A complicated web of laws regulates and taxes tobacco production and sale. Enforcing these laws requires both discovering legal violations and using criminal and civil legal tools to disrupt, punish, and deter the illegal activity. It also requires that law enforcement agencies have the motivation, opportunity, and capacity to intervene, including the necessary legal authority, resources, and knowledge about the illegal activity. For law enforcement, the illicit tobacco trade is in many ways similar to other illegally smuggled and sold products. It is a criminal enterprise for financial gain.
The committee was not able to obtain systematic, up-to-date information on measures of enforcement activity and success by these agencies or find a systematic discussion of the priority given to tobacco enforcement. The relevant data are inconsistent or absent. For the data that are available, they were often not recorded or collected in a manner that would allow systematic analysis. With these limitations in mind, the first two sections in this chapter discuss the enforcement efforts in the United States at the federal level and for two key states in the illicit tobacco trade, Virginia and New York. The third section analyzes the risk, and the perception of risk, associated with participating in illicit tobacco markets. The fourth section outlines some of the challenges to, and opportunities for, successful law enforcement. The last section presents the committee’s recommendations for research and data collection.
In the United States, the key federal laws that address the illegal tobacco trade and product diversion are the Jenkins Act, the Contraband Cigarette Trafficking Act (CCTA), the Prevent All Cigarette Trafficking Act of 2009 (PACT Act), and the Family Smoking Prevention and Tobacco Control Act (see Box 1-2, in Chapter 1). In addition, federal statutes regarding trafficking in counterfeit goods and services, currency reporting, money laundering, aiding and abetting, conspiracy, and racketeering have been used in tobacco enforcement investigations. The bulk of the enforcement for these laws is conducted by the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) in the U.S. Department of Justice (DOJ); the Immigration and Customs Enforcement (ICE) and Customs and Border Protection (CBP) in the U.S. Department of Homeland Security (DHS); and the Alcohol and Tobacco Tax and Trade Bureau (TTB) in the U.S. Department of the Treasury.1
The Bureau of Alcohol, Tobacco, Firearms and Explosives
ATF employs federal agents, auditors, and investigators to identify, investigate, and present for prosecution violations of federal laws involving firearms, explosives, arson, and the illicit alcohol and tobacco trade. With regard to tobacco, ATF seeks to curtail illicit cigarette trafficking by enforcing the CCTA and divesting criminal and terrorist organizations of money derived from this illegal activity. ATF does not often pursue investigations internationally, and its cigarette smuggling investigations usually involve interstate smuggling activities (U.S. General Accounting Office, 2004). An ATF representative informed the committee that the problems currently being handled by the agency include corrupt manufacturers, Master Settlement Agreement fraud and diversion, low-tax state to high-tax state diversion, diversion through Native American reservations, smuggling of other products (i.e., other than cigarettes), counterfeit cigarettes and tax stamps, Internet sales, smuggling, hijackings, organized crime, and terrorist organizations.
The agency began to increase its cigarette smuggling investigations in 2000: from 1998 to 2000, ATF initiated only 95 tobacco investigations; from 2001 to 2003, it brought 368 cigarette smuggling cases—of which only 8 were linked to terrorism (U.S. General Accounting Office, 2004, pp. 11, 20). The number of investigations continued to rise, with ATF initiating 566 tobacco investigations from 2004 to 2008: however, this
1Prior to 2002, both ATF and TTB were in the U.S. Department of the Treasury. In that year, the Homeland Security Act transferred ATF to DOJ, while TTB remained in the U.S. Department of the Treasury.
number still represented less than 1 percent of ATF’s total caseload (U.S. Department of Justice, 2009, p. 21).
Limitations were imposed on investigations in July 2012 by an internal memorandum from ATF’s assistant director of field operations: it stated that all new tobacco investigations “need a nexus to violent crime” and only on “rare occasions” will investigations be authorized if they do not involve a violent crime component but still involve “large-scale fraud perpetrated by organized criminal enterprises and results in a significant loss of federal or state tax revenue” (Turk, 2012, pp. 1-2). Since then, the number of tobacco investigations initiated by tobacco has fallen significantly, from 100 initiated in 2011 to just 11 in 2013: see Figure 6-1.
