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Illegal Cigarette Trafficking in Virginia

Overview of the Virginia State Crime Commission's study on illegal cigarette trafficking, including methods employed, financial impacts, health implications, and policy recommendations.

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Illegal Cigarette Trafficking in Virginia

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  1. Illegal Cigarette Trafficking in Virginia Virginia Municipal League 2013 Annual Conference G. Stewart Petoe, Director of Legal Affairs October 14, 2013

  2. Overview VIRGINIA STATE CRIME COMMISSION • Virginia Senate Joint Resolution 21 • Findings: • Methods of Trafficking • Beneficiaries of Trafficking • Summary of 2013 Legislative Changes 2

  3. Va. Senate Joint Resolution 21 VIRGINIA STATE CRIME COMMISSION In 2012, the Virginia General Assembly passed Senate Joint Resolution 21, mandating the Virginia State Crime Commission to study illegal cigarette trafficking. The VSCC was instructed to “seek the participation of interested parties” in the deliberations of this study. 3

  4. Va. Senate Joint Resolution 21 VIRGINIA STATE CRIME COMMISSION • The sub-topics that were reviewed included: • Methods of illegal cigarette trafficking and the strategies used by smugglers; • Financial impacts of illegal cigarette trafficking; • Counterfeit cigarettes and their health implications; • Cigarette tax stamps; and, • Possible policy and/or legislative recommendations to enhance Virginia’s efforts in combating such trafficking. 4

  5. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION All cigarette trafficking 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 profits to be made. 5

  6. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION In Richmond, Virginia, a carton of premium cigarettes costs approximately $40.00 to $45.00. In New York City, a carton of premium cigarettes costs approximately $120.00 to $150.00. The profit on a diverted load of 1,500 contraband cartons of cigarettes could easily be $100,000.00 due to these price differentials. 6

  7. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION 7

  8. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION • 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: $58.50

  9. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION • The state excise tax rate for a case of cigarettes (60 cartons): • Virginia: $180.00 • Pennsylvania: $960.00 • New Jersey: $1,620.00 • Rhode Island: $2,076.00 • Massachusetts: $2,106.00 • New York: $2,610.00 • New York City: $3,510.00

  10. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION Trafficking can also occur intra-state within Virginia due to local tax rate differentials. 10

  11. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION • “Illegally trafficked cigarettes now have a higher profit margin than cocaine, heroin, marijuana, or guns.” • Quote from an agent with the Virginia State Police.

  12. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION There are numerous techniques used by criminals who engage in illegal cigarette trafficking. Tax evasion schemes can take place at all levels of the regular cigarette manufacturing and distribution systems.

  13. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION • The broad categories of cigarette trafficking crime are: • Smurfing; • Fraudulent retail operations for purchasing in bulk; • Retailers selling cigarettes “off the books;” • Tax avoidance by wholesalers; • Tax avoidance by manufacturers; • International smuggling; • Importing counterfeit cigarettes; and, • Forged tax stamps.

  14. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION Many convenience stores and gas stations have contractual agreements with cigarette manufacturers that they will sell no more than five cartons to any one individual in a day. To circumvent this impediment, the leader of a “smurfing” ring will pay a group of people to travel around all day, stopping at dozens of stores, with each individual purchasing five cartons of cigarettes.

  15. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION At the end of the day, all of the cartons of cigarettes will be stockpiled together. When a sufficient quantity is assembled, the collected cartons will be transported out of the state, typically to New York, New Jersey, or Rhode Island, where they are sold on the black market, often to retail establishments.

  16. Findings: Methods of Trafficking Source: ATF, shows a vehicle seized by ATF Agents and the Maryland Comptroller's office stopped on I-95. VIRGINIA STATE CRIME COMMISSION The number of cartons of cigarettes that can be trafficked in just a regular car can be surprisingly large.

