What Did 7-Eleven Know?

Questions focus on corporate's central payroll system

Published in CSP Daily News

By
Mitch Morrison, Vice President & Group Editor

DALLAS -- A federal probe into human trafficking at 7-Eleven franchise locations is generating more questions and a broader investigation, according to sources familiar with both the company and the charges recently filed.

A federal sweep earlier this month 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.

7-Eleven corporate has not been charged with any wrongdoings and most recently issued a directive to its estimated 5,700 franchises to conduct self-reviews by end of June or face up to $1,100 in fines per violation. Additionally, 7-Eleven executive vice president and chief operating officer Darren Rebelez said the company will be conducting its own audits of franchises.

The company's actions come as sources tell CSP Daily News that the federal probe is expanding into other states and could involve the brand's entire retail network.

At play is 7-Eleven's backoffice 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 are sold every day at each store, how many candy bars are sold, how many cigarettes are sold."

"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 Daily News that the payroll system is virtually fool-proof. Employees begin and end their day by entering their PIN number, 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 under-reporting the number of hours employees were working. Additionally, they are suspected of receiving hard checks and, in some cases, cashing it, paying out a portion to the workers, and pocketing the rest.

Several sources interviewed are raising the following questions as it relates to corporate controls:

  • Was 7-Eleven's payroll department aware of discrepancies?
  • What role did field supervisors play, if any?
  • In-store inspections: 7-Eleven conducts regular inspections of all franchised locations. Were there telltale signs the company should have picked up on concerning noncompliance of normal payroll policies?
  • Japan: Will the company's Japanese ownership allow for anything to potentially tarnish what is a well-recognized and praised brand? Will officials in corporate's payroll division or others bear the brunt of the ongoing investigation?

7-Eleven officials did not respond to emails requesting an interview.

Watching Payroll

Both 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 of the Ohio-based law firm McGrath & Grace Ltd., which works with companies on internal compliance investigations, articulated this point in a recent 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 on the payroll fraud and the higher-profile human trafficking angles, if any?"

In a followup interview with CSP Daily News, 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 numbers?," he asked. "7-Eleven has a master-servant relationship with their franchisees, meaning everything, including payroll, goes through a broader inventory tracking system. 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, he said, "then 7-Eleven's people should have caught onto 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."

Considering the federal government's crackdown on human trafficking, McGrath suggested that 7-Eleven should have commissioned an internal inquiry into the payroll matter in the past, and certainly now "with an eye toward exonerating itself and its systems from participation in the more heinous human trafficking aspect of this case."

Brand Questions

An industry expert raises questions about the potential adverse impact 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 made by 7-Eleven's Rebelez in a letter last week to franchisees that directs them to conduct internal audits. Rebelez said, "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 have 100% franchised stores a few years ago I have been concerned that, absent appropriate policing (e.g. that franchisees comply with the spirit and actual 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 added. "They can be a leader in immigration compliance while also protecting their brand by taking a firm stand against payroll abuses."

Click here to keep updated on the current news surrounding 7-Eleven.

By Mitch Morrison, Vice President & Group Editor
View More Articles By Mitch Morrison