ATF’s tobacco (and alcohol) diversion investigations are minimal in relation to its other mission areas. An examination of ATF’s budget shows that diversion programs are allocated significantly fewer resources than violent crime investigations. From fiscal 2004 through fiscal 2009, the Alcohol and Tobacco Diversion Program represented approximately 2 percent ($16.5- $20 million) of ATF’s total budget each year: in contrast, the Fire-
FIGURE 6-1 Number of ATF tobacco investigations initiated and closed, 1998 through 2014.
NOTE: Data for 2014 are for 6 months, through July 15.
SOURCE: Data through 2003 from U.S. General Accounting Office (2004); data for 2004-2014 provided to the committee by ATF.
TABLE 6-1 Estimated Value of All Forfeitures in Contraband Tobacco Investigations, Fiscal 2007-2014
|Year||Value of Forfeited Assets ($)|
NOTES: Data for 2014 are as of July 10. The value of forfeited assets represents cash forfeited to the U.S. government or value of assets (cars, etc.) placed into official use by date of seizure. The value of assets comes from July 2014 and is subject to an increase in value that would result from installment payments made by defendants with unpaid monetary judgments.
SOURCE: Data provided to the committee by the U.S. Department of Justice.
arms Program represented 72 percent of ATF’s budget, and the Arson and Explosives Program represented 26 percent. Fewer than 70 of ATF’s 2,535 special agents are involved in investigating diversion activities.
Despite the relatively small investment by ATF in enforcement against the illicit tobacco trade, the value of seizures from tobacco diversion cases quadrupled from $6,276,648 in fiscal 2004 to $26,680,976 in fiscal 2008 (which were years of relatively more attention by ATF),2 and the value of tobacco seizures as a percentage of all ATF seizures rose from 30 to 50 percent in that period (U.S. Department of Justice, 2009). ATF, along with other participating law enforcement agencies, keeps a small percentage of seizures through forfeitures: see Table 6-1. Though perhaps lucrative for the agency, the amounts do not appear to be large enough to change the risk calculus for illicit tobacco entrepreneurs.
A 2009 audit report from DOJ’s Office of the Inspector General found the agency’s diversion efforts to be ad hoc and lacking clear coordination between the headquarters and field units, with no formalized procedures
2 The total is the value of assets seized prior to forfeiture (U.S. Department of Justice, 2009).
for sharing intelligence information (U.S. Department of Justice, 2009). The auditors also found a lack of oversight within ATF at both the field and headquarters levels with regard to ATF “churning” investigations, in which financial proceeds obtained from an undercover operation are used to further that specific investigation. The auditors noted that internal guidance for these investigations “lacked breadth and specificity” and was often disregarded (U.S. Department of Justice, 2013, p. i).
The low priority given by ATF to tobacco smuggling relative to firearms, arson, and explosives is consistent with DOJ’s broader prioritization of terrorism and violent crime over other areas of legal enforcement and is consistent with the fact that criminal prosecutions of those involved in the illicit tobacco trade appear to be an especially low priority for prosecutors. For example, DOJ’s strategic plan makes it clear that terrorism is the first priority and that preventing crime is the second priority, with violent crime and firearm trafficking at the top of the crime-prevention agenda (U.S. Department of Justice, 2014).
U.S. Immigration and Customs Enforcement
ICE is the largest investigative agency in DHS, responsible for enforcing immigration and customs laws within the United States. As part of its strategic objective to combat illicit trade, ICE investigates criminal activity when CBP intercepts contraband at the border (U.S. General Accounting Office, 2004; U.S. Immigration and Customs Enforcement, 2010). In fiscal 2001, ICE initiated 59 cigarette-related investigations and closed 33; in fiscal 2003, those numbers had increased to 99 investigations initiated and 103 investigations closed. In fiscal 2003, CBP and ICE also made 56 seizures of counterfeit cigarettes, with an estimated value of $45.8 million, and 135 seizures of genuine cigarettes, with an estimated value of $5.1 million (U.S. Government Accountability Office, 2004, pp. 18, 21).
