TERROR LINK TO COUPON FRAUD?

[Update: Saturday, February 16th, 2008--The Wall Street Journal has a front-page

DOES COUPON FRAUD FUND TERRORISM?

A Milwaukeeworld exclusive

By Michael Horne

Cents-off coupons, those money-saving documents that spill out of the purse of the woman in front of you at the grocery checkout are also a license to steal according to an indictment filed March 7^th, 2007 by U.S. Attorney Steven M. Biskupic. In it he charged 11 principals of coupon clearinghouse International Outsourcing Services LLC (IOS) as well as the corporation itself with causing “over $250,000,000 in loss to manufacturers nationwide and over $15,000,000 to Wisconsin-based companies,” according to a press release.

The $3 billion dollar-a-year industry is ripe for abuse, despite manufacturer fraud controls. Some say that fraudulently submitted coupons have even been used to finance terrorism. And this is not the first time IOS has come under federal scrutiny.

The terrorism connection was the claim of Ben Jacobson, a Florida investigator and former New York police officer who testified before a Senate committee in 1998 that the proceeds of fraudulently submitted coupons may have financed the first bombing of the World Trade Center in 1993. He traced a web of small grocery store owners who participated in the fraud, and linked them to terrorist organizations – including that of Osama bin Laden.

According to the Chicago Tribune of September 19^th, 2001, “after the 1993 bombing of the World Trade Center, [an] investigation showed bin Laden and others in the Middle East had made an estimated $100 million a year through consumer coupon fraud. ”Ben Jacobson, CEO of the investigative consulting firm Peregrine Group, testified before Congress about the fraud. He said people associated with bin Laden ran an extensive operation stealing coupons offering discounts on groceries and other items and returning them to clearing houses for reimbursement.”

Unfortunately, his research fell on deaf ears: “I was unable to enlist the substantive aid of any law enforcement agency or prosecutor's office,” he told the senators in 1998. In 2004 he wrote, “it took Sept. 11, 2001 and the disaster of this tragedy to get the Feds off their butts.”

The prosecutors are certainly paying attention now. In addition to the charges unsealed in Milwaukee, Biskupic’s office also participated in an investigation that led to guilty pleas entered March 2^nd, 2007, by seven men in a New Jersey scheme. Clearly Biskupic’s investigations reach beyond the Eastern District of Wisconsin.

Who knows where Biskupic’s reach will end? According to his indictment, “manufacturers and their agents historically have rejected a much higher percentage of coupons from smaller, independent stores than from larger retailers.”

The smaller, independent stores are much more likely than larger retailers to be owned and operated by immigrants, many of whom hail from middle-eastern countries.

In the New Jersey case, the defendants, including Shahin Kayed, Rizek Kayed, Mohammad Awadalla, Gazi Nassralla, Siya Kayed, Belal Dalia and Ribhi Mustapha contacted at least 54 stores in New Jersey, New York, Pennsylvania and Maryland “soliciting participation in a coupon redemption promotion which would purportedly qualify the store owners to receive cash payments by redeeming manufacturer coupons.”

What the unwitting store owners did not know is that the defendants then opened accounts with coupon clearing houses in the stores’ names, fraudulently processed coupons, and received more than $580,000 from the clearing houses. The stores got less than 50% of the funds, with the rest going to the defendants.

In the IOS case, a similar procedure was used on a much grander scale. According to Biskupic’s indictment, “IOS and various defendants took a series of actions to conceal the scheme from not only product manufacturers but also the innocent retail clients whose accounts were used by IOS to launder the fraudulent coupons.”

IOS issued a letter on March 12^th, 2007, saying that it serves over 40,000 retailers, both large and small, in the processing of hundreds of millions of coupons each year.

According to the letter, research will “show that the company has complied with the law and dealt fairly with all parties. These allegations stem from a long-standing industry dispute regarding coupon processing and a very small number of manufacturers.

“We have always sought to treat every type of retailer the same, regardless of size and influence. In fact, IOS has tried to stand up for the rights of small grocers to ensure they are not shortchanged in the process. As a result our integrity has been challenged and our reputation assailed.” [Emphasis added.]