  17. Findings: Methods of Trafficking Source: Seized by Maryland and NVCTB VIRGINIA STATE CRIME COMMISSION

  18. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION Fraudulent retail operations are used by traffickers and co-conspirators to more efficiently purchase cartons of cigarettes in bulk. Traffickers will create or purchase a retail establishment, solely for the purpose of being able to buy cases of cigarettes from wholesalers.

  19. Findings: Methods of Trafficking Source: NVCTB VIRGINIA STATE CRIME COMMISSION

  20. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION • When fraudulent retail operations are conducted in connection with cigarette trafficking, both the state and the locality will likely be cheated out of their tax revenue. • Real case example: • Retailer was open for 2 months and purchased $290,000 worth of cigarettes from Sam’s Club. • Virginia Tax Dept. never received any sales tax from this retailer; estimated loss to state of $14,500.

  21. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION • Smurfing and fraudulent retail bulk purchases appear 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).

  22. Findings: Methods of Trafficking • Increased numbers of cigarettes bearing VA tax • stamps are being seized in NYC. Source: New York City Sheriff’s Office, Tobacco Task Force, Data compiled from August 1, 2011 to August 2, 2012 VIRGINIA STATE CRIME COMMISSION

  23. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION • Some wholesalers have been found to have distributed cigarettes “off the books,” falsely reporting their numbers. • In 2010, a Kentucky tobacco wholesaler plead guilty to tax evasion. • Between October 2007 and July 2008, Charles H. Wells stole more than $7 million dollars, by failing to pay taxes and lawsuit settlement fees. • The scheme involved falsely claiming the cigarettes were sold to a Mississippi company, when they were actually kept and sold in Kentucky. • By not paying taxes, Wells was able to sell his cigarettes more cheaply, increasing his sales volume.

  24. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION Certain manufacturers have used similar schemes to evade taxes, filing false documents and under-reporting their sales.

  25. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION • In 2011, Roberto Ribeiro, the president of Belcorp of America, Inc., was indicted for tax evasion. • Belcorp was a licensed tobacco importer and manufacturer. • It is alleged that just from August to October 2008, Belcorp evaded over $3 million dollars in taxes, by failing to accurately report the quantities of cigarettes manufactured. • The tax evasion scheme used by wholesaler Charles H. Wells also involved a conspiracy with a tobacco manufacturer to create false documents and invoices.

  26. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION Traffickers will smuggle cigarettes into the United States, not declaring them on shipping invoices, thereby evading taxes. Sometimes these cigarettes are legitimately manufactured, but were not intended for the United States market. East Coast ports are often used, including Virginia ports.

  27. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION Counterfeit cigarettes are also smuggled into the country. These cigarettes are manufactured in illegal factories, often under less than sanitary conditions. 27

  28. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION “Most counterfeit cigarettes…tend to differ in every respect from their legal counterparts, including tobacco, paper, filter tips, and packaging ”(Shen et al., 2010). This does more than result in a cigarette that is less pleasant in taste; serious health risks are implicated by counterfeit cigarettes. Contaminants and excessive levels of cadmium, thallium and lead have been found in counterfeit cigarettes.

  29. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION 29

  30. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION 30

  31. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION • Related to cigarette trafficking is the collateral crime of forging tax stamps. • These are used on counterfeit cigarettes, to make them appear legitimate. • They are also used to help disguise the origin of legitimate cigarettes that are trafficked from one state to another. • Because tax stamps are small, an individual roll of stamps can be worth $30,000 or more. • Ideal commodity for criminals to trade in their transactions.

  32. Findings: Methods of Trafficking VIRGINIA STATE CRIME COMMISSION 32

  33. Findings: Trafficking Beneficiaries VIRGINIA STATE CRIME COMMISSION • Law enforcement, both in Virginia and nationally, have noted that organized crime has moved into the business of cigarette trafficking. • 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.

  34. Findings: Trafficking Beneficiaries VIRGINIA STATE CRIME COMMISSION • 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. • However, these figures do not represent total VSP Department action regarding cigarette smuggling.

