ATF puts 250M black-market smokes on streets, arrests dozens in cigarette smuggling stings

ATF stings put 250M illegal cigarettes on streets

FALLS CHURCH, Va. — Undercover ATF agents in Virginia have funneled more than 250 million cigarettes onto the nation’s streets in the past three years through black market sales targeting smugglers, an Associated Press review has found.

Authorities say the flood of government-provided smokes — a pack and a half for every man, woman and child in New York City, the smugglers’ main destination — leads them to organized crime rings and can even cut off financing for terrorists. The stings by the Bureau of Alcohol, Tobacco, Firearms and Explosives have yielded about five dozen federal arrests, albeit none on terror charges.

Many of those cigarettes undoubtedly wind up in the mouths of minors, since black market vendors have no reason to turn away teenage purchasers.

Despite that, government auditors and anti-tobacco groups want the ATF to do even more.

“Smuggling reduces prices, so it increases use, especially among kids, who are more price-sensitive” in their purchases, said Eric Lindblom, director of policy research for the Campaign for Tobacco-Free Kids.

The Department of Justice, the ATF’s parent agency, estimates that federal, state and local governments lose out on $5 billion annually in tax revenue from cigarettes sold through illegitimate channels.

In the biggest and most recent prosecution, federal authorities charged 14 people in November with paying more than $8 million in cash, supplemented by guns and drugs, for 77 million cigarettes over the course of a year. Two are accused of paying an undercover agent posing as a hitman to kill a couple over missing cigarettes.

In September, the Justice Department’s inspector general found that tobacco diversion cases account for just 1 percent of ATF’s caseload and 2 percent of its budget. In large swaths of the country, ATF has not conducted any investigations of cigarette smuggling for at least five years, the audit determined.

A notable exception, the AP found, was the Eastern District of Virginia, which includes Richmond, northern Virginia and the Interstate 95 corridor. The area is a hotbed for the crime because while 42 states and the District of Columbia have collectively passed more than 80 tax hikes on cigarettes since 2002, Virginia and North Carolina, the heart of tobacco country, still tax tobacco at only pennies per pack.

“The profit margin on this is ridiculous,” said Ashan Benedict, resident agent in charge of the bureau’s office in Falls Church, Va. “It’s not that hard to find a customer who wants to save $40 a carton.”

All told, the AP found undercover sales of more than 250 million cigarettes in the last few years. The AP review did not include state charges — authorities said that the vast majority of cases brought in state courts involve relatively small quantities of cigarettes.

While 250 million is a large number, it pales to the 469 million cigarettes produced every day by Philip Morris USA at its two plants in Virginia and North Carolina last year.

The Virginia agents say they focus on cigarette smuggling in large part because the investigations often turn up other crimes. The ATF’s Richmond office went so far as to set up its own store in King George, Va., called KG Wholesale, which advertised in Arabic-language newspapers and elsewhere. The store was set up with audio and video surveillance to record the transactions, all of which were illegal undercover sales.

By the time ATF pulled the plug on KG Wholesale in 2008, 27 people had been arrested and roughly 60 million contraband cigarettes had been sold.

The planners of the storefront sting were aware that cigarette smuggling has been a source of terrorist funding in the past — in 2002 a federal jury in North Carolina convicted two Lebanese citizens of diverting millions of dollars in cigarette smuggling proceeds to the radical Islamic group Hezbollah — and were anxious to disrupt other similar money trails.

Agent Ken Mosley is confident that investigations like the KG case disrupt terror financing, but he acknowledged evidence was insufficient to bring terrorism charges.

“There is no doubt in my mind that we have arrested people involved in terrorism,” Mosley said.

The focus on Arabic-speaking smugglers in the KG Wholesale investigation — the store did not run ads in other foreign-language papers — smacks of profiling, said Ibrahim Hooper, a spokesman for the Council on American-Islamic Relations, a Muslim civil rights group.

“Obviously it would be a concern if they targeted only Muslims and/or Arab-Americans,” Hooper said.

While there have been terrorists who have made money through cigarette smuggling, it’s far more common to find smugglers linked to organized crime, said John W. Colledge III, a Nevada-based consultant who once ran large-scale cigarette smuggling investigations for the U.S. Customs Service.

“Unfortunately, terrorism has become a sort of a buzzword,” he said. “That’s what gets you funding.”

Smuggled cigarettes end up in legitimate retail establishments as well as on street corners, where they’re often sold for $5 a pack — several dollars below retail. The cheap cigarettes are especially alluring to minors, experts say, since black market sellers are less likely to card.

A tractor-trailer filled with untaxed or low-tax cigarettes can hold a potential profit of $1 million if they’re trucked to New York City, where each pack faces $2.75 in state taxes plus a $1.50 levy from the city itself. A single vanload can turn a $115,000 profit.

By their nature, the undercover investigations require agents to act convincingly as criminals. Benedict and Fairfax County Police Lt. David Smith had the Korean smugglers convinced they were Italian mobsters. In the KG case, Mosley said agents would get angry or cagey if their customers asked where all the cigarettes were coming from.

“We’d tell them, ‘It’s none of your business,’” Mosley said.

In fact, the cigarettes come from the same places the legitimate ones do: Big Tobacco. Under an ATF program, tobacco corporations supply cigarettes for stings and are repaid with the proceeds from the sales.