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94–005 PDF 2004

ORGANIZED RETAIL THEFT: CONDUIT OF MONEY

LAUNDERING

HEARING

BEFORE THE

SUBCOMMITTEE ON CRIMINAL JUSTICE,

DRUG POLICY AND HUMAN RESOURCES

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

NOVEMBER 10, 2003

Serial No. 108–147

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

JOHN SULLIVAN, Oklahoma

NATHAN DEAL, Georgia

CANDICE S. MILLER, Michigan

TIM MURPHY, Pennsylvania

MICHAEL R. TURNER, Ohio

JOHN R. CARTER, Texas

WILLIAM J. JANKLOW, South Dakota

MARSHA BLACKBURN, Tennessee

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. ‘‘DUTCH’’ RUPPERSBERGER, Maryland

ELEANOR HOLMES NORTON, District of

Columbia

JIM COOPER, Tennessee

CHRIS BELL, Texas

———

BERNARD SANDERS, Vermont

(Independent)

PETER SIRH, Staff Director

MELISSA WOJCIAK, Deputy Staff Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHILIP M. SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON CRIMINAL JUSTICE, DRUG POLICY AND HUMAN RESOURCES

MARK E. SOUDER, Indiana, Chairman

NATHAN DEAL, Georgia

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

DOUG OSE, California

JO ANN DAVIS, Virginia

EDWARD L. SCHROCK, Virginia

JOHN R. CARTER, Texas

MARSHA BLACKBURN, Tennessee

ELIJAH E. CUMMINGS, Maryland

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

LINDA T. SANCHEZ, California

C.A. ‘‘DUTCH’’ RUPPERSBERGER, Maryland

ELEANOR HOLMES NORTON, District of

Columbia

CHRIS BELL, Texas

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

J. MARC WHEAT, Staff Director and Chief Counsel

ELIZABETH MEYER, Counsel and Professional Staff Member

NICOLE GARRETT, Clerk

(III)

C O N T E N T S

Page

Hearing held on November 10, 2003 ...................................................................... 1

Statement of:

Merritt, Randy, detective, Pasadena Police Department, Pasadena, TX,

accompanied by Johnnie Jezierski, sergeant, Texas Department of Public Safety; Alonzo Pena, Associate Special Agent in Charge, Bureau

of Immigration and Customs Enforcement, U.S. Department of Homeland Security; Frank Borden, assistant director, Manufactured Food

Division, Texas Department of Health; Don Clemmer, assistant attorney general, Texas Attorney General’s Office; and James Jacks, first

assistant U.S. attorney, northern district of Texas, U.S. Department

of Justice ........................................................................................................ 6

Williams, Joe, Gulf Coast Retailers Association; Darrell Taylor, director

of loss prevention, HEB Grocery Co.; Deborah Brookshire, Texas Department of Health; and Frank Muscato, investigative task force, WalMart Stores, Inc. ........................................................................................... 116

Letters, statements, etc., submitted for the record by:

Borden, Frank, assistant director, Manufactured Food Division, Texas

Department of Health, prepared statement of ........................................... 95

Brookshire, Deborah, Texas Department of Health, prepared statement

of ..................................................................................................................... 135

Clemmer, Don, assistant attorney general, Texas Attorney General’s Office, prepared statement of ........................................................................... 100

Jezierski, Johnnie, sergeant, Texas Department of Public Safety, prepared statement of ........................................................................................ 66

Merritt, Randy, detective, Pasadena Police Department, Pasadena, TX,

prepared statement of ................................................................................... 10

Muscato, Frank, investigative task force, Wal-Mart Stores, Inc., prepared

statement of ................................................................................................... 140

Pena, Alonzo, Associate Special Agent in Charge, Bureau of Immigration

and Customs Enforcement, U.S. Department of Homeland Security,

prepared statement of ................................................................................... 88

Souder, Hon. Mark E., a Representative in Congress from the State

of Indiana, prepared statement of ............................................................... 3

Taylor, Darrell, director of loss prevention, HEB Grocery Co., prepared

statement of ................................................................................................... 128

Williams, Joe, Gulf Coast Retailers Association, prepared statement of ..... 120

(1)

ORGANIZED RETAIL THEFT: CONDUIT OF

MONEY LAUNDERING

MONDAY, NOVEMBER 10, 2003

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON CRIMINAL JUSTICE, DRUG POLICY AND

HUMAN RESOURCES,

COMMITTEE ON GOVERNMENT REFORM,

Cypress, TX.

The subcommittee met, pursuant to notice, at 10 a.m., in the Settlement House, Northwest Forest Conference Center, 12715 Tegle

Road, Cypress, TX, Hon. Mark E. Souder (chairman of the subcommittee) presiding.

Present: Representatives Souder and Carter.

Staff present: Elizabeth Meyer, counsel and professional staff

member; John Stanton, congressional fellow; and Nicole Garrett,

clerk.

Mr. SOUDER. Good morning and thank you all for coming this

morning. I also want to take the opportunity to recognize the U.S.

Marine Corps on its birthday, 228 years since 1775 to today, so it’s

very fitting today on Veterans Day.

Today our subcommittee will address the status of investigations,

prosecutions and convictions relating to organized retail theft rings

in Texas and elsewhere. We’ll learn that organized retail theft is

much more than petty shoplifting. We’ll also address the magnitude of the retail theft problem with particular emphasis on what

the retail industry calls high price point products such as baby formula and other consumer items.

A significant problem with organized retail theft is the losses to

American businesses which are invariably passed on to the tax

payer. This problem is widespread, affecting supermarkets, drug

stores, mass merchandisers and convenience stores. In 2001, the

Federal Bureau of Investigation’s Interstate Theft Task Force

quantified the problem as over $30 billion in store level losses annually.

The next significant problem with organized retail theft is the

interruption of the product supply chain. Many products must be

stored and transported under prescribed conditions to keep the

product safe for consumption. The large quantities of stolen high

priced point merchandise creates storage challenges for these rings.

Climate control storage is not provided and worse, merchandise

may spoil or become tainted. You wouldn’t want to buy a gallon of

milk which had been sitting around in an 80 degree warehouse for

a week before it got to the store shelf.

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The third significant problem with organized retail theft is the

gray market of resale. Stolen products are sold at flea markets,

swap meats, shady storefront operations, the trunks of people’s

cars and worst of all, sometimes unwittingly at Mom and Pop

stores. Some of these secondary retailers know they are buying stolen merchandise for retail. Some do not. Invariably, the consumer

never knows.

The fourth significant problem is money laundering. Once stolen

property is resold to secondary retailers, where do cash proceeds

from the chain of illegal activity go? You may be surprised here

today to learn that this problem extends far beyond our own borders.

Unfortunately, this problem is not new nor is it limited to the

State of Texas. Operation Blackbird and the Pasadena Community

Defense Force Task Forces in Texas are premiere examples of cooperation between law enforcement agencies and prosecutors from

all levels of government working together with regulatory agencies

and businesses to interrupt this crime. These efforts will have to

be duplicated across this great country to eliminate these problems.

Efforts to discover the international money laundering component

of this hearing must be redoubled. Interagency cooperation must be

at its best to have any chance of identifying and ultimately convicting all the members of these rings.

This hearing will address all these difficult issues as well as legislative and other potential solutions. We’re aware of the lack of

the Federal statute that specifically addresses the crime of organized retail theft.

We are pleased to be joined by representatives of several levels

of law enforcement community. We also have both State and Federal prosecutors to enlighten us about their roles.

To conclude, we have business representatives who will share

their concerns and solutions. I want to take time again to thank

everyone for coming, to take their time out of their schedules to

join us and I look forward to your testimony.

Now I’d like to yield to our gracious host and very active member

of our subcommittee, Judge Carter.

[The prepared statement of Hon. Mark E. Souder follows:]

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Mr. CARTER. Thank you, Mr. Chairman, and I want to thank everybody for coming here today. For me, this all started when

Johnnie Jezierski came to me at a town hall meeting here in the

south area of Houston to ask for 5 minutes of time to go back in

the back room and talk to me about stealing of baby formula.

I’m an old trial judge. I’ve been a district judge in Texas for the

last 20 years and don’t tolerate a whole lot of stealing, so I guess

that was the reason they were picking on me. But I was just

shocked to understand the level because when I went back, quite

frankly, I was thinking about some misdemeanor crime and didn’t

really understand why we were going to talk about it, but when I

found the level of what was going on, just in the Pasadena County

area, I immediately became very concerned and wanted this issue

brought out and brought before the public and examined by the

Congress.

As I said, the chairman was very gracious to hear me out when

I got back to Washington and to show great interest in this whole

operation that’s going on and as a result we were able to get this

hearing here in Houston. I wanted to have the chairman come in

and hold this hearing and I’m looking forward to hearing from all

of the folks in government agencies and the citizens who are here

to testify to tell us about just exactly the magnitude of this problem

and help us learn what we can do to seek better solutions for the

problem.

With that, I’ll yield back to you, Mr. Chairman.

Mr. SOUDER. I thank you. Before proceeding, I’d like to take care

of a couple of procedural matters. I ask unanimous consent that all

Members have 5 legislative days to submit written statements,

questions for the hearing record and that any answers to written

questions provided by the witnesses also be included in the record.

Without objection, it’s so ordered.

I also ask unanimous consent that all Members present be permitted to participate in the hearing. That’s a technical thing. If any

other member would come in who’s not a Member of our subcommittee, to cover that.

Now it’s been a longstanding congressional protocol rule that

government witnesses representing the administration testify first,

so our first panel consists of those witnesses and we have on our

first panel Detective Merritt of the Pasadena Police Department.

As I understand it, he began the investigative effort here on this

topic. He’ll be followed by Sergeant Jezierski of the Texas Department of Public Safety; and the Associate Special Agent Alonzo Pena

of the Department of Homeland Security, Bureau of Immigration

and Customs Enforcement.

Then we’ll hear from the Assistant Director, Frank Borden of the

Manufactured Food Division of the Texas Department of Health

and to conclude this panel, we’ll then hear from our prosecutor,

witnesses and Assistant Attorney General for the State of Texas,

Mr. Clemmer and Mr. James Jacks, First Assistant U.S. Attorney,

Northern District of Texas.

We’re a congressional oversight committee and it’s the standard

practice of this committee to ask all of our witnesses to testify

under oath. So would you please stand, raise your right hands.

[Witnesses sworn.]

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Mr. SOUDER. Let the record show that each of the witnesses responded in the affirmative.

When I first got elected to Congress in 1994, this committee became immediately active, starting with the Travel Office Investigations of the White House and we moved to ‘‘Who hired Craig Livingston’’ and the FBI files, the Indian casinos, White Water, Waco,

everything. So you’re now a distinguished panel of being sworn

under oath in the congressional investigations committee.

I very much appreciate your coming and Detective Merritt, we’ll

start with you.

STATEMENTS OF RANDY MERRITT, DETECTIVE, PASADENA

POLICE DEPARTMENT, PASADENA, TX, ACCOMPANIED BY

JOHNNIE JEZIERSKI, SERGEANT, TEXAS DEPARTMENT OF

PUBLIC SAFETY; ALONZO PENA, ASSOCIATE SPECIAL AGENT

IN CHARGE, BUREAU OF IMMIGRATION AND CUSTOMS ENFORCEMENT, U.S. DEPARTMENT OF HOMELAND SECURITY;

FRANK BORDEN, ASSISTANT DIRECTOR, MANUFACTURED

FOOD DIVISION, TEXAS DEPARTMENT OF HEALTH; DON

CLEMMER, ASSISTANT ATTORNEY GENERAL, TEXAS ATTORNEY GENERAL’S OFFICE; AND JAMES JACKS, FIRST ASSISTANT U.S. ATTORNEY, NORTHERN DISTRICT OF TEXAS, U.S.

DEPARTMENT OF JUSTICE

Mr. MERRITT. Good morning, Mr. Chairman and distinguished

members of the subcommittee. My name is Detective Randy Merritt and I’m assigned to the Pasadena Police Department’s Community Defense Unit. I’ll refer to it as the CDU. It is a privilege and

honor to appear before you to discuss my investigation of the activities of an organization engaged in large scale theft and fencing of

consumer products and a wide variety of other crimes in Pasadena,

TX, throughout the United States and abroad generating millions,

if not billions, in illicit profits.

For background purposes, Pasadena’s population is about

150,000. The city is located along the southern bank of the Houston

Ship Channel posting 41 chemical refineries out of the 110 in the

Houston area. Pasadena is also bordered by NASA’s Johnson Space

Department. Its police department has about 270 officers and I’ve

been a Pasadena officer for 12 years with about 6 years as Detective, specializing in organized crime and career criminal investigations.

