Crime and the Bottom Line
Companies assaulted by thievery and violence are being robbed of precious profits
Sgt. Keith Levine set out to stop a crime one night in Manhattan last December, but he wound up stopping a bullet instead. Driving home with friends at 2 a.m., the off-duty police officer spotted a robbery in front of a Manufacturers Hanover cash machine. Levine, 27, leapt from his car and gave chase. After two blocks, the robber turned and fired a gun. Levine shot back. When the bullets stopped flying, Levine lay dying on the sidewalk. A few hours later, police arrested Christopher Lewis, a 25-year-old with a record of 26 convictions for petit larceny and minor drug charges. Soon after, Manufacturers Hanover wrote a bitter epilogue to the tragedy. The robbery victim for whom Levine died may have been a thief himself: Bank records show that someone tried to use a stolen bank card at the machine minutes before the shooting.
Keith Levine got caught in the cross-fire between a convenience economy and a violent society. But hundreds of banks and their customers are paying a significant price, too. U.S. banks have spent more than $650 million on security systems for cash machines, yet ATM patrons are still robbed once every 88 minutes and large banks still lose an average of $41,741 a year to ATM fraud. Now New York City is considering a set of tough security requirements--measures that would add $30 million to $50 million to bank outlays, or force the closing of dozens of ATMs. This extra expense would be piled on to the staggering $25.6 billion burden that fraud already imposes on the financial-services industry.
Theft at ATMs, however, is small change compared with the walloping bill American business pays for crime in all its forms. U.S. News estimates--conservatively--that crime against business cost companies $128 billion last year in direct losses, litigation expenses and security outlays. That is eight times the cost of crimes committed against individuals and households, or, put another way, about 69 percent of after-tax corporate profits in America. Even worse for the balance sheet, the cost of crime against business has doubled since 1980.
Virtually the entire cost of crime against companies is passed on to consumers in the form of higher prices, which results in a "crime tax" of $1,376 for every American household. "Directly or indirectly, business crime is an overhead cost," says William Cunningham, a security consultant and president of Hallcrest Systems Inc. "The consumer pays every bloody penny." At 2.3 percent of gross domestic product, the cost of crime is also a drag on the nation's productivity, because a dollar spent on security guards is a dollar not spent on research or product quality. "You've got to build the price of security into the price of your product," says Lester Thurow of the Massachusetts Institute of Technology. "It means our goods are going to cost more than Japanese goods, even if we produce them as efficiently."
THE SCARE TAX Two blocks from the spot where Keith Levine was slain, and barely one month later, crime struck once more--again with grisly results. This time the victim was 22-year-old Lisa Steinberg, an assistant manager at Gap Kids whose dream of a Manhattan retailing career ended in sudden death. Steinberg and her store manager arrived early one January morning to admit two construction workers who needed to complete some repairs. Once inside the store, the manager went to the basement with the two repairmen, leaving Steinberg alone. Roughly an hour later, the manager went to Steinberg's office, where he found her lifeless, bleeding body, bound and gagged with duct tape. Her office was a shambles, and $7,000 was missing from a nearby safe. It was later determined that she had been stabbed in the neck with a Phillips screwdriver and shot in the head.
Executives at the Gap won't comment on the murder while it is under investigation, but neighboring merchants have plenty to say. Several blocks away, at a trendy clothing shop on Madison Avenue, the women employees won't work after dark and the store manager is not permitted to open up without a guard on the premises. "We have a scare tax on the place that's unbelievable," says Bud Konheim, owner of the store. Konheim says his costs--and the price he has to charge customers--are inflated 10 percent by guards, surveillance cameras and extra clerks to escort his deliverymen.
These security expenditures are beginning to weigh heavily on the bottom line. Crime protection expert James Cawood of Factor One estimates that a violent crime like Steinberg's death can cost a business $250,000 in workers' compensation for stressed-out employees, lost revenue, management time and extra security. Across the country, business was victimized by $11.6 billion worth of burglaries and robberies last year and spent $36.3 billion on guards, locks and surveillance cameras. These outlays are growing at two to three times the rate of inflation as companies scramble to protect customers and employees against crime and themselves against litigation.
It isn't easy. Just ask Motel 6, the Dallas-based budget-lodging chain. In September 1988, a 24-year-old freelance photographer checked into one of the chain's Fort Worth motels. Later that night, two strange men forced their way into her room and beat and raped her. The woman survived and sued, charging that the attack had left her unable to work. Motel 6 and its insurers paid $10 million to settle the suit.
