The Bottom Line: Forget Business as Usual

Although he was 3,000 miles from ground zero on Sept. 11, Roland Furtado has felt the effects keenly.

As the owner of a Los Angeles airfreight service, Furtado makes his living placing cargo in the bellies of passenger jets. Even before the attacks, his business was off more than 20% for the year.

The terrorist strikes dealt the economy a further blow. For Furtado and many others, they also altered the business landscape in fundamental ways. In early October, for instance, the Federal Aviation Administration dramatically tightened rules on airfreight. Among other restrictions, freight forwarders were permitted to place a package on a passenger flight only if the sender was a long-term customer or one whose premises they had personally inspected.

The requirement forced Furtado’s small operation, Roland International Freight Services, to turn away business by the crate load.

“Lately, we’ve said no to so many shipments because we can’t visit the customer,” said Furtado, an India-born U.S. citizen. “I had a young kid from France who wanted to ship a stereo set, books and clothes to Europe. I had his passport, his green card, his driver’s license. But we couldn’t handle it.”

Furtado’s plight is one of numerous echoes of Sept. 11 resounding across the business world. Although the repercussions for some high-profile industries have been widely publicized--airlines and cruise lines threatened with bankruptcy, vacation resorts begging for customers--the broader effects on U.S. industry run deeper and may last longer.

Protecting employees, buildings and data has become a paramount concern and a significant expense. Importing goods and supplies from overseas is more complex, more costly and more prone to delay.

On the labor front, the attacks have raised unexpected questions: Should fear of flying qualify as a disability protected by the Americans With Disabilities Act? Are businesses violating federal law by opening employee mail in search of anthrax spores?

Perhaps the most important change is the increasing intrusiveness of government in the relationship between some businesses and their customers. This is particularly evident in financial services.

Federal laws enacted within weeks of the attacks will require banks and other financial institutions to secretly scrutinize more private transactions and report to government agencies any activities that appear even faintly unorthodox--often without informing their customers.

Other industries may find the government less involved in their affairs--to their regret. Textile and pharmaceutical makers that have relied on the U.S. government’s big stick to advance their interests overseas will have to adjust to a new foreign policy.

Post-Sept. 11, the U.S. is defining its friends and enemies less by how closely their economic and trade systems resemble ours and more by their eagerness to embrace America’s anti-terrorism doctrine. Agencies that promoted U.S. corporate interests abroad will be otherwise engaged.

“The Treasury and Commerce departments will focus on monitoring and surveillance of finance and trade with terrorist networks,” Jeffrey E. Garten, dean of the Yale School of Management and a former Commerce Department official, said shortly after the attacks. “It is hard to believe that these and other agencies will have the time and energy to pursue normal commercial goals.”

This shift in priorities was brought home to pharmaceutical companies after October’s anthrax scare. As cases of exposure proliferated, the U.S. government threatened to break Bayer’s patent on the anthrax remedy Ciprofloxacin to ensure an adequate supply. This was a sharp departure for Washington, which long had supported the U.S. drug industry in its insistence that developing countries honor patents on AIDS drugs.

Garten and others also say U.S. companies will have to be more attentive to opposition to globalization in the underdeveloped world, where it often is seen as a force oppressing unskilled laborers.

“The love of American values and hate of American power are found among the same people because most workers don’t see American politics. They see American companies,” said S. Prakash Sethi, a business professor at the City University of New York and chairman of an independent committee that oversees working conditions at foreign plants for Mattel Corp.

“We give them a picture of American values, but what they see is an almost total indifference to workers,” he said. “The practices of foreign multinationals in these countries where workers are really suffering make them breeding grounds for future terrorists.”

A Preoccupation With Security

The computer tape vault operated by Atlanta-based Recall Corp. deep within the San Fernando Valley is a fortress whose defenses are high-tech and almost invisible. Cameras inconspicuously track all visitors to the nondescript two-story building. Guards patrol 24 hours a day. A fire-safety system using halon gas can extinguish a blaze without getting a drop of water on any of the 500,000 data cassettes.

Since Sept. 11, Recall’s sales staff has spent hours fielding questions about this vault, the 16 others the company operates around the country and Recall’s ability to store and protect data for its clients.

“We’re being asked to do more simulations,” said Victor Mendes, Recall’s chief executive. “There’s more interest by potential clients in coming to the facilities to check security. We’re getting inquiries from customers about whether we can process their mail.”

American business executives have become preoccupied with security in all its forms, from the uniformed sentries in their building lobbies to the creation of “hot sites,” backup facilities with computers, phones and stored data where relocated personnel could carry on after a disaster.

