Clipping Coupon Fraud.

...and other tales from the front lines of food service

BESTFOODS' GERMAN AFFILIATE had received the threat three days earlier: If the food processing company did not pay the money the extortionist demanded, he would contaminate several pouches of the company's most popular soup mix with a lethal poison and return them to the shelves of two German supermarkets. Management had immediately notified law enforcement. Now, senior managers, including the director of corporate security (the author), waited at headquarters as events unfolded on a bridge in Hamburg. An undercover police officer, wearing a tan trench coat, brown scarf, and brown leather gloves, carried a black, hard-sided Samsonite briefcase, supposedly filled with 500,000 DM-all according to the extortionist's express instructions.

As the officer began to walk across the bridge to the location specified for the money exchange, he noticed two other men, apparently waiting for someone. Drawing closer, he realized they were also dressed in tan trench coats, brown scarves, and brown leather gloves; each had a black, hard-sided Samsonite briefcase. The three ignored each other for about 15 minutes, trying to look inconspicuous. Thirty minutes after the time they were to receive further instructions, they congregated to determine exactly what had happened.

As it turned out, the other two "couriers" were there in response to extortion attempts by the same individual. The three companies involved were headquartered in three nearby cities, and local police had not coordinated with national authorities because of the very short deadlines given by the extortionist. (Normally in Germany, these cases would be coordinated at the national level.) Each was acting without knowledge that the others were involved.

But nothing was to come of their efforts: The extortionist never showed up. Perhaps he was concerned about police surveillance and stayed home. (Rightly so, as most extortionists who are apprehended are caught during the money exchange.) It might have been just an attempt to create mischief. Or maybe he did come to the bridge and was too frightened to go through with it.

Even though Bestfoods will never know why the extortionist failed to show up, the episode could be considered a success from a security standpoint in that the business avoided an incident, thus protecting its customers, reputation, and profits.

Extortion is just one of the security issues confronting a large food service company like Bestfoods, which has numerous internationally recognized products, such as Skippy peanut butter, and almost 48,000 employees in more than 60 nations. The following discussion looks at three common problems--product contamination, coupon fraud, and promotional funds fraud--and how Bestfoods is working toward solutions. While each challenge requires unique countermeasures, teamwork among business units is the critical ingredient in each successful strategy.

Product contamination. Numerous opportunities exist for a contaminant to be intentionally or unintentionally introduced into a product. Unintentional contamination can, for example, be caused by the introduction into a food product of some sort of bacteria, such as E. coli or Listeria, or of an allergen such as that contained in nuts and seeds.

A food processing company can effectively decrease its vulnerability to accidental contamination through strong internal quality assurance programs and strict adherence to the good manufacturing practices required by the Food and Drug Administration. At Bestfoods, quality control checks are performed at various stages during the manufacturing and packaging processes, and industry-standard equipment is used to detect foreign objects in the product.

Efforts against contamination continue after food products have been processed. Bestfoods tests samples of finished product and even retains samples from each batch throughout its shelf life after it has been cleared for distribution and sent to stores. Batch samples are kept in case any questions about product quality are raised by consumers after the product has been purchased. For instance, if a consumer reports a problem with mayonnaise, Bestfoods can check the sample from that batch.

Intentional contamination is more difficult to defend against. Safeguards might be thwarted, for example, if employees are directly involved. In addition, products may be contaminated anywhere along the supply chain, when being transported or warehoused or sitting on a retail store's shelf. The person who commits such an act might be a disgruntled employee of the food company, the transportation carrier, the warehousing operation, or the retailer; someone seeking to harm the food processing company or the retail outlet financially or to benefit themselves financially; someone who wants to bring attention to a particular issue, such as food irradiation; or psychologically unbalanced person.

Basic good manufacturing practices, including quality assurance tests, indirectly protect against contamination. For instance, in many locations, employees on the production me must wear uniforms that have pockets, so nothing could unintentionally fall into the product. Employees are thus unable to carry potential contaminants in their pockets.

Outside of manufacturing procedures, the main security option is installing CCTV cameras that watch the plant floor. Video surveillance raises a number of issues though, such as responsibility for monitoring the cameras, the areas to be monitored, picture quality in a large area such as a manufacturing plant, and the working atmosphere and morale issues created by what might be seen by some as employee surveillance.

Obviously anti-tampering packaging can play a role. For instance, certain types of packaging might provide evidence that someone has tried to tamper with the food product inside. But even foods that are presented in sealed cans are susceptible to tampering.

