Well-organized, sophisticated rings of professional shoplifters and boosters – including terrorist cells helping to finance violence in the Middle East – are filching American retailers for upward of $30 billion annually, selling stolen merchandise at a discounted price to other retailers and increasingly on the Internet, a virtual flea market with a worldwide customer base hunting for bargains.

   Organized retail theft (ORT), or organized retail crime (ORC), plagues the retail marketplace, driving up prices on a wide range of consumer goods, everything from diapers and baby formula to auto parts, power tools and jewelry.

   Dubbed “shrink” by the industry, losses reached nearly $115 billion globally last year, according to a report from the Center for Retail Research and Checkpoint Systems based in the United Kingdom.

   The crime rings are active in northern New Jersey and New York City; the region ranks in the top 10 nationwide for organized retail theft activity, according to the National Retail Federation. New Jersey retailers lose between $250-$500 million annually, according to Union County Prosecutor Ted Romankow, a member of a statewide committee working to combat ORT by organizing law enforcement agencies and retailers to share information through a dedicated communications network.

   The idea is to find ways to stop this if we can or slow it down, reduce the theft problem we have,” Romankow said. “We’re already focusing in on the intelligence that will be gathered by these retail participants and shared amongst themselves… “We all agree it’s important to share this information on a timely basis. If so, we may

be able to prevent it. If there are some boosters hitting Sussex or Bergen County and

they begin to move up and down the state, we can forewarn merchants.”

   Pending federal legislation also is designed to add more firepower to the fight against ORT. In September the House passed the Organized Retail Theft Investigation and Prosecution Act of 2010, bipartisan legislation that directs the U.S. Attorney General to establish an Organized Retail Theft and Investigation Unit tasked with investigating and prosecuting ORT, assisting state and local law enforcement’s pursuit of organized retail thieves, and working with victims of the growing criminal activity. The legislation must pass the Senate.

   No one is immune, experts say. The boosters target everyone, from big box retailers to neighborhood mom and pop stores, suburban strip malls and urban storefronts.

   “New Jersey retailers have a loss of about $230 per shoplifting incident on average,” Romankow said. “We think of shoplifting as someone who steals a stick of gum or a piece of clothing, some small item. But it’s a much more serious problem than that. These rings are stealing pretty substantial amounts of product and moving it through a fence. A lot of this now is being sold online. Whereas you used to get about 10 cents or a quarter on the dollar at a flea market, now you’re getting  upwards of 65 to 70 percent on the dollar.”

   Several compelling arguments demand a ramped up, coordinated response to ORT, according to John Emling, senior vice president of government affairs at the Retail Industry Leaders Association (RILA). He said ORT:

   • Puts public safety at risk since crime rings often resort to violence. The continued presence of organized criminals in retail settings threatens the safety of shoppers and employees, alike. 

   • Hurts everyone. Retailers lose money though reduced profits and additional expenditures for security personnel, training and equipment – dollars that could be better spent on business expansion and job creation or better pricing and selection.

   • Hurts consumers through higher prices and the inconvenience of more limited product selection or more difficult access to products that are secured as a preventative measure.

   • Presents a serious threat to public health and safety. ORT gangs steal high-cost items, including infant formula, pharmaceuticals and other consumer health care products. These products require proper storage and handling – issues for which ORT thieves have little regard.

   • Costs state and local governments more than a billion dollars per year in lost tax

revenue that would have been generated through legitimate sales.

   “We deal with this problem every day,” said Nate Hartle, senior group manager of investigations for national retailer Target Stores. “Our first and foremost focus is on prevention. Most retailers will tell you the same thing. We want to stop the theft from

happening in the first place.

   “An issue this large, you can’t apprehend your way to resolving this problem due to the sheer volume. It puts an added drain on law enforcement. It’s just more cases for the cops to work and they’re already strapped.

   “This requires a deeper solution than one retailer,” he continued. “We want the online marketplace to have (the) mindset, how are they making it tougher or more difficult to sell stolen property online? This problem requires a multi-pronged, multi-level approach.”

   Global online marketplace eBay has partnered with retailers to combat ORT.

   “At eBay we have no tolerance for stolen goods as it hurts honest entrepreneurs who are selling legitimate products and is totally against what we stand for,” said Paul Jones, senior director of global asset protection for the online marketplace. “A lot of progress has been made in the last few years in terms of cooperation, both in terms of industry groups and also with law enforcement.”