Economists are hard-pressed to quantify the cost to the U.S. economy. Some have estimated that spending on guards, padlocks and security systems, along with shipping delays caused by tighter inspections at ports and border crossings, will pare as much as 1 percentage point, or $110 billion, from the annual U.S. gross domestic product. (That’s roughly equal to the annual net earnings of the 10 most profitable corporations in America.)

Not all security expenditures are a drain on the economy. Hotels and resorts are laying off housekeepers, but security companies are staffing up. And manufacturers’ buildup of larger inventories of parts as a cushion against shipping bottlenecks means bigger orders--at least temporarily--for the factories that make those parts.

Overall, however, economists believe that security spending will inhibit growth. That’s because tighter security does not make businesses more efficient or their products more desirable.

Consider the lengths to which companies have gone to ensure that imported parts and supplies reach their destinations on time.

During the nationwide grounding of air travel in the days after Sept. 11, Delphi Automotive Systems, the world’s No. 1 auto components maker, arranged backup routes for air cargo shipments from a plant in Singapore--preparing to send the freight through Luxembourg to Alabama, or through Anchorage to Los Angeles, depending on which route reopened first.

Once flights resumed, Delphi employees were mobilized to carry critical parts, such as air-bag sensors and the silicon wafers needed to make them, aboard international flights as personal luggage.

The automotive industry is especially vulnerable to shipping delays. Auto factories depend heavily on cross-border traffic between Detroit and supply plants in Canada.

“The auto companies have gone to all-night traffic,” said David Littmann, chief economist for Comerica Bank in Detroit. “It’s more expensive, but it’s what they did to alleviate three- or four-hour tie-ups. They had pickups [in Canada] during the wee hours of the morning so that transports could go over the bridge or through the tunnel before traffic built up in the early morning.”

Greater Oversight of Transactions

When Congress turned its attention to combating terrorism, the spotlight fell first on the business of money.

Of the scant traces the 19 hijackers had left of their pre-attack wanderings, most were financial records: international wire transfers, checking accounts, cash-machine withdrawals and other mundane transactions. That helped investigators, but it also whetted the appetite of regulators and legislators in Washington for greater oversight of private financial transactions.

Among the leading provisions of the USA Patriot Act of 2001, the first major anti-terrorism bill to become law, are several that could open traditionally confidential financial transactions to government scrutiny.

“Banks have been deputized to be spies on their customers,” said Bert Ely, a Washington-based banking consultant. This trend, he said, will undermine the role of banks “as a trusted third party to hold private financial information.”

The Patriot Act was enacted with little public debate, during a period when few people or institutions dared question the motives or methods of the anti-terror campaign. Its financial provisions, borrowed from previous bills aimed at curbing money laundering by organized crime and drug traffickers, include some that the financial services industry previously had blocked.

Many in law enforcement say the rules will help track suspect financial transactions wherever they lead--to drug runners laundering money or to terrorists accumulating war chests.

But some financial experts are not so sure. Even as they maintained a patriotic silence, bankers and other financial executives say they harbor doubts that the new measures will be as effective as their proponents claim.

“My concern is you don’t pass a bill like this in five weeks. I think there will be unintended consequences that will be very worrisome,” said Kathleen Quenneville, general counsel for Mechanics Bank, a regional bank in Richmond, Calif., and a member of an American Bankers Assn. committee on federal regulatory issues.

The Patriot Act expands rules on money laundering beyond banks to securities brokerages, insurance companies, even auto dealerships and travel agencies that handle large cash transactions. It grants the Treasury Department great latitude to draft regulations implementing the law, a process that will take up to a year.

The rules are expected to require stringent monitoring of accounts held by foreign or affluent customers and higher standards of identification for almost all banking clients. In some cases, the law will require banks to ascertain not only their customers’ identities but also the source of their funds and how much money they expect to deposit or maintain in new accounts. Any departure from such expectations might rank as a “suspicious” event warranting secret notification of a government agency.

Regulators may not stop there. They may require that new accounts be opened in person, a change that could cut deeply into the business of online brokerages and insurance agencies that sign up clients over the Internet and handle transactions potentially worth millions of dollars without face-to-face contact with customers.

Quenneville and others say they fear that any regulations that increase banks’ or brokerages’ inquisitiveness will undermine their relationship with customers.

“When someone comes in to deposit a large check, I don’t think they want to explain to their banker how they’re doing,” she said. “There will be a real sea change in how people view their bank.”

Still, she said, “it seems un-American to criticize this at all.”

New reporting requirements will add to an already overwhelming cascade of paperwork. Financial institutions file 13 million Currency Transaction Reports each year to the Treasury or Internal Revenue Service. The reports document any cash transaction of $10,000 or more. Much more subjective are the Suspicious Activity Reports filed when a transaction appears to violate any of 25 specific financial crimes--such as money laundering, check fraud or embezzlement--or looks otherwise shady.

