By James I. Marasco | Partner
On a recent trip to the Pacific Northwest, I was bombarded with stores and products advertising “all natural”, “organic”, “farm-raised”, etc. It got me thinking to when I was a kid growing up on a farm which raised chickens and sold eggs in a roadside stand. Who knew we could charge a premium for cage-free, free-range brown eggs?
What’s the Difference?
Most people don’t realize white eggs come from chickens like White Leghorns and brown eggs come from Rhode Island Reds or similar varieties. We raised both – there is no difference in taste. But, how much of a premium are people willing to pay for something perceived as more healthy or organic? How prevalent is deceptive advertising and fraud in the food industry involving these issues?
Food Fraud is described as the deliberate and intentional substitution or misrepresentation of food, ingredients or packaging for economic gain. This topic went mainstream when the television news show 60 Minutes ran a story in 2016 exposing the olive oil industry. Although packaging of certain brands of olive oil boasted “extra virgin”, it was found to contain mostly peanut, soy or sunflower oils. The report estimated that 75-80 percent of the extra virgin olive oil sold in the U.S. does not meet the legal grade. Some of the largest grocery chains and most expensive brands were falsely marketing these products.
The Organic Explosion
As the U.S. emerged from the 2008 recession, there’s been a huge growth in food products that claim to be healthier for you, and coincidently, cost more. According to the Organic Trade Association, in 2016, industry sales reached $43 billion. Some of the most prevalent monikers you may come across are:
• Cage free
• Fair trade
• Grass fed
• Locally grown
• No GMOs (genetically modified organisms)
• No hormones or hormone-free
Hungry consumers are attracted to these labels with many not understanding what they really represent or how well they are enforced. In late 2017, this topic became increasingly political when the U.S. Department of Agriculture’s (USDA) Inspector General released a report detailing widespread fraud throughout the global organic-food supply chain and noting the failure of federal officials to ensure the integrity of the organic market in the U.S. Some voiced their opinions that organic companies and their advocacy groups ignored the fraud so they could continue charging higher prices for food labeled organic. Some legislators pushed to double the USDA’s enforcement budget.
How Closely is this Enforced and Monitored?
In May 2017, a story originally investigated by the Washington Post highlighted a fraudulently labeled shipment of 36 million pounds of “organic” soybeans and corn. They were shipped from the Ukraine, but originated from Turkey which supplies various organic products to the U.S. The shipment was later found to have been treated with various pesticides and was likely to be used in cattle feed. Under USDA rules, a company importing an organic product must verify that it has come from a supplier that has a “USDA Organic” certificate. It must keep receipts and invoices, but doesn’t need to trace the product back to the original farm. Most crop seeds, fruits and vegetables used in the U.S. are genetically modified and cannot be used in the certification of a product or livestock feed as organic. What’s especially alarming is that to meet the growing demand, these “organic” products are being increasingly imported from other countries, like Turkey and China.
Most of the certifications or descriptions noted above have their own certifying organization. For example, the USDA certifies the organic program, while Fairtrade International or Fairtrade Labeling Organization certifies the Fair Trade program. Ultimately, in the U.S., deceptive food packaging would normally fall under the enforcement of either the Federal Trade Commission (consumer commodities used in the household), the Food & Drug Administration (foods, drugs and cosmetics) or the USDA.
According to the USDA website, they have the authority to suspend or revoke the organic certificates of any farm or business that violates the regulations, as well as levy financial penalties of up to $11,000 per violation. However, there is no mention of any criminal penalties. In the six months between October 2017 and March 2018, the USDA closed 170 investigations and levied less than $16,000 in fines.
What Should You Look For?
Since organic or all-natural products usually cost considerably more than their counterparts, you should be aware of some precautions to avoid being scammed. These include:
- Be alert to buying oils, honey, dairy foods, spices, fruit juices and fish since they are most frequently compromised.
- If the price is too good to be true, it probably is.
- Buy from a reputable store or supplier.
- If possible, buy whole or unprocessed products (i.e. a block of parmesan cheese).
- Be especially alert when purchasing online.
- Educate yourself – there are several recently published books which offer advanced tips on how to spot the most fraudulently compromised items. The USDA also maintains a website at: https://www.nal.usda.gov/fnic/fraud-and-nutrition-misinformation. Their site also maintains a list of companies who have been found to be fraudulently using the “organic” label.
Striving for a healthier lifestyle is certainly admirable, but don’t lose sight of the deception that lurks. The increased popularity of the organic craze has created a whole new opportunity for fraud preparators to infiltrate. Don’t fall victim and remember, white eggs come from white chickens and brown eggs come from brown chickens. Sometimes, it’s really that simple.
About Jim Marasco: Jim is a Partner at EFPR Group, LLP and one of the Founding Members of StoneBridge Business Partners, an affiliated consulting firm. He is a member of the firm’s Business Valuation, Litigation Support & Forensic Services Group and other nontraditional accounting services. Jim has been with EFPR Group for over 20 years and is a full-time management consultant traveling extensively throughout the country. He has helped safeguard some of the largest Fortune 1000 companies from fraud and abuse and has assisted in the identification and recovery of millions of dollars back to the affected parties. His experience is mainly concentrated in the healthcare distribution and franchise fields, where he has worked with over fifty of the top franchisors in the U.S. In addition, he has worked closely with the Catholic Church in the U.S. for the past five years assisting in their compliance efforts to ensure the safety of children within the church. Jim is also a court-recognized expert, lecturer and author on varying subjects of fraud and forensic auditing.