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1 Tobacco Traf)icking and Organized Crime in Virginia Judicial Conference of Virginia for District Courts September 29, 2014

2 Overview Why Does Traf1icking Occur? Methods Used by Traf1ickers Bene1iciaries of Traf1icking Crime Commission Recommendations and Enacted Legislation 2

3 Why Does Traf1icking Occur? All cigarette traf1icking schemes, no matter the methods employed, depend upon tax avoidance. Cigarette smuggling and black market cigarettes have existed for decades, but recent tax increases in a number of states have greatly increased the potential pro1its to be made. 3

4 Why Does Traf1icking Occur? Virginia has the 2 nd lowest cigarette tax rate in the country, while the mid Atlantic and New England states have some of the highest cigarette tax rates. This tax differential and the geographical proximity of Virginia to these other states has led to Virginia becoming the primary source state for black market cigarettes. 4

5 Why Does Traf1icking Occur? 5

6 Why Does Traf1icking Occur? The state excise tax rate for a carton of cigarettes (10 packs): Virginia: $3.00 Pennsylvania: $16.00 New Jersey: $27.00 Rhode Island: $34.60 Massachusetts: $35.10 New York: $43.50 New York City: $

7 Why Does Traf1icking Occur? The state excise tax rate for a case of cigarettes (60 cartons): Virginia: $ Pennsylvania: $ New Jersey: $1, Rhode Island: $2, Massachusetts: $2, New York: $2, New York City: $3,

8 Why Does Traf1icking Occur? State State Excise Tax Rate/carton Per Carton Differential Per Case Differential Virginia $3.00 N/A N/A Pennsylvania $16.00 $13.00 $ New Jersey $27.00 $25.00 $1, Rhode Island $34.60 $31.60 $1, Massachusetts $35.10 $32.10 $1, New York $43.50 $41.50 $2, New York City $58.50 $55.50 $3,

9 Why Does Traf1icking Occur? Representative prices for a premium brand pack of cigarettes in: Virginia: $5.81 Pennsylvania: $6.95 New Jersey: $8.55 Massachusetts: $8.77 Rhode Island: $9.56 New York: $13.00 New York City: $14.50 Source: Jampel,

10 Why Does Traf1icking Occur? In Richmond, Virginia, a carton of premium cigarettes costs approximately $40.00 to $ In New York City, a carton of premium cigarettes costs approximately $ to $ The pro1it on a diverted load of 1,500 contraband cartons of cigarettes could easily be $100, due to these price differentials. 10

11 Why Does Traf1icking Occur? The price differential between states can lead to enormous pro1its when cigarettes are transported from a low cost state like Virginia to a high cost state, like New York. Photo and Description taken from (King, P. 2008) 54,000 cartons of untaxed cigarettes purchased in and smuggled from Virginia and seized in Queens, New York by New York State Department of Taxation and Finance 11

12 Why Does Traf1icking Occur? The Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) estimates the amount of pro1it that a cigarette traf1icker can make, taking cigarettes from Virginia to New York City, as: $8.50 for a pack of cigarettes $85.00 for a carton of cigarettes $5, for a case of cigarettes $4,080, for a single truckload of 800 cases of cigarettes. Source: ATF Fact Sheet, March

13 Why Does Traf1icking Occur? A separate estimate provided by an ATF agent was as follows: A car can carry 10 cases of cigarettes, with an estimated pro1it of $34, A van can carry 50 cases of cigarettes, with an estimated pro1it of $170, A U Haul can carry 200 cases of cigarettes, with an estimated pro1it of $670, Source: Effectively Combating I 95 Cigarette Traf1icking Conference,

14 Why Does Traf1icking Occur? Traf1icking can also occur intra state within Virginia due to local tax rate differentials. Locality State Tax City Tax Total Tax Per Pack Tax Per Carton (x 10) Alexandria* Chesapeake Fairfax City Fairfax County Hampton Newport News Norfolk Portsmouth Suffolk Tazewell* * Va Beach Note: All rates effective as of July 1,