The recent investigation into IOS was triggered by an FBI raid in February 2003 in seven states in which 16 people, including an IOS employee, were arrested for coupon fraud. The investigation involved 370 stores, most with “Arab / Middle Eastern ownership” in 15 states.

Jacobson, the investigator, said at the time that the arrests and indictments exposed only a tip of the iceberg. “Coupon fraud rings have put scores of Arab immigrants into the grocery business by sub-leasing them the stores and arranging loans from shady finance companies that are then repaid with the store's share of the fraud."

Such allegations, if true, could have tremendous implications. For larger grocers, with much tighter internal controls, the prevalence of coupon fraud alleged among small grocers gives their competitors an unfair advantage.

And what of the “very small number of manufacturers,” that IOS insists is the source of the complaints against it?

Biskupic’s indictment is carefully limited to Wisconsin-based concerns. According to the indictment:

“To receive reimbursement payments from manufacturers, IOS often opened bank accounts in the names of its retail clients. IOS controlled those bank accounts, and the retailers in whose name the accounts were listed were not aware of how much money was deposited into or paid out of these accounts.”

In one five-month period in 2002, IOS fraudulently billed Sargento Foods for $530,748 in fraudulent coupons said to have been redeemed for Sargento products at its client CVS, a very large chain with over 5,400 stores by 2006. “In reality, CVS did not carry the products at issue and, as IOS well knew, those coupons had not been used to purchase Sargento products at CVS.”

Also in 2002, IOS invoiced Good Humor / Breyers Ice Cream, a division of Unilever with corporate headquarters in Green Bay, for $1,965,513 that IOS said had been redeemed at HEB stores in Texas. However, the coupons for the ice cream products had only been distributed in the northeastern United States.

Between June and October, 2002, IOS submitted $15,653,874 in coupons to Kimberley-Clark Corporation in Neenah for coupons issued for Kotex products. Once again, the coupons were alleged to have been redeemed at HEB stores in Texas, yet had been distributed only in the northeast.

Between November, 2002 and February of the following year, IOS similarly billed S. C. Johnson & Sons of Racine for $6,915,041 for coupon redemptions.

This “small number of manufacturers” appear to have been bilked for a large amount of money, and these are only the Wisconsin manufacturers. Who knows what lies beyond?

It is one thing to steal from Uncle Sam; quite another to steal from Uncle Sam Johnson, as IOS has learned.

FORFEITURE REQUEST

Upon conviction of one or more of the offenses in the indictment, Biskupic has asked that a considerable amount of money and property be forfeited. In the event the defendants cannot cough up $250,000,000 cash, Biskupic has other plans, including (but not limited to) seizing property in Indiana, Texas, New Jersey, Missouri, Michigan, New York, Pennsylvania, South Carolina, Tennessee and New Mexico. The defendants include Chris Balsiger, a mountaineer and explorer.

He also has his eyes on automobiles belonging to the IOS defendants, any one of which would raise an eyebrow if seen on a Milwaukee street, including “1999 Bentley Arnage, 2003 Mercedes Benz S500, 2003 Mercedes Benz Roadster (2), 2003 Mercedes Benz C Series, 2003 Mercedes Benz 600 Series, 2002 Mercedes Benz S43, 2002 BMW 745 LI, 2003 BMW X5, 2004 Infiniti QX56, 2005 Lexus RX330, 2004 Lexus SC430, along with lesser vehicles including a 2005 Toyota Landcruiser, a 2006 Land Rover, a 2004 Cadillac SLR Roadster, and a 22.2-foot Harris-Kayot boat.

Clearly there is a tremendous amount of money involved in coupons and coupon fraud. Why do manufacturers expose themselves to such risk? As always, it is because of the rewards, particularly in a state like Wisconsin, where coupon usage is probably higher than many other states, and where the grocery business is fiercely competitive. Procter & Gamble, the largest manufacturer of consumer products, experimented with a no-coupon policy in Upstate New York a number of years ago, and abandoned the plan when sales dropped.

[Milwaukeeworld spoke with the office of Senator Herb Kohl to see what his perspective, as a former grocer, is on the coupon scandal. Although the staff of the senator was most kind, he was apparently too busy hiring and firing basketball coaches to comment on this topic. – Ed.]