CDU is a task force consisting of eight investigators from local,

State and Federal agencies. It was formed in October 2002 to investigate crimes identified as key terrorist financing and facilitation crimes after Pasadena investigations uncovered significant

amounts of such activity in Pasadena and the Houston area. The

CDU works closely with the FBI’s Joint Terrorism Task Force.

The bread and butter of the organization I’m here to discuss is

the theft and resale of consumer products. This is not the sole

crime of the organization’s crimes or legion. A few examples are

narcotics trafficking, alien smuggling and other immigration violations, motor vehicles theft and plundering of a variety of government programs. A few examples of targeted products are infant formula, cigarettes and over-the-counter medications.

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For simplicity, I have divided the organization into two groups,

thieves and fences. Group 1, the thieves are primarily Central

American illegal immigrants. They operate in teams stealing consumer merchandise through a variety of methods. There appears to

be 600 to 1,000 members of this group operating out of the Houston

area committing crimes across the United States. The criminal

gang, Mara Salvatrucha, commonly known in the United States as

MS–13 appears to play a significant role in the activities of this

group. MS–13 operates throughout the United States and Central

America. Gang resources characterize MS–13 for its extreme violence and level of sophistication exceeding that of many U.S. criminal street gangs. Members were reported to have executed three

Federal agents and shot numerous law enforcement officers across

the country.

Group 2, the fences are primarily found to be Middle Eastern immigrants who own a variety of businesses and immigrated from

countries such as Egypt, Jordan, Israel, Lebanon and Pakistan.

The common convenience store appears to play a key role or play

an important role with this group. This group buys and resells the

product stolen by the Central American thieves. Evidence collected

in our investigation found long-term relationships often existed between the fences and the thieves. Many of the Middle Eastern

fences are under investigation by Federal authorities for possibly

supporting terrorist organizations.

The incident initiating my investigation was a night time burglary of a Pasadena business in May 2001 where approximately

$137,000 in cigarettes were stolen. The burglary investigation identified several burglary teams and a number of shoplifting teams

made up of Central American illegal immigrants based in the

Houston area. The burglars and shoplifters were found to work

with Middle Eastern businessmen who bought the stolen property.

In November or December 2001, Pasadena’s Direct Action Response

Team conducted a surveillance operation over several weeks resulting in the in-progress arrest of eight members of two burglary

teams. Detectives videotaped the teams stealing approximately

$608,000 in clothing and tools from two Houston businesses. The

investigation declared dozens of similar burglaries resulting in millions of dollars in losses in Texas and other States. It was discovered that these burglary teams were part of a large organization

working for the Middle Eastern fences since 1997.

In 2003, I was involved in CDU cases where several three-person

shoplifting teams in the same organization were arrested and

charged for shoplifting infant formula and medications from Pasadena area grocery stores. CDU began pooling resources from several State, local and Federal agencies into an ad hoc informal work

group called Operation Blackbird which meets regularly at the

Houston FBI Field Office.

The results of Operation Blackbird are 40 suspects, over half illegal aliens, were arrested and charged with Federal and State felony crimes; 14 civil suits were filed by the Texas Attorney General’s Office against 21 members of the organization, and approximately $2.7 million is suspected stolen products and assets were

seized, of which almost $1 million worth was infant formula. Blackbird has impacted the organization on national level. The FBI and

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retailers report a significant decrease of infant formula thefts, however, thefts of other products increased dramatically indicating a

shift in operations by the organization.

Blackbird has temporarily wounded this network which has

found a gaping hole in the system to operate with virtual impunity.

A person caught with $25,000 in cocaine faces years in prison. Another caught with $25,000 in stolen jeans or baby milk may never

see the inside of a prison cell. The Pasadena Police Department did

not accomplish this alone. It occurred by leveraging resources

through nontraditional means between local, State and Federal

agencies and unprecedented cooperation and information sharing.

I attribute success more to the efforts of rank and file officers,

special agents and prosecutors persevering against institutional inertia than to culture changes in our respective agencies, although

significantly improving the old problem of bitter agency rivalry, bureaucracy and poor communications still exists. What is needed to

fight this organization is legislative changes, training and tools for

all levels of the justice system with more emphasis on interaction

between local, State and Federal agencies and the private sector.

In Houston, we found the State laws were more effective against

this organization, but it required the tools and resources of Federal

agencies to successfully enforce them. Improving cooperation appears to be focused on improvements between Federal agencies. A

small fraction of the 700,000 law enforcement officers in the United

States are Federal agents. Federal agencies have the tools to fight

organized crime. The local agencies, having the bulk of manpower,

deal with its effects daily in the front lines, usually flying blind. To

manage this insidious threat, we must revolutionize the integration

of local, State and Federal resources along with the listing of private section in the fight.

This criminal organization is cellular in structure with membership and methods insulated by cultural barriers. The organization

cannot be neatly charted like an Army division or a Fortune 500

corporation. Its business plan is a state of mine, not a formal mission statement. The commonality of crimes, methods and suspects

between so many different investigations around the country cannot be coincidental. Suspects and dozens of investigations around

the United States have been linked to Blackbird targets. Many suspects in other cases have been charged with supporting terrorism

or on watch lists as being terrorist organization members. I believe

most organization members are not terrorists in the traditional

sense, however, their schemes may cause more damage to our

country in the long haul.

I strongly suspect what I have summarized as part of a greater

plan executing over a decade ago to attack the United States like

a cancer from within. I believe this organization is a national

threat at a grassroots level by corrupting our food distribution industry, plundering government programs and encouraging street

crime and edging honest businesses out of the marketplace, due to

the inability to compete with organizations inherently lowering

costs of buying stolen goods while facing additional expense of replacing inventory stolen by the organization’s thieves.

I strongly suspect the attacks on the United States by the terror

network are part of the same diabolical plan embodied by this orgaVerDate 11-MAY-2000 09:03 Jun 24, 2004 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 D:\DOCS\94005.TXT HGOVREF1 PsN: HGOVREF1
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nization, that is, more philosophy than written orders or directives.

I am reminded by the words shouted by Nikita Khrushchev at the

U.N. to the U.S. Delegation 40 years ago, ‘‘we will bury you from

within,’’ as he pounded his shoe on the table.

As a student of history, I learned the Soviet Union was the largest sponsor of terrorism before its collapse. The terror network

trained and built by the Soviet Union survived. Without Soviet control, it has run amok. It took our government more than 30 years

to recognize and admit the existence of the Mafia. We may not

have the luxury of decades to address this problem.

I hope my statement is not taken as an attack on any ethnic

group or religion. It is intended to expose the nefarious activities

of a minute portion of our society.

In conclusion, I would like to thank the distinguished members

of the subcommittee for the opportunity to testify before you today.

It will be my pleasure and honor to answer any questions.

[The prepared statement of Mr. Merritt follows:]

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Mr. SOUDER. Thank you very much and I should have noted in

the beginning that written testimony and any additional documents that you believe need to be entered into the record after any

questions from us or things that you may think of, you’ll have a

certain number of days to do that. So we’ll put the full statements

in. It’s a frustrating process for every individual to try to keep it

within the 5 minutes. It gives you warning. We’ll be a little more

lenient this morning. We know you have prepared statements. It’s

a field hearing. It’s a little bit different than in Washington, but

if you can put any written statements, you can always add to the

record and we’ll draw some out in additional questions and that

may also lead to some additional questions after the hearing.

Sergeant Jezierski, thank you for being here this morning to give

your testimony.

Mr. JEZIERSKI. Good morning, Mr. Chairman, and distinguish

member of the subcommittee. It’s a privilege to appear before you

today. I’m Sergeant Johnnie Jezierski of the Texas Department of

Public Safety, Special Crimes Service.

On September 11, 2001, terrorists attacked the United States. I

believe attacks on our government and business programs began

many years earlier and those largely unnoticed attacks may have

been aimed at acquiring assets to be used against the United

States.

The State Department has issued a reward poster that states

‘‘Stopping Terrorism Starts With Stopping the Money.’’ We’ve

brought a copy of the poster with us today. It’s on the left.

One of the illicit sources of funding for terrorism listed on the

posted is the theft, adulteration and resale of infant formula. On

September 11, 2001, a DPS Trooper stopped a vehicle after a citizen reported that a Middle Eastern male was driving toward Houston in a rental truck. One can assume that the citizen believed the

driver of the vehicle may have been involved in the attack on our

country and I believe that citizen was correct. The truck was not

loaded with explosives. It contained infant formula. The driver of

the rental truck told investigators that he was not a terrorist.

Today, the FBI recognizes him as a member of a terrorist organization. The driver was part of a nationwide theft ring operating in

the United States who send proceeds from their illegal activities

back to the Middle East. Professional theft teams of illegal Honduran and El Salvadorean immigrants from Houston steal infant

formula around the country and sell it to the Middle Eastern fences

who distribute it through a nationwide network of trading companies.

The organization has been operating largely unnoticed for years

and much of the stolen formula is sold to WIC vendors. Infant formula is one of the most prevalent items stolen from retailers

around the country, with the most popular formula stolen being the

brand and type of formula distributed in the WIC program. In

Texas, that would be Enfamil With Iron.

Investigators believe that WIC had something to do with the

problem. WIC began as a $10.4 million program in 1974 and has

grown to a $6 billion program in 2003 that provides benefits to 47

percent of all babies born in the United States. The USDA funds

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the Federal program with additional funding derived from a rebate

program.

I contacted the USDA with my concerns and I was told that the

Department of Health administered the WIC program in Texas. I

contacted the Texas Department of Health and informed them that

the WIC program appeared to have left doors open and that criminals and possibly terrorists were exploiting those open doors.

The Texas Department of Health was concerned and an advisory

committee was created to identify problems and determine what

measures could be taken to correct them. The committee consisted

of representatives from government agencies, retail businesses and

manufacturers. Mead Johnson’s representative indicated that the

cooperation and business and government was unprecedented. The

committee determined that inadequate policies controlling the WIC

program had allowed criminals and some WIC vendors to exploit

the program and changes were recommended. WIC vendor contracts were changed that required WIC vendors obtain their formula from licensed Texas wholesalers or the manufacturer.

The Manufactured Food Division of Texas Department of Health

began an aggressive inspection campaign targeting the fences and

seized over $1 million in product from the fences. The Texas Attorney General sued and obtained injunctions against the fences, and

penalties for violations of the Texas Food, Drug and Cosmetic Act

were increased. After the changes, Texas retailers reported a significant decrease in theft of infant formula.

Sources in a Federal law enforcement agency also reported that

the changes have been the subject of chatter and conversations

monitored overseas.

Some members of the USDA voice concerns about negative publicity. The USDA does not appear to be taking any quick action nationally and the market for stolen formula outside of Texas remains available. This criminal organization has a pattern of committing nonviolent property crimes that are taken lightly. When

law enforcement encounters infant formula, it is difficult, if not impossible to prove that the formula is stolen, therefore it is necessary to conduct undercover operations in which purported stolen

infant formula is sold to the fences and those types of criminal investigations are lengthy, costly and require significant manpower.

Most agencies having limited resources, see the investigations required as being too difficult and too costly. Only a small number

of criminal investigations are targeting this activity around the

country. One of the investigations in the Houston area involves a

small group of local, State and Federal officers operating out of the

Pasadena Police Department.

The Pasadena Working Group, confronted with the funding and

manpower issues, has significantly impacted the operations of this

criminal organization in Pasadena and around Texas.

Federal resources are being expended conducting terrorism investigations attempting to identify terrorist operatives, but the organized criminal infrastructure that is believed to be funding terrorism is being largely ignored. Business records obtained by

search warrants show that members of this group report millions

in sales while claiming checks written through sales business expenses, having paid no income tax they receive IRS refunds after

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claiming the earned income credit. This information has been forwarded to the IRS and should be acted upon.

Realizing that some members of this criminal organization are

suspected to be members of or supporters of terrorist organizations,

one cannot help but be concerned. Some of the positive steps that

I believe could be taken include (1) take the lucrative WIC market

for stolen formula that is being exploited by this group away by requiring that WIC vendors in all States purchase their formula from

approved sources.

Two, education. One needs to recognize that there is a primarily

Middle Eastern organized criminal group that is operating largely

unnoticed in the United States.

Three, create law enforcement task forces to combat this criminal

organization and provide those task forces with adequate funding.

Stopping terrorism starts with stopping the money. Thank you

for the opportunity to testify before you today on this very important issue. I’d be glad to answer any questions you might have.

[The prepared statement of Mr. Jezierski follows:]

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Mr. SOUDER. Thank you very much.

Mr. Pena, I believe you’re next.

Mr. PENA. Good morning, Mr. Chairman, Mr. Souder, Congressman Carter. It’s a privilege to appear before you to discuss the Bureau of Immigration and Customs Enforcement Investigations into

organized retail theft and money laundering violations.