15 Why Does Traf1icking Occur? Illegally traf1icked cigarettes now have a higher pro1it margin than cocaine, heroin, marijuana, or guns. Quote from an agent with the Virginia State Police. 15

16 Why Does Traf1icking Occur? In Fairfax County, Va., suspects exchanged one kilogram of cocaine in exchange for 3,000 cartons of cigarettes. They were willing to trade cocaine for cigarettes. That tells you about the pro1it margin they saw on the cigarettes, said Edgar Domenech, who heads the ATF s Washington, D.C. 1ield division. Fields, The Wall Street Journal, July 20,

17 Why Does Traf1icking Occur? Law enforcement estimates that the current street value of a kilogram of cocaine in Virginia is roughly $97,000. This is the amount of pro1it a cigarette traf1icker can make transporting a load of around 1,500 cartons of cigarettes to New York City, depending upon his purchase costs. The street value for a pound of marijuana in Virginia is roughly $3,500; this is the pro1it that could be realized from transporting just one case of cigarettes (60 cartons). 17

18 Methods Used by Traf1ickers: Smur1ing Smur1ing is the legal purchase of cartons of cigarettes, and then transporting them out of state, with the intent to sell them. Frequently involves small groups of individuals, who are paid to purchase cartons at multiple locations, throughout the course of a day. The smurfs then meet at a central location, and the cartons are gathered together for a smuggling run in one or more vehicles. 18

19 Methods Used by Traf1ickers: Smur1ing Smur)ing appears to be very common in Virginia. A recently published study that examined the extent of cigarette tax avoidance in the South Bronx found that 9.1% of cigarettes there came from Virginia (Kurti et al., 2012). Another study found that 30.1% of all cigarettes in New York City came from out of state; of those, 71.4% came from Virginia (Davis et al., 2012). 19

20 Methods Used by Traf1ickers: Smur1ing Increased numbers of cigarettes bearing VA tax stamps are being seized in NYC. Contraband Cigarettes Seized Number of Cartons LOOSE 79.8 UNSTAMPED 762 CTFT STAMPED VA GA. KY. NH. MS. OK. DE. LA. MO. Source of Tax Stamps KS. CO. NJ. AL. PA. MI. NYS.ONLY Source: New York City Sheriff s Of1ice, Tobacco Task Force, Data compiled from August 1, 2011 to August 2,

21 Methods Used by Traf1ickers: Smur1ing Between August 3, 2012 and October 7, 2013, the NYC Sheriff s Of1ice seized roughly 4,222 cartons of illegal cigarettes, of which 2,142 (51%) cartons came from Virginia. 21

22 Methods Used by Traf1ickers: Smur1ing The New York City Sheriff s Of1ice is continuing their enforcement efforts against the sale of black market cigarettes. 22

23 Methods Used by Traf1ickers: Smur1ing The number of cartons of cigarettes that can be traf1icked in just a regular car can be surprisingly large. Source: ATF, shows a vehicle seized by ATF Agents and the Maryland Comptroller's of1ice stopped on I

24 Methods Used by Traf1ickers: Smur1ing Source: Seized by Maryland and NVCTB 24

25 Methods Used by Traf1ickers: Retailers Fraudulent retail operations are used by traf1ickers to more ef1iciently purchase cartons of cigarettes in bulk. Many convenience stores and gas stations have contractual agreements with cigarette manufacturers that they will sell no more than 1ive cartons to any individual in a day. To circumvent this impediment, some cigarette traf1ickers have created retail establishments solely for the purpose of being able to purchase large quantities of cigarettes from wholesalers. 25

26 Methods Used by Traf1ickers: Retailers Source: NVCTB 26

27 Methods Used by Traf1ickers: Retailers When fraudulent retail operations are conducted for purposes of cigarette traf1icking, it becomes much more likely that Virginia will not receive any tax revenue from the cigarettes purchased. 27

