investigates 7-Eleven’s Legal Unease A series of publicity nightmares put the retailer and its franchisees on the defensive By Steve Holtz and Mitch Morrison || [email protected], [email protected] E ven amid charges of siphoning funds, unrecorded sales, wire fraud, stolen identities and harboring illegal aliens, the most surprising aspect of the widening legal issues facing the 7-Eleven franchisee system is how unsurprised franchisees are about it. A sampling of franchisee reactions: “7-Eleven’s known about this for years.” “7-Eleven chose to look the other way.” “Franchisees are advising fellow franchisees: If you’re doing anything illegal or anything that’s contrary to the [franchise] agreement, stop.” And from one former 7-Eleven employee: “At any given time, at least 10% of my franchisees [were] stealing in pretty significant quantities.” Most of the comments refer specifically to 7-Eleven’s claims against a well-known franchisee, Tariq Khan, former chairman of the National Coalition of Associations of 7-Eleven Franchisees (NCASEF), who is accused of siphoning funds, “open-drawer schemes” and unrecorded sales. The accusations rang a familiar bell for one former 7-Eleven field manager. “There were so many schemes going on, and [the franchisees] would teach each other how to do this,” he told CSP magazine on condition of anonymity. The more than a dozen franchisees contacted for this story were less likely to say they’ve witnessed anything as egregious as human trafficking—a key element in a U.S. Department of Justice indictment of nine 7-Eleven franchisees on the East Coast—but most said they’ve seen basic employee-rights violations ignored by 7-Eleven corporate management. “Many new Americans do bring people in [from outside the United States] and break the law by making them work excessive hours,” said a franchisee on the West Coast, again on condition of anonymity. “They’re there 12 hours a day, seven days a week. It’s very common.” “There were many franchisees that had family members that probably overstayed their visas and were not paid, per se,” added the former field manager. “[It would be], ‘This is my cousin; he’s going to work for me to pay off a debt.’ ” In light of the legal activity and media coverage connected to the c-store industry’s largest, most well-known brand, CSP delved into both issues to assess where they stand and what they might mean for 7-Eleven Inc. and its franchisees. Nine Stores Raided The federal sweep into one of the country’s largest cases of human trafficking netted a slew of indictments against 7-Eleven franchisees in Long Island, N.Y., and Virginia, including conspiring to harbor illegal immigrants employed at the stores, conspiracies to commit wire fraud and stealing identities. News of the June 17 arrests made headlines across the United States and in other countries, where coverage often concluded that “slavery is still an American problem.” The arrests also served as a timely hook for Secretary of State John Kerry, who, two days later, released the State Department’s 2013 Trafficking in Persons report. Kerry didn’t specifically mention the 7-Eleven franchisee charges, but national news outlets reported the stories together. While the original indictments focused on nine franchisees of 15 c-stores in Long Island and eastern Virginia (see sidebar, p. 72), U.S. States Attorney Loretta Lynch said more arrests could follow as part of “an ongoing investigation into the employment and exploitation of illegal immigrants at 7-Eleven franchise stores nationwide.” 7-Eleven has not been named a defendant in any of the allegations, but information from a source deep inside the human-trafficking case suggests that could change as the initial defendants reach plea agreements and the investigation “turns its attention uphill.” “[The charged franchisees] would be CSP A ugus t 2013 69 able to tell about how 7-Eleven corporate knew all about what they were doing,” the source told CSP under a strict condition of anonymity. 7-Eleven’s Response For its part, Dallas-based 7-Eleven Inc. released a statement soon after the arrests: “7-Eleven Inc. has cooperated with the government’s investigation. All of our franchise owners must operate their stores in accordance with laws and the 7-Eleven franchise agreement. 7-Eleven Inc. will take aggressive actions to audit the employment status of all its franchisees’ employees. 7-Eleven Inc. is taking steps to assume corporate operation of the stores involved in this action so we can continue to serve our guests. We continue to cooperate with federal authorities in this matter.” Since then, franchisees as a whole have had only a single communication with 7-Eleven corporate. The one letter to franchises from 7-Eleven executive vice president and chief operating officer Darren Rebelez issued a directive to conduct self-reviews of personnel compliance by the end of June or face up to $1,100 in fines per violation. Also, Rebelez said the company would conduct its own audits of franchises beginning July 1. Beyond that, 7-Eleven has been in an “informational blackout,” sources say, and refused to comment for this story. The current chairman of NCASEF, Bruce Maples, a franchisee in Tucson, Ariz., offered these comments: “Members of [NCASEF] pledge to observe the highest standards of competency, fairness and integrity in the conduct of their relations as franchised owners of 7-Eleven stores.” NCASEF represents the interests of approximately 4,700 c-store owners with nearly 5,900 franchise-owned stores that employ more than 40,000 workers. 