Since the 1988 incident, Motel 6 has spent more than $8 million to train security personnel and install brighter lights and fencing. Guest-room doors are now fitted with deadbolt locks, safety latches and peepholes. Hugh Thrasher, executive vice president of the chain, says it will spend $3 million a year to maintain these safety-related changes and cover costs for increasing insurance premiums.
TOUCH-TONE THEFT One team of detectives crouched behind a concealed camera above the concourse of Newark's Pennsylvania Station. Another sat below the depot floor, monitoring phone calls on earphones. What they recorded several weeks ago was startling: a steady stream of long-distance crooks, using pay telephones to call overseas destinations as remote as Ghana and Ecuador but charging the calls to stolen account numbersin the United States. Before the day was out, the New Jersey Transit Police had arrested a dozen long-distance thieves.
It is called toll fraud, and it's just one example of the way a computerized society has given birth to some $3 billion in high-technology crime. Toll fraud alone cost the major phone companies $1.2 billion last year,according to the Communications Fraud Control Association. And it is becoming more sophisticated every day. Hackers now dial into a corporation's switchboard, use computer programs to crack the company's long-distance security code, then place their own long-distance calls through the corporate switchboard. That is apparently what happened in 1990 to Mitsubishi International Corp., which is based in New York and saw its long-distance bill mushroom from $17,000 to $400,000 in one month. Today Mitsubishi is suing AT&T, which sold it the long-distance switchboard, for $10 million.
High-tech crimes take many other forms, and their cost is limited onlyby the perpetrator's ingenuity. TheNational Center for Computer Crime Data estimates that business spends $555 million a year to repair computer sabotage. And Hallcrest Systems says that business lays out an additional $244 million on equipment and consultants to secure its computers against hackers and vandals.
INSIDE JOB Donald Houde might still be driving his Rolls-Royce and vacationing in Europe if it weren't for a routine personnel shuffle at Mile Hi Cablevision in Denver last year. Instead, the 38-year-old former systems director is parked in the Denver County Jail after a new supervisor began wondering how Houde's department could spend $30,000 on computers every month and how Houde's $57,000 salary could pay for three expensive cars and a mansion with Waterford chandeliers.
On closer inspection, supervisor Romaine Pacheco found that two of Houde's "vendors" consisted of nothing more than phony letterheads and rented mailboxes. That fact had escaped notice because Houde, a trusted nine-year employee, often rushed his invoices past supervisors with little documentation and made sure that no one executive ever saw his total expenses. Pacheco accused him of embezzling nearly $2 million from the cable television company over five years--no small sum for a company with annual revenues of $28 million to $30 million. Houde pleaded guilty last winter to felonious theft and was sentenced to eight years in prison.
As Mile Hi learned so painfully, the biggest crooks sometimes occupy corner offices. Embezzlement and kickbacks cost business $27.2 billion last year, and some experts believe the figure is manybillions higher because most companies are too embarrassed to report internal wrongdoing or simply never see it. And the cost is rising fast: Federal embezzlement cases multiplied by 40 percent during the 1980s, far more swiftlythan traditional forgery and burglary prosecutions.
Business is especially vulnerable to the enemy within because most corporate bookkeeping systems are unable to catch deception by those in positions of trust. Says Joseph T. Wells, presidentof the National Association of Certified Fraud Examiners, "Most auditors couldn't see a fraud if it hit them right in the face."
FIVE-FINGER DISCOUNT She needed money to buy clothes. Her friend needed money to make his car payments. The answer to Tamara Guerin's problem seemed simple enough. Last March, she started stealing from her employer, the Toys "R" Us store in Henrietta, N.Y., near Rochester. When customers returned merchandise to the store, the 18-year-old service clerk would write a refund slip for another, more expensive item and just pocket the difference. Over a five-month period ending last July, when she was arrested, Guerin took the toy store for a grand total of $6,970.18. In February, she pleaded guilty to third-degree grand larceny.
Refund scams are just one of the many ways dishonest employees are able to bilk retailers. Other workers simply walk out of the store with merchandise, conspire with delivery people or hide goods in trash receptacles for pickup at a later date. Of the estimated $12.6 billion that retailers lose to pilferage and shoplifting each year, roughly 60 percent stems from employee theft, according to a current study by the University of Florida. Internal theft is a much bigger problem than shoplifting, according to Jerry VanderPloeg, staff assistant for national loss prevention at Sears, Roebuck & Co. "The average shoplifter we apprehend is caught with $90 of merchandise," says VanderPloeg, "while the average [employee] apprehension is $750." A recent survey conducted by loss-prevention specialist Jack L. Hayes International concludes that 1 of every 15.2 retail employees is apprehended for stealing.