   This summer eBay announced formal partnerships with leading retail industry trade groups, including the National Retail Federation (NRF), Food Marketing Institute and Jewelers Security Alliance, in an ongoing effort to work together and fight ORT.

   The partnership, supported by the Federal Bureau of Investigation, aims to help law

enforcement in criminal probes and to prevent crimes in which goods are stolen from brickand-mortar stores and then resold online.

   NRF and RILA have pooled their data into a single national retail crime database. The Law Enforcement Retail Partnership Network (LERPnet) is a database that gives retailers a way to share details of crime with the authorities. LERPnet has information on 20,000 crimes gathered from a network of 50,000 stores, including diversion and security evasion tactics, witness statements, photography and video.

   Increased vigilance and cooperation seems to be making a difference, according to the sixth annual ORC survey conducted by the NRF, released in June, which shows 89.5 percent of retailers surveyed said their company had been a victim of ORC in the past 12 months, a slight decrease from 92.2 percent the year before. The survey also found that nearly six out of 10 retailers, 58.9 percent, reported an increase in ORC activity in the past 12 months, down from 73 percent the year before.

   “The relationships retailers have built with local, state and federal law enforcement agencies are making it harder for felons, but billions are still being lost each year from this exhausting battle with criminals,” said Joe LaRocca, NRF senior asset protection advisor.

   Some of that money is being funneled overseas by terrorist cells to finance terrorist

operations in the Middle East, according to Steven Emerson, executive director of the Investigative Project on Terrorism, whose testimony before the Senate Committee of Banking,

   Housing and Urban Affairs offers a chilling assessment of the link between ORT and terrorism.

   “Organized Retail Theft has links to money laundering and financing of Middle Eastern terrorism,” Emerson said. “It targets everyday household commodities and consumer items affecting a variety of retail enterprises including supermarkets, chain drug stores, independent pharmacies, mass merchandisers, convenience stores, and discount businesses.

   “Strong evidence indicates that profits from this chain of illegal activity are funneled to terrorist groups in the Middle East, posing a serious threat to national and international security.”

   This is not stealing an apple from the local grocery.

By Gina Diorio

   It is one of your worst nightmares come true. You reach for your blackberry – packed with your schedule, hundreds of contacts and sensitive business information – and it is gone.

   One moment of distraction and your confidential information could be anywhere, in anyone’s hands. For Eric Tunis, an attorney with Greenbaum, Rowe, Smith & Davis LLP, such a nightmare recently became reality.

   Tunis was fortunate to recover his device but he emphasizes, “No matter how vigilant you are, no matter how hightech you are, no matter how far you go  to counter the sophistication of the bad guys out there, you’re still at the mercy of human weakness.”

   Last year alone there were 11 million reported lost or stolen identities, an approximate 10 percent increase over the previous year, according to Art Brown of Pre-Paid Legal Services, Inc. Of these cases, database breaches accounted for slightly more than 50 percent.

   As incidents of data theft rise, businesses are under increasing pressure – not to

mention state and federal regulations – to protect customer and employee information. While flagrant violators could face substantial fines and penalties that may run into the millions of dollars per violation, Brown notes that non-flagrant violators – those who have at least made a “reasonable attempt” to guard data – may also face fines, albeit lesser ones.

   Yet not all businesses fully understand their vulnerabilities, liabilities and what steps to take to safeguard confidential data.

   Tunis recommends starting at the point of hire and having employees sign a formal

waiver acknowledging that “anytime (an employee) uses company equipment for personal use, (he or she) is subject to discovery.” It is also important to hold periodic training to remind employees of the use and misuse of company equipment and to emphasize the consequences of misuse, he adds.

   Sergeant Michael Hoose, supervisor of the Union County Prosecutor’s Office High

Tech/Computer Services Unit, agrees that the greatest threat to data security is the

employee.

   “Everyone feels that they have the most sophisticated information and protection in

place,” he notes, citing examples like firewalls, antivirus programs, retina scans, smart cards and biometric entry. “We have the best protection on our computer network (but) the weakest link in this whole circle is the human being.”