70 CSP A ugu s t 2 0 1 3 Back-Office Blunder? At issue is 7-Eleven’s back-office system and who knew what when, according to several 7-Eleven franchisees who spoke on condition of anonymity. “Basically, the ISP runs the store,” one operator said of 7-Eleven’s in-store processing system, which manages ordering, scan data, payroll and more. The system is so sophisticated it knows how many cups of coffee, candy bars and cigarettes are sold every day at each store. “7-Eleven corporate is extremely involved in the day-to-day operations of the store,” the operator continued. “With all that oversight and sophistication, it’s extremely difficult to believe 7-Eleven couldn’t red-flag the payroll abnormalities that is alleged to have happened.” 7-Eleven franchisees tell CSP that the payroll system is virtually foolproof. Employees begin and end their day by entering their PIN, which basically clocks them in and out. The information feeds directly into 7-Eleven’s corporate office, where a centralized payroll system pays all workers via direct deposit, money network or a hard check. Among the allegations is that the franchise owner or managers were entering and deliberately underreporting the number of hours employees were working. Also, they are suspected of receiving hard checks and, in some cases, cashing them, paying out a portion to the workers, and pocketing the rest. Legal experts and c-store industry veterans are wondering how 7-Eleven corporate failed to snag the payroll irregularities, and how exposed the company could be to legal recourse. James McGrath, partner in the Ohiobased law firm McGrath & Grace Ltd., which works with companies on internal compliance investigations, articulated this in a blog: “The organizational concern for 7-Eleven ought to be predicated upon its role in failing to detect this scam, paying these illegal-immigrant employees, and any resulting liability that it might have for the same. … But what of 7-Eleven’s role in the payroll fraud and the higher-profile human-trafficking angles, if any?” In a follow-up interview with CSP McGrath said federal investigators will want to understand what 7-Eleven corporate’s responsibility and legal obligations are. “How does 7-Eleven’s central computer system not identify that it’s paying two people with the same Social Security number?” he said. “My question is: What checks and balances did 7-Eleven have, and what steps are they now taking to ensure they’re getting accurate information [on payroll]?” McGrath questioned whether 7-Eleven had monitored its payroll system. Had it done so, “then 7-Eleven’s people should have caught on to the entire fraud scheme and conducted an internal investigation that would have yielded not only the payroll scam, but the concomitant human-rights abuses that reportedly went along with it.” Brand Questions An industry expert raises questions about the potential adverse effect the federal charges could have on 7-Eleven’s brand value. Specifically, if the federal investigation finds widespread wrongdoing across the company’s franchise network, will the adversity undermine not only the power of 7-Eleven’s name but also how much a franchise is worth? The industry veteran, who spoke on condition of anonymity, cited a statement by Rebelez in his letter to franchisees: “We have a critical need to protect the integrity and reputation of the 7-Eleven brand.” The industry expert said, “Ever since 7-Eleven made a conscious decision to To read all of CSP Daily News’ coverage of and updates on 7-Eleven’s legal crises, visit www.cspnet.com/7eLC. have 100% franchised stores a few years ago, I have been concerned that, absent appropriate policing (e.g., that franchisees comply with immigration and other laws), our industry landscape of franchised stores could become havens for inconsistent business operandi, exploiting illegals or other dynamics that could be a threat to the enhanced reputation our industry has earned the last couple decades. “If 7-Eleven can modify their payroll system to more proactively filter out systemic violators, they can ultimately build an effective alliance with the federal and state governments and their franchisees,” the expert continued. “They can be a leader in immigration compliance while also protecting their brand by taking a firm stand against payroll abuses.” Khan’s Alleged Con While 7-Eleven’s systems—and its attentiveness to them—come into question in the human-trafficking case, the corporate entity is calling foul on Tariq Khan for misusing those systems in his alleged “illicit, wide-ranging schemes” to bilk his franchisor out of more than $2.43 million. “Tariq intentionally failed to report multiple hundreds of thousands of dollars of merchandise sales, including taxable sales, at the stores by manipulation of the cash registers and working from ‘open drawers,’ ” 7-Eleven claims in a 59-page court complaint. “Tariq intentionally caused inventory shortages to be created artificially and, thus, falsely underreported his net income to the federal and state governments,” 7-Eleven says in the complaint, the result of a three-year investigation that began in March 2010 following an “operational review” in connection with the renewal of one of the franchise agreements. “The results [of the review] were so startling that, in lieu of confronting Tariq with such 72 CSP A ugu s t 2 0 1 3 Breaking Down the Cases Federal Indictment When: June 17, 2013 Plaintiff: United States of America Defendants: Nine 7-Eleven franchisees: In New York, Farrukh Baig, Bushra Baig, Malik Yousaf, Ramon Nanas, Azhar Zia, Ummar Uppal. In Virginia, Zahid Baig, Shannawaz Baig, Tariq Rana. Charges: Charges vary from defendant to defendant. Among them: conspiracy to commit wire fraud, concealing and harboring illegal aliens for financial gain, aggravated identity theft. Potential outcome: More than 20 years in prison, loss of stores Why: The defendants, who owned, managed