For the past 5 years the Special Agents assigned to the Special

Agent in Charge, Houston, TX, have conducted investigations into

the activities of a loosely joined confederation of individuals involved in the theft, repackaging and resale of consumer goods.

These consumer goods primarily consist of infant formula, over-thecounter medical goods, and other health and beauty aids. ICE special agents have also been investigating the money laundering aspects of these criminal activities.

The targets of these investigations are predominantly individuals

from Latin America or the Middle East, including Egypt, Jordan

and Lebanon. These individuals operate as grocers, dry good wholesalers, buying and selling goods on the gray market or secondary

side of the industry. The wholesalers are supported by groups of

shoplifters operating around the United States.

ICE investigations have identified approximately 60 groups of organized shoplifters plus a multitude of independent individuals.

For the most part, these individuals are residing and operating in

the United States in violation of our immigration laws and travel

the country stealing merchandise from legitimate retailers and

wholesalers.

The shoplifting scheme background. ICE special agents have

interviewed a number of shoplifters and identified a method of

their operation. The shoplifting group is comprised of five or six

women and younger men. An experienced man is established as a

team leader and is subsequently responsible for making the travel

arrangements, providing transportation, food and lodging for the

group.

Once the group is assembled, they travel to a target city, obtain

a hotel room, and spend the next 7 to 10 days shoplifting from

major stores in the area. Each day the stolen goods are stored in

a self-service storage unit that is rented by the team leader. Upon

conclusion of the operation, the stolen goods are removed from the

storage units, loaded into rental trucks and returned to their home

city and sold to buyers. If there is an exceptionally large amount

of stolen goods, the teams have occasionally shopped them via legitimate trucking companies back to the buyers.

Most team members are equipped with several false names and

dates of birth in the event they are arrested. If a member is a

minor, they provide identification purporting them to be an adult

in order to avoid State laws requiring parental notification and

they can be released on bond.

The buyers. The buyers generally identify themselves as grocery

wholesalers in an effort to establish an air of legitimacy. These

companies file corporate charters with the Secretary of the State of

Texas and obtain a local ‘‘doing business as’’ license. Very few of

these individuals operate out of a normal business location. Most

operate out of their residence or from a storage unit where the stolen goods are stored. ICE, working in conjunction with the IRS and

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the FBI, have shut down large-scale theft operations throughout

the United States.

In Lexington, KY, the Shalash Organization was dismantled and

three leaders were arrested and subsequently convicted. In Arizona, 12 members of the Jamal Organization were arrested. In Dallas, TX, 23 members of the Ghali Organization were arrested. ICE

is currently conducting investigations in Florida, California, North

Carolina, South Carolina, Virginia and Kentucky. Here in Houston,

the activities of the combined Federal, State and local law enforcement agencies have forced these criminal organizations to change

from theft of infant formula to other products to avoid civil and

criminal sanctions.

Five years ago, several subjects were repackaging stolen infant

formula and placing them in counterfeit cardboard boxes. The purpose of the counterfeit boxes was to deceive the buyers into thinking the formula was from the actual manufacturers. In the words

of one subject, ‘‘if you are going to sell a Rolex watch it has to be

in a Rolex box.’’ The repackaging operations took place in warehouses or storage units. After the goods were repackaged, the cases

were placed on pallets, shrink-wrapped and shipped to local or outof-state buyers. Investigators efforts resulted in dismantling of the

company identified as a manufacturer of the counterfeit boxes.

The secondary market. To conceal the origin of the product, false

purchase orders are produced alleging that Company A sold the

merchandise to Company B who sold it back to Company A or C.

Payments for these shipments are usually structured in order to

avoid Federal monetary reporting requirements. Several checks are

written in amounts less than $10,000 and are addressed to different subjects on different dates, all within the same company.

Wire transfers are used when a company sells to a large-scale

buyer or to an unsuspecting legitimate buyer. Each company is

able to claim and show receipts indicating that it had purchased

the product from the other company, without knowledge that the

merchandise was stolen. If the stolen goods are over the counter

medical goods or health and beauty aids, they are typically sold to

‘‘mom and pop’’ type convenience stores. Frequently, the stolen

merchandise is sold in the convenience stores that are actually

owned and operated by the organization.

Some criminal organizations are also involved in the large-scale

burglary of tobacco, jewelry, and clothing warehouses. Most of the

stolen tobacco products are sold in stores owned or operated by

these organizations. The loss of taxes on this merchandise has a financial impact on each State. Typically, stolen jewelry, perfume

and clothing are mixed with legitimate shipments and exported

overseas. Other times, these items are shipped by falsely manifesting the goods.

Investigation has also revealed that some commercial burglaries

involving merchandise in excess of hundreds of thousands of dollars have been shipped to the Middle East, where it can be resold

for three times the value. The investigation into the money laundering aspect of these proceeds have revealed individuals involved

in the exportation of motor vehicles suspected of being purchased

with money derived from these illegal activities. The vehicles can

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be sold overseas for three times the value. The proceeds of this illegal activity are subsequently returned to the United States.

To prosecute members of these criminal organizations for Interstate Transportation of Stolen Property, the government must show

that each can of infant formula or over the counter was stolen or

obtained by fraudulent means. This is difficult, as individual items

are not marked in a unique way, such as currency, to aid in tracking of these items.

Women, Infant and Children Stores. In addition to the convenience stores, some of thee criminal organizations also own and operate Women, Infant and Children [WIC] stores where they can sell

their stolen goods. The WIC program is a federally funded, State

operated program to aid lower income citizens. There are many

forms of WIC fraud both by the vendor and by the recipient. I will

explain a few of them today. By purchasing stolen infant formula

for $5 per can and selling it for $10 per can, the WIC store profits

are generally greatly increased. Each month, a WIC store submits

all the WIC vouchers used to purchase food from the store. Investigations have revealed that some stores are marking the WIC

vouchers to indicate that food was sold which was never sold and/

or cash was given to the persons instead of food. At this time there

is no Federal regulatory requirement that the WIC stores buy the

food sold at their stores from controlled sources. The State of Texas

has recently enacted requirements that WIC stores buy directly

from the manufacturer or from a regulated source.

Following the money. Profits generated by the sale of stolen

goods are used for the purchase of additional goods, thus repeating

the cycle, and to further the wealth of the criminals involved. Investigations around the country have determined that large

amounts of money are being shipped out of the United States to

the Middle East. Investigations have revealed that the money is

smuggled out of the country by concealment on individual travelers, wire transfers through European banks, express-type mail

shipments containing currency or monetary instruments, and unlicensed money remitter services. Many banks in the Middle East do

not cooperate with the U.S. law enforcement and the funds cannot

be traced.

In conclusion, I would like to thank the chairman, Congressman

Carter for your continued support and interest in ICE. It is an

honor to serve as a Bureau of Immigration of Customs Enforcement agent. I thank you for the opportunity to appear before you

today and to discuss some of our investigative efforts and it would

be a pleasure to answer any questions you may have.

[The prepared statement of Mr. Pena follows:]

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Mr. SOUDER. Thank you.

I’d now like to recognize Mr. Borden on behalf of the Department

of Health, State of Texas.

Mr. BORDEN. Thank you. My name is Frank Borden. I’m the assistant director of the manufactured foods division, Bureau of Food

and Drug Safety with the Texas Department of Health [TDH].

TDH is mandated by the Texas Health and Safety Code, Chapter

431, Texas Food, Drug and Cosmetic Act to license and inspect all

firms in Texas that are engaged in the manufacture and distribution of foods, drugs, medical devices and cosmetic products. The act

provides authority for inspections, detentions, condemnations,

record verification, enforcement, which includes civil, criminal and

administrative penalties. The Act also allows TDH access to copy

and verify all records pertaining to infant formula.

On December 4, 2002, Texas Governor Rick Perry asked the Bureau of Food and Drug Safety, to attend the WIC Advisory Committee meeting concerning theft of powdered infant formula and other

high priced consumer products in Texas. The committee is comprised of Federal, State and local law enforcement agencies and industry. The committee attempted for several months to curb the

theft and illegal redistribution and repacking of these high priced

consumer products such as infant formula, prescription drugs and

over the counter drugs and medical devices back into commerce. At

the December meeting, the Bureau presented to the committee the

authorities granted to TDH by our act and offered our assistance

to the WIC Committee. As a result, TDH began coordinating with

various local, State, and Federal law enforcement agencies

throughout Texas.

Since then, TDH has been working closely with law enforcement

on the unlicensed distributors. Our main concern is the possible

contamination, adulteration, tampering and misbranding of the stolen infant formula that could affect the safety of Texas children

who are enrolled in the WIC program. One child injured is one too

many.

Law enforcement develops leads and identifies unlicensed distributors for TDH. TDH staff accompanied by law enforcement officers then inspects these distribution facilities. There are many organized infant formula theft operations. We have found formulas

throughout Texas stored in filthy garages, mini storage facilities,

vehicles, and bars. Products are repacked and lot numbers are

changed or removed. In some cases, the products are contaminated

with insects and/or are out of date. To date, over $1 million of adulterated infant formula is now in secure locations under the protection of TDH.

TDH has spent thousands of hours investigating these distributors. Of the firms identified by law enforcement, none were licensed

and none could provide product records that would verify the

source of the infant formula. Evidence indicates that the distributors were making up to $1 million or more a year. Many of them

were enrolled in State welfare programs such as Medicaid and the

food stamp program and were declaring incomes to the IRS of less

than $10,000 a year. In addition, some had visas that were expired

for up to 10 years while collecting government benefits.

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As of November 2003, TDH has referred about 40 cases to the

Texas Attorney General’s Office for civil prosecution. Civil penalties

for violations of the act are up to $25,000 a day per violation. The

Texas Attorney General, John Abbott, has appointed three special

prosecutors to file these cases on behalf of TDH.

In 2003, the 78th Texas Legislative Session increased the criminal penalties for violations of the act from a misdemeanor for the

first time conviction to a State jail felony for the second conviction.

However, District Attorneys are reluctant to prosecute these violations.

Since TDH started conducting these inspections with law enforcement, we have seen a decrease in the distribution of the stolen

infant formula back into commerce in Texas through unlicensed

distributors. However, the thefts continue. Thieves are now selling

the infant formula, high-priced drugs and device items at flea markets. In 1999, an act, Chapter 35 of the Business and Commerce

Code became law. It states that infant formula, drugs which include over the counter and prescription, and contact lenses cannot

be distributed at flea markets. Due to the extraordinary number of

flea markets throughout the State, TDH does not have the resources to conduct investigations at all flea markets. In addition,

TDH is now investigating pawnshops that are buying infant formula and over the counter drugs from thieves and selling the products at flea markets. A more recent development is the discovery

of infant formula for sale in the classified sections of local newspapers.

Our investigations have also revealed that stolen infant formula

is going to unlicensed distributors who have moved from Texas and

set up their operations in other States. In addition, the product is

readily available through Internet auction sites. This is a national

problem. There is a need for strict consistent legislation concerning

the distribution of infant formula, drugs and medical devices in all

States.

Thank you.

[The prepared statement of Mr. Borden follows:]

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Mr. SOUDER. Thank you very much.

I’d like to recognize Mr. Clemmer on behalf of the Texas Attorney General.

Mr. CLEMMER. Thank you, Chairman Souder and Congressman

Carter. Again, my name is Don Clemmer, I’m the Associate Deputy

Attorney General for Criminal Justice. I work under Attorney General Greg Abbott and it’s a pleasure to be here today. We appreciate the invitation.

My role is to supervise the work of our Criminal Justice Divisions which include a number of Assistant Attorneys General, three

of whom are with me here today, Kent Richardson, Joe Sherlock

and Harry White. They are the attorneys who have been assigned

by Attorney General Abbott to handle what we call the infant formula theft cases.

I’d like to confine my remarks just to their work. I think the

Pasadena Police Department and DPS representatives summed up

what the facts are in these criminal schemes. In October 2002, we

met with Pasadena Police Department representatives to discuss

what was going on. They brought this to our attention and it was

quickly recognized that this was not something that was being handled particularly well in the criminal justice system. But in our discussions we recognize that there was something we could do in

working with the Texas Department of Health in dealing with

these criminal organizations because they were dealing with adulterated food products and that type of activity was something that

the code, the Health and Safety Code, had provisions that we could

work with.

Commissioner Borden has described some of those provisions,

but basically a person who’s involved in selling food, wholesaling

food, retailing food, they’re required to keep that food in a certain

safe and unadulterated manner. If they violate those regulations,

they’re subject to certain penalties that are set out in the code and

so we saw an opportunity there to deal with these organizations on

a civil level rather than a criminal level. What we did was we

started working with the TDH inspectors who would go in to these

different so-called wholesaling operations and look for violations.

