Even amid charges of siphoningfunds, unrecorded sales, wirefraud, stolen identities andharboring illegal aliens, the most surprisingaspect of the widening legal issuesfacing the 7-Eleven franchisee system ishow 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 oranything that’s contrary to the [franchise]agreement, stop.”
And from one former 7-Elevenemployee: “At any given time, at least 10%of my franchisees [were] stealing in prettysignifi cant quantities.”
Most of the comments refer specifi callyto 7-Eleven’s claims against a well-knownfranchisee, Tariq Khan, former chairmanof the National Coalition of Associationsof 7-Eleven Franchisees (NCASEF), who isaccused of siphoning funds, “open-drawerschemes” and unrecorded sales.
The accusations rang a familiar bell forone former 7-Eleven fi eld manager.
“There were so many schemes goingon, and [the franchisees] would teach eachother how to do this,” he told CSP magazineon condition of anonymity.
The more than a dozen franchiseescontacted for this story were less likely tosay they’ve witnessed anything as egregiousas human traffi cking—a key elementin a U.S. Department of Justice indictmentof nine 7-Eleven franchisees on the EastCoast—but most said they’ve seen basicemployee-rights violations ignored by7-Eleven corporate management.
“Many new Americans do bring peoplein [from outside the United States]and break the law by making them workexcessive hours,” said a franchisee on theWest 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 thathad family members that probably overstayedtheir visas and were not paid, perse,” added the former fi eld manager. “[Itwould be], ‘This is my cousin; he’s goingto work for me to pay off a debt.’ ”
In light of the legal activity and mediacoverage connected to the c-store industry’slargest, most well-known brand, CSPdelved into both issues to assess wherethey stand and what they might mean for7-Eleven Inc. and its franchisees.
Nine Stores Raided
The federal sweep into one of the country’slargest cases of human traffi cking netteda slew of indictments against 7-Elevenfranchisees in Long Island, N.Y., andVirginia, including conspiring to harborillegal immigrants employed at the stores,conspiracies to commit wire fraud andstealing identities.
News of the June 17 arrests made headlinesacross the United States and in othercountries, where coverage often concludedthat “slavery is still an American problem.”The arrests also served as a timely hook forSecretary of State John Kerry, who, twodays later, released the State Department’s2013 Traffi cking in Persons report. Kerrydidn’t specifi cally mention the 7-Elevenfranchisee charges, but national news outletsreported the stories together.
While the original indictments focusedon nine franchisees of 15 c-stores in LongIsland and eastern Virginia (see sidebar, p.72), U.S. States Attorney Loretta Lynch saidmore arrests could follow as part of “anongoing investigation into the employmentand exploitation of illegal immigrants at7-Eleven franchise stores nationwide.”
7-Eleven has not been named adefendant in any of the allegations, butinformation from a source deep insidethe human-traffi cking case suggests thatcould change as the initial defendantsreach plea agreements and the investigation“turns its attention uphill.”“[The charged franchisees] would be able to tell about how 7-Eleven corporateknew all about what they were doing,” thesource told CSP under a strict conditionof 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 thegovernment’s investigation. All of ourfranchise owners must operate their storesin accordance with laws and the 7-Elevenfranchise agreement. 7-Eleven Inc. will takeaggressive actions to audit the employmentstatus of all its franchisees’ employees.7-Eleven Inc. is taking steps to assumecorporate operation of the stores involvedin this action so we can continue to serveour guests. We continue to cooperate withfederal authorities in this matter.”
Since then, franchisees as a whole havehad only a single communication with7-Eleven corporate. The one letter tofranchises from 7-Eleven executive vicepresident and chief operating officer DarrenRebelez issued a directive to conductself-reviews of personnel compliance bythe end of June or face up to $1,100 infines per violation. Also, Rebelez said thecompany would conduct its own auditsof franchises beginning July 1.
Beyond that, 7-Eleven has been in an“informational blackout,” sources say, andrefused to comment for this story.
The current chairman of NCASEF,Bruce Maples, a franchisee in Tucson,Ariz., offered these comments: “Membersof [NCASEF] pledge to observe thehighest standards of competency, fairnessand integrity in the conduct of their relationsas franchised owners of 7-Elevenstores.” NCASEF represents the interestsof approximately 4,700 c-store ownerswith nearly 5,900 franchise-owned storesthat employ more than 40,000 workers.
