Daisy Chains

A DAISY CHAIN IS the terminology used to describe a series of businesses that are connected together for purposes of a business transaction. Normally, the transactions involved are either criminal or fraudulent activities, and the businesses are “chained” together in an attempt to make investigating the criminal activities of the companies difficult.

Investigators devote endless time and energy to locating a company at the end of a daisy chain, only to discover that by the time the end of the chain is located, the corporation that has chained the companies together may have removed the final company in an attempt to hide the activities.

The use of daisy chains is perhaps best exemplified in the transactions of oil and fuel companies. The oil industry is controlled by legislation that mandates the pricing of oil. Therefore, no one company can obtain the same profit that could arise in a free market, because no one company is allowed to sell oil at the maximum price that the general public will pay.

Daisy chains attempt to increase profits by aligning companies that will sell the oil to each other. The first company will obtain the oil at the average market price of the commodity. Company number one will then sell the oil to company number two in a manner that maximizes its allowable profits. Company number two will then operate in the same manner, selling the oil to a third company and maximizing its profits in the process.

This process continues throughout the daisy chain until such time as each company involved has maximized its profits. Once everyone has profited, the oil is then sold to a legitimate company that is not a part of the daisy chain. This company is then forced to pay a significantly higher price for a product. Thus, each of the companies in the daisy chain maximizes its profits at the cost of the end purchaser.

The use of a daisy chain in fuel-fraud schemes is often linked to the activities of organized crime groups such as the Russian Mafia. These entities employ daisy chains to falsify state and federal tax forms involving the sale of fuel. Several companies are established, as is a “burn company.” The burn company is nothing more than a company that exists only on paper. When investigators begin to close in on the criminal activity, the burn company is destroyed.

Because the company exists only on paper, there is no record of assets and the trail dissolves. Through the use of these falsified companies, organized crime groups can make as much as 50 cents per gallon, costs that are saved from not paying the federal and state taxes. With these savings it is possible[Page 242] for operators of the daisy chain to sell fuel at a lower price than their competitors. By undercutting the prices of legitimate fuel retailers, the organized crime group forces their competitors out of business. The former competitors can be bought out and the fuel prices can be increased.

Daisy chains have also been linked to the activities of stock traders and investment firms, but their use is primarily linked to fraudulent activities that involve the sale of commodities like that of fuel and oil. The very nature of daisy chain schemes make the investigation and prosecution of operators difficult, and leads to a need for better training and awareness among those in the criminal justice field who encounter such operations, awareness that is sure to be increasing every passing day.

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