They would then bring those violations to us and at that point our

attorneys would go into court and file for civil injunctions against

these operators which is kind of unusual, I think, you’ll recognize,

to use a civil injunction against a criminal organization, but based

on the laws that we have on our books, this looks like the best way

to actually substantially impact these organizations.

Part of that was because, as was already mentioned, the criminal

penalties for this type of activity, it’s Class A misdemeanor to State

jail felonies, neither of which is a particularly strong deterrent

who’s involved in this type of activity. The profits are just too large.

This type of penalty doesn’t scare them off. However, the civil penalty that’s involved, the $25,000 per violation really becomes a penalty that they begin to fear. They begin to take that into account

when they’re conducting these businesses, so we proceeded with a

civil injunction remedy. And I think we’ve had fairly good results

with that. One of the interesting things about the cases themselves

though is, as you might imagine, when you’re in a civil lawsuit and

you’re requesting discovery from the other side, typically, you’re

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dealing with a legitimate business or legitimate defendant and

they’re going to provide you with discovery, but in these cases almost in every instance, the people we were filing cases against refused to provide any discovery. They took the fifth amendment to

all of our discovery for the most part which again tells you what

type of people we’re dealing with.

Our client in these cases is the Department of Health. We’re

there to enforce their regulations that are set out in the Health and

Safety Code. Again, it’s kind of unusual. We’re using a regulatory

scheme to try to combat what is essentially a criminal organization,

but again it’s something that we found was more effective than trying to pursue the criminal laws that are currently on the books.

Since beginning this effort, we filed lawsuits against 15 individuals and 11 corporations. Those suits have alleged over 200 individual violations of the code, more than 10,000 cans and 1,000 case

of infant formula have been seized. The value of those seizures is

put at almost $1 million.

We’ve also been told and I think you’ll hear later that the retailers have reported that there has been a reduction in—actually

there’s been an increase in the demand for legitimate wholesalers

to provide infant formula which indicates that the illegitimate

wholesalers are being put out of the picture to some extent.

Again, I’d be happy to answer any questions you might have, but

to conclude, I’d just like to state that Attorney General Abbott and

his staff are anxious to continue this effort and they appreciate

your interest in this and we’d be grateful for any continued support

and any support you can give us in any way in dealing with this

very serious matter. if there are any questions, I’d be happy to answer them.

[The prepared statement of Mr. Clemmer follows:]

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Mr. SOUDER. Mr. Jacks, we’re going to let you close the first

panel and I appreciate your coming this morning.

Mr. JACKS. Thank you, Mr. Chairman and Congressman Carter,

thank you for extending the invitation to our office and I did not

have any prepared comments that I’ve presented, but just let me

begin by giving a little bit of background.

As mentioned, my name is Jim Jacks. I’m the first assistant U.S.

attorney in the northern district of Texas. Our office has been involved in investigating and prosecuting these types of cases for several years now. One of the first cases that was brought in this area

was brought by our office. The case originally involved strictly infant formula and the difference in that particular case or the facts

surrounding that particular case concerned the fact that at that

time many retailers were using infant formula as a loss leader and

basically selling it for quite a discounted price, offered rebates and

a great deal of that product in that case was being acquired legitimately or it was not stolen. But at such a price that it could be

repackaged and sold for great profit for those people that were obtaining it.

So our case originally involved actually conspiracy to traffick

goods with counterfeit marks as Mr. Pena alluded to in his comments. That case was indicted and prosecuted. The defendants

were convicted and after the jury’s verdict, the Judge granted the

Rule 29 motion to set aside the conviction based upon the defendants’ motion that the goods were actually—that there was no counterfeit mark. The counterfeit mark which was the subject of that

particular indictment was actually, as Mr. Pena alluded to, the defendants were making or having made by a printer new boxes

which bore the mark of the manufacturer and the formula containers then were repackaged. The court ruled that because it was legitimate formula, it was not counterfeit formula, that did not fall

within the statute. The Department of Justice appealed that case

and the Fifth Circuit reached the same conclusion as the court did

that while there may be a civil violation for trafficking in a counterfeit mark, the criminal violation of the evidence was not there

to support that because, in fact, it was legitimate formula.

Since that time, as has been mentioned by other members of the

panel, it appears that persons involved in this crime have shifted

their tactics and are now resorting to out and out theft either

through shoplifting or burglarizing businesses. We do have another

case that has been indicted. It’s set for trial and that case is probably going to go to trial some time between now and the end of the

year. I can tell you that the Department has focused on these types

of activities. There are several investigations going on all around

the country. The agents involved in those investigations have met.

The prosecutors involved in those investigations have met. They

are in touch with one another. They know each other very well and

they keep in contact in terms of sharing information and suggestions about how to address the problem. So it’s something that the

Department of Justice is aware of and the U.S. Attorneys Offices

around the country are very actively involved in investigating these

types of crimes.

If the committee has any questions, I’ll be happy to answer any

questions I can.

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Mr. SOUDER. I’d first like to deal to Congressman Carter, to open

the question.

Mr. CARTER. I’d like to start off by saying thank you to all of you

for testifying here today and thank you for the efforts that all of

you are putting forward in this, what I consider a very serious situation.

The fact that we’re talking about baby formula ought to offend

every mother in the United States, as far as I’m concerned, that

somebody would be illegally trafficking something that we would

give to innocents. I want to particularly commend the Pasadena

Police Force and DPS for doing a great job bringing this to light.

A couple of things were mentioned and first, I don’t know, maybe

Johnnie, you want to answer this. How closely are we able to tie

this to Middle East terrorists right now, the FBI, you’ve been working with the FBI on this also, is my understanding, is that correct?

Mr. JEZIERSKI. Yes. We’ve been providing information to them,

but that would really be something they’d have to answer. I can’t

say that there’s any prosecutable evidence that connects this group

to terrorist organizations.

Mr. CARTER. Now Mr. Pena, you mentioned that these 60 some

odd groups of shoplifters, most of those people are in violation of

immigration laws right now?

Mr. PENA. From my understanding, often many of these individuals are in some type of violation. They either overstayed. They

came in as students and they’re not students and/or they illegally

enter the United States.

Mr. CARTER. What’s the general procedures when we catch a

group of these people? When we catch a group of these people, because I know we are catching some of these groups, are they being

deported?

Mr. PENA. Yes, prosecuted and deported. If we can prosecute

them for a criminal violation, if they had been deported previously

and then they re-entered, we’re going to prosecute them for that

violation and try to get additional jail time and then deport them

and keep them out of the country.

Mr. CARTER. One of the things that I’m curious about, that I

think I understand from the U.S. attorney’s unfortunate situation

with their first prosecution, but the DA’s reluctant to prosecute,

State jail felonies. My DA certainly wasn’t reluctant to prosecute

State felonies. Does anybody want to comment on why people are

reluctant to prosecute State jail felonies?

Mr. Clemmer.

Mr. CLEMMER. Congressman Carter, I don’t know if it’s so much

a reluctance to prosecute the case as it is knowing that the potential punishment is so low that it’s—I just don’t see a lot of local

DAs being able to de bono for resources to this type of case versus

something that they would view as more serious violation.

The cases certainly can be prosecuted, but from what we’re hearing, and again, this is something the local DAs handle, as you

know, it’s just prosecuting a shoplifting case, it doesn’t get as high

up on their radar as something else.

Mr. CARTER. It’s not as glamorous anyway.

Mr. CLEMMER. Exactly.

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Mr. CARTER. But with the knowledge that we’re now able to tie

this in to activities, both illegal activities internationally and relating to drug laundering, drug money laundering, a 2-year stay in

the State jail the way we used to have our probation/parole system

in Texas would have been a considerable sentence because you do

State jail time day for day. You’ll get good time and you don’t get

parole.

Mr. CLEMMER. Yes sir.

Mr. CARTER. And so I don’t rightly understand that thinking, except it’s not very glamorous and you don’t make the headlines for

sending somebody to prison for shoplifting baby formula. Unless we

better educate the public as to what this relates to, and the overall

scope of what’s going on, here in this country because we’ve already

heard from this testimony that we’re talking about millions of dollars. And when you start talking about millions of dollars, it’s pretty bad.

Does anyone know anything about electronic tagging system that

some people are proposing to tag this merchandise so we catch a

warehouser and make a bigger case? Has anyone heard anything

about—anything like that? You may need to talk to the merchandisers about that.

Mr. JEZIERSKI. I believe Joe Williams probably would be able to

give you more information on that in the last panel.

Mr. CARTER. OK, thank you. Thank you, Mr. Chairman.

Mr. SOUDER. I’m missing one basic factor and it would help if

somebody could clarify, if I could do that. When they steal, let me

actually go off with Jack’s last statement. When companies are

using it as a loss leader and then they’re re-selling it, in other

words, they’re buying it legitimately and then re-selling because of

the profit differential, my basic struggle is where is the market to

repurchase this? In other words, if they can buy it in a legitimate

store, at that price, is there a distribution network that’s missing,

Mr. Merritt and Mr. Jezierski?

Mr. MERRITT. Yes, a very intensive distribution network. There’s

various, I guess you’ll call them fly by night export companies or

wholesale companies operating out of storage buildings. We’ve got

over 30 of them in Houston. The convenience store, the neighborhood convenience store, is a grass roots outlet for some products.

Many of the members of this organization——

Mr. SOUDER. What I’m trying to understand is, is the selling

price that they’re selling it, higher or lower than what you could

get it in the legitimate store?

Mr. MERRITT. It depends on where it’s being sold at. The cans

cost in the store $10 or $12 a can. They buy it from a shoplifter

for $5. If they sell it—then they sell it, they sell it to the WIC store

and they are reimbursed from the U.S. Government at a premium

price in the rebate program, sometimes up to $10 or more. We see

this in California where the rebate program is the highest in the

country, they’re getting $16 a can. So the cheaper they can get the

can, usually it’s stolen, the bigger the profit is when they get reimbursed by the U.S. Government.

Mr. SOUDER. In understanding our basic concerns, that we have

the health concern about the storage and contamination. We have

the theft concern from legitimate retailers. We have theft concern

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with the Federal Government. We have what these organizations

are doing with their money, but the consumers are not necessarily

paying a higher price?

Mr. JEZIERSKI. When you have companies that are losing money,

they’re going to pass those costs on to the consumer.

Mr. SOUDER. I have a retail background, but as far as the infant

formula, that’s why there hasn’t been a focus on whether somebody

who’s buying infant formula in the street may not be paying a

higher price. That’s why you haven’t mentioned that as the concern. The taxpayers are paying a higher price. The companies have

to cover their losses. But if they are selling it as a loss leader, there

are no losses.

Mr. JEZIERSKI. In response to that, we got a call when we aired

this publicly in a crime stoppers program here in Houston from a

person who said that he took credit for beginning this operation

many years ago and said when it began then, it was a legitimate

operation. They did acquire their product legally by buying in loss

leader prices. He said that this group now has changed every one

in it to criminals. They all operate stealing the formula now as opposed to the way they operated years ago.

Mr. SOUDER. There’s been allusions to other things. What would

be some—do you view baby formula as the biggest part of these

kind of theft rings? What other products would they be dealing in?

Is baby formula the dominant problem?

Mr. JEZIERSKI. It’s dominant, but cigarettes are probably right up

there with the same, over the counter medicines. The Health Department, in their program has some pictures of products that have

been seized. They include Zantac, Pepcid AC, glucose test strips,

and the glucose monitors. Basically they target higher priced items

that are available that they can steal easily. And those are the

items that we see them marketing.

Baby formula, because of the efforts that we have done in Texas,

has slowed down. It hasn’t stopped. We’ve impacted them, but

they’re still operating, stealing formula. But they’ve refocused a lot

of their attention to the over the counter medicines. Fortunately,

the Health Department also regulates those items and we think

we’ll be able to do something about that problem also.

Mr. SOUDER. Mr. Pena, on the networks that are involved in this,

my understanding is that the financial tracking of potential terrorist organizations is over at the FBI. In ICE, do you still track this

and what about if it’s say a Guatemalan group?

Mr. PENA. We’re still heavily involved and committed to financial

investigations. It is a top priority of ICE about money laundering,

whether it be narcotics, money involved through corruption and

there is a big focus in ICE on money laundering investigations.

And if I understand your question correctly, Mr. Chairman, the

commitment is whether—the FBI is lead agency now, financial terrorism. We will work closely with them. We are looking at the

vulnerabilities that exist that offer those opportunities to either

terrorists or smugglers or whatever. That’s the main focus now, the

legacy of Customs and legacy of INS are directed to those areas.

They’re our cornerstone program which is identify infrastructures

whether it be wire remitters, the banking system that could faciliVerDate 11-MAY-2000 09:03 Jun 24, 2004 Jkt 000000 PO 00000 Frm 00113 Fmt 6633 Sfmt 6633 D:\DOCS\94005.TXT HGOVREF1 PsN: HGOVREF1
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tate some of these activities to move the money throughout, internationally, you can get the proceeds back to these.