   Not only can employees with work-based internet access inadvertently invite threats, but hackers may be able to convince workers to reveal bits of information over time which, when collected, can open the door to inside attacks, according to Hoose. He warns that employees must be trained to ask questions of people, regardless of whom they may be.

   “Additional security will be training personnel, monitoring what they’re doing…(and

making) sure they’re cleared to do the job they’re hired to do,” he said.

   Brown recommends businesses take several steps.“Every business should appoint an information security officer,” he said. “They need to have a non-public information  policy. They need to educate and train their employees about their non-public information policy…(And) they need to prepare some type of a written plan should they ever have a database breach.”

   Although talk of data theft may conjure up images of computer whizzes cracking codes and hacking systems, the risks can often be much less sophisticated – and be addressed with common sense.

   For example, when Arlene Reardon took the helm of Therapeutic Massage and Training Center in Westfield two years ago, she found virtually no security on private information. Paper files containing individuals’ medical history were everywhere, with not so much as a lock to protect them.

   “The first thing I did was call in a locksmith to have the cabinets where the files were held locked,” Reardon said. Over the next two years, she went through the files, scanning or digitally recreating all those containing important information and saving them in password-protected files that only she and her assistant director can access.

   “Look at the information that you’ve got out on your desk,” Reardon recommends to other business owners. “If somebody were to copy that information, would you want that information being spread? Look at everything with the eye, ‘What if somebody picked that up?’”

   Whether high-tech or humanly perpetrated, experts warn that data theft is a threat

that gives no indication of disappearing. It is up to businesses to maximize their defenses against it so those “what if” scenarios do not become living nightmares.

   “I would urge you to take this problem seriously,” advised Tunis.

   The operation was a success but the patient died.

   Those famous words soon may be written upon the medical chart of small and medium businesses, nonprofits, trade associations and institutions beginning in 2012 thanks to a provision of the Patient Protection and Affordable Care Act enacted into law earlier this year that will greatly expand the burden of financial reporting on these entities.

   Simply put, beginning in 2012 all businesses will have to file 1099 forms for any goods or services exceeding $600 purchased from other businesses during the calendar year, with both the Internal Revenue Service and the vendor from which the goods or services were purchased.

   Currently 1099 filings are required for very narrowly defined types of purchases, for example financial transactions, targeted transactions such as bartering and prizes, and amounts paid to unincorporated businesses – generally understood to be independent contractors – for services, according to the Journal of Accountancy.

   The new rule extends the requirement to all companies, trade associations, non-profits and state and local governments and also expands the provision to include the purchase of goods or products. In one commonly-cited example, if a business buys more than $600 in office supplies from Staples over the course of a year, it now will have to send a 1099 form to Staples and file another one with the IRS.

   It is estimated that the new requirement will impact between 30 and 40 million businesses. The ramifications within the business community, particularly small and medium businesses, are enormous and varied. While most large businesses track their transactions by both type and vendor, most small and medium businesses rely on software that sorts expenses by category. Compliance with the new 1099 filing requirements will mandate that more businesses adopt new tracking procedures at a time when taxation paperwork, at $74 per hour, is the most expensive paperwork burden placed on smaller businesses, according to the National Federation of Independent Businesses (NFIB).

   The IRS promises to somewhat ease this new burden by exempting transactions made using credit and debit cards (great news for credit card companies). However, as the NFIB points out, many larger businesses may look to streamline their reporting burdens by minimizing their transactions to vendors that only accept payment via these cards, further placing at a disadvantage smaller companies that either do not accept credit and debit cards or cannot do so competitively.

   Those lining up to condemn the new 1099 requirements go far beyond the usual business advocates, such as associations. While certified public accountants likely will see an increased demand for their services due to the complexity of 1099-related tracking and filing, CPA associations are bemoaning the impact the new requirements will have on their clients.

   Even the federal government’s National Taxpayer Advocate of the IRS “expresses concern that a new (1099) reporting requirement…may impose significant compliance burdens on businesses, charities, and government agencies,” according to a summary of its report to Congress.

   So who is in favor of this, and why?

   Reports are that Congressional staffers who crafted the legislation say it is needed to offset $35 million in tax cuts for small businesses, as it is expected to generate more than $17 billion in additional revenue, one supposes through improved tax compliance and fines on business for failing to properly file ($50 for failure to file or filing with incomplete or inaccurate information; $100 for deliberately doing so).

