Is black-market baby formula financing terror?

On the day terrorists destroyed the World Trade Center, a Texas state trooper pulled over a rental van driven by a Middle Eastern man toward Houston. Opening the cargo door, the officer found a huge load of ... baby formula.

False alarm? Not really. Police later identified the driver as a member of a terrorist group and linked him to a nationwide theft ring that specialized in reselling stolen infant formula, says Sgt. Johnnie Jezierski of the Special Crimes Service of the Texas Department of Public Safety. Proceeds were wired to the Middle East. The driver is still under investigation.

Operation Blackbird, as Texas investigators dubbed their multistate baby-formula investigation, has since led to felony charges against more than 40 suspects, about half illegal immigrants. Authorities have seized some $2.7 million in stolen assets, including $1 million worth of formula.

Blackbird was just the beginning. In the nearly four years since 9/11, police have uncovered and dismantled a growing number of regional and national theft rings specializing in shoplifted infant formula, over-the-counter medicines, and personal-care products. At least eight of the major baby-formula cases have involved "fences" who are of Middle Eastern descent or who have ties to that region, according to a Monitor review of congressional testimony, news accounts, and a study by the National Retail Federation released Tuesday.

The Federal Bureau of Investigation has traced money from these infant-formula traffickers back to nations where terrorist groups, such as Hamas and Hizbullah, are active, investigators say. Then, the trail usually goes cold. Once funds enter such countries, there's often no way to track them.

FBI Director Robert Mueller first talked of a possible link in a speech last fall. He did it again in testimony before the Senate Committee on Intelligence in February, saying: "Middle Eastern criminal enterprises involved in the organized theft and resale of infant formula pose not only an economic threat, but a public health threat to infants, and a potential source of material support to a terrorist organization."

So far, most officials are unwilling to draw conclusive links between proceeds from shoplifted formula and terror financing, saying only that they're "likely" or "probable" in some cases.

"Just because you have an infant- formula operation doesn't mean it's a terror funding operation," says Sergeant Jezierski. "But to say there's no terrorist funding isn't the case either."

While many terrorist groups eschew criminal commerce because it tends to attract police attention, other groups finance themselves with theft, fraud, and smuggling. The Irish Republican Army, Colombia's FARC, and Hizbullah all have engaged in criminal enterprises, says Matthew Levitt, a former FBI counterterrorism analyst, now director of terrorism studies at the Washington Institute for Near East Policy. Some Al Qaeda cells, mostly at the fringes of their operations, have engaged in criminal self-financing, he says. "Important operational funding can come from these criminal activities.... If you are funding yourself, it's freeing up the home organization."

Less convinced is Mardi Mountford, executive director of the International Formula Council, an Atlanta-based trade association that represents infant formula manufacturers in the United States. "We've heard that speculation, but we're not aware of a direct connection."

Theft of baby formula from store shelves has risen over the past decade, costing retailers billions of dollars. Formula was the fourth most-often-shoplifted item last year, according to a survey by the Food Marketing Institute, a Washington, D.C., trade group.

In the wake of several cases in North Carolina and Florida, some retailers have transferred formula from store shelves to behind the counter. One big grocery chain, Albertsons Inc., now keeps a few cans on the shelf - along with a sign directing customers to the courtesy counter.

Calling it "a serious security issue" for retailers, the National Retail Federation unveiled its 200-page report highlighting "organized retail theft" of infant formula. At least seven of the report's 10 case studies detail fencing operations run by citizens of Middle Eastern origin.

"The rings I identified dealing in stolen infant formula are operated mostly by Middle Easterners," says Charles Miller, a loss-prevention consultant and author of the report. They typically organize the rings, pay the shoplifters (who are mostly from Latin America), repackage the formula, and resell it. Out of $30 billion in annual retail theft, about $7 billion of infant formula is stolen and resold for a tidy profit, Mr. Miller estimates.