Mr. SOUDER. If you could answer this or Mr. Jackson or Mr.

Clemmer, really anyone who could. In trying to distinguish between—let me deal with the Central American groups because that

seems to be actually the greatest number according to the statistics

that you’re dealing with. Do their remittances factor their home

countries for the most part? In other words, one of the—I understood from the testimony that the remittances of the Middle Eastern groups often goes back to the Middle East. Is that also true of

any of the other groups that you’ve been able to identify?

Mr. MERRITT. I think most of the Central Americans, the illegal

aliens, they’re kind of nonentities as far as the government is

tracking their money. They don’t have bank accounts or if they do

send money about—they don’t have established financial storage

deposits to track it or subpoena it. It’s kind of hard to figure

out——

Mr. SOUDER. So I think there’s another thing that we need to establish. In the testimony there were a number of arrests and people involved in this and the numbers were greater in Central

American numbers than South American numbers, but you’re saying those cases weren’t as organized? In other words, do the Central American or Hispanic groups, do they have false front warehouses with large networks or is it just the Middle Eastern groups

that are more organized.

Mr. MERRITT. We know of two different groups in Houston. The

vast majority of the fencing level suspects were Middle Eastern.

We know a couple of Hispanic subjects that have fencing operations

that we were able to look at financially, but the vast majority were

Middle Eastern.

Mr. JEZIERSKI. I’d say the higher level of the fences are the Middle Eastern.

Mr. SOUDER. How do you determine, Mr. Pena, when something

is basically a group of crooks that need to be shutdown and when

they’re terrorist suspects? How are ICE and FBI going to make

that tradeoff?

Mr. PENA. I think that the distinguishing factor now is that the

FBI will have the lead, as it is now, to the Memorandum of Understanding that was signed recently on when we had the Operation

Green Quest. They’ll have the lead on these investigations and

they’re to be worked out of the Joint Terrorism Task Force. If we’ve

developed information independently of the FBI, then we will bring

it in to the Joint Terrorism Task Force with our agents’ participation, full participation, but the leadership will be the FBI’s through

this Memorandum of Understanding that was signed off on.

Mr. SOUDER. But if it was a Guatemalan fencing group?

Mr. PENA. Regardless of whether it was a Central American,

Mexican, Middle Eastern, it’s the same protocol.

Mr. SOUDER. Because the FBI would have Financial Crimes and

not just terrorism?

Mr. PENA. I stand corrected. If it’s tied to terrorism, if the link

is terror. If there’s not a link to terrorism, then the ICE will be the

lead agency, will pursue that investigation independently.

Mr. SOUDER. Like a traditional Customs case?

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Mr. PENA. Like a traditional Customs case.

Mr. SOUDER. So if a case is transferred over to the FBI, there’s

a reasonable doubt as to whether it should be investigated as a terrorist case?

Mr. PENA. If it is transferred over?

Mr. SOUDER. In other words, it’s not going to be transferred over

the FBI unless there’s a possibility that they think there’s a terrorist link?

Mr. PENA. Correct and that is what was agreed upon in the

Memorandum of Understanding when they dissolved Green Quest,

was that only those cases that there was a link to terrorism would

be going over to be worked at the Joint Terrorism Task Forces.

Mr. SOUDER. A link is the potential?

Mr. PENA. From my understanding of reading the agreement, it

has to be almost conclusive that says this organization is involved

in terrorism and at that point that case is going to be controlled

by the FBI.

Mr. JACKS. Mr. Chairman, maybe I can shed some light on that.

As Mr. Pena pointed out, these Joint Terrorism Task Forces exist

in every judicial district now in every FBI region and U.S. Attorney’s Office and what generally happens on the ground is that as

these names come up in the investigations, Immigration or whoever—they have agents assigned to these task forces and they will

contact their representative on that task force and say we’ve come

across this name, does it show up in your indices? So Immigration

does have access. The Immigration agent assigned to that Joint

Terrorism Task Force has access to these FBI indices and they can

run that name and say yes, it does or no, it doesn’t or it has a different spelling. It’s something like that, so there is that flow of

communication back and forth. And just because it doesn’t show up

the first time the Bureau and the Terrorism Task Force, that is not

the end of the discussion at that time.

They continue to monitor, but those agents investigating the infant formula or the organized theft, will continue to proceed. But

their information as it comes across, for example, they’ll say we

found out that this subject we’re looking at is sending money to

Jordan and it’s going this route. If we give you that information,

does that change your answer?

So that information continues to flow back and forth. All of us

in Federal law enforcement and State law enforcement are always

looking for that connection and our antenna are up all the time to

see if any of this is related to potential terrorist activity or support

for terrorism overseas.

Mr. SOUDER. Mr. Carter.

Mr. CARTER. Just to clarify something. I’ve misunderstood and I

want to make sure—this relationship between the Central American shoplifting team and the Middle East is that almost an employer/employee relationship? The Middle Eastern organizations

more or less contract with these guys and they go out and steal for

these Middle Eastern operations? Is that the way it works?

Mr. MERRITT. In many cases, yes. In many cases it could be described as a regular vendor they deal with. Like if you were Mr.

Smith, this is a guy that he buys his regular stuff from, but we’ve

been able to establish in some cases these people have lived with

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Middle Eastern fences from time to time, travel with them. When

theft suspects are in prison, we get Middle Eastern fences visiting

them in prison, putting money in their commissary, taking care of

them.

Mr. CARTER. Do you feel like that they may, in fact, have recruited these illegals to do this work for them?

Mr. JEZIERSKI. I found it interesting that on some loan applications, the Middle Eastern folks were signing off as employers to

some of these people for them to get their loans.

Mr. CARTER. So it’s an employer/employee relationship that

they’ve developed?

Mr. JEZIERSKI. Yes.

Mr. CARTER. There seems to be a little bit of confusion and so

they really wouldn’t have a storage operation as much as just taking the stuff to the Middle Eastern store?

Mr. JEZIERSKI. That’s correct.

Mr. SOUDER. Mr. Borden, have you seen much response at the

Federal level or investigations further up the system? I kind of

gathered from your testimony that there’s a general awareness, but

how much because the numbers that you have here in Texas, once

you got into it, were fairly staggering?

Mr. BORDEN. I see quite a bit of response from Customs, FBI. I

haven’t seen a whole lot from FDA at this point. I may not be

aware of everything that they’re doing.

Mr. SOUDER. You’ve not seen any additional things come through

the WIC program that suggests that they understand that this

problem could exist elsewhere?

Mr. BORDEN. I haven’t dealt with WIC people. I’ve not dealt with

the Federal WIC people. I think there’s a willingness at the State

level for funding for positions to give us just strictly to do WIC

stores and we’re currently working on that to try to get that position. Those moneys will ultimately come from the Federal source.

Does that answer your question?

Mr. SOUDER. Let me just make a couple of statement that were

behind some of my earlier questions. The jurisdiction of this committee is very broad in oversight. The overall jurisdiction is narcotics and we work with narcotics issues very closely. But among

other things we have the Department of Justice, Department of

HHS, Department of HUD, Department of Education, Commerce

Department, basically because when we first looked at narcotics we

combined a lot of the different agencies.

In addition to narcotics, I’m also on Homeland Security and the

Committee on Homeland Security and part of our dilemma as we

tackle these often separate, but potentially inter-related questions

is all the jurisdictions of the Federal Government, State government, local government, different agencies, and different initials.

It’s like once you get in one category of human services, you have

a whole number of initials just inside the Department of Health

and Human Services and then WIC and food stamps come actually

under Ag, but they’re interrelated with Human Services side which

is just baffling. I have an MBA and I get confused and I’ve been

doing this stuff for years as a staffer and as a Member.

No wonder on the street when actual people are trying to get

services for the poor, who are trying to get government services

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they can’t figure it out because we in government can’t figure it

out. How in the world can they possibly figure it out?

It leads to opportunities for all kinds of other people through convenience stores and all sorts of distribution networks because we’re

kind of all cockamamie in the Federal Government as to how we’re

doing a lot of this stuff and trying to get it organized.

Now in the Homeland Security question, it’s ironic here because

the ICE is in Homeland Security. FBI is not. FBI is under the Department of Justice. We have, in this committee, subcommittee, jurisdiction over FBI; in any narcotics that’s in Homeland Security.

And it shows the difficulty even in how Congress is set up to try

to figure out the oversight transfer of these different type of programs.

Now we have all the local task forces which has everybody in it,

but I have this great fear that we’re going to have, if we actually

did a flow chart some time with the Federal Government that 60

percent of your little date planner would be meetings and 40 percent would be going out and getting criminals because we have so

many different overlapping jurisdictions. We’re trying to address

that because I think hearings like this are helpful for us as Members of Congress and the general public and you all to see the challenge here.

What looks like a common theft ring, just a bunch of people

stealing, could be just a bunch of people stealing. But when, right

now if you said what’s the biggest challenge, No. 1, or anybody who

forgets that jobs is a No. 1 issue won’t be a Congressman for very

long, unless, of course, there’s a terrorist attack and then they go

well, why don’t you pay attention to terrorist attacks? So those obviously safety in the country and jobs are the two big issues. And

this is an example of them convening even if it was just a security

and theft issue, we would have to be concerned about, not to mention a health risk to the individuals. We would have to be concerned about it. But we’re all watching because as we know, as we

get better in the government of shutting down illegitimate ways to

launder money, that are above ground, for example, fake foundations, we drive it underground and just like as you close down legitimate opportunities or quasi-legitimate opportunities to take the

infant formula at a markup price then move to theft. As they move

to theft, and they get hooked up, we don’t know what happens. It

could be a bunch of people enriching themselves and selling it to

a higher market because they have the connections. On the other

hand, it is potentially going to be a terrorist nexus. And just like

narcotics are, just like trafficking in human beings are, and we

have to be increasingly vigilant at the State, local and Federal level

to watch for how the criminal organizations are going to work because ultimately they’re going to interconnect and it’s very interesting for me ever since Judge Carter first raised it, because I hadn’t

really thought, nor have most American people thought kind of conventional theft/fencing/flea market/convenience store type of ripoffs,

feeding into terrorist movements. We don’t know that, but the fact

is from what I understand from the testimony if the FBI thought

there was a potential terrorist connection, they don’t have jurisdiction on this case.

Is that correct?

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Mr. MERRITT. That’s correct.

Mr. SOUDER. It would suggest that at least some of the names

were showing up as potential risk people which is very hard since

we all know the difficulty of cell groups, until there’s an action

committed, you don’t know for sure whether the person has committed it, but it means some of the suspects had either ties to certain mosques or ties to certain groups that suggested that they

were on a watch list. And this is a very controversial question in

the United States, but it’s one we have in narcotics. We have it in

other terrorist groups. If you show up and you’re the police department, if somebody has been somehow picked up in three different

raids on another subject, whatever it is, stealing cars and you see

them around that, you’ve got them on a watch list and they show

up in the fourth one, you’re going to assume they might have something to do with the car thefts. Same thing here.

Does anyone else want to add anything? I wanted to try to make

a connection because it’s been interesting to try to do that and see

at our level how we’re trying to look at it too, but it’s very difficult

because as the cross jurisdictions hit, and as we try to figure out

how to do this intelligence, there is no clear cut answer for the

American people because a terrorist doesn’t check in at a border

and say I’m part of a terrorist network. We don’t know what we

basically get, so we have to figure out how to work through the

process in between.

Mr. Merritt.

Mr. MERRITT. I’ve submitted a copy of the same binder with my

written statement. I’ve included articles we’ve been collecting

throughout the United States for different investigations. Many of

these articles referencing cases while suspects have been indicted

with the people in these articles in other States. One article here,

although I’m sure there’s any connection in reference to our suspects, but Dr. Al-Arian from Florida, several businesses he owned

are Russian-related businesses or stores. They’ve just indicted most

of these businesses owned by him for trafficking in stolen infant

formula. He’s been identified by the FBI as the leader of the Palestinian Al Jahar group as a key fundraiser by the Secretary of the

United States. That’s just an example.

Also, we have the Hizbollah cell that was taken down in North

Carolina in 1998 that was trafficking in cigarettes and operating

identically, we almost have matching photographs of suspects, personal photos of subjects, the name is just different. It’s the same

exact MOs, it’s the cell they had out in North Carolina and that

was shown to be a terrorist cell for Hizbollah.