Contingency planning. Since preventive options are limited, companies must have good contingency plans. Responses after discovering an intentional product contamination must be quick and well coordinated. And companies must be prepared to try nontraditional solutions for situations that have not been seen before. That was the case several years ago at a European Bestfoods affiliate.

The company had learned from one employee that another employee working on the packaging line had intentionally placed broken glass into jars of a popular marmalade over four days, and perhaps for longer than that. He had a personal grudge and wanted to damage the name and market share of one of Bestfoods' popular brands.

When confronted with the information that security had obtained, the employee refused to reveal when he had started putting the glass in the jars. Because the plot was discovered nearly at the end of the production run, the safety of almost a year's supply of finished marmalade was in question.

As soon as management learned of the contamination, they halted production. Fortunately, because there was still current-year inventory in stock, none of the new batches had been released for sale.

An interdisciplinary task force consisting of the country manager, plant manager, and representation From the company's legal, security, manufacturing, and engineering departments set out to deal with the situation. The group began by securing the entire inventory of finished product in the warehouse. They next researched x-ray machines, fluoroscopes, and other equipment to determine what would be able to differentiate pieces of broken glass from the fruit in the marmalade. The equipment selected, similar to that used for airport screening, was then leased.

Tens of thousands of jars had to be examined. Because of the time involved and because no Bestfoods employees were experienced in operating that kind of equipment, the search was performed by personnel from the equipment manufacturer, with one or two Bestfoods employees supervising. The company rented space in a nearby warehouse and moved the inventory there. The contract and in-house staff used an assembly-line process to examine the jars over almost two months.

Ultimately, only about a dozen jars of marmalade containing broken glass were found; the rest of the year's inventory was released for sale. Meanwhile, the employee was fired, charged with product tampering, and given a suspended sentence.

Though the incident was public knowledge in the plant, the Bestfoods management team requested that employees keep the situation confidential. Because the contamination was caught early and the general public was not exposed to any risk, the company opted not to make any public statements.

After the incident was resolved, the team met to examine how the situation had evolved and how it was handled. They noted that human resource actions may have contributed to the employee's disgruntlement. For example, he had been promoted to a supervisory position for a probationary period. At the end of the period, management determined that he did not meet the required performance levels, and he was returned to his former place on the packaging line. Human resource policies were reviewed to determine how to better deal with such circumstances in the future.

Bestfoods also initiated more open discussions with employees about the potentially devastating results of contamination, particularly the effects on consumers and confidence in the product. The company stressed that employees are part of the security process and should report anything unusual.

The most frequent intentional contamination threat is that resulting from extortion attempts. The threats are typically similar: If the company does not deliver what is being demanded, the extortionist will contaminate a product with some sort of toxin and return the contaminated product to supermarket shelves, from which consumers will purchase it, eat it, and become sick or die.

Bestfoods' action plan for product extortion threats is built on a simple imperative: Be prepared. Extortion is dealt with through the company's crisis management procedures, and its crisis management teams found in plants, regional and division offices, and corporate headquarters. At the plant level, members include representatives from the operations, quality assurance, and transportation departments as well as management. Corporate crisis management committee members come from the communications, finance, human resources, insurance, legal, quality assurance, and security departments. Other employees with required specialties can be added to crisis teams as a situation dictates. The system's flexibility is key: Responses are functionally driven and tailored to the level of seriousness of the situation and type of problem involved.

Each facility or office should ensure that staff know whom to contact in the crisis management organization. At Bestfoods, contact lists with the home and office phone numbers of everyone on the corporate and division crisis management teams are disseminated frequently, along with corporate reminders on crisis management issues. Each member of the corporate crisis management committee has a Palm Pilot with a list of the emergency contacts in each office and plant, including home, office, cell, and fax numbers. The list is updated monthly.

Training Bestfoods also gives crisis management training to employees around the globe. Typically, training sessions last one day, with the first three hours or so devoted to the theories behind effective crisis management and the rest to case studies that support the theories. In areas where Bestfoods is more frequently exposed to extortion attempts, the company holds more intensive sessions. In times of crisis, the company calls on the technical support of a consulting firm with expertise in the field.

To illustrate how the process works, imagine that a threatening letter is opened in the mail room of Bestfoods' Milan office. The mail room employee--trained in what to do after receiving such a message--places the letter in a clear plastic document cover and takes it to the managing director. The managing director reviews the letter and calls the division crisis management coordinator in Brussels, Belgium. (If that person is unavailable, alternative contacts and the order in which they should be called are clearly delineated.)

