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Tobacco Traf icking and Organized Crime in Virginia Judicial Conference of Virginia for District Courts September 29, 2014 NIA ST GI A R T I E Overview V C
R N I M I O S E S C O M M I • Why Does Traf icking Occur? • Methods Used by Traf ickers • Bene iciaries of Traf icking • Crime Commission Recommendations and Enacted Legislation
VIRGINIA STATE CRIME COMMISSION 2 NIA ST GI A R T I E Why Does Traf icking Occur? V C
R N I M I O S E S C O M M I • All cigarette traf icking 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 pro its to be made.
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R N I M I O S E S C O M M I • Virginia has the 2nd 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.
VIRGINIA STATE CRIME COMMISSION 4 NIA ST GI A R T I E Why Does Traf icking Occur? V C
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VIRGINIA STATE CRIME COMMISSION 5 NIA ST GI A R T I E Why Does Traf icking Occur? V C
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• 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
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R N I M I O S E S C O M M I • 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
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State Excise Tax Per Carton Per Case State Rate/carton Differential Differential
Virginia $3.00 → N/A → N/A
Pennsylvania $16.00 → $13.00 → $780.00
New Jersey $27.00 → $25.00 → $1,440.00
Rhode Island $34.60 → $31.60 → $1,896.00
Massachusetts $35.10 → $32.10 → $1,926.00
New York $43.50 → $41.50 → $2,430.00
New York City $58.50 → $55.50 → $3,330.00
VIRGINIA STATE CRIME COMMISSION 8 NIA ST GI A R T I E Why Does Traf icking Occur? V C
R N I M I O S E S C O M M I • 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, 2013.
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R N I M I O S E S C O M M I • 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 pro it on a diverted load of 1,500 contraband cartons of cigarettes could easily be $100,000.00 due to these price differentials.
VIRGINIA STATE CRIME COMMISSION 10 NIA ST GI A R T I E Why Does Traf icking Occur? V C
R N I M I O S E S C O M M I • The price differential between states can lead to enormous pro its 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
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R N I M I O S E S C O M M I • The Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) estimates the amount of pro it that a cigarette traf icker 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 – $5,100.00 for a case of cigarettes – $4,080,000.00 for a single truckload of 800 cases of cigarettes.
Source: ATF Fact Sheet, March 2011.
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R N I M I O S E S C O M M I • A separate estimate provided by an ATF agent was as follows: – A car can carry 10 cases of cigarettes, with an estimated pro it of $34,000.00 – A van can carry 50 cases of cigarettes, with an estimated pro it of $170,000.00 – A U‐Haul can carry 200 cases of cigarettes, with an estimated pro it of $670,000.00
Source: Effectively Combating I‐95 Cigarette Traf icking Conference, 2012.
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R N I M I O S E S C O M M I • Traf icking 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* 0.30 1.15 1.45 14.50 Chesapeake 0.30 0.50 0.80 8.00 Fairfax City 0.30 0.85 1.15 11.50 Fairfax County 0.30 0.30 0.60 6.00 Hampton 0.30 0.80 1.10 11.00 Newport News 0.30 0.85 1.15 11.50 Norfolk 0.30 0.80 1.10 11.00 Portsmouth 0.30 0.90 1.20 12.00 Suffolk 0.30 0.50 0.80 8.00 Tazewell* 0.30 0.10* 0.36 3.60 Va Beach 0.30 0.70 1.00 10.00 Note: All rates effective as of July 1, 2014.
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• “Illegally traf icked cigarettes now have a higher pro it margin than cocaine, heroin, marijuana, or guns.” – Quote from an agent with the Virginia State Police.
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R N I M I O S E S C O M M I • “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 pro it margin they saw on the cigarettes,’ said Edgar Domenech, who heads the ATF’s Washington, D.C. ield division.” – Fields, The Wall Street Journal, July 20, 2009.
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R N I M I O S E S C O M M I • Law enforcement estimates that the current street value of a kilogram of cocaine in Virginia is roughly $97,000. • This is the amount of pro it a cigarette traf icker 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 pro it that could be realized from transporting just one case of cigarettes (60 cartons).
VIRGINIA STATE CRIME COMMISSION 17 NIA ST GI A R T I E Methods Used by Traf ickers: Smur ing V
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R N I M I O S E S C O M M I • Smur ing 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.
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R N I M I O S E S C O M M I • 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).
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R N I M I O S E S C O M M I • Increased numbers of cigarettes bearing VA tax stamps are being seized in NYC. Contraband Cigarettes Seized
2500 2053 2000 1786.4 1500 1000 762 500 79.8 110.5 18.7 4.3 3 0.8 1.6 2.2 94 4 0.2 7.3 0.2 0.3 0.1 54.1 0 Number of Cartons of Number MI. VA. GA. KY. NH. MS. OK. DE. LA. MO. KS. CO. NJ. AL. PA. LOOSE NYS.ONLY UNSTAMPED CTFT STAMPED Source of Tax Stamps
Source: New York City Sheriff’s Of ice, Tobacco Task Force, Data compiled from August 1, 2011 to August 2, 2012
VIRGINIA STATE CRIME COMMISSION 20 NIA ST GI A R T I E Methods Used by Traf ickers: Smur ing V
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• Between August 3, 2012 and October 7, 2013, the NYC Sheriff’s Of ice seized roughly 4,222 cartons of illegal cigarettes, of which 2,142 (51%) cartons came from Virginia.
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R N I M I O S E S C O M M I • The New York City Sheriff’s Of ice is continuing their enforcement efforts against the sale of black market cigarettes.
