggybacked trailers while on rail cars as they were moving at a relatively slow speed. Then using bolt cutters and other devices, they would breach the doors of the trailers or shipping containers holding the merchandise and extract it. While the train continued moving, the merchandise was thrown off the train onto the side of the tracks. Accomplices on the ground gathered the stolen items which were then moved to a secret collection point. There the products were staged and organized to be sold to local fences.
From 1992 through March 2003, the Conrail Boyz were responsible for committing hundreds of cargo thefts totaling over $20 million in stolen merchandise, at manufacturer cost, including such articles as:
• 17,496 Sony PlayStation electronic game consoles valued at more than $5 million
• Tommy Hilfiger clothing valued at more than $140,000
• theft of more than 1,000 Jones of New York brand women’s blouses valued at more than $49,000
• theft of 1,800 cartons of Wave brand cigarettes valued at more than $500 each
• theft of approximately $7,000 in cash from the Metro Freight Line
• theft of numerous tractor-trailers for use in transporting stolen merchandise
The 24 gang members each received 13 years in jail. The economic impact of their escapade reeked havoc in the transportation industry as well as in retail and commercial trade in the Northeast for years.
Periodically gangs using cargo theft as their main source of revenue create a criminal enterprise which becomes too large for them to handle. Such gangs tend to break apart fractioning out into smaller, and at times, more violent associations. These turf wars escalate into uncharacteristic violence and can be extremely dangerous to commercial truck drivers, rail yard personnel, warehousemen, and other unsuspecting supply chain and retail personnel.
Because they begin to run out of unattended loads to target, many of these gangs raid working warehouses. In some cases gang members infiltrate the companies, force in order to gain intelligence as to the location of valuable products such as chips and electronics in these facilities. In many large, diverse warehouses or retail distribution centers, high-value goods are dispersed randomly to avoid such smash and grab operations; therefore, location intelligence is paramount to a quick and fruitful robbery.
Most supply chain gateway cities such as Atlanta, New York, Miami, and Los Angeles experience tremendous thefts. Secondary air courier companies such as FedEx, UPS, and DHL have significant theft losses but limit their liability through their bill of lading and insurance requirements and exclusions. The random nature of courier goods makes specific product targeting difficult but not impossible. Without specific knowledge of the shipper’s packages and products inside, these packages become far more difficult to target for their specific goods.
Theft of goods from known shippers is relatively easy. However, even in
