Thank you, Mr. Chairman, members of the Committee. I appreciate this opportunity to better acquaint you with ATF’s mission, and specifically, its role in preventing and investigating tobacco diversion. 

For those of you not familiar with the Bureau's functions, let me tell you briefly a little about ATF’s mission. In 1791, the nation's first tax was imposed on distilled spirits. This tax led to an uprising known as the Whiskey Rebellion, to which Treasury Secretary Alexander Hamilton dispatched the militia to put down the uprising. Over the years, ATF, and its predecessor, the Alcohol and Tax Unit of the Internal Revenue Service (IRS), has been charged by Congress with the regulation, taxation and criminal enforcement jurisdiction over violations of firearms, explosives, alcohol and tobacco laws.

The common thread in ATF’s responsibilities over these varied products is they all are both legal commodities produced by a highly regulated industry and are also controversial products that have been traditionally susceptible to criminal diversion and misuse or abuse.
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ATF’s mission is three-fold: to reduce violent crime; to collect revenue; and to protect the public. We accomplish this with an integrated approach using regulatory inspectors, auditors, chemists, criminal investigators, and other specialists. And might I add, we are very good at what we do. For the past two years, ATF has been awarded the highest rating possible on its annual CFO audits by the Treasury Inspector General. We have learned from years of experience that in many cases, voluntary compliance by the regulated industry can be achieved and criminal misuse and diversion can be prevented by regulatory oversight. The area of tobacco diversion is a prime example of the interactive nature of ATF’s resources and authority. Ensuring that the industry is complying with regulatory and tax requirements can help prevent criminal diversion. 

In 1978, Congress passed the Contraband Cigarette Trafficking Act, giving ATF the authority to investigate interstate diversion of cigarettes in avoidance of paying state tax, by prohibiting the shipment, transportation, or possession of more than 60,000 cigarettes (which equates to 3,000 packs or 300 cartons) not bearing indicia (or tax stamp) of evidence of tax payment in States that require such evidence. With this and other statutes, ATF’s mandate to assist state and local governments has become a significant part of its mission. Originally enacted to prevent sales on the street the problem of cigarette smuggling has become large commercial operations resulting in these cigarettes ending up on retail shelves and distribution by organized crime.

Other statutes which can be applied in these cases include the Internal Revenue Code (IRC) and the Racketeer Influenced and Corrupt Organizations Act (RICO). ATF’s goal is to achieve compliance with U.S. laws and to close the avenues to those involved in illegal diversion. 

In recent years, some foreign governments and certain state government have imposed a higher excise tax on tobacco products, thus creating a lucrative black market. Diversion involves products for both export and domestic consumption from a manufacturer to individuals acting as a broker or wholesaler. Rather than shipping the product to the destination stated on required Federal records, the product is diverted and sold illegally. Traceability is lost as goods disappear from legal commerce. Some wholesalers have been found to be the sources of supply, with retailers becoming increasingly active in these illegal sales. Unlike tobacco manufacturers, tobacco wholesalers and retailers are not statutorily required to hold permits and licenses issued by ATF.

For example, due to extremely high Canadian taxes on tobacco, significant quantities of U.S. manufactured tobacco products are smuggled into Canada. In addition, large amounts of Canadian manufactured tobacco products are "exported" into the United States and then smuggled back into Canada. As a result of this smuggling, Canada has lost billions of dollars in tax revenues.

In addition, there has been a significant increase in trafficking in cigarettes from States with low taxes on tobacco to States with high taxes on tobacco. In a survey ATF conducted earlier this year on behalf of the House Appropriations Committee, ATF received estimates from several states on revenue loss figures. The State of Michigan estimated losing approximately $75 million a year to cigarette diversion. The State of Washington estimated losing around $63 million per year from cigarettes diverted from low tax states. California estimates its annual loss to be approximately $30 million a year. The fill extent of loss nationwide is difficult to calculate as many states polled were unable to give an estimate of their annual losses.

To give you an idea of ATF’s involvement in diversion cases, we currently have over 56 open tobacco trafficking investigations. Although limited resources put limitations on the number and extent of the investigations ATF undertakes, our investigations have increased over 300 percent in the past five years. Seizures of tobacco commodities in 1997 totaled $1.1 million.

ATF’s largest contraband cigarette trafficking investigation involved the trafficking of cigarettes from the state of Montana -- the Flathead Indian Reservation --to Washington state. In this case, six persons were convicted of racketeering, and three persons pleaded guilty to Conspiracy to Commit Racketeering. The average jail time was three years, and the maximum was 12 to 15 years. Total penalties were $4.7 million and this sum was split between the U.S. government, the states, and the tribes.

ATF has a current investigation open involving 21 persons indicted in New York as part of a joint ATF, RCMP, U.S. Customs, INS, IRS and New York State Enforcement investigation. This investigation involved a smuggling ring on the St. Regis Mohawk Indian Reservation. Those indicted include prominent Native Americans from the St. Regis/Akwesasne Reservation and individuals associated with a Buffalo organized crime family. The charges include money laundering and racketeering. The assets from illegal proceeds are in this case estimated at over $500 million.

In addition to illegal trafficking by traditional organized crime groups and Native Americans, ATF has also uncovered involvement in cigarette smuggling by Russian, Middle Eastern, and Asian organized crime groups. Investigation has revealed that these groups are also involved in firearms and narcotics trafficking, alien smuggling, and other illegal activities.

Over the past several years, alcohol and tobacco crimes have grown larger and more complex and have extended to both interstate and international investigations. Diversion cases often include nationwide activities since the smuggled goods are acquired in one part of the country and may be distributed unlawfully in another far away part of the country. In recognition of this national scope, ATF has established a Diversion Branch in Bureau Headquarters to coordinate and monitor these investigations. An Alcohol and Tobacco Database has also been developed to track diversion and trafficking activity.

Due to a substantial loss of revenue and a heightened awareness, many states have requested ATF’s assistance in helping to eliminate this problem. Through our efforts to eradicate this problem, ATF, in cooperation with the Federation of Tax Administrators, has established a 24 hour cigarette hotline, 1-800-659-6242, to report stolen, hijacked or seized cigarettes. You can be assured of our commitment to assisting state and local governments in their efforts to combat cigarette diversion.

On the international level, ATF maintains ongoing liaison with foreign law and revenue enforcement authorities, such as the Royal Canadian Mounted Police (RCMP) and Revenue Canada, to ascertain the scope of cigarette trafficking worldwide. The Bureau also is working closely with criminal investigators and tax officials in East European countries to develop and implement criminal and regulatory enforcement schemes with respect to cigarettes.

Finally, ATF has worked, through the issuance of Industry Circulars and meetings, to ensure that legitimate members of the tobacco industry do not facilitate illicit tobacco trafficking.

Thank you, again, for the opportunity to appear before your committee today. I would be happy to answer any questions you may have.
 
  This was last updated on January 16, 1998