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R N Methods Used by Traf ickers: Smur ing I O M I S E S C O M M I • The number of cartons of cigarettes that can be traf icked in just a regular car can be surprisingly large.
Source: ATF, shows a vehicle seized by ATF Agents and the Maryland Comptroller's of ice stopped on I‐95.
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Source: Seized by Maryland and NVCTB
VIRGINIA STATE CRIME COMMISSION 24 NIA ST GI A R T I E Methods Used by Traf ickers: Retailers V
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• Fraudulent retail operations are used by traf ickers to more ef iciently 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 ive cartons to any individual in a day.
• To circumvent this impediment, some cigarette traf ickers have created retail establishments solely for the purpose of being able to purchase large quantities of cigarettes from wholesalers.
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Source: NVCTB
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• When fraudulent retail operations are conducted for purposes of cigarette traf icking, it becomes much more likely that Virginia will not receive any tax revenue from the cigarettes purchased.
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R N I M I O S E S C O M M I • More than 850 cartons were seized from this van in RI coming from VA with an estimated value of $80,000.
Source: NVCTB
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Source: NVCTB
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Source: NVCTB
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R N I M I O S E S C O M M I • 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 $870,000.
VIRGINIA STATE CRIME COMMISSION 31 NIA ST GI A R T I E Bene iciaries of Traf icking V C
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• Law enforcement, both in Virginia and nationally, have noted that organized crime has moved into the business of cigarette traf icking. • 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.
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• 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 $45,749.
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• While no precise igures can be ascertained, it seems clear, from law enforcement reports and rudimentary data calculations, that illegal cigarette traf ickers 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
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R N I M I O S E S C O M M I 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 in iltrated several criminal organizations and businesses operating around the center by irst selling them unstamped, untaxed cigarettes. Undercover police of icers identi ied 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.
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• “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 con iscated the illegal cigarettes.” – WBALTV, November 9, 2012. VIRGINIA STATE CRIME COMMISSION 36 NIA ST GI A R T I E Bene iciaries of Traf icking V C
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• 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, 2012.
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Source: Northern Virginia Cigarette Tax Board, October 30, 2013
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• Conclusion: Illegal cigarette traf icking is not a “cigarette issue.”
• IT IS AN ORGANIZED CRIME ISSUE.
• Traf icking hurts all legitimate manufacturers, wholesalers, and retailers, who are faced with unfair competition in the form of lower prices offered by their competitors.
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R N I M I O S E S C O M M I • 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 traf icking, primarily from North Carolina to Michigan.
– Over $8 million dollars was illegally earned.
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R N I M I O S E S C O M M I • Found in the possession of Taha Mutaher, Yemeni national, involved with traf icking cigarettes from Virginia to New York, 2003:
Source: Richmond Times Dispatch, November 5, 2012
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R N I M I O S E S C O M M I • 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 traf icked into New York. – It is estimated that at least $65 million were made by the defendants.
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• Virginia took a meaningful step towards combating cigarette traf icking, with the enactment of Va. Code § 58.1‐1017.1, which went into effect on July 1, 2012. – 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; 2nd offense was a Class 1 misdemeanor.
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R N I M I O S E S C O M M I • Based on the Commission’s recommendations, additional changes went into effect on July 1, 2013. • The penalty for Va. Code §58.1‐1017.1 was increased to a Class 1 misdemeanor, and a 2nd offense was increased to a Class 6 felony. • In addition, a 1st offense involving 500 cartons or more was made a Class 6 felony; a 2nd offense involving 500 cartons or more was made a Class 5 felony.
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R N I M I O S E S C O M M I • The penalties for Va. Code §58.1‐1017 (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 2nd offense was made a Class 6 felony. • A 2nd offense involving 50 cartons was raised from a Class 6 felony to a Class 5 felony.
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R N I M I O S E S C O M M I • Virginia’s traf icking statute, Va. Code §58.1‐1017.1 was included as a qualifying offense under Virginia’s RICO statute (Va. Code §18.2‐513). • Possession of unstamped cigarettes was already a RICO offense since 2004. • Virginia’s cigarette forfeiture statute, Va. Code §19.2‐386.21, which only applied to counterfeit cigarettes and cigarettes with counterfeit tax stamps, was expanded to include unstamped and traf icked cigarettes.
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R N I M I O S E S C O M M I • The distribution of counterfeit cigarettes under Va. Code §18.2‐246.14 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 §59.1‐92.13, 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.
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R N I M I O S E S C O M M I • Going into effect on July 1, 2014: – Cigarette traf icking can be investigated by multi‐ jurisdictional grand juries – Any person convicted of cigarette traf icking will no longer be able to be an “authorized holder” – The civil penalties for traf icking stamped cigarettes will be greatly increased • No less than $5,000 for a 1st offense • No less than $10,000 for a 2nd offense • No less than $50,000 for a 3rd offense
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R N I M I O S E S C O M M I A copy of the cigarette traf icking report can be found on the Crime Commission website, under our 2013 reports:
h p://leg2.state.va.us/dls/h&sdocs.nsf/ 4d54200d7e28716385256ec1004f3130/ dba061dea0fa878b852579c8006e00a4? OpenDocument VIRGINIA STATE CRIME COMMISSION 49 NIA ST GI A R T I E Contact Information V C
R N I M I O S E S C O M M I G. Stewart Petoe Director of Legal Affairs Virginia State Crime Commission [email protected] (804) 225‐3422 http://vscc.virginia.gov
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