  35. Findings: Trafficking Beneficiaries VIRGINIA STATE CRIME COMMISSION • While no precise figures can be ascertained, it seems clear, from law enforcement reports and rudimentary data calculations, that illegal cigarette traffickers 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

  36. Findings: Trafficking Beneficiaries VIRGINIA STATE CRIME COMMISSION • “ATF agents stopped a Lincoln Town car in Richmond, loaded down with 1,800 cartons of smuggled cigarettes.” • ABC7, Kris Van Cleave, November 9, 2012. • “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 confiscated the illegal cigarettes.” • WBALTV, November 9, 2012.

  37. Findings: Trafficking Beneficiaries VIRGINIA STATE CRIME COMMISSION Conclusion: Illegal cigarette trafficking is not a “cigarette issue.” IT IS AN ORGANIZED CRIME ISSUE. It inherently involves multi-state criminal operations.

  38. Findings: Trafficking Beneficiaries Source: Northern Virginia Cigarette Tax Board, September 11, 2013. VIRGINIA STATE CRIME COMMISSION Traffickers are continuing to use small vehicles as one means of transporting cigarettes north. 38

  39. Findings: Trafficking Beneficiaries VIRGINIA STATE CRIME COMMISSION • Operation Smokescreen, a large, inter-agency 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 trafficking, primarily from North Carolina to Michigan. • Over $8 million was illegally earned.

  40. Findings: Trafficking Beneficiaries VIRGINIA STATE CRIME COMMISSION • 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 trafficked into New York. • It is estimated that at least $65 million was made by the defendants.

  41. Legislative Changes VIRGINIA STATE CRIME COMMISSION • Virginia took a meaningful step towards combating cigarette trafficking, with the enactment of Va. Code § 58.1-1017.1, which went into effect on July 1, 2012. • Criminalizes the possession of 25 or more stamped cartons of cigarettes, by non-authorized holders, with the intent to distribute. • Current penalty is a Class 2 misdemeanor; 2nd offense is a Class 1 misdemeanor.

  42. Legislative Changes • As of July 1 of 2013, the penalties for possessing with the intent to distribute stamped cigarettes were increased: • 25 to 500 cartons is a Class 1 misdemeanor; a second offense is a Class 6 felony. • 500 cartons or more is a Class 6 felony; a second offense is a Class 5 felony. VIRGINIA STATE CRIME COMMISSION

  43. Legislative Changes • As of July 1 of 2013, the penalties for unlawfully possessing unstamped cigarettes were increased: • Less than 500 packs (50 cartons) is a Class 1 misdemeanor; a second offense is a Class 6 felony. • 500 packs (50 cartons) or more is a Class 6 felony; a second offense if a Class 5 felony. VIRGINIA STATE CRIME COMMISSION

  44. Legislative Changes • As of July 1, 2013, distributing or possessing with the intent to distribute counterfeit cigarettes is now a crime: • Less than 10 cartons is a Class 1 misdemeanor; • Ten or more cartons is a Class 6 felony. • Any second offense is automatically a Class 6 felony. VIRGINIA STATE CRIME COMMISSION

  45. Legislative Changes • As of July 1, 2013, possessing with the intent to distribute stamped cigarettes now qualifies as a RICO offense. • All equipment and personal property used in connection with cigarette trafficking is now subject to forfeiture. VIRGINIA STATE CRIME COMMISSION

  46. Contact Information VIRGINIA STATE CRIME COMMISSION A copy of the cigarette trafficking report can be found on the Crime Commission website, under our 2013 reports: http://leg2.state.va.us/dls/h&sdocs.nsf/4d54200d7e28716385256ec1004f3130/dba061dea0fa878b852579c8006e00a4?OpenDocument

  47. Contact Information VIRGINIA STATE CRIME COMMISSION G. Stewart Petoe Director of Legal Affairs Virginia State Crime Commission spetoe@vscc.virginia.gov (804) 225-3422 http://vscc.virginia.gov

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