In practice, ICE mostly combats the illicit tobacco trade through its National Intellectual Property Rights Coordination Center (IPR Center) and through its Tobacco Program. The IPR Center was started in 2000 as an interagency effort to coordinate a unified federal response to intellectual property rights violations, including counterfeit tobacco violations. The Tobacco Program, which does not directly manage investigations, promotes and assists investigations and interdictions of tobacco smuggling by monitoring, coordinating, and providing guidance to various federal, state, and local law enforcement agencies on international smuggling matters (U.S. General Accounting Office, 2004, pp. 9-10). In a presentation to the committee, a representative from ICE suggested to the committee that the primary cigarette threats handled by the agency were in-bond diversion (which occurs when U.S. customs declarations show that a good destined for
export or for transshipment through the United States has been exported when in fact it has entered the domestic market), counterfeit cigarettes, and mail and express mail facilities. In-bond diversion was suggested as being especially problematic, while smuggling through the mail and express mail was noted as an emerging threat. As discussed in Chapter 2, however, in-bond diversion does not appear to play a major role in the domestic illegal market in the United States.
Customs and Border Protection
CBP is responsible for securing U.S. borders against terrorist threats and for preventing the illegal entry of inadmissible persons and contraband, while facilitating lawful travel, trade, and immigration. Its inspection duties are carried out by inspectors at ports of entry into the United States. CBP uses its Automated Targeting System (ATS), which is constantly being updated by tips from various sources, to target arriving containers for review and inspection at ports of entry. The ATS is supplemented by the supply chain stratified examination, which randomly selects additional containers for random inspections.
CBP does not necessarily target cigarettes for physical inspection (U.S. Government Accountability Office, 2004, pp. 12-14), and the role played by targeted tobacco-specific enforcement by CBP (as opposed to a more general effort to prevent the smuggling of contraband product into the country) is unclear. However, CBP officials suggested that the increase in seizures of counterfeit cigarettes in the early 2000s was due to better intelligence and better inspections, based on electronic methods such as ATS targeting and the ICE Tobacco Program, which in turn helped to bring awareness to the problem of cigarette smuggling and led to more seizures (U.S. Government Accountability Office, 2004, pp. 21-22). This chain of events suggests that training law enforcement officials and dedicating tobacco-specific enforcement resources could have an impact on the illicit tobacco trade.
Alcohol and Tobacco Tax and Trade Bureau
TTB is tasked with collecting federal excise taxes on tobacco products manufactured in the United States for domestic consumption and on tobacco products that are imported in bulk and transferred in bond to premises of manufacturers, who are also required to obtain a permit (license) from TTB in order to produce cigarettes. As of February 2014, there were 238 active tobacco manufacturers licensed with TTB. However, TTB does not publicly disclose the names of those manufacturers because it treats the information as tax records that are protected under 26 USC 6103; this lack
of information about licensed manufacturers poses a challenge for enforcement.3 TTB employs auditors, investigators, and laboratory scientists, who analyze tobacco products to ensure their appropriate tax classification, analyze counterfeit tobacco products and tax stamps, and provide other technical support for investigations of illicit tobacco products (U.S. Department of the Treasury, 2010).
In a presentation to the committee, a TTB representative indicated that, in addition to the “usual illegal activities” (i.e., underreporting of the manufacture of tobacco products, sale of processed tobacco through “brokers,” relabeling of products, smuggling, counterfeiting, and manipulating constructed sales price [for cigars]), current trends in the illicit tobacco trade include roll-your-own machines, hookah tobacco, Native American manufacturing, product category shift, raw leaf trade, and processed and roll-your-own retail sales. In fiscal 2012, TTB conducted 48 criminal investigations of diversion schemes of alcohol and tobacco products that were estimated to have a total tax liability of more than $47 million—about 0.3 percent of the taxes collected by the bureau (Alcohol and Tobacco Tax and Trade Bureau, 2013, p. 5).
Within the United States, states and localities are affected by the illicit tobacco trade in quite different ways. Virginia, which is a major “source” state for contraband cigarettes, and New York, which is an important “destination” state, reflect very different experiences with the illicit tobacco trade and illustrate the range of enforcement efforts being undertaken by states and localities.4 However, data at the state and local levels are also problematic, and the committee found only a scattering of information about state and local efforts.
