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November 2007

Operation can scam

Even after 20 simultaneous raids in 2 states, 15 arrests, the seizure of 2 cars and $500,000 in cash, Detective First Lt. Marty Bugbee, commander of the criminal investigation unit of the Michigan State Police, said, “We’re still investigating.”

On the Ohio side of the border, Sergeant Joe Heffernan of the Toledo police department said, “It could be another year,” before the investigation is concluded. While Michigan and Ohio law enforcement worked together, the investigations started independently.

Operation Can Scam was the name given to the 18-month investigation into aluminum cans that were smuggled across state lines and redeemed in Michigan, where each can is worth 10 cents. While a dime doesn’t seem like much in today’s economy, it adds up fast when there are 13 stores and 2 scrap yards shipping and processing cans by the truckload. Bugbee estimated that the state of Michigan lost approximately $13 million dollars per year to the scam, and bottlers including Coca Cola and Pepsi lost another $10 million.

Bugbee said that two scrap yards in Ohio, LaGrange Metals and DLG Recycling, were paying 65 cents per pound for aluminum cans, well over market value. He said that surveillance videos showed people lined up with bags of cans.

Heffernan said the two yards were just fronts for the can operation. Not only were they buying cans from individuals, they were buying from legitimate scrap companies in the area, paying more than market price for the metal. Heffernan said, “One of the first things that alerted us to this was that the legitimate recyclers were no longer able to buy cans from regular sources.”

Heffernan said that the two yards, now both closed by authorities, were processing the cans by crushing them the same way Michigan’s reverse vending machines would, and then bagging them in Michigan’s special redemption bags. Filled to a designated line, each bag was worth $72 when it was redeemed. Of that, the Ohio yards received $31 and the grocers got the rest.

Bugbee explained that in Michigan, it’s expected that about 60 percent of the cans produced in the state will be returned for the 10 cent deposit. The funds from the remaining 40 percent go into a state “under-redeemers fund” which is used by Michigan’s Department of Environmental Quality to fund various projects.

The under-redeemers fund typically brought in about $23 million per year, until 2001 when the amount dropped to $10 million, even though sales of canned beverages had gone up. Something was amiss, and the state started working with bottlers to see where the money was going.

What the investigation found was 13 stores that were redeeming an excessive number of cans.

When stores in Michigan purchase from distributors, the distributors also pick up empty cans. The distributors count the cans, and compare that number to the amount of stock sold. If the number of returned cans exceeds the number of cans purchased from the distributor, the distributor pays the store “on the spot” in cash or in product, according to Bugbee.

In theory, stores would simply be getting back the money they had paid out to customers. In this case, store owners were getting ten cents per can for the cans that had been smuggled in from out of state, where no deposit had ever been paid by the consumer.

One of the store owners in on the scam also owned one of the scrap yards in Ohio, but Bugbee said that it was the store owners “who were orchestrating it all.” When distributors got curious about one store’s excessive redemptions, the group would shift the excess to another store.

On the Ohio side, Heffernan said that the two scrap yards were competing with each other for the can business, and it wasn’t a friendly competition. In a separate case, the owner of one yard contracted a hit on someone from the other yard.

Bugbee explained that Michigan stores use “reverse vending machines” that take empty cans and pay out redemption fees. At the stores in question, the machines were manipulated to increase the number of cans reported to have been redeemed. That way, the machines’ totals coincided with the number of cans that were sent back to the distributors.

A flaw in the system is that reverse vending machines can’t distinguish Michigan cans from “foreign” cans. A bill introduced by Rep. Steve Bieda would require a universal product code on beverage containers that would identify whether the containers are returnable in Michigan. The reverse vending machines would read the bar code, determine whether the can is returnable in Michigan, refuse deposit returns on “foreign” cans and print out a weekly report of the number of cans read, the brand names of each can, the type and size of the can, and the number of foreign cans rejected. Under the law, distributors would be allowed to refuse refunds to stores that didn’t have proper printouts.

Heffernan said that many people don’t realize that buying a beverage in Ohio and redeeming the can across in Michigan is a crime. There are also businesses that buy beverages in Ohio at warehouse stores and resell them in Michigan, which is also illegal. “But where they were really losing money was in the organized crime.” Heffernan said. “It’s kind of amazing that there is that much money in used pop cans.”

Heffernan estimated that so far, $3.2 million dollars in assets, not including real estate, has been seized. Now, the investigation in Ohio has teamed up with the FBI to look at the legitimate scrap yards and see what role they played. “There were legitimate scrap yards and recyclers that were providing cans to the illegitimate ones,” he said. “If they knew these cans were going up to Michigan – if they had knowledge of what was happening – we could charge them.”