I can tell you from a street officer’s perspective what we’re seeing

in our communities, these stores are connected to the organizations

we’re investigating. There’s a very disturbing pattern. Many of

these stores they now own anywhere from 20 to 30 properties, residential properties surrounding their stores. We’re seeing street

crime increasing dramatically around these stores. They’re selling

narcotics over the counter. They’re bringing the neighborhood

around them down. We’ve got narcotics transactions and we’re trying to follow—they’re running full-blown pawn shops, buying items

stolen from house burglaries, car burglaries and thefts. These

stores are running full blown pawn shops in the back, keeping

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track of who they’re loaning money to, buying stolen property off

the street. I’ve personally recovered stolen property from several of

these stores.

Mr. SOUDER. Mr. Clemmer, is there any law holding that pawn

shops and flea market owners are themselves accountable?

Mr. CLEMMER. There are laws on the book. I can’t give you a real

clear answer on how it would apply in this case. We’re looking at

that, but I’d be happy to look into that and give you an answer on

that question.

Mr. JEZIERSKI. I’d like to say if you think of terrorism as a state

of mind, a mindset that these people have, many of these suspects

have that same mindset that extremists view of America as their

enemy. One of the subjects that we had in our office interviewing

said that if he was younger, he would blow something up. That’s

a mindset. Is he a terrorist? He has similar beliefs. Several of the

people who got arrested in the Dallas area indicated that same

mindset.

In Arizona, there was an article that I submitted that connects

Hani Hanjour to some of the suspects in the Arizona case. Does

that make them terrorists? They have associations that connected

them to a known terrorist who flew into the Pentagon. How do you

define a terrorist is the question.

Mr. SOUDER. There are those that define it as those who commit

acts of terrorism, and those who harbor them or fund them. It’s

pretty clear.

Mr. MERRITT. One of the big problems, you get intelligence about

these guys and the problem is you sometimes never let that cross

into the public sector, so somebody may know something about a

guy, but he cannot be on the list of his own and it’s just—it’s frustrating because once the money gets over there, you can’t track

where it goes.

Mr. SOUDER. This is not going to be easy, but none of your jobs

have ever been easy. You have to be able to prove it and we have

to be very careful. We’re on a fine line here because most of us,

quite frankly, I say this all the time, up in my area we have—because of our proximity to Detroit, I have one rural high school in

northeast Indiana that up until a few years ago, the only other foreign language was German because we were mostly German, but

now they have teachers of Farsi, 23 languages in the school and

there’s 800 kids. It is a different challenge, but you know what?

Most people like me do not know who the strangers at the mosque

are. And the truth is is that we have to be very careful as we profile and make general statements because our best defense right

now are the many people of Middle East descent who come in and

who can identify those within who are the strangers. I often have

heard and I’m sure it’s true in Texas too, people come up to me and

say there’s all these drug problems and I know this person is dealing drugs and the police won’t do anything about it and the courts

won’t do anything about it. That’s because you have to have hard

evidence, not a suspicion or rumor. It’s difficult, it’s higher risk

here in terrorism and we’re all worried about it because weapons

of mass destruction, while they aren’t killing as many people as

narcotics because we have like 20,000 deaths a year because of narcotics and we’ve had 3,000 over the last 2 years from terrorism diVerDate 11-MAY-2000 09:03 Jun 24, 2004 Jkt 000000 PO 00000 Frm 00119 Fmt 6633 Sfmt 6633 D:\DOCS\94005.TXT HGOVREF1 PsN: HGOVREF1
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rectly on our soil. Never the less, the fear that people have is a bag

of anthrax this big can take out 3 million people in Washington,

DC, is a different level of fear and we have to be systematic. We

have to do the type of thing we’re doing today that you all are

doing, taking apart their means of financing. Fortunately, we seem

to be ahead of them. They’ve been saying they’re going to kill us

for 2 years and they haven’t executed on our soil. On the other

hand, they’re aren’t looking for short term. This is like a 100 year

or 200 year project. So we have time to work with it, but we can’t

let our guard down at all.

Thank you very much for coming today. If you have additional

statements, we’ll make sure we get the different articles submitted

and your full statement in the record.

The second panel can now come forward. The second panel consists of Joe Williams, Gulf Coast Retailers Association; Darrell Taylor, HEB Grocery Chains; Deborah Brookshire, Texas Department

of Health; and Frank Muscato, Investigative Task Force, Wal-Mart

Stores.

As you come up, if you can remain standing I’ll give you your

oath. Please raise your right hands.

[Witnesses sworn.]

Mr. SOUDER. Let the record show that each of the witnesses responded in the affirmative.

Let’s again, we thank all of you for coming, for being part of our

hearing today. We’re going to start with Mr. Williams.

STATEMENTS OF JOE WILLIAMS, GULF COAST RETAILERS ASSOCIATION; DARRELL TAYLOR, DIRECTOR OF LOSS PREVENTION, HEB GROCERY CO.; DEBORAH BROOKSHIRE, TEXAS

DEPARTMENT OF HEALTH; AND FRANK MUSCATO, INVESTIGATIVE TASK FORCE, WAL-MART STORES, INC.

Mr. WILLIAMS. Thank you, Chairman Souder and members of the

subcommittee. My name is Joe Williams. I am president of a retail

trade association called Gulf Coast Retailers. I also serve on

USDA’s National Advisory Council on Maternal, Infant and Fetal

Nutrition and I’m a member of the Food Marketing Institutes WIC

Task Force.

Our trade association has approximately 600 member companies

representing over 1,000 locations and a diverse group of members

from furniture retailers to drug stores to supermarkets.

A lot of the background information has been given so I’m going

to get to the point. Retail theft results in consumers having to pay

higher prices for the products they purchase as retail establishments attempt to cover their losses. From infant formula theft,

Texas currently serves over 800,000 households who participate in

the Women, Infant and Children WIC Program. This means that

approximately 200,000 of that 800,000 householders are babies.

Close to 50 percent of the infants born in Texas last year are enrolled in the WIC program.

There is compelling evidence that theft of infant formula and

subsequent repackaging, altercation, falsification of labeling to

change expiration dates, storage of formula at improper temperatures in trucks and warehouses and finally sale to unsuspecting

WIC retailers or laundering of product through storefronts posed as

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legitimate WIC retailers, flea markets or over the Internet through

sites like eBay poses a health hazard to every infant in Texas and

in the Nation who is dependent upon this product for their sole

source of nutrition.

A majority of the infant formula products stolen and then illegally distributed back into the marketplace contribute to funding

of organized crime rings and in some cases, links to funding terrorist organizations.

Let’s talk about the scope of the Texas problem. There are approximately 400,000 infants on infant formula in Texas at any

given point in time. Less than 2 percent of that population is

breastfed. A baby normally needs 32 ounces of fluid formula a day.

One can of infant formula powder will normally sustain one baby

for 3 days. This means that on any given day in Texas, Texas infants would consumer 133,000 cans of powdered infant formula assuming this was the only type of infant formula available.

Infant formula is one of the top 10 items targeted and most frequently shoplifted. As a product category, contract infant formula

and that’s the brand that the State negotiates and contracts for,

represents over 75 percent of the brand targeted for theft. In

March 2003, and I’m only looking at that 1 month, we estimated

the amount of infant formula products shoplifted in Texas at $2.5

million or approximately 120,000 cans of infant formula powder.

This is 1 day’s complete nutritional needs for approximately

354,000 babies in Texas or nearly a 1-day supply.

In Texas, we organized a task force through our State WIC Advisory Board to address this growing problem. The task force is comprised of local, State and Federal agency personnel, client advocates, local, State and Federal law enforcement, retailers and retailer associations, and manufacturers. We started meeting in December 2002. We came up with a list, a set of recommendations

that we wanted to pursue. These were: One, we sought legislation

strengthening penalties in the State’s Food and Drug Code. It was

signed into law, Senate bill 1826, signed by Governor Perry, effective September 1, 2003.

We wanted to develop contract provisions that would require

WIC vendor retailers, grocery stores, to only purchase infant formula through State licensed, inspected and regulated wholesalers.

The Department of Health WIC program through the blessing of

the USDA has now put that in place and that was effective with

the contracts signed effective October 1st.

We wanted to work with the national infant formula manufacturers to develop product packaging that will accept security tags. As

of this date that’s going through the research and development departments.

We were seeking to raise industry, law enforcement and State

and Federal legislators of the awareness of the issue and its dangerous health concerns without creating a Tylenol panic. If you remember back to the 1980’s, with Tylenol, four bottles of Tylenol

were tainted and we’re talking about thousands of cans of infant

formula.

As part of our efforts we have visited with Under Secretary of

Agriculture, Commissioner Bows. We’ve also visited with the Food

and Drug Administration Commissioner, Commissioner McClure.

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One of our earliest issues was to work to develop legislation at

the State level forbidding the sale of consumable food items, infant

formula and baby food, usually consumed by children younger than

2 years of age. This bill actually was House bill 749, was signed

into law by then Governor Bush, effective September 1, 1999. As

you’ve heard Frank Borden talk about, they don’t have the staff

right now to really followup with that legislation. In Texas, we

have legislation concerning flea markets, but now we’re working to

get them an enforcement agency so we can have that in force.

This year, we’re also sponsoring and looking for support of Senate bill 1553 sponsored by Senator Larry Craig of Idaho and the

title of the legislation is ‘‘Organized Retail Theft Act of 2003.’’

Another point, we were working to seek legislation or regulation

of the sale of consumable food items to children 2 years and younger and other items like prescription drugs via the Internet through

on-line flea markets like eBay. I’m talking about Federal.

To give you some concrete results that you can look at, we talked

to our wholesaler members and we also talked to our retail members. I’ve got a major wholesaler that operates here in the Houston

area, serves over 1,000 supermarkets from independents to multichain operator. When he went and looked at his sales information

for March 2003 which was kind of the starting point for us and

then re-looked at his sales for September 2003 which was about approximately 6 months down the road, his overall business was up

6 percent across the board through the market.

When he looked at infant formula category, this category itself,

the volume there was up 12.5 percent, not related strictly to new

business, but the fact that he found that when he visited with his

retailers, a lot of the retailers were buying most of their goods and

services through his company, except for infant formula. They were

buying infant formula through a specialty distributor, if you will,

who later was indicted here in our State for being part of organized

crime.

To retail that additional 6.5 percent, this wholesaler, that’s an

additional 2,200 case of product per month or another way to look

at that, that’s enough infant formula to feed 40,000 babies.

We also looked at a smaller wholesaler that operated in the rural

area and much the same thing, specifically, I can tell you we looked

at our contract formula, Enfamil Powder, his distribution in sales

of March 2003 were 2,763 cases for the month of March. For the

month of September, it was 4,201.

If you look at retailers, and I won’t go into all of that in the interest of time, let me mention a couple. Company B: infant formula

loss in March 2003, $220,000. Infant formula loss in September

2003 after we enacted some of the solutions that had been suggested, $70,000. That’s a 68 percent improvement.

Company C lost $375,000 just for the month of March. These are

just companies operating in Texas. I mean these are just Texas

numbers. Their loss in September after some of the solutions that

had been in place, $55,000. This is an 85 percent improvement and

that’s great and we’re thrilled to death with the response from

that, but the losses still represent for this particular retailer,

enough to feed 8,250 babies.

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Based on retailers participating in a market share they enjoy in

Texas, we estimate that September 2003 amount of infant formula

products shoplifted or stolen in Texas to still be valued at $1.1 million. This is a reduction of 56 percent since March since some of

the recommendations by the Task Force were put into place. That

$1.1 million is still enough to feed 165,000 babies.

Next steps. We would like to see as WIC goes through the reauthorization process, that USDA requires States, territories and

Tribal Councils develop a structure that licenses and inspects all

entities involved in the distribution of authorized WIC products, including formula products from the manufacturer to the authorized

WIC retailer.

We would like FDA be requested to formally host a series of feedback sessions with retailers, manufacturers of infant formula products, State WIC agencies and security specialists to research all

kinds of packaging conducive to source tagging devices or labels

like the EPC, electronic product code.

We would like for the Federal Government to require States to

mandate that retailers who choose to participate as a WIC retail

vendor must meet both WIC and food stamp eligibility qualifications for WIC vendors as recommended by the National WIC Association.

We would like to see legislation developed prohibiting the sale of

consumable food products, usually consumed by children 2 years

and younger through the Internet, eBay or other similar on-line

flea markets.

We are looking for support for Senate bill 1553 as I mentioned,

‘‘Organized Retail Theft Act of 2003’’ sponsored by Senator Larry

Craig and my friend Thomas McClure has already agreed that he

would look at that and we really appreciate that.

I’ve enclosed copies of articles from several States that indicate

this is much bigger than a Texas problem and photos from several

sting operations that we’ve had here in the area.

Thank you for the opportunity to testify before you today on this

very important topic. I appreciate both your involvement and your

dedication to us. And I’d be glad to answer any questions that you

may have. Thank you.

[The prepared statement of Mr. Williams follows:]

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Mr. SOUDER. Thank you.

Mr. Taylor.