The state of Virginia has the second lowest cigarette excise tax rate in the country (at $0.30 per pack), while the (geographically proximate) mid-Atlantic and New England states have some of the highest cigarette tax rates. For that reason, Virginia has become the primary source state for illicit cigarettes (Virginia State Crime Commission, 2013a, 2013b). Although the committee estimates that Virginia gained $57.64 million in state
3Personal correspondence, Alcohol and Tobacco Tax and Trade Bureau staff, February 20, 2014.
4The California enforcement experience is discussed in Chapter 5.
In 2012, Virginia was the first state to pass a criminal statute to specifically deal with interstate trafficking (Virginia State Crime Commission, 2013a, p. 16):
While all states have statutes making it a crime for a person to import cigarettes for re-sale that do not bear a tax stamp, or have not had the cigarette excise tax paid on them, Virginia is the only state that has a statute that applies to cigarettes that have a correct tax stamp. The focus of Virginia’s statute is not the loss of tax revenue to the state; it is an attempt to stop people who purchase large quantities of cigarettes for what would likely be trafficking purposes. The crime is committed, not when the trafficker crosses one of Virginia’s border into another state, but immediately upon his possession of more than 25 cartons (5,000 cigarettes), provided he also has the requisite intent to later distribute those cartons, and not retain them for personal consumption.
Under Va. Code § 58.1-1017.1, possession of more than 5,000 stamped cigarettes with the intent to unlawfully distribute can result in a class 2 misdemeanor for a first offense and a class 1 misdemeanor for a second or subsequent offense. Possession, sale, or purchase of unstamped cigarettes with the intent to evade taxes results in a felony offense for 3,000 or more packs (60,000 cigarettes); for the possession, sale, or purchase of less than 3,000 packs of unstamped cigarettes, a person can be charged with a class 2 misdemeanor (Va. Code § 58.1-1017). All fixtures, equipment, materials, and personal property used in connection with the sale or possession of counterfeit cigarettes (including cigarettes with counterfeit tax stamps) are subject to forfeiture under Va. Code § 19.2-386.21, and anyone caught selling or possessing counterfeit cigarettes faces civil penalties (Va. Code § 18.2-246.14).
Four state and local agencies have key roles in enforcement efforts against the illicit tobacco trade:
- The Virginia Department of Taxation audits cigarette wholesalers to ensure that all required forms have been accurately completed and that all required invoices are kept as required by law. Between 2011 and 2013, it issued 201 assessments for cigarette-related vio-
5 This figure represents just over 1 percent of national tax-paid sales. The net economic impact may be even smaller to the extent that smokers who quit smoking in response to the lack of availability of cheap bootlegged cigarettes instead spend their money on other goods and services, thereby producing increased revenue from other tax-paid sales.
TABLE 6-2 Number of Cigarette Packs Seized by the Northern Virginia Cigarette Board, 2007-2012
SOURCE: Virginia State Crime Commission (2013b, Fig. 5).
lations and collected $112,500 in penalties (Virginia State Crime Commission, 2013a, p. 17).
- The Northern Virginia Cigarette Tax Board is responsible for ensuring the payment of local excise taxes in 17 jurisdictions6 in Northern Virginia, and it performs approximately 3,000 inspections of retail establishments each year (Virginia State Crime Commission, 2013a, p. 17). Table 6-2 shows the number of cigarette packs seized during inspections for failing to have proper tax stamps or for other violations of the law.
- The Criminal Interdiction and Counterterrorism Unit of the state police seized 1,941 cartons of cigarettes and $226,360 during its routine drug interdiction efforts from January 2012 to October 2012, and it seized 6,775 cartons and $45,749 between January 2013 and October 10, 2013 (Virginia State Crime Commission, 2013b, p. 30).
- The Tobacco Enforcement Unit in the Virginia Attorney General’s Office conducted 145 retail inspections in 2012 and seized 114,569 packs of cigarettes. In 2013 (as of November), it had conducted 159 inspections and seized 2,923 packs of cigarettes (Virginia State Crime Commission, 2013b, p. 33).
Law enforcement in Maryland (where the state cigarette tax is