Shoplifters are on the loose, too. According to the FBI, shoplifting has soared 35 percent since 1987 and now represents the fastest-growing form of larceny in the United States. Tough times in a tight economy have forced retailers to reduce their audits and sales help, which has greatly increased opportunities for theft. When Kroger's corporate security manager in charge of loss prevention left more than two years ago, for example, the grocery chain never bothered to replace him and completely disbanded the department. "They're cutting back," says Jack Henry, a security consultant in Longview, Texas, "just when they should be spending more."
CRIMEBUSTERS Donald Burdick is one businessman who has not cut back on his security budget. When he took over his 7-Eleven franchise in Antioch, Calif., six years ago, he was being bled dry. Inventory shrink--a retailing euphemism for loss of merchandise through breakage, pilferage and shoplifting--amounted to $60,000 a year, more than 4 percent of sales. The average shrinkage for retailers is 1.8 percent. Burdick's solution: a security tag system. Every item in his store is now slapped with a small white magnetic label. When an item is paid for, a checkout clerk scans it with a wand that deactivates the label. If a tagged item isn't scanned, it sets off an alarm that sounds like a truck horn when the customer passes through security panels placed at the store's exit. With the tagging system in place, inventory shrink at Burdick's store plummeted last year to $2,500 on sales of $1.4 million.
By most standards, Burdick got away cheaply. He paid $4,250 to have his tagging system installed and will lay out $1,800 a year to maintain it. Based ona 1991 survey, the average annual security budget at 149 American businesses was $321,000. Crown Central Petroleum Corp. spent much more--in excess of $1 million--to create a customized monitoring system that watches over 55 ofits most vulnerable gas-and-convenience stores across the country from a single command center in South Carolina. Unlike most security cameras that merely record events, Crown's deluxe system provides an immediate link toan "intervention specialist" who hasinstant access to each store's emergency numbers.
Unfortunately, some of the sophisticated technology now being used to combat crime against business is too expensive for many companies. Infrared cameras, for example, which convert heat radiation from people and objects into video images and are therefore ideal for spotting crimes in the dark, start at about $30,000 each.
The growing rate of crime committed against companies will almost certainly lead to increasingly high costs for business in the coming decade. As a result, already burdened bottom lines will be robbed of precious profits. And thatis the last thing American companies need as they struggle through the slow-growth 1990s.
CASE HISTORY: ATM FRAUD AND MURDER Keith Levine died trying to stop an ATM crime. The man saved may have used a stolen bank card. FINANCIAL-SERVICES FRAUD: 25.6 BILLION
CASE HISTORY: GAP MURDER Lisa Steinberg, a 22-year-old who worked at Gap Kids in Manhattan, was brutally murdered in the store one morning last January. BURGLARY AND ROBBERY: 11.6 BILLION
CASE HISTORY: MOTEL 6 RAPE The chain paid $10 million to a woman who was raped at this Fort Worth motel and since then has paid millions more to beef up its security. SPENDING ON SECURITY: $36.6 BILLION
CASE HISTORY: LONG-DISTANCE THEFT Telephone companies got stuck for $1.2 billion last year in long-distance calls placed by thieves who had stolen calling-card numbers from consumers or had cracked computerized corporate switchboards. HIGH-TECHNOLOGY CRIME: $3.0 BILLION
THE FUTURE: HIGH-TECH SOLUTIONS Crime-plagued companies are turning to expensive high-tech solutions such as television surveillance of robbery-prone stores and retinal scanners that identify employees as they enter the workplace.
ARSON AND VANDALISM: $9.5 BILLION
EMBEZZLEMENT AND KICKBACKS: $27.2 BILLION
RETAIL PILFERAGE, SHOPLIFTING: $12.6 BILLION
GRAPHIC Picture |c No caption |s Tom Monaster-New York Daily News; Picture |c No caption |s New York Times; Picture |c No caption |s Photo (left): Courtesy of William Smith College; Picture |c No caption |s Pat Carroll-New York Daily News; Picture |c No caption |s John R. Fulton for USN&WR; Picture |c No caption |s AT&T; Picture |c No caption |s Chip Henderson; Picture |c No caption |s Eyedentify Inc.
This story appears in the April 13, 1992 print edition of U.S. News & World Report.