Next, the division coordinator or whoever has taken the information calls the corporate security director. They perform a cursory assessment, then provide the consultant with a copy and translation of the letter. After the division coordinator and corporate security director receive the consultant's formal assessment and recommendations, the corporate committee, in concert with the division group, evaluates the recommendations and agrees on a course of action. Bestfoods strives to finish this process on the same working day as the threat is received, often possible because of the time differences between affiliates and headquarters.

Coupon fraud. Manufacturers offer product coupons to entice customers to try advertised products they would otherwise not buy. Customers use coupons for purchases at local retailers; each retailer then submits the redeemed coupons to the manufacturer, which reimburses the store for the consumer discounts. Retailers may also submit coupons to a clearinghouse that pays the retailer and then redeems the coupons with the manufacturer.

Fraud occurs when well-organized rings of criminals and unscrupulous retail owners falsely redeem coupons. It is relatively easy for them to collect large numbers of coupons and send them to the manufacturer for redemption without having sold the product promoted.

The potential financial impact is large given that millions of coupons are printed and distributed via media 'such as Sunday newspaper inserts and store fliers, representing hundreds of millions of dollars of potential discounts. If only 10 percent of redemptions are fraudulent, a figure suggested by experts in the field, this still constitutes a large loss.

When coupons are redeemed without a purchase having been made, the company is hurt not only because it has paid out money fraudulently but also because its marketing efforts have been thwarted--no product is sold and no consumer receives a reduced price.

Bestfoods has been a target of these scammers in the past and, as a result, has looked for ways to tackle the problem. For example, about three years ago, Bestfoods began working closely with its coupon clearinghouse to identify retailers that might be engaged in fraudulent redemption. Through this process, the company identified three West Coast stores with unusual redemption patterns. Over about 12 months, these stores had redeemed more than $230,000 worth of coupons for one product.

To learn more about the stores, the company hired a private investigator, and stores were visited for first-hand observations of their size, number of checkout counters, nature of products sold, level of customer activity, types and quantities of Bestfoods' products sold, and other relevant attributes. The investigation revealed that one of the three stores did not stock any food products, another was a relatively small momand-pop grocery, and the third was a medium-sized meat market that sold only a few grocery products. These stores could not have sold the quantity of product that would represent the legitimate redemption of $230,000 in coupons.

As the investigation continued, the corporate security director began ongoing conversations with representatives from the U.S. Postal Inspection Service (USPIS) to determine whether the agency was interested in taking such a case and, if so, what specific evidence the company should gather. (Because the U.S. postal system is often used in committing coupon fraud, USPIS normally leads major investigations into this type of fraud, and prosecution is typically brought forward in federal courts.) Unfortunately, in this case, the corporate security director was informed that no federal prosecution would be attempted because the amount involved did not meet the minimum dollar value for a federal prosecutor to be assigned.

But the team handling this issue--including representatives from the legal department, the business unit involved, and corporate security--were determined not to let the matter end there. They convinced management to proceed on its own by filing a civil lawsuit. Working with outside counsel on the West Coast, the company filed civil complaints in U.S. district court alleging violation of the Racketeer Influenced and Corrupt Organizations (RICO) Act, conspiracy, fraud and deceit, breach of contract, violation of the state's Unfair Business Practices Act, conversion, and constructive trust. The case never went before a jury. Within three months of filing the suit, Bestfoods settled with the retailers and received $275,000. (The final settlement required that the retailers involved not be identified.)

While not identifying the litigants, Bestfoods had private discussions about the case through professional and business associations to let it be known that the company would not tolerate fraud. The company also instituted internal control procedures to identify pattems of possible fraudulent redemption.

Management continues to work closely with the coupon clearinghouse in identifying suspect practices. Although many of the control procedures depend on fairly sophisticated software and information systems that compare redemption patterns among retail outlets, part of the process comes back to simply sorting and looking at the coupons coming through the clearinghouse, searching for clues in physical appearance.

Promotions fraud. Promotions are another tool for increasing a product's sales and market share. A promotion might be aimed directly at consumers, such as by mailing free samples to homes. For wholesalers or distributors, the company might offer a rebate for every case of product sold into a particular market segment, for instance, public schools. Promotions usually involve large volumes of finished product, and promotional budgets can easily run into millions of dollars.

