Cigarette Smuggling – States Lose Millions in Tax Revenue

March 18, 2008

The Contraband Cigarette Trafficking Act (CCTA) was enacted in 1978. The purpose for enacting the CCTA was to stop organized criminal networks that were profiting from the movement and sale of untaxed cigarettes.

After the CCTA was enacted, ATF regulated the tobacco industry and had primary federal law enforcement jurisdiction over the “black market” trade of cigarettes. This was the case until 2003 when ATF transferred from the Department of Treasury to the Department of Justice, and when the Tax and Trade Bureau (TTB) formed within the Department of Treasury. TTB was given control over all regulatory functions in the tobacco industry, and ATF maintained jurisdiction over the CCTA. The CCTA was amended in 2006 when President George W. Bush signed the Re-Authorization of the Patriot Act.

Tobacco products have long held a significant place in our culture. Shortly after the American Revolutionary War, tobacco was used as a form of currency. Throughout our history there has been a social attachment to cigarettes. In recent history there has been a social stigma attached to cigarettes and other tobacco products (OTP) because of the serious health issues associated with their use. Because of these associated health risks, numerous states began to levy higher taxes on cigarettes and OTP. These higher taxes created huge price differences from state to state. This pricing difference created an opportunity for organized criminal networks to reap huge profits by avoiding state excise taxes (SET) and even the federal excise tax (FET).

In 1998, the Master Settlement Agreement (MSA) came into effect. The MSA is an agreement between the states and many members of the tobacco industry that came about from a lawsuit by the National Association of Attorneys General over health issues associated with the smoking of cigarettes. The intent of the MSA is threefold: (1) to make the tobacco industry help pay for some of the rising healthcare costs associated with smoking; (2) to develop educational programs to better inform people of the health hazards associated with smoking; and (3) to prohibit the tobacco industry from targeting youth in advertising cigarettes.

The MSA changed how the tobacco industry conducted business. Since it went into effect, the landscape of the tobacco industry has changed significantly. The MSA also afforded the criminal element another opportunity for increased profit margins.

The trafficking of contraband tobacco is all about the money and the huge profits that are obtained from such criminal activity. If one can avoid the SET in a high-tax area such as New York City ($30.00 per carton), the FET ($3.90 per carton), and the MSA payment (approximately $5.00 per carton), one can generate huge profits. For example, if someone avoided all those payments on cigarettes and moved a minivan load of contraband cigarettes into New York City, in theory that individual could earn $115,000 more than a legal vendor on that load. In reality everyone gets their cut of the funds generated through the diversion of cigarettes, and most often it is just the SET that is avoided.

A few studies and estimates have been done regarding tax loss due to the diversion of tobacco products. Estimates are usually in the billions of dollars per year in the United States.

The trafficking of contraband cigarettes is a global problem, and it is believed these cigarettes are the number-one black market commodity in the world. There are diversion schemes occurring on every continent in the world, and the estimates of tax loss due to diversion are astronomical. For example, the European Union has estimated that tax loss due to the black market trade of cigarettes is more than $20 billion per year.

Throughout the years ATF has seen the development and advancement in this criminal activity. We have seen the traditional state-to-state diversion schemes, the grey market schemes (exportation of the product and illegal re-importation), elaborate counterfeiting schemes of cigarettes and tax stamps—and of special interest today, we have seen the funding of terrorist organizations.

ATF has conducted two tobacco diversion investigations that resulted in convictions for Material Support to a Terrorist Organization. The first and most significant was an investigation conducted in Charlotte, North Carolina. The case was entitled Operation Smoke Screen. ATF ended up working with the FBI and a number of other agencies in this investigation. The end result was phenomenal. Twenty people were convicted of Racketeering, and two of the 20 were convicted for Material Support to a Terrorist Organization. This was the first time in the United States that anybody had been tried and convicted of the Material Support charge. Mohammed Hammoud was sentenced to 150 years in the summer of 2002.

The other ATF investigation resulted in a Material Support conviction for Hassan Makki in September 2003. This investigation occurred in Michigan, and ATF conducted this case with the FBI Joint Terrorism Task Force. In this investigation, 12 people pleaded guilty to Racketeering, and Hassan Makki pleaded guilty to Material Support. In March 2006, another 19 people were indicted for Racketeering as a result of the follow-up investigation into this Michigan-based organization.

ATF has had numerous other CCTA investigations where money has been sent overseas. In upstate New York, for example, an individual who started off as a trafficker in contraband cigarettes was convicted for Material Support because he paid for individuals to train with al-Qaeda.

Since the turn of the century, ATF has seen a large increase in the number of tobacco diversion cases. These investigations are bigger and more complex than those in the past. Such investigations are long-term efforts, cover large geographical areas, cross a multitude of jurisdictional boundaries, and feature other crimes going on simultaneously.

If you have information regarding cigarette smuggling call the ATF Tips Line at: 1-888-ATF-TIPS (1-888-283-8477).

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