Back-Office Blunder?
At issue is 7-Eleven’s back-office systemand who knew what when, according toseveral 7-Eleven franchisees who spokeon condition of anonymity.
“Basically, the ISP runs the store,” oneoperator said of 7-Eleven’s in-store processingsystem, which manages ordering,scan data, payroll and more. The systemis so sophisticated it knows how manycups of coffee, candy bars and cigarettesare sold every day at each store.
“7-Eleven corporate is extremelyinvolved in the day-to-day operations ofthe store,” the operator continued. “Withall that oversight and sophistication, it’sextremely difficult to believe 7-Elevencouldn’t red-flag the payroll abnormalitiesthat is alleged to have happened.”
7-Eleven franchisees tell CSP thatthe payroll system is virtually foolproof.Employees begin and end their day byentering their PIN, which basically clocksthem in and out. The information feedsdirectly into 7-Eleven’s corporate office,where a centralized payroll system paysall workers via direct deposit, moneynetwork or a hard check.
Among the allegations is that thefranchise owner or managers were enteringand deliberately underreporting thenumber of hours employees were working.Also, they are suspected of receivinghard checks and, in some cases, cashingthem, paying out a portion to the workers,and pocketing the rest.
Legal experts and c-store industry veteransare wondering how 7-Eleven corporatefailed to snag the payroll irregularities,and how exposed the company could be tolegal recourse.
James McGrath, partner in the Ohiobasedlaw firm McGrath & Grace Ltd.,which works with companies on internalcompliance investigations, articulated thisin a blog: “The organizational concern for7-Eleven ought to be predicated upon itsrole in failing to detect this scam, payingthese illegal-immigrant employees, andany resulting liability that it might have forthe same. … But what of 7-Eleven’s role inthe payroll fraud and the higher-profilehuman-trafficking angles, if any?”
In a follow-up interview with CSPMcGrath said federal investigators will wantto understand what 7-Eleven corporate’sresponsibility and legal obligations are.“How does 7-Eleven’s central computer systemnot identify that it’s paying two peoplewith the same Social Security number?”he said. “My question is: What checks andbalances did 7-Eleven have, and what stepsare they now taking to ensure they’re gettingaccurate information [on payroll]?”
McGrath questioned whether 7-Elevenhad monitored its payroll system. Had itdone so, “then 7-Eleven’s people shouldhave caught on to the entire fraud schemeand conducted an internal investigationthat would have yielded not only the payrollscam, but the concomitant human-rightsabuses that reportedly went along with it.”
Brand Questions
An industry expert raises questions aboutthe potential adverse effect the federalcharges could have on 7-Eleven’s brandvalue. Specifically, if the federal investigationfinds widespread wrongdoing acrossthe company’s franchise network, will theadversity undermine not only the powerof 7-Eleven’s name but also how much afranchise is worth?
The industry veteran, who spoke oncondition of anonymity, cited a statementby Rebelez in his letter to franchisees: “Wehave a critical need to protect the integrityand reputation of the 7-Eleven brand.”
The industry expert said, “Ever since7-Eleven made a conscious decision to have 100% franchised stores a few yearsago, I have been concerned that, absentappropriate policing (e.g., that franchiseescomply with immigration and other laws),our industry landscape of franchisedstores could become havens for inconsistentbusiness operandi, exploiting illegalsor other dynamics that could be a threat tothe enhanced reputation our industry hasearned the last couple decades.
“If 7-Eleven can modify their payrollsystem to more proactively fi lter out systemicviolators, they can ultimately buildan effective alliance with the federal andstate governments and their franchisees,”the expert continued. “They can be aleader in immigration compliance whilealso protecting their brand by taking afi rm stand against payroll abuses.”
Khan’s Alleged Con
While 7-Eleven’s systems—and its attentivenessto them—come into question inthe human-trafficking case, the corporateentity is calling foul on Tariq Khanfor misusing those systems in his alleged“illicit, wide-ranging schemes” to bilk hisfranchisor out of more than $2.43 million.
“Tariq intentionally failed to reportmultiple hundreds of thousands of dollarsof merchandise sales, including taxablesales, at the stores by manipulationof the cash registers and working from‘open drawers,’ ” 7-Eleven claims in a59-page court complaint.