28 Methods Used by Traf1ickers: Retailers More than 850 cartons were seized from this van in RI coming from VA with an estimated value of $80,000. Source: NVCTB 28

29 Methods Used by Traf1ickers: Retailers Source: NVCTB 29

30 Methods Used by Traf1ickers: Retailers Source: NVCTB 30

31 Methods Used by Traf1ickers: Retailers Real case example: Retailer was open for 2 months and purchased $290,000 worth of cigarettes from Sam s Club. Virginia Tax Department never received sales tax (estimated $14,500). Hypothetical: If 10 retailers operated like this for 1 year, Virginia would lose an estimated $870,

32 Bene1iciaries of Traf1icking Law enforcement, both in Virginia and nationally, have noted that organized crime has moved into the business of cigarette traf1icking. There are reports that criminals formerly involved with drug smuggling have switched to cigarettes. Just as much money, less violence, much less prison time if caught. 32

33 Bene1iciaries of Traf1icking Virginia State Police s Criminal Interdiction and Counter terrorism Unit (CCI) reported that from January 2012 October 2012 approximately 1,941 cartons and $226,360 were seized as a result of their normal drug interdiction efforts. This trend has accelerated; from January 2013 through October 10, 2013, approximately 6,775 cartons were seized, along with $45,

34 Bene1iciaries of Traf1icking While no precise 1igures can be ascertained, it seems clear, from law enforcement reports and rudimentary data calculations, that illegal cigarette traf1ickers are generating tens of millions of dollars a year in Virginia. As organized crime turns to Virginia for its supplies of cigarettes, there is an increase in attendant crimes: Identity theft/credit card fraud; money laundering; burglaries; robberies of rival gangs 34

35 Bene1iciaries of Traf1icking Fairfax County Police Department News Release May 7, 2009 Undercover Operation Nets 143 Criminal Charges On Wednesday, May 6, over 135 law enforcement personnel participated in concluding a year long undercover investigation. Operation Build America was launched in May 2008 to better understand the criminal activity taking place in and around the Build America Shopping Center. Community concerns of illegal activities in the shopping center coupled with indicators that crime was in the upswing sprung the operation into motion. The investigation successfully in1iltrated several criminal organizations and businesses operating around the center by 1irst selling them unstamped, untaxed cigarettes. Undercover police of1icers identi1ied nearly 40 people suspected of criminal activity that ranges from property crimes to crimes of violence. The undercover operation successfully recovered stolen )irearms and illegal narcotics including cocaine and marijuana. Collectively, 143 criminal arrest warrants and 15 search warrants were issued in this undercover operation. 35

36 Bene1iciaries of Traf1icking ATF agents stopped a Lincoln Town car in Richmond, loaded down with 1,800 cartons of smuggled cigarettes. ABC7, Kris Van Cleave, November 9, Maryland s comptroller said about 8,000 packs of contraband cigarettes worth about $52,000 were seized from a car on Interstate 70 in Hagerstown. Comptroller Peter Franchot said agents pulled over a vehicle registered in New Jersey on Thursday and con1iscated the illegal cigarettes. WBALTV, November 9,

37 Bene1iciaries of Traf1icking Large quantities of cigarettes continue to be seized en route from Virginia to New York and New Jersey. Source: Northern Virginia Cigarette Tax Board, November 9,

38 Bene1iciaries of Traf1icking Source: Northern Virginia Cigarette Tax Board, October 30,

39 Bene1iciaries of Traf1icking Conclusion: Illegal cigarette traf1icking is not a cigarette issue. IT IS AN ORGANIZED CRIME ISSUE. Traf1icking hurts all legitimate manufacturers, wholesalers, and retailers, who are faced with unfair competition in the form of lower prices offered by their competitors. 39