Mr. TAYLOR. Good morning, Mr. Chairman, and members of the

subcommittee. I’m pleased to have this opportunity to discuss the

problem of organized retail theft in the supermarket industry. My

name is Darrell Taylor and I’m currently the director of loss prevention for HEB Grocery Co.

HEB, just to give you some background, is one of the Nation’s

largest privately owned grocery chains and has over $10 billion in

sales in our fiscal year 2003. HEB was founded in Kerrville, TX in

1905 and will be celebrating our 100-year anniversary in 2005.

HEB currently employees approximately 58,000 employees and operates over 300 stores throughout Texas and internationally in

Mexico.

We estimate that HEB is losing approximately $8 million annually in merchandise through organized retail theft and obviously

this is one of HEB’s most pressing security problems. Separate and

distinct from petty shoplifting, organized retail theft involves professionals who target specific items for resale and then reintroduce

these items into the legitimate marketplace.

As discussed earlier today, they typically target household commodities and consumer items that can be easily sold through fencing operations, flea markets and swap meets. Even the Internet is

being used to sell these products now. In fact, a simple search on

eBay will list page after page of household commodities ‘‘in neverused, mint condition and in unopened packages.’’ These ‘‘new’’ products many times are often significantly below the fair market

value.

By analyzing our invoices in our stores, I’ve discovered that

variances exist that suggest that HEB is also being victimized by

organized retail theft. Specific products which are being targeted

include formula, razor blades, cough and cold medications, batteries, film, cigarettes and cosmetic items. In comparing these with

professionals in other industries, we have found that these items

are also being targeted throughout the retail industry.

Of particular concern to HEB is the organized retail theft of

consumable items such as infant formula. An analysis of our numbers suggests that HEB lost an estimated 314,000 cans of infant

formula in our fiscal year 2003. Obviously, this is a significant financial impact to the company.

However, more important to us is the potential health risk that

this poses for young babies. We believe that the organized retail

theft of 314,000 cans of infant formula last year created 314,000

chances that somewhere in the United States a mother could be

feeding her child infant formula which was purchased outside the

normal and established distribution chain and which could prove

unsafe. This number increases dramatically if you assume that

other retailers in Texas and throughout the country are suffering

similar losses of infant formula through organized retail theft.

As we talked about earlier, the reason why this occurs is the unsafe storage conditions and temperature controls which are not

placed many times which can affect the integrity of the product

and the nutritional content and even the physical appearance.

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We believe that the organized retail theft rings target infant formula for the same reasons that panel one discussed.

First is the demand, especially in the State of Texas, which has

one of the largest growing populations. We have 800,000 Texas

families which currently purchase formula through the WIC Program.

The profits which can be sustained through the illegitimate or il- legal market of formula. We can get $5 a can based on bringing the

formula to a fence.

There’s also the risk. The risk to a shoplifter who engages in this

type of an act is seldom prosecuted and seldom identified as being

part of a larger criminal enterprise.

HEB has long supported efforts to ensure that all of our customers have access to quality food products, whether it is through

the use of food stamps, food banks or other nutrition programs. In

fact, we provide millions of dollars in financial support and food donations to food banks every year. HEB is proud to partner with

State and Federal Governments to ensure that recipients of WIC

are able to purchase unadulterated and properly labeled infant formula at our stores. We therefore support the initiatives of the WIC

Task Force to combat the organized retail theft problem involving

infant formula including the Task Force’s proposal that a national

law be enacted to regulate the WIC products and make sure that

they’re exclusively purchased from authorized product suppliers.

At this time, Mr. Chairman, I’d be happy to answer any questions you may have.

[The prepared statement of Mr. Taylor follows:]

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Mr. SOUDER. Thank you.

Ms. Brookshire.

Ms. BROOKSHIRE. Good morning, Mr. Chairman, and Member

Carter. My name is Debbie Brookshire. I’m the director of the WIC

Vendor Operations Division which is housed within the Texas Department of Health.

WIC provides nutrition services and supplemental foods to pregnant and post-partum women and to children under the age of 5.

The program is 100 percent funded by a combination of Federal

funds and rebates from infant formula and cereal manufacturers.

Rebates are dedicated general revenue for the WIC program as required by Federal regulations.

Over 50 percent of the infants born in Texas receive WIC benefits which include infant formula. An average of 117,183 babies

each month are provided powdered infant formula through

issuance of a voucher which families redeem at authorized grocers.

Powdered infant formula represents an average of 60.7 percent of

all formula issued to Texas WIC participants each month. As we

were mentioning earlier, it’s the powdered formula that’s particularly in question here and it tends to be stolen from frequently.

Grocers are authorized by the Texas Department of Health Bureau of Nutrition Services under rules in 25 Texas Administrative

Code and as required by Federal regulations governing the program.

In 2002, the Texas Department of Public Safety and other local

law enforcement officials alerted the TDH program to the widespread problem of theft of infant formula both in Texas and nationwide.

DPS evidence shows formula theft is organized crime, could have

ties to money laundering and financing of Middle Eastern terrorism and the black market sale of formula to grocers for resale could

constitute a potential health hazard.

Both law enforcement and grocers confirm that the WIC authorized formula under contract for rebate is the formula stolen most

often.

Health hazards can include direct tampering with the formula

before it is sold to unsuspecting retailers, falsification of labeling

to change expiration dates, counterfeiting or cutting formula and

storage of the formula at improper temperatures in trucks and

warehouses.

The Texas Department of Health, TDH Bureau of Food and Drug

Safety Manufactured Foods Division and the Texas WIC program

have been working together on several initiatives.

WIC developed new rules that require all grocers authorized by

WIC in Texas to purchase formula only from licensed wholesaler

distributors, licensed retailers or directly from the manufacturer.

These rules were adopted by the Texas Board of Health and became effective October 1, 2003 which coincides with our contract

year.

The National WIC Association is using the rule language developed by Texas WIC as a model for other States to adopt for their

own use.

SIC has revised its vendors agreement document or contract to

require grocers to provide the name and Central File Number of

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the licensed wholesale distributor from whom they are purchasing

infant formula.

WIC has revised its policies and procedures to include sanctions

for WIC-authorized grocers who do not comply with the new rules

under the terms of their vendor agreements.

Bureau of Food and Drug Safety staff investigates individuals

who are suspected of violating Chapter 431 of the Texas Health

and Safety Code entitled the Texas Food, Drug and Cosmetic Act.

The same division staff has the ability to use the following enforcement tools: detention authority, civil and criminal penalty authority, the ability to order or move detained articles to a secure

location, and the ability to request condemnation of a product by

court order. When infant formula is confiscated, WIC helps fund

the temperature-controlled warehouses used to store the formula

under appropriate conditions pending outcome of the case.

For the 2004 Federal fiscal year, WIC did not renew vendor

agreements for specific grocers whose cases have been referred to

the Texas Attorney General’s Office.

Updates regarding activities related to infant formula theft are

provided to WIC’s Federal funding agency, the U.S. Department of

Agriculture on an ongoing basis.

Some of the retailer and formula manufacturer solutions. At a

December 2002 meeting of the Texas WIC Advisory Committee,

staff from the Texas Department of Health and the U.S. Department of Agriculture, retailers, formula manufacturers, committee

members and law enforcement representatives endorsed various

measures to reduce incidents of infant formula theft.

In addition to the rule mentioned previously and eventually

adopted by the Board of Health, the group also developed these recommendations for retailer and formula manufacturer action: retailers should consider locking up formula and/or placing it in a more

visible part of the store to deter thieves; formula manufacturers

should meet and find solutions to packaging of formula that will

allow for security tagging. Current packaging does not allow for

sensors.

Some of our conclusions. There is compelling evidence that theft

of infant formula poses a health hazard to the most vulnerable citizens of the State, contributes to funding organized crime activities

and funds terrorist organizations.

Texas WIC has taken swift, appropriate and effective measures

to assist investigators and law enforcement officials in their efforts

to deter the theft of infant formula and to help ensure that there

is no market for stolen infant formula. Current reports indicate

that stolen infant formula is being shipped out of Texas for resale

since Texas has become too ‘‘hot’’ for this business.

Infant formula is not the only item being stolen. Staff report that

over the counter medications, razors and other consumer commodities are being stolen, warehoused and resold by some of the same

individuals.

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Texas WIC is proud of what they’ve done to take steps to deter

this theft and resale of infant formula. At this point we look to investigators, law enforcement officials and legislators across the

country to work jointly to eliminate this problem.

If you have any questions, I’d be happy to answer them.

[The prepared statement of Ms. Brookshire follows:]

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Mr. SOUDER. Thank you.

Mr. Muscato.

Mr. MUSCATO. Good morning, Mr. Chairman, members of the

committee. My name is Frank Muscato and I am an investigator

for Wal-Mart Stores, Inc. A measurable part of my duties is working organized crime as it relates to retail theft. I live in Bloomington, IN and I work out of Bloomington. I believe to the Wal-Mart

Investigative Task Force [ITF]. It was formed in 1992 out of a

growing concern over organized crime in retail theft. We’re made

up of investigators who have been long-time with Wal-Mart and

law enforcement. In fact, I’m a retired police officer out of Dallas,

TX. We live in different parts of the country. With that $30 billion a year that the FBI estimates is lost in retail theft, it comes out to about 4 cents on a dollar. For every dollar

we spend as consumers, 4 cents goes to cover theft. The thefts are

major, internal and external and cargo theft.

On the external theft, it breaks down into two categories, what

we call in our business shoplifters are people who steal products for

personal use, whether it be a tube of lipstick or some food or cosmetics. They steal it for their own use or somebody in the family

versus what we call professional thieves or boosters. They steal

property to move that property on to make money. They move this

property of course to property fences, fences are those that knowingly buy stolen property.

They’re sophisticated, they’re professionals. They travel city to

city, State to State, committing these thefts and then at the back

of my testimony there’s a little flow chart that indicates the path

of stolen merchandise. This is not theory. These are cases we

worked over and over, whether it be baby formula, inkjet cartridges, over the counter medications, these cases we worked all

over the country involving this.

External theft in the retail industry appears to be growing at an

alarming rate. Through our apprehensions, we substantiate retailers are experiencing an exorbitant amount of theft by organized retail groups. In my testimony, I’ve listed several of the cases we

have going right now. This is just the tip of the iceberg of the cases

that we work throughout the country.

Because State laws are soft on retail theft and retail crime, because there are very few Federal laws addressing the issue, retail

theft is a high profit/low risk type of crime. Felony levels throughout the country vary in different States from theft over $100 in

Vermont is a felony up to the highest in the country which is Wisconsin, theft under $2,500 in Wisconsin is a misdemeanor. A person can’t carry that much out of a store. He’d have to make three

or four trips before it would become a felony. We’re talking two or

three computers, four or five televisions before it becomes a felony.

Here in Texas, theft under $1,500 is a misdemeanor. Theft over

$1,500 becomes a State jail felony. In Texas, theft under $200, an

officer can just write a ticket, like a speeding ticket for theft. So

it’s not looked at as any kind of a serious crime and that’s why

these professionals are in this. It’s a high profit/low risk type

crime.

Retails spend millions of dollars on systems, camera systems,

trying to stop this. We can control shoplifting. That’s easy to conVerDate 11-MAY-2000 09:03 Jun 24, 2004 Jkt 000000 PO 00000 Frm 00142 Fmt 6633 Sfmt 6633 D:\DOCS\94005.TXT HGOVREF1 PsN: HGOVREF1
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trol. And retailers control the shoplifting. What is so hard to control is the professional boosters. They come up with ways to defeat

the systems we put in. We’ve put in the detection systems, the AES

systems and the bad guys figure out ways to defeat those. In fact,

we worked bills around the country trying to get laws to protect us

against the things they do to beat us. For instance, an EAS system,

an alarm is set up when you walk out of a store if you didn’t pay

for the product. They figured out that if they put that inside of aluminum, it defeats the alarm, so they’ll get a bag and line it with

aluminum or a purchase, line it with aluminum and they’ll just

that up and out the store they go. So we’re working laws that target that, that if you use these specific devices to defeat these systems it’s a law in itself.

Joe Williams and Johnny Jezierski, on this task force they

formed back in December is proof that if we work together and

bring these things together and attack this problem, it works. They

have solved a huge portion of the baby formula theft in Texas. It’s

unbelievable. It’s unheard of in law enforcement to do what they

did.

Now, of course, I’m not taking this away from the Department

of Health and if it wasn’t for Dennis, it wouldn’t have been done,

but Johnnie and Joe started this and it actually works. If we can

move this further and with this bill 1553 in Congress, if we can get

that bill through, that would give us a tremendous tool for law enforcement, for retailers to put a crunch on this and save millions

of dollars to the consumers.

Thank you, and I’d be happy to answer any questions.