“Tariq intentionally caused inventoryshortages to be created artificially and,thus, falsely underreported his net incometo the federal and state governments,”7-Eleven says in the complaint, the resultof a three-year investigation that beganin March 2010 following an “operationalreview” in connection with the renewalof one of the franchise agreements. “Theresults [of the review] were so startlingthat, in lieu of confronting Tariq with such results, an investigation of all stores, underthe auspices of 7-Eleven’s Asset ProtectionDepartment, was commenced.”
It’s at this point that other franchiseesreadily line up to profess that, while theypersonally operate above-board, cheatingthe 7-Eleven system is all too common,and they wonder why the corporate officehasn’t done something about it sooner.“The 7-Eleven system is certainlysophisticated enough to determine abnormalities.The word in the franchise communityis that 7-Eleven chose to look theother way,” one longtime franchisee says.
Some franchisees say the charges againstKhan, which were leveled just four daysafter the federal indictments, are a reactionto the DOJ arrests, that “a spotlight has beenput on 7-Eleven by the federal governmentand the authorities, and that has caused7-Eleven to take seriously accountabilityissues,” as one franchisee says.
The truth, however, is that 7-Elevenhas charged several franchisees on similarallegations going back to at least September2012. Still, franchisees see the Khanaction, because of his notoriety, as “a warningto franchisees who are not honoringthe [franchise] agreement, the system andthe law that they need to stop.”
“I think this is the tip of the iceberg,”says another operator. “There’s more ofthis to come.”
‘A Political Witch Hunt’
For Khan’s part, he maintains “there is notruth to” the charges against him, his wife,son and employees, calling the lawsuit “apolitical witch hunt” in a statement madeexclusively to CSP.
In a declaration to the court, Khanexpanded on his claim, accusing 7-Elevenof targeting him for being an “outspokenadvocate” for franchisee rights. “[7-Eleven’s]motivation is not my alleged misconduct,”he wrote. “It is vindictive animus predicatedon my many years of being an outspokenadvocate for myself and fellow franchiseeowners who are viewed by corporatemanagement not as partners in a successfulbusiness plan, but essentially as low-levelindividuals whose voice is irrelevant.”
Some fellow franchisees back Khan’sclaim, while others said his behavior hascome into question before, specificallyreferring to his exit from the chairmanshipof NCASEF. Several referenced a2008 attempt to audit Khan’s NCASEFbooks. Khan’s alleged lack of cooperationled to the challenge being droppedto avoid an expensive court battle.
On either front—claims of siphoningmoney from 7-Eleven and charges ofhuman trafficking—a harsh spotlight isshining on the c-store industry’s largestretailer and its systems, and there’s reasonto believe we haven’t seen the worstof it. Whether more charges of takingadvantage of illegal immigrants are filedagainst additional franchisees, executivesin 7-Eleven’s corporate offices are indictedfor willful negligence or more franchiseesare outed by corporate for breaking the lawor franchise agreements, 7-Eleven and itsfranchisees face an uphill PR battle.
“There are a lot of hard-workingfranchisees who are in no way, shape orform involved in wrongdoing,” says a longtimestore operator. “The consequencesof all this stuff that’s going on is damageto the brand, damage to the reputation,and in some extreme cases, such as is inLong Island and Virginia, there may becustomers who simply choose not to shopat 7-Eleven because they don’t want to supporta brand that is facing allegations ofhuman trafficking.”
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 commitwire fraud, concealing and harboring illegal aliens for fi nancial 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 identitiesstolen from United States citizens—including that of a former U.S. Marine and an 8-year-oldchild—housed them at residences owned by the defendants and stole substantial portionsof their wages.
Follow-up: All defendants pleaded not guilty to the charges when arraigned. A source closeto 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 RacketeerInfl uenced and Corrupt Organizations (RICO) Act, common-law fraud, breach of contract,trademark infringement.
Potential outcome: Franchisee agreements terminated, stores and property claimed by7-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 fi veconvenience stores on Long Island, N.Y. “Tariq intentionally failed to report multiple hundredsof thousands of dollars of merchandise sales, including taxable sales, at the stores bymanipulation of the cash registers and working from ‘open drawers,’ “ according to 7-Eleven’s59-page court complaint. “Tariq intentionally caused inventory shortages to be created artifi -cially 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-Elevenviolated its own franchisee agreement when its representatives “ransacked” the fi ve stores.He also fears irreparable damage to his business should 7-Eleven corporate take over operationof the stores.
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