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Bureau of Alcohol, Tobacco, Firearms and Explosives

April 23, 2010

Tobacco: The New Commodity for Criminals

Tobacco smuggling is a growing problem in U.S. that has turned into a lucrative business for criminals who trade cigarettes and other tobacco products on the black market.

February 2010 – an unsuspecting delivery driver made a stop at a popular discount retail store in Corona, California. He was there to replenish the store’s supply of cigarettes and other tobacco products but what he didn’t know is that lurking in the darkness were two men – watching, waiting for their moment to attack.

The two men confronted the truck driver as he stepped out the truck to ring the receiving bell. With guns drawn and pointed at the delivery man, the two men who were wearing ski masks ordered their victim to get into a waiting vehicle and drove away. The suspects left the delivery man in a neighborhood, miles away from the scene. Police were able to track down the tractor trailer but its contents – more than six thousand cigarettes worth more than $250,000 were gone.

Nationally it’s estimated $5 billion in tax revenue annually is lost on the black market, says Special Agent Chris Perez, Chief of the Alcohol and Tobacco Diversion Division for Bureau of Alcohol, Tobacco, Firearms and Explosives. Some smugglers trade firearms and drugs for tobacco products while we’ve had cases of groups that will hire a hit-man to kill someone they see as competition.

November 2009 – ATF special agents bust a ring of tobacco smugglers in Northern Virginia. Culminating a 14–month investigation, agents took 14 people into custody where the suspects allegedly paid or traded for more than $8 million, nearly 40 firearms, and drugs to purchase 388,000 cartons — totalling more than 77 million contraband cigarettes — all in headed for retail stores in New York. But these weren’t just any kind of criminals, two of the suspects allegedly agreed to pay $15,000 for a hit-man to kill a man and wife whom suspects believed were involved in stealing more than 15,000 cartons of contraband cigarettes.

The ongoing problem of tobacco diversion seems harmless on the surface but the people working the black market often resemble organized crime gangs of the past and the potential revenue loss, costs states billions annually – money that often times is never recovered and in extreme cases has been found to fund terrorist activity.

In the summer of 2002 Mohammed Hammoud was sentenced to 150 years in prison for using money he got from selling tobacco products on the black market in Charlotte, N.C., to fund a terrorist operation.

ATF is working diligently to investigate and prosecute tobacco traffickers but work the that goes into a tobacco diversion investigation is long and tedious, requires the U.S. Attorneys assistance, and because of the financial complexity of tobacco cases help from financial auditors – complex investigations which sometimes last years.

Tobacco cases take time, explains Perez. It takes a while to gain the trust and infiltrate some of these organizations enough to track the money get to the people who are in charge.

Here is how most tobacco smuggling rings work – legal entities pay significant taxes on their product, including $1.01 per pack in Federal Excise Tax, from $0.07 to $4.25 per pack in state and local excise taxes, and typically $0.50 per pack to a settlement fund for health care costs incurred by the states as a result of tobacco use by their citizens.

By selling non-tax paid cigarettes at tax paid prices or just below that price, criminal organizations are able to net a substantial profit. For example, purchasing legally taxed products in Virginia (a low excise tax state) and driving them to New York (a high excise tax state) for resale creates an immediate $3.95 per pack profit margin. A single carton of cigarettes (10 packs) purchased in Virginia and sold in New York will yield about $39.50 in profits; a single case (60 cartons) yields $2,397 in profits and a single truckload (typically 800 cases) yields $1,917,600.

The bottom line is tobacco diversion is a crime, says Perez. It’s a crime that affects local economies through the loss of state tax revenue and a crime that affects communities because of the increasing violence tobacco smugglers are involved in.