In part because financial institutions cannot be sued for filing the reports, more than 180,000 were submitted this year--nearly four times as many as in 1996, when they were introduced. Experts say banks and other institutions, nervous about their potential liability for failing to flag a transaction linked later to a terrorist act, will report any unusual transaction.

“The entire financial community is already filing a tremendous number of reports,” said Tom Heider, head of government affairs for Travelers Express/MoneyGram, a leading money transmission service. “One has to wonder if even the most sophisticated computer systems we have can look at all that data and come up with useful information.”

Skeptics point to the transactions conducted by the Sept. 11 hijackers. Many were so routine that some industry observers say they might not have raised red flags even under tougher reporting rules.

“The popular myth is that this will allow [the government] to identify terrorist activities,” said James Rockett, a San Francisco bank lawyer. “I think that belief is misplaced. The more likely impact on banks is that they’re not going to be able to identify terrorists any better, but they’re going to be held accountable.”

Smoothing the Flow of Cargo and Vehicles

In a white van at a Los Angeles port freight depot, Senior U.S. Customs Inspectors Owen Teruya and Fred Henke subjected a container of export oranges to radiological scrutiny.

As the van rolled forward at a steady speed of 3 to 4 mph along the 40-foot length of the container, a low-power gamma-ray unit mounted on the van’s extensible arm displayed a shadowy black-and-white computer image of the container’s interior.

With the sweep of a computer mouse, Teruya and Henke peeled away layer after layer of the image, looking for any indication that something other than oranges was in the consignment. Finding only genuine California produce, Teruya and Henke sent the container on to a ship bound for Japan.

Few industries will be as heavily affected by Sept. 11 as international shipping. Although the hours-long lines at Customs posts on the Mexican and Canadian borders in the first weeks after the attacks have abated, industry observers express doubt that procedures at the crossings will ever return to normal.

“There’s a new paradigm at the border,” said Stephen Gross, president of Border Trade Services in San Diego and president of the Border Trade Alliance, an advocacy group for import-export service companies. “We’re told this is not a situation that’s going to pass.”

Some in the shipping business say they hope Sept. 11 will spur a recognition of the need to move cargo and vehicles in and around the port faster and more efficiently.

Import entries have increased by half since 1995, to more than 20 billion trucks and containers a year, according to the General Accounting Office, while the number of Customs employees has remained at 19,000. A computerized system meant to identify and to track risky shipments is several years behind schedule and far over budget, the GAO has reported.

The heightened security imposed after the attacks has challenged the system even more. Customs authorities have been operating at “Code Red,” their highest state of alert. Not only has that meant more inspections, but it also has forced Customs to shift its traditional emphasis from contraband drugs and counterfeit merchandise to the search for weapons of mass destruction.

“One of the recognitions post-9/11 is that we need a better handle on what is in the container, where it comes from and who loaded it,” said M. John Vickerman, a consultant on port design who worked on the long-range master plan for the ports of Los Angeles and Long Beach. “There are technologies, particularly information technologies, that will empower North American ports. We’ll be installing them for security purposes, but eventually they’ll be used for efficiency.”

Shipping professionals say Customs, the Coast Guard and other agencies have managed to tighten security without significantly slowing the flow of goods. But just as financial services firms wait uneasily for Treasury’s new regulations, shipping and transport companies are waiting for Congress’ next move.

Proposed regulations run the gamut, from a plan by Rep. Duncan Hunter (R-Alpine) to inspect every truck and container entering the U.S. to one by Sen. John F. Kerry (D-Mass.) to cooperate with foreign port operators to ensure the security of U.S.-bound containers.

But they all have the potential to disrupt the delicate balance among shippers, importers, brokers and authorities that enables ports such as Los Angeles to handle a huge volume of traffic.

“Ninety-five percent of what we eat, drive with and consume comes to us by vessel,” Vickerman said. “If we tamper with it, we’ll affect our quality of life.”

On average, Customs inspects about 2% of all trucks and containers entering the U.S.--400 million inspections a year. Customs officials target shipments for examination based on an analysis of the country of origin, the container’s itinerary, the ship that carried it and other factors.

Doubling or tripling inspections could create chaos at the ports of Los Angeles and Long Beach, the country’s busiest ports complex.

“It’s overwhelming to think about examining 100%,” said John Peterson, Los Angeles branch manager for C.H. Powell Co., a leading nationwide freight forwarder. “You’d need a freight depot the size of the L.A. Basin.”

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Times staff writers Terril Yue Jones in Detroit and Chris Kraul in Mexico City contributed to this report.