Outsmarting the black market
November 30, 2003
YONGSAN GARRISON, South Korea — Retail experts say the Army and Air Force Exchange Service’s black market woes in South Korea may signal a need for stronger inventory controls and employee monitoring.
Alarms and closed-circuit television can help prevent employee theft, the largest contributor to inventory losses, said Charles Sennewald, an independent security-management consultant contacted by Stripes. Sennewald has authored six books on retail security and inventory loss — called “shrinkage.”
And inventory control systems can compare the amount of goods sold versus how much was ordered, said Patrick Murphy, president of LPT Security Consulting, a Texas-based firm advising retailers on theft issues.
Neither Sennewald nor Murphy have visited AAFES stores in South Korea. In a written reply to questions, AAFES reported it has measures in place to prevent shrinkage and employee theft, but it did not directly address black-marketing problems. AAFES denied requests for interviews with loss prevention officials.
During the last three years, 16 of its employees were investigated by AAFES for theft. Eleven were separated for cause; two received suspensions and the remaining cases are pending action, according to AAFES.
And South Korean customs police have arrested 25 South Korean AAFES employees since 1999 after catching them with duty- free items from U.S. military bases, charging them with tariff violations.
Kim Song-chae, of the Korea Custom Service’s Investigation and Surveillance Bureau, said 13 of those Koreans were indicted and the others were fined.
Under the status of forces agreement, the U.S. military is allowed to bring duty-free items into South Korea as long as they are sold only to authorized personnel.
But off-base black market areas are full of grocery items, blue jeans, aftershave, baby formula and televisions, generating a profit for those clever enough to smuggle them off base.
Many black market operations reported on by Stripes have been inside jobs involving AAFES employees who moved the goods to others who sold them. Black marketers have obtained goods by simply having authorized persons buy them and resell them, by moving them from AAFES warehouses to the black market, and even boldly driving them off the base in government-plated vehicles.
“In any retail setting, one of the most important control points has to do with the back door, the dock,” said Sennewald, a Korean War veteran and graduate of the U.S. Army military police school. “Apparently, there’s just an absence of standard control that one would expect in the movement of goods from site to site.
“Nothing should leave the base unless there is sufficient control that legitimizes or approves that movement off of the base,” Sennewald said.
AAFES said it takes up to 60 days to receive ordered merchandise, and that necessitates more remote storage facilities. Many stores are located in old buildings not specifically designed for retailing and need more storage.
Over the years, retailers have found installing electronic security equipment pays off in the long run, Sennewald said. But employees often have the wherewithal to defeat those systems, he said.
“Trying to equip all of these locations with alarms and CCTV equipment would not be economically feasible,” AAFES said. “Access to the storage facilities is regulated by the store manager who is ultimately responsible for safeguarding the contents of each.”
In a few cases, South Korean police have arrested AAFES managers. In September, the former manager of the Hannam Village post exchange was arrested after customs investigators discovered a tunnel leading from an on-base warehouse to an off-base coffee shop. The coffee shop had a hole in the floor; investigators said it was used to smuggled 62,000 cases of booze over two years using a rolling track system.
“It should be noted that the tunnel at Hannam Village was a first for all of us, and the entrance to the tunnel on the container end was not easily detectable [covered with a solid pallet which was loaded with boxes],” according to AAFES. “We have now included a more thorough check in our annual surveys.”
AAFES reported a $76,000 loss after an inventory was taken.
Even using a tamper-proof seal on the storage container could have prevented entry to it until items were needed, Sennewald said.
Murphy said inventory systems should be able to show the simple math of retailing: If your sales are running 5 percent more than last year and your inventory for the store is 20 percent higher for the same period this year, where’s the merchandise?
His company develops software programs that generate reports comparing things like sales versus orders.
“Over time, even if it’s just a little theft at a time, there begins to develop a variance because you are shipping in more than you are selling,” Murphy said.
Closely monitoring employees can indicate theft, Murphy said.
Security checks may not be done properly, creating the fox in the henhouse scenario, Murphy said. But “employees are so ingenious. If it wasn’t a tunnel, it would be some other way.”
A smart manager intent on black-marketing could cover inventory loss through a myriad paperwork methods: fictitious returns, full-price markdowns and inventory padding.
Proper employee screening and creating an anti-theft culture are key, both experts said.
“When it becomes clear to the Korean nationals — or I don’t care what national — that no one really pays attention and the variances don’t send an alarm, no one gets excited, that’s an invitation,” Sennewald said.
And big theft rings take much time and are hard to crack, Murphy said. A retailer “can’t defeat every scam,” he said.
AAFES says losses well within industry standards
YONGSAN GARRISON, South Korea — South Korea’s Army and Air Force Exchange Service lost $857,000 due to shrinkage last year, but the military retailer said that figure is within industry and its own standards.
Retailers write damaged and stolen goods off as losses, known as shrinkage. In South Korea, AAFES retail sales totaled $253 million. The loss amounted to 0.4 percent of total retail sales, below the company’s standard of 1 percent.
Industry standards allow 1.5 to 3 percent shrinkage, according to written answers provided by AAFES.
Agreements with South Korea mandate U.S. forces prevent black marketing of duty-free goods.
Several cases over the past few years have involved AAFES employees working with others off-base to move and resell goods.
Physical inventories are done once a year. Each AAFES store maintains its own financial data, and the receipts from sales are reconciled monthly.
Employee theft is the biggest cause of shrinkage in the industry, said Charles Sennewald, an independent security management consultant on retail issues.
AAFES employs loss prevention consultants who investigate shoplifting, employee theft, theft during goods transit, concession fraud, check and credit card fraud, misconduct and black marketing, according to the AAFES.
The retailer has a system called “Fraud Watch” which analyzes large amounts of sales data to detect theft activity by customers and associates.
“We have computer-operated closed-circuit camera systems in our larger stores that are manned and operated during business hours,” according to a statement. “These are used for detection of shoplifting, cash register manipulation and other theft acts by associates.”
In the past, AAFES reported certain black-marketing scams resulted in no loss of revenue, meaning those involved were paying AAFES for the goods, then reselling them on the black market. One such case occurred in June 2001 when three AAFES employees smuggled 1,000 cases of beer per week out of Camps Howze, Edwards and Giant for two years.
AAFES did not answer specific questions on how its employees ordered excessive amounts of goods. More and more merchandise is centrally managed in Dallas using information generated by electronic cash registers, the retailer said.
People who order merchandise look at how much is on hand, how much is in transit, the weekly sales demand of the product and expected changes based on troop movement and seasonal fluctuations.
Two systems developed in-house maintain a perpetual inventory, and AAFES is looking at replacing merchandising systems.
— Jeremy Kirk