The scheme works this way: A shoplifter may get $5 for a can of formula from his fence, who then reboxes the loot and sells that to a dishonest retailer for $9 a can. That retailer then sells it for perhaps $15 or $16 a can. The result may be a $6 or $7 profit a can for the dishonest retailer - instead of pennies a can for the honest merchant, Miller says.

Several Middle Eastern businessmen have already been charged or convicted in connection with baby-formula thefts.

Mohammed Khalil Ghali was sentenced in February to 14 years in prison, convicted on 15 counts that included transporting stolen goods and money laundering. A search warrant states that money generated from the sale of the goods was wired to banks in the Middle East, "specifically Jordan, Egypt, and Palestine." Nine of the 11 individuals indicted in the case are of Middle Eastern descent, according to the Department of Homeland Security.

Samih Fadl Jamal was a fixture in Phoenix, until investigators discovered that his company gained $11 million in profits from the sale of $22 million of stolen baby formula from 2001 to 2003, prosecutors say.

In all, 27 people connected to the Jamal Trading company scheme were indicted, most from Iraq, Jordan, or Lebanon. Some are naturalized US citizens; others overstayed student or visitor visas, the National Retail Federation report said. Investigators' wiretaps indicated that about $8 million was funneled to countries in the Middle East, where it disappeared. Mr. Jamal, a naturalized US citizen born in Lebanon, was convicted in April of 20 counts of conspiracy to transport and receive stolen property and other related charges, as well as money laundering.

Of course, just because the money goes to the Middle East doesn't mean it's going to terrorists, some groups point out.

"To say that - 'Oh, there's a chance that these funds went to fund terrorism because there are terrorist groups active in this country' - is irresponsible," says Rabia Ahmed of the Council on American-Islamic Relations in Washington. "We've seen many cases like this, where a prominent Muslim leader has been charged with horrible things, but it ends up being some kind of immigration technicality."

First identified in the early 1980s, organized retail theft is a key feature of baby-formula theft. Teams of professional shoplifters may travel 200 to 300 miles over a week or more, Miller says. Typically each has a shoplifting list of specific brands of infant formula, medications, shaving products, and batteries given them by their fences.

Shoplifting teams may involve five or six women or young men. Typically they disperse into a store in pairs or separately, posting lookouts to watch for store security. Then a separate team loads carts of formula and goes straight to the exit where a vehicle is waiting, investigators say.

Formula is a favorite of theft rings mostly because of the steady demand, high cost, and large profit margins. Its price is also supported by the US Department of Agriculture's $4.9 billion Women, Infants and Children (WIC) program.

To battle this trend, Texas authorities mandated that retailers participating in WIC must purchase their infant formula from approved WIC wholesalers or the manufacturers themselves. US Rep. John Carter (R) of Texas sponsored legislation included in the WIC Reauthorization Act of 2004 that aims to eliminate the market for stolen infant formula with a similar mandate. But those measures have not been implemented in most states.

As of May, the USDA has mandated that stores nationwide use a licensed wholesaler, say Oklahoma officials, where a recent burst of formula shoplifting has drawn attention even though Oklahoma is one of the few states that require stores to buy from a licensed wholesaler.

A key problem is that many local law enforcement officers view baby- formula theft as petty shoplifting - and shoplifting laws tend to be soft, experts say. Few shoplifters go to jail.

But there are signs that that attitude is changing. The Retail Industry Leaders Association in March testified before Congress, asking for tougher laws to crack down on organized shoplifting. Major retailers like Wal-Mart, Kroger, Walgreens, and others reported to be losing millions on shoplifted baby-formula have internal teams focused on the problem.

Although the FBI has also deployed teams nationwide to crack down on organized retail theft, some investigators say the problem is growing - and moving onto the Internet. On Monday, the online auction house eBay carried more than 1,000 offers of Enfamil baby formula. "This problem is getting worse, no question," Miller says. "It is in every state in the union, and neither law enforcement nor the retailers have their arms around it."

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