   The logic, of course, is faulty – although Washington through-and-through.

   Solutions to the pending 1099 nightmare are abundant. Recently four remedies proposed by both sides of the aisle floated through Congress but failed – along largely partisan lines, or course. The argument, it seems, is not that the new regulations should be modified or repealed, but rather who should get the credit and how to pay for the lost revenue the measure is expected to raise.

   While health care reform was intended to heal the wounds of the American health care system, in the process this one reporting requirement within the act may result in further weakening an ailing business community already weighed down by onerous regulations. At a time when small and medium businesses are fighting to recover from the worst recession since the Depression and the federal government is touting them as the phoenix that will lead America to renewed economic health and stability, this sector is caught in an eddy of partisan politics and skewed logic.

   The new requirements related to Form 1099 filings must be repealed before they take effect – and before the patient dies despite a successful operation.

By Chris Young

   The National Bureau of Economic Research recently announced the United States recession ended in June 2009, ending the longest and one of the deepest recessions in its history. Couple this with falling initial jobless claims, declining unemployment rates, flattening decreases in home values and an increase in mortgage applications and one would surmise that confidence is returning to the market.

   Yet consumer optimism has been slow to materialize, evidenced by the Consumer Confidence Index (CCI), which is down approximately 10 percent since August and 70 percent since its high in 2007.

   Consumer spending is down significantly, as well. According to a recent Gallup poll, “Americans’ self-reported average daily spending in stores, restaurants, gas stations, and online averaged $63 per day during August — down $5 from July, and down $2 compared with August 2009.”

   Economists have several theories for the slow recovery in consumer confidence and spending, including: the 1.7 percent dismal growth rate of the gross domestic product; unemployment, hovering substantially above 9 percent; the wealth effect – declines in investment portfolios and home values causing people to feel less secure and pushing them to save more to compensate for their losses; and new federal and state regulations created with the new health care and financial regulations.

   Yet all appear to address some characteristic of consumer spending.

   Although this recession has and will continue to impact the consumer, it has detrimentally impacted the business community, as well, with the small and medium business (SMB) being impacted perhaps the greatest. Unlike large corporations with the ability to quickly change production and distribution functions, SMBs are typically locked into their business model, with only slight ability to modify in the short term.

   More important are the interdependencies between SMBs and the consumer. With most of the businesses in the United States being classified as SMBs and approximately 50 percent of the workforce employed by them, there seems to emerge a “chicken and egg” problem.

   SMBs cannot grow unless the consumer purchases their products and consumers will not purchase unless they have a foreseeable income – typically supplied by the SMB.If SMBs are to grow, hire new employees, provide raises to existing employees, engage in new projects, seek new capital and provide confidence to the consumer, they need to engage the local community, build loyalty with existing customers and seek production cost efficiencies wherever possible.

   SMBs should educate the local community about the quality of their goods and services in comparison with lower-cost, international rivals and chain stores. They should engage in community events, support local charities, municipal sports programs and the like.

   First, SMBs should build strong loyalty and communication programs that not only reward repeat business, referrals and family programs but also reach out to customers they have not lately seen. The first step is to purchase a customer relationship management (CRM) tool for a few dollars per month.

   Second, they should consider establishing a social media marketing campaign that includes a website, a blog and possible Twitter and Facebook accounts. Social media is almost free and the ability to target existing and new local customers is uncomplicated and potentially rewarding.

   Third and possibly most important, many SMBs are either unaware of and/or averse to the idea of outsourcing some of their value chain and/or production functions to overseas, low-cost business service providers. They can outsource lower-value, routine tasks such as database entry, accounts payable and receivable, programming, development and quality assurance. They will lower costs and create more time for R&D, marketing, client engagement, sales and community outreach.

   If consumer confidence is to be restored, it starts with the SMB moving from a high-cost provider of goods and services to a more efficient lower-cost provider that leverages the low-cost service providers throughout the world. By doing this, consumer confidence will be restored – fundamentally because more time will be spent on innovation and R&D and creating new markets and profit centers that will ultimately translate into more jobs, creating incomes and better ways of life for most Americans.

   Christopher Young, Ph.D., is professor of economics at Seton Hall University and managing director of M&A at Berkery Noyes. He can be reached at 646.442.7998.