Like i, promotions sometimes attract unscrupulous individuals seeking to take advantage of the system. Bestfoods recently had a problem with the fraudulent receipt of promotional funds in the Foodservice Unit of its North America division, which sells to customers such as restaurants, fast-food chains, hospitals, schools, and correctional institutions. A senior sales manager had learned that sales in his area of gallon-size containers of mayonnaise had plummeted to a fraction of what they had been during the previous to 18 months. Also, whenever sales representatives called on wholesalers and distributors with whom the company usually did business, they always had plenty of fresh stock on the shelves.

Meanwhile, one wholesaler in the area had aggressively pursued a promotion program targeting sales to the state department of corrections. According to the documentation that the wholesaler provided (copies of his invoices and shipping records), he had sold the target a substantial volume of product in the prior year. As a result, the wholesaler collected almost $1 million in promotional rebates and other volume-based discounts from Bestfoods. After subtracting the promotional funds that the wholesaler received from the total price of the product purchased by the wholesaler for resale, the wholesaler was paying an actual price per case that was significantly below the company's normal lowest wholesale price.

After much discussion among corporate staff, who did not want to offend an apparently good customer, Bestfoods decided to take a closer look. Once again, Bestfoods took a team approach. Senior management from the Foodservice Unit (representatives of sales and finance), representatives of the U.S. grocery products division (finance and division counsel), the company's assistant general counsel for litigation, and the corporate security director met to review what was known and determine what was needed.

At counsel's direction, corporate security initiated an investigation, which revealed that the wholesaler had never sold the product to the corrections department and that its documentation was fraudulent. With this information in hand, staff quickly deduced that the wholesaler had been selling the product to other wholesalers and distributors in that area at a price lower than that offered by Bestfoods.

Once the plot was uncovered, the company took a somewhat unusual approach. Some companies might Only terminate their business dealings with the defrauding wholesaler, and others might go directly to law enforcement to pursue a criminal remedy. In this matter, Bestfoods used a hybrid of the two tactics.

After the team developed a carefully scripted meeting plan, the Foodservice Unit's vice president of finance, outside counsel (with expertise in fraud cases), and the corporate security director traveled to the wholesaler's city, asking to meet with senior management the next day.

The group told the wholesaler's vice president that it had evidence that, during the prior year, his organization had applied for and received from Bestfoods almost $1 million in rebate payments under a specific promotion; that the evidence indicated that these payments were obtained fraudulently; that it believed the fraudulent activities fell within the purview of RICO; and that it wanted the company to demonstrate that Bestfoods was wrong in believing the wholesaler owed repayment of all the promotional monies and other discounts derived from that promotion.

The group's statements were met with loud protestations of innocence, anger, and expressions of personal hurt that Bestfoods would even think such things about a company with such a successful track record. Although the vice president indicated that he knew of no fraud, he agreed to investigate the matter and respond to the accusations.

The wholesaler retained a knowledgeable attorney with experience in white-collar crime and RICO. Its attorney conferred with Bestfoods' counsel, and within 90 days of the initial meeting, Bestfoods had recovered $1 million--its entire loss. The wholesaler admitted that something wrong had occurred, but did not admit to criminal wrongdoing. Although Bestfoods chose not to pursue criminal charges in this case, the threat of a civil case against the wholesaler sent the message that Bestfoods knew about the scheme and intended to do something about it. The company has experienced several of these types of cases, and typically they are settled out of court.

As a footnote to this case, the wholesaler went out of business within three months after the settlement. In light of that, it might not be unreasonable to assume that the wholesaler was defrauding other manufacturers in the same manner and wanted to close before the others caught on to the scam.

Teamwork. Security professionals must make the most of limited resources in today's business environment. A central step is developing successful working relationships with colleagues to increase security's effectiveness without increasing staff As the preceding cases illustrate, that has been the key to success for security at Bestfoods, where problems ranging from product contamination to coupon fraud are handled by interdisciplinary teams that bring together the knowledge and experience of the company's business, legal, human resources, and security personnel.

These departments help each other on a daily basis as well. For example, if the corporate security director observes a safety hazard or a practice that might be in violation of quality assurance guidelines while conducting a security survey at a plant site, he notifies the local plant manager.

These symbiotic working relationships have been an essential tool for corporate security as it works to manage security-related problems. Contrary to the old adage, sometimes many cooks, working together, only make the broth better.

Henry A Nocelia, CPP, is the director of corporate security for Bestfoods, which recently was acquired Unilever. The resulting new organization is known as Unilever Bestfoods, a subsidiary of Unilever. He serves on the ASIS Standing Committee on Global Terrorism, Political Instability, and International Crime.