40 Bene1iciaries of Traf1icking Operation Smokescreen, a large, interagency state and federal operation that took place between 1995 and 2000, discovered a Hezbollah cell, operating in the United States. The cell was generating money through illegal cigarette traf1icking, primarily from North Carolina to Michigan. Over $8 million dollars was illegally earned. 40

41 Bene1iciaries of Traf1icking Found in the possession of Taha Mutaher, Yemeni national, involved with traf1icking cigarettes from Virginia to New York, 2003: Source: Richmond Times Dispatch, November 5,

42 Bene1iciaries of Traf1icking In May of 2013, a multi agency police investigation of a cigarette smuggling ring led to 16 arrests in New York and Virginia. The defendants are believed to be associated with both Hamas and Hezbollah operatives. This criminal conspiracy involved Palestinians smuggling up to 20,000 cartons of cigarettes a week. The cigarettes were bought in bulk from a wholesaler in Virginia, stored in Delaware, and then traf1icked into New York. It is estimated that at least $65 million were made by the defendants. 42

43 Crime Commission Recommendations Virginia took a meaningful step towards combating cigarette traf1icking, with the enactment of Va. Code , which went into effect on July 1, Criminalized the possession of 25 or more stamped cartons of cigarettes, by non authorized holders, with the intent to distribute. Penalty was a Class 2 misdemeanor; 2 nd offense was a Class 1 misdemeanor. 43

44 Crime Commission Recommendations Based on the Commission s recommendations, additional changes went into effect on July 1, The penalty for Va. Code was increased to a Class 1 misdemeanor, and a 2 nd offense was increased to a Class 6 felony. In addition, a 1 st offense involving 500 cartons or more was made a Class 6 felony; a 2 nd offense involving 500 cartons or more was made a Class 5 felony. 44

45 Crime Commission Recommendations The penalties for Va. Code (possession of unstamped cigarettes) were also increased, and the existing felony threshold limit was lowered from 300 cartons to 50 cartons. The Class 2 misdemeanor was raised to a Class 1 misdemeanor. A 2 nd offense was made a Class 6 felony. A 2 nd offense involving 50 cartons was raised from a Class 6 felony to a Class 5 felony. 45

46 Crime Commission Recommendations Virginia s traf1icking statute, Va. Code was included as a qualifying offense under Virginia s RICO statute (Va. Code ). Possession of unstamped cigarettes was already a RICO offense since Virginia s cigarette forfeiture statute, Va. Code , which only applied to counterfeit cigarettes and cigarettes with counterfeit tax stamps, was expanded to include unstamped and traf1icked cigarettes. 46

47 Crime Commission Recommendations The distribution of counterfeit cigarettes under Va. Code was made a criminal offense, instead of simply involving civil penalties. Less than 10 cartons is now a Class 1 misdemeanor; 10 cartons or more is a Class 6 felony. Any second or subsequent offense is a Class 6 felony. NOTE: Under Va. Code , knowing violations of Virginia s trademark statute are a Class 1 misdemeanor; possession of 100 or more identical counterfeit registered marks is a Class 6 felony. 47

48 Crime Commission Recommendations Going into effect on July 1, 2014: Cigarette traf1icking can be investigated by multijurisdictional grand juries Any person convicted of cigarette traf1icking will no longer be able to be an authorized holder The civil penalties for traf1icking stamped cigarettes will be greatly increased No less than $5,000 for a 1 st offense No less than $10,000 for a 2 nd offense No less than $50,000 for a 3 rd offense 48

49 Contact Information A copy of the cigarette traf1icking report can be found on the Crime Commission website, under our 2013 reports: h@p://leg2.state.va.us/dls/h&sdocs.nsf/ 4d54200d7e ec1004f3130/ dba061dea0fa878b852579c8006e00a4? OpenDocument 49

50 Contact Information G. Stewart Petoe Director of Legal Affairs Virginia State Crime Commission (804)

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