[The prepared statement of Mr. Muscato follows:]

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Mr. SOUDER. Thank you. Hopefully, this didn’t just give a big

boost to the aluminum purse market. They also don’t have to worry

in Bloomington about all the celebrations after football wins very

often, people going on a rampage unfortunately.

Mr. Carter.

Mr. CARTER. Ms. Brookshire, you talked about what WIC is

doing here in Texas.

Ms. BROOKSHIRE. Yes sir.

Mr. CARTER. What about the rest of the country?

Ms. BROOKSHIRE. Well, we do know that—we do have a representative on our subcommittee on infant formula theft from the

U.S. Department of Agriculture and Federal Funding Southwest

Region. So he’s out of Dallas. I know he communicates with his

boss who communicates with D.C. about all these issues.

Right now, they’re looking at the National WIC Association

which is not actually a Federal agency, as you know, it’s a private

association, is looking at adopting the language that we wrote for

our rules across the country. So they’re looking, they’re sharing

that information with other States and hoping that they will adopt

some of the same language to help deter the theft of infant formula

as well.

Mr. CARTER. California is the Mecca for every kind of—we just heard $16 a can for WIC formula. If you got $5 in the theft, it

wouldn’t be tough to rent a truck and haul it to California, if California will take anything they can get, that’s a pretty good profit.

Ms. BROOKSHIRE. Yes.

Mr. CARTER. Is this something you think we need to do at a Federal level? Have Federal laws to regulate this?

Ms. BROOKSHIRE. I think if you’re going to deter the theft of infant formula across the country, it has to be concerted Federal effort, yes. Where that language would go or what laws would be enacted, I can’t speak to that because I’m not really sure what would

be appropriate, but I do know that just by strengthening the rules

in Texas, we’ve really, it’s been helpful and the fact that we have

an entity within the Health Department that licenses the wholesale distributors and keeps a data base on them is really helpful

for us because we require that now on their applications. So unless

they put that on their application, we don’t approve one. I know

that’s sort of a rinky-dink kind of thing compared to the country

as a whole, but sometimes just doing those little steps helps a lot.

Mr. CARTER. Mr. Taylor, I told you nobody shops at HEB more

than I do and I know you move things around a lot because I can’t

find them. But I will tell you that baby food is always way off in

the corner some place.

Mr. TAYLOR. Yes sir.

Mr. CARTER. I’ve raised lots of babies. And we’ve heard some

comments about moving things up to the front and I’ll address this

to both Wal-Mart and HEB. Is that what you’re doing internally to

put this close to where people can watch this stuff?

Mr. TAYLOR. Yes sir, we actually have gone through—it’s a case

of recognition and response. Once you recognize these problems, we

now are re-merchandising our baby formula categories and even

changing the types of fixtures we use. You can’t take 15 or 20 cans

in one sweep. You would have to take one at a time and we’re putVerDate 11-MAY-2000 09:03 Jun 24, 2004 Jkt 000000 PO 00000 Frm 00150 Fmt 6633 Sfmt 6633 D:\DOCS\94005.TXT HGOVREF1 PsN: HGOVREF1
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ting them up near the front of the registers where there’s more

traffic.

Mr. CARTER. Is Wal-Mart the same way?

Mr. MUSCATO. Yes sir. We have a lot of controls. I’ve never

worked inside of a Wal-Mart store, but we have continuous controls, continuous counts on the product to see what’s happening to

it.

Mr. CARTER. Mr. Williams, do you think your bill 1553 is going

to fix the nationwide, or at least address the nationwide problem?

Mr. WILLIAMS. I think it’s a great start.

Mr. CARTER. Are you able to get that to us so we can look at it?

Mr. WILLIAMS. Yes sir. I think it’s a great start. I just want to

comment a little bit. Certainly that was one of the areas that we

looked at at relocating, but retailers are also on the other side that

those are clients coming into the store and we do not want to spotlight or discriminate against those clients and so if you do like with

infant formula like you do with cigarettes that you lock them up

and put them behind lock and key, if I’m a mother and I’m on the

program and I’ve got to go to the front, I may not even be on the

WIC program. I may just be doing Enfamil because that’s what my

doctor recommended and I’ve got to go to the front and ask a clerk

to go across the store to unlock it to get my infant formula, that’s

not really customer-friendly and we have found that in a lot of

cases.

Certainly, where the losses in the store document that we need

to take some kind of drastic action, we can do that and we have

done that on a short-term basis. That’s not a long-term fix though.

Mr. CARTER. As a group, do you feel like the law enforcement

agencies are prosecuting as effectively on this as they should be?

Mr. WILLIAMS. I think, Congressman, I have never been involved

with a more team effort working toward a common goal than with

this group, whether it was an Office of Inspector General with

USDA or with Comptroller’s Office or with DPS or Customs. The

agencies, both private and public sector, came together and we all

left our egos at the door to put together a complete task force to

say OK, we know that there’s not one quick fix out there, but what

are some solutions that we can start working on and then continue

to come back together to work together and we’ve changed since

day one. There’s different areas that we’re looking at, ways that we

can kind of all work together to move it forward. I’ll tell you, that’s

been the best part of it.

Our concern is even though we’ve had a substantial impact on it, it’s still $1.1 million in September and unfortunately what we’ve

seen, we’ve shut a lot of the fences and the places that they

laundered here, but it’s moved over into Louisiana. We know that

they’ve opened storefronts in Arkansas, for example. So we’re still

being—they’re still stealing it here. We’ve just cutoff most of the

storefronts. We’ve cutoff a lot of the laundering. We haven’t prevented all of the theft yet, but we’re working toward that and we’re

going to continue.

Mr. SOUDER. I’m still trying to understand a couple of basics. Mr. Taylor, your hypothetical example of $11.99 and you get rebated

from $12, the $12 is a fixed dollar?

Mr. TAYLOR. Correct.

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Mr. SOUDER. The $11.99 isn’t necessarily what you pay, it isn’t

necessarily what you purchase it for?

Mr. TAYLOR. With the WIC program, there’s a guaranteed

amount that if you were stealing it off the street, you would get

$5 as a booster to come and sell it off. In the WIC program, they

have a guaranteed max of the $12.99 establishing that profit margin. I don’t know if that helps.

Mr. SOUDER. So is the level of profit, knowing there’s some

very—I’m still trying to figure out the lost leader thing from earlier.

Mr. WILLIAMS. Can I explain that because it’s hard to understand. You have to realize that across the board generally the

wholesale cost or the price of that product, let’s take a hypothetical.

Let’s say it’s $12. And under the WIC program—the WIC program,

their retail price is the same price if you and I went and bought

the product. Our retail on that product may be $12.10 and we pay

$12 for it. OK? A small retailer has to buy generally from a wholesaler. He can’t go out——

Mr. SOUDER. Like going to Sam’s Club?

Mr. WILLIAMS. Yes, like going to Sam’s Club. He may actually

pay $12.10 and sell it for $12.10.

Mr. SOUDER. He’s trying to get traffic in the store.

Mr. WILLIAMS. Trying to get traffic in the store.

Mr. SOUDER. So there’s really no profit?

Mr. WILLIAMS. Correct. Now a large retailer potentially will buy from the manufacturer direct. He still may pay $12 for it, but he’s

selling it for $12.10.

Mr. SOUDER. So at some point if it isn’t addressed, the bottom

line is that you as a retailer, if I understand this, you’re basically

going to be reluctant to give up front space which is your highest

profit margin, presumably, people coming in and out, impulse

items. That’s where you want your highest profit items, not your

lowest profit items.

Mr. WILLIAMS. Right.

Mr. SOUDER. You don’t particularly want to have to use the labor

cost which is one of your other major things to lock up something.

In addition, it’s nice to talk about discouraging customers, but

that’s another element. You don’t want to discourage them from

coming in and actually may encourage another market. Things that

put the pressure on retail could eventually have the retailer decide

between the theft, the cost of labor and where I have to put it, why

should I carry it?

Mr. WILLIAMS. And we have some retailers that have dropped

out.

Mr. SOUDER. Which limits access to low income people. In other

words, it’s potentially access.

Let me ask another question. Is there any legitimate business

that sells infant formula over the Internet? In other words, do you

have retailers that would sell this over the Internet?

Mr. WILLIAMS. Not that I’m aware of.

Mr. SOUDER. Is there any kind of a wholesale market from the

manufacturers that if they have an overabundance of supply that

they cut the cost? Are there times when you get a bargain at the

rate of infant formula if somebody has overestimated market and

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you can get that and that there could be other places other than

theft that people could buy low income baby formula?

Mr. WILLIAMS. No. If I’m Wal-Mart and I’m buying from Lee

Johnson which is the contract—manufacturer for the State of

Texas, certainly I’m going to get a better price than if I’m at Joe’s

neighborhood grocery store, just because of pure volume. But those

are the only discounts. In most cases, those manufacturers, that’s

a specialty product and they don’t have runs on it that they then

volume discount for one market to another.

We’ve even seen those manufacturers run extremely short with

some of their contracted formula in some States and will issue

notes out. We had that happen to us in Louisiana 2 or 3 months

ago, 4 months ago. I don’t quite remember, but they were running

short on the formula, so we had to put a note out to the WIC clients or to our WIC retailers, actually, stating that formula was

short and short throughout the State. Visit with customers when

they come, allow them to purchase, they can purchase Enfamil instead of Simulax. Simulax is the rebated formula, in that particular case.

Mr. SOUDER. Ms. Brookshire, there’s an assumption there’s a

health risk. Do you have actual cases of somebody who that get

sick from this?

Ms. BROOKSHIRE. I don’t. I don’t know that there have been any

to date. We’re looking at this as a preventive, we’re taking preventive measures because we uphold the public trust and we don’t

want anything to happen. But at this point I don’t know of any

cases where a child has been hurt or harmed by infant formula——

Mr. SOUDER. Is there any history of this? In other words, there’s

a presumption that it needs to be cooler for what reasons? What

are the risks?

Ms. BROOKSHIRE. For powdered formula and that’s what we’re

primarily talking about because that’s what’s primarily stolen, the

formula itself has to be kept at a certain temperature in order to

uphold the integrity of the ingredients in that formula.

Mr. SOUDER. In other words, it may not work? Or is it a health

risk?

Ms. BROOKSHIRE. I think it eventually becomes a health risk, but

basically the nutritional content is decreased.

Mr. SOUDER. So basically it would just be wasting the money,

taxpayers would be wasting money and an individual would think

that a child could have long-term subtle health damages, but not

necessarily immediate. They’re not going to drop over dead. They’re

not going to have to go to the emergency room.

Ms. BROOKSHIRE. Correct. That’s my understanding. And actually it’s below, the cooler temperatures that are more of the problem than the high temperatures, interestingly enough.

Mr. SOUDER. It’s really interesting the concept of like what we

did with drug paraphernalia laws for shoplifting or methods of distribution. When we did that law in the paraphernalia laws and trying to address some of that kind of thing, the presumption is if

there is a legitimate use for a certain distribution network, collection network, that may be actually another way to crackdown on

some of the cases. If somebody is coming in with something that’s

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body who has worked in retailing, if you’re working against an organized ring, it is just about impossible. It is very frustrating to try

to do that. It’s kind of the cost of doing business and since business, I can make an ideologic statement, businesses don’t pay

taxes, businesses are not an entity, they just pass it through. So

you either pay your people less, you reduce the quality of your

goods or you charge people more because there’s no entity there

with which to absorb shoplifting losses, taxes or other things. It’s

a pass through. The business is a pass through institution. So if

we don’t address that, you’re going to have to deal with it one way

or another. Do you have any additional questions?

Mr. CARTER. Just one. There’s a special rebate for WIC, is that

right?

Ms. BROOKSHIRE. That’s correct. We negotiate a contract every

few years with both formula companies and cereal, infant cereal

companies. And we can serve almost twice as many participants

because of the rebate contracts.

Mr. CARTER. How exactly does that work? You take a retail price

and you add something on top of it?

Ms. BROOKSHIRE. No. Actually, frankly, it’s complicated and I’m

not sure I understand it completely either, but basically for every

can of formula that we redeem in Texas on the WIC program, the

manufacturer pays a rebate back to the WIC program.

Mr. CARTER. To the big WIC program or does that go down to

the WIC merchant?

Ms. BROOKSHIRE. No, it goes back to the State of Texas WIC program so that we can serve more participants.

Mr. CARTER. Thank you. Thank you, Mr. Chairman.

Mr. SOUDER. Anything else any of you want to add? We thank

you very much for this input. It’s been an interesting mix of law

enforcement, terrorism and the very infrequently heard problems

that retailers face. And I appreciate your coming today and taking

the time to testify.

With that, the subcommittee hearing stands adjourned.

[Whereupon, at 12 noon, the hearing was adjourned.]

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