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Intermodal Cargo Transportation: Industry Best Security Practices Previous Section | Table of Contents | Next Section 2. Research Findings: Cargo Crime and Cargo Terminal ConcernsThe effective operation of the U.S. economy and the protection of the Nation depend on efficient movement of people, goods, information, and financial resources. This movement is assured by the U.S. transportation infrastructure, an interdependent and interconnected system of highways, railways, waterways, pipelines, and airports. Cargo terminals provide the "heart" of this transportation network, facilitating the organized and efficient transfer of cargo between or among modes, and preparing it for delivery to final destinations. This section presents research findings concerning the two most significant threats to the operation of cargo terminals: cargo theft and fraud and drug trafficking. Cargo TheftCargo theft from terminals interrupts the smooth functioning of the U.S. distribution system, and first received considerable research attention in the late 1970s and the early 1980s. Prompted by changing patterns in theft, government and private industry analysts attempted to quantify the extent of cargo theft throughout the Nation. In March 1980, on the eve of major transportation deregulation legislation, the General Accounting Office (GAO) released a study identifying the extent of cargo crime in the United States and evaluating the performance of the USDOT Office of Transportation Security (OTS) in quantifying and addressing this crime. Subsequent motor carrier, rail, and international shipping deregulation rendered reporting changes that severely limited OTS’s ability to collect data on the extent of crimes committed against transportation carriers. As a result of these changes, the GAO study remains one of the most comprehensive evaluations of cargo crime to date. This study found that cargo theft in the transportation network "disrupts the reliable and efficient flow of goods from shippers to receivers. It is also expensive; theft-related losses, which include the direct cost of the stolen cargo, higher insurance premiums, and additional administrative expenses, reduce transportation industry profits and increase prices for consumers."1 Based on reports from the Interstate Commerce Commission (ICC), the Civil Aeronautics Board (CAB), the Federal Maritime Commission (FMC), and Quarterly Freight Loss and Damage submissions by major regulated motor carriers and railroads, OTS estimated that 1977 losses experienced as a result of cargo theft amounted to approximately $1 billion.2 (When adjusted for inflation, the GAO figure equals approximately $1.8 billion in 1997 dollars.) According to OTS data, direct costs by mode were estimated as follows:
Indirect costs, such as filing, investigating, and paying claims, were believed to be two to five times the amount of losses, bringing the total cost estimated by OTS to between $2 and $5 billion.4 The majority of this theft occurred at cargo terminals and terminal transfer facilities. Based on an independent review of the 1977 data, the GAO determined that OTS analysis "understated the amount of theft-related losses."5 GAO found that the OTS data relied exclusively on submissions from large carriers (in some cases, medium and small carriers were not even aware of OTS cargo theft data collection activities), and because of limited reporting requirements, did not appropriately integrate cargo theft data from the insurance industry. Further, according to the GAO, OTS analysis did not address the issue of unreported or under-reported losses. According to the GAO, shippers and insurance companies were reticent about reporting losses that could result in publicity and inhibit customer confidence. As a result, the transportation industry often viewed it as less costly to absorb smaller claims and have insurance cover larger claims. Additional rationales for under-reporting identified by the GAO include:
Cargo Theft TodayThe Federal Bureau of Investigation (FBI) conservatively estimates that cargo theft-related incidents account for $3.5 billion in merchandise losses in the United States annually. This estimate is based primarily on data obtained from local law enforcement agencies with significant cargo theft-related losses. However, the rule of thumb used by law enforcement in estimating property theft is that only 40 percent of businesses or individuals actually report the theft. Based on this percentage the FBI estimate equates to $8.75 billion for 1997. The FBI readily acknowledges that this estimate may not reflect the losses of smaller transportation facilities and cargo stolen in regions not affiliated with the FBI’s cargo criminal apprehension programs or task forces.7 The National Cargo Security Council (NCSC), a coalition of public and private transportation organizations, estimates that cargo theft accounts for more than $10 billion in merchandise losses each year. This estimate is based on confidential data provided to the NCSC by transportation freight carriers and insurance groups, and may be more inclusive than the FBI assessment. Figure 2 presents the twenty-year trend for direct losses from cargo theft. Figure 2: FBI and NCSC Cargo Theft Estimates (Twenty-Year Trend)The NCSC estimate is a composite number and is not broken down by annual losses for mode of freight transportation. Many analysts believe that motor carriers experience the majority of loss due to cargo theft (approximately 85 percent of all reported thefts), followed by maritime, rail, and air.8 This is not surprising since, in terms of value, nearly three-quarters of all cargo is transported by truck, followed by postal, parcel, and courier service, rail, and water. While cargo loss can be attributed to individual modes, both the FBI and NCSC estimates indicate that the majority of cargo theft actually occurs in cargo terminals, transfer facilities, and cargo consolidation areas. The costs of stolen merchandise are not the only losses associated with cargo theft. When applying the conservative multiplier identified in the GAO study to determine indirect costs of cargo theft, total costs are estimated at between $20 billion and $60 billion per year. This figure includes the cost of filing, investigating, and paying claims, but does not include all law enforcement and security technology expenses. Containerized Cargo CrimeThe "container revolution," which has increased transportation efficiency and spawned the rapidly growing intermodal freight transportation industry, may have inadvertently encouraged increased organized criminal presence in freight transportation. Traditionally (before the 1960s), high-value cargo was moved using break-bulk packaging and shipping techniques. During the "break-bulk" era, high-value cargo was packaged in cases or pallets for shipment and loaded and unloaded on a piece-by-piece or pallet-by-pallet basis. Easy access encouraged the theft of electronics, appliances, clothes, engine parts, liquor, cosmetics, and cigarettes from terminals (including warehouses, docks, and transfer points) and during loading, unloading, and shipment. During the 1950s, high levels of pilferage from break-bulk shipments, combined with promises of increased efficiency, encouraged the U.S. military to experiment with containers. First used by military traffic commands, containers were extended to commercial use in the mid-1960s. Container use has continued to grow steadily in the United States and is projected to grow at 6 percent annually. Presently, 80 percent of U.S. overseas cargo trade is containerized. Over 60 percent of the world’s deep-sea general cargo is transported in containers. Worldwide, more than 400 ports have the capability to handle containers. Containers have become the primary means for shipping cargo between economically strong and stable countries. Along these trade routes, containerization of cargo approaches 100 percent. Containerized shipping is crucial in routes across the North Atlantic, and between the United States and Japan and neighboring countries. The technology and capital investments required to load, ship, store, and unload containers, however, limit their use on routes involving Less-Developed Countries (LDCs). In these markets, cargo is usually shipped according to the non-containerized classifications of bulk, break-bulk, and neo-bulk. Terminals to handle transported containers require more land for storage and transfer than do break-bulk or bulk terminals. Containers have received wide acceptance in the transportation industry, however, because of their numerous benefits in operating efficiency, including:
When first introduced, containers successfully reduced pilferage. Estimates indicated that during the early years of the container revolution, theft of containerized cargo dropped to less than one-tenth of 1 percent of all cargo shipped in containers. 9 Unfortunately, "after an initial honeymoon period, during which criminals adjusted to the new container system, other patterns of theft developed." 10 Organized crime recognized the potential for big business. Containers, stacked in terminals, could be stolen as a whole, opened and made subject to pilferage, or serve as a conduit for drug smuggling. "Much larger ‘packages’ containing higher value cargoes could now be spirited away with comparative ease and the spoils made it worth using more elaborate methods of deception and daring. Whereas, previously ten televisions might go missing because that was all thieves could carry or secrete, now two hundred could be stolen at a go in a container."11 For example, computer laptops, cellular telephones, perfume, and wearing apparel are among the top items stolen and could be worth from hundreds of thousands of dollars to millions of dollars per container load. A pallet of these devices can command upwards of $250,000. Sixty-four pallets can be loaded into a single 40-foot container, with a net value of $16 million. 12 Based on new patterns of cargo theft, the U.S. Coast Guard, the NCSC, and American Trucking Association (ATA) estimate that the value of single cargo thefts is on the rise, averaging approximately $500,000 in 1996. This estimate represents a five-fold increase from 1970. 13 Methods of Cargo TheftContainerized cargo theft is carried out primarily as an organized criminal conspiracy. Substantial evidence supports the hypothesis that most theft of containerized cargo is systematic in method. 14 Often, criminals act with apparent information about cargo manifests, suggesting that collusion is occurring with transportation employees. Cargo terminals are particularly vulnerable to employee penetration at intermodal transfer points, warehouses, rail yards, and docks. In its Ports of the World: A Guide to Cargo Loss Control, the CIGNA Corporation reports that the majority of cargo loss claims "involve cargo taken from transportation facilities by personnel authorized to be there and on vehicles controlled or similarly authorized by management." This immense network of importers, wholesalers, freight brokers, truckers, and dock workers create problems for law enforcement and transportation operations in pinpointing instances of bribery, extortion, or "purchased" information. Estimates indicate that "well over 80 percent of all theft and pilferage of transportation cargoes is accomplished by, or with the collusion of, persons whose employment entitles them access to the cargo that is stolen." 15 Criminals use a variety of methods to steal cargo, including:
Once stolen from a terminal, the cargo merchandise is quickly repackaged in a nearby warehouse or facility for transportation to an out-of-state fencing location or out of the country. These goods may re-enter the United States and be sold at a discount, providing an effective way to legitimize illegal profits (referred to as transshipment). The FBI estimates that most stolen cargo remains in the possession of those who stole it for less than twenty-four hours. Organized criminal groups are becoming transnational, facilitating theft of containerized cargo in one country and trafficking of stolen goods in another. Transnational criminal operations use the entire international shipping cycle, in particular, the maritime and trucking transportation shipping system and the freight-forwarding sector, to support stolen merchandise trafficking. Organized criminals enjoy the same efficiencies and economies of scale as legitimate transnational businesses, but can elude national efforts to restrict their activities. 16 Regional Patterns in Cargo TheftThe FBI estimates that $1 to $2 million worth of cargo theft occurs daily in three regions of the country, accounting for approximately three-quarters of the FBI’s estimate for the Nation’s total cargo theft. Since 1994, specialized cargo units in these three regions, comprised of local law enforcement and the FBI, have made thousands of arrests and recovered hundreds of millions of dollars in stolen property. 17 The FBI estimates that more than $1 billion worth of cargo is stolen annually in the New York/New Jersey area alone, which has the Nation’s most active trucking, rail, and continual freight handling system. 18 Local law enforcement agencies in Southern California estimate that approximately $500 million worth of cargo is stolen annually in their region. 19 Federal and local law enforcement officials in Miami tentatively estimate that cargo theft accounts for between one-half to three-quarters of a billion dollars in lost merchandise for local shippers and freight forwarders. 20 Since the 1970s, traditional, fixed organizational crime hierarchies have given way to entrepreneurial enterprises that are suited to specific criminal tasks. This criminal specialization allows greater flexibility, resulting in enhanced efficiency and operational effectiveness, particularly for cargo theft. Cargo thieves have proven highly adaptable, and are capable of meeting changing market needs for stolen or discounted goods. Cargo FraudOver the last two decades, fraud has increasingly become associated with organized cargo theft. Cargo fraud generally requires a high degree of sophistication and potentially generates large sums of money. Many types of fraud are effectively conducted in the freight transportation industry including:
Cargo Theft: Key FindingsChanging methods for shipping high-value cargo are cited by many analysts as the major contributor to increasing cargo theft in the transportation sector. Containerization of cargo inadvertently encourages increased organized criminal presence in freight transportation. Cargo terminals, which manage the loading, unloading, storage, and transfer of these containers, are particularly vulnerable to penetration. Other key findings include the following:
Drug Trafficking and Money LaunderingDrugs are an international business; they are produced, marketed, finished, wholesaled, shipped, and transshipped. Transportation facilities, particularly cargo terminals, are focal points for the movement of illegal drugs, and transportation operators and security personnel play a key role in enforcing drug laws and in interdicting drugs in transit. Transportation analysts routinely cite the shipment of illegal drugs in the national transportation system as one of the most serious problems facing both the integrity and the long-term stability of the industry. The growing volume of containerized trade provides numerous opportunities for smuggling illicit drugs. Containers sealed in one nation may not be opened until they reach a final destination in another. Both the volume of container trade and the labor-intensive methods required for inspecting containers, severely limit law enforcement personnel and freight transportation operators in identifying and preventing drug smuggling. The Drug Enforcement Agency (DEA) reports that the use of legitimate commercial freight containers by smugglers to conceal cocaine and heroin shipments has become a large-scale problem compromising the operations of legitimate business enterprises. Victimized companies are sustaining significant financial loss, erosion of operating integrity, and diminished corporate reputation. One self-insured trucking company noted that in the second quarter of this year (1998) it had a container stolen from its facility valued at approximately $3 million. Further, since concealment of illegal narcotics in commercial shipping is the primary method for transporting drugs and money into and out of the United States, organized crime has intensified involvement in the transportation sector. Corporations financed by drug profits may purchase, own, and operate apparently legitimate trucking companies and transportation operations to transport products and to obtain crucial shipping information. Organized criminal groups are also successfully infiltrating the transportation industry by compromising employees into acts of commission using bribery or extortion to induce collusion. In addition to transportation employees, police, customs and other government officials have been targeted for corruption. Drugs and Money Laundering: An OverviewThe container revolution, and its importance to the U.S. freight transportation system, has paralleled the rise of the international drug trade. Illegal drug trafficking is big business:
Over the last thirty years, the United States has employed thirty-seven Federal agencies in the "war on drugs," including the DEA, the FBI, U.S. Customs, the U.S. Coast Guard, and the Secret Service. Despite record seizures and imprisonment of many traffickers over the past decade, the U.S. State Department reports that "worldwide narcotics production is reaching new levels, corruption continues to undermine enforcement efforts, and a number of governments still fail to exhibit a serious commitment to reducing drug production and trafficking." 22 As a result of immense drug trade profits, drug trafficking groups are better organized and have more resources at their disposal than ever before. Faced with increasing governmental resistance, narcotics traffickers are relying more on indirect trafficking routes and transshipment. In addition, drug traffickers target terminals and border checkpoints previously identified as congested and understaffed. For example, Port Newark, one of the Nation’s largest sea container terminals and the fourth largest in the world, handles approximately 6,000 cargo ships carrying 1.7 million sea containers each year. Further, an estimated 200,000 containers enter this port annually by West Coast rail shipments. Of the 5,000 containers that enter Port Newark each day, Customs officials only inspect 30 to 50, accounting for approximately 1 percent of all container traffic. 23 Cocaine comprises more than 90 percent of the drugs seized at Port Newark and has been found in a variety of sources (e.g., plastic refrigeration tubing, diesel engines, walls and ceilings of containers, concentrated fruit juices, walls of cardboard boxes, flowers, chocolates, and in plastic bags inside the stomachs of live tropical fish). 24 Additionally, one ingenious source for smuggling has been built into the base of aluminum cookware (pots/pans). Given the high volume of container traffic at Port Newark, smugglers exploit the statistically low risk of detection. Backlogged containers sit idle for extended periods of time, providing additional opportunities for surreptitious access. In an attempt to further reduce the amount of suspected smuggling from occurring, in 1984 the U.S. Customs Service established the Carrier Initiative Program. The goal of this program is to deter narcotic smugglers from utilizing commercial air, sea, and land conveyances to transport their contraband. By signing an agreement with Customs, carriers agree to enhance their security at foreign terminals, aboard their conveyances, and at their facilities in the United States. Additionally, they agree to cooperate closely with U.S. Customs in identifying and reporting suspected smugglers. To date over 3,800 air, sea, and land carriers have voluntarily signed carrier initiative agreements with Customs. A second program was initiated in 1996. The Business Anti-Smuggling Coalition (BASC) is a business-driven and Customs-supported alliance created to combat narcotics smuggling via commercial trade. In the past three years (1995-1997) The Carrier Initiative Program, along with the Business Anti-Smuggling Coalition, have provided information to Customs which has resulted in domestic seizures totaling over 30,000 pounds of narcotics. During the same period, program participants intercepted over 70,000 pounds of narcotics destined for the United States from abroad. 25 Money LaunderingCommercial containerized shipments conceal money as well as illicit drugs. Currency smuggling is essential to the money laundering process, where money laundering is defined as the legitimization of proceeds from any illegal activity. Currency must be collected from local drug distributors (gangs or organizations), and then transported to specialized organized crime operations devoted to money laundering. This process is accomplished through the following steps:
According to the U.S. Department of State’s International Narcotics Control Strategy Report, the increasing concentrations of wealth among organized criminal groups is an impediment to legitimate commerce, government, and the integrity of the political process in several parts of the world. The transportation infrastructure supports the accumulation, transportation, and legitimization of illegal profits. Both drug trafficking and cargo theft exploit vulnerabilities in the existing national transportation system. Illegal profits are made from the sale of stolen merchandise or the sale of narcotics shipped into and around the country using commercial freight transportation. Cargo theft fraud, organized crime ownership of transportation operations, and the bribery and collusion of transportation employees all serve to legitimize organized criminal activity and undermine the integrity of the freight transportation industry. Drug Trafficking and Money Laundering: Key FindingsDrug trafficking and money laundering are international problems that take advantage of vulnerabilities in the national transportation system:
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