and controlled 14 7-Eleven franchise stores, allegedly hired dozens of illegal immigrants, equipped them with more than 20 identities stolen from United States citizens—including that of a former U.S. Marine and an 8-year-old child—housed them at residences owned by the defendants and stole substantial portions of their wages. Follow-up: All defendants pleaded not guilty to the charges when arraigned. A source close to the case tells CSP most are expected to strike plea agreements. Franchisee Civil Action When: June 21, 2013 Plaintiff: 7-Eleven Inc. Defendants: 7-Eleven franchisees and employees Tariq Khan, Senita Khan, Farouq Khan, Rajesh M. Ajmeri, Iram M. Khan, Mohammed Tariq Wattoo, Asaid Sohail, Ansarul H. Rana, Mohammed Tanveer, Faith E. Camacho, Shahid F. Khan, several John and Jane Does. Claims: Claims vary from defendant to defendant. Among them: violation of the Racketeer Influenced and Corrupt Organizations (RICO) Act, common-law fraud, breach of contract, trademark infringement. Potential outcome: Franchisee agreements terminated, stores and property claimed by 7-Eleven, $1 million in damages. Why: Tariq Khan, his wife, son and employees allegedly used “illicit, wide-ranging schemes” to “secretly and successfully siphon hundreds of thousands of dollars in cash” from his five convenience stores on Long Island, N.Y. “Tariq intentionally failed to report multiple hundreds of thousands of dollars of merchandise sales, including taxable sales, at the stores by manipulation of the cash registers and working from ‘open drawers,’ “ according to 7-Eleven’s 59-page court complaint. “Tariq intentionally caused inventory shortages to be created artificially and, thus, falsely underreported his net income to the federal and state governments.” 7-Eleven claims more than $2.43 million was stolen through inventory shortages. Follow-up: Khan vehemently denies all the accusations, calling the lawsuit a “witch hunt” for being a vocal franchisee activist. He also refused to vacate his stores, claiming 7-Eleven violated its own franchisee agreement when its representatives “ransacked” the five stores. He also fears irreparable damage to his business should 7-Eleven corporate take over operation of the stores. results, an investigation of all stores, under the auspices of 7-Eleven’s Asset Protection Department, was commenced.” It’s at this point that other franchisees readily line up to profess that, while they personally operate above-board, cheating the 7-Eleven system is all too common, and they wonder why the corporate office hasn’t done something about it sooner. “The 7-Eleven system is certainly sophisticated enough to determine abnormalities. The word in the franchise community is that 7-Eleven chose to look the other way,” one longtime franchisee says. Some franchisees say the charges against Khan, which were leveled just four days after the federal indictments, are a reaction to the DOJ arrests, that “a spotlight has been put on 7-Eleven by the federal government and the authorities, and that has caused 7-Eleven to take seriously accountability issues,” as one franchisee says. The truth, however, is that 7-Eleven has charged several franchisees on similar allegations going back to at least September 2012. Still, franchisees see the Khan action, because of his notoriety, as “a warning to franchisees who are not honoring the [franchise] agreement, the system and the law that they need to stop.” “I think this is the tip of the iceberg,” says another operator. “There’s more of this to come.” on my many years of being an outspoken advocate for myself and fellow franchisee owners who are viewed by corporate management not as partners in a successful business plan, but essentially as low-level individuals whose voice is irrelevant.” Some fellow franchisees back Khan’s claim, while others said his behavior has come into question before, specifically referring to his exit from the chairmanship of NCASEF. Several referenced a 2008 attempt to audit Khan’s NCASEF books. Khan’s alleged lack of cooperation led to the challenge being dropped to avoid an expensive court battle. On either front—claims of siphoning money from 7-Eleven and charges of human trafficking—a harsh spotlight is shining on the c-store industry’s largest retailer and its systems, and there’s reason to believe we haven’t seen the worst of it. Whether more charges of taking advantage of illegal immigrants are filed against additional franchisees, executives in 7-Eleven’s corporate offices are indicted for willful negligence or more franchisees are outed by corporate for breaking the law or franchise agreements, 7-Eleven and its franchisees face an uphill PR battle. “There are a lot of hard-working franchisees who are in no way, shape or form involved in wrongdoing,” says a longtime store operator. “The consequences of all this stuff that’s going on is damage to the brand, damage to the reputation, and in some extreme cases, such as is in Long Island and Virginia, there may be customers who simply choose not to shop at 7-Eleven because they don’t want to support a brand that is facing allegations of human trafficking.” n —Additional reporting by Greg Lindenberg ‘A Political Witch Hunt’ For Khan’s part, he maintains “there is no truth to” the charges against him, his wife, son and employees, calling the lawsuit “a political witch hunt” in a statement made exclusively to CSP. In a declaration to the court, Khan expanded on his claim, accusing 7-Eleven of targeting him for being an “outspoken advocate” for franchisee rights.“[7-Eleven’s] motivation is not my alleged misconduct,” he wrote.“It is vindictive animus predicated Circle 159 on reply card CSP A ugus t 2013 73
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