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]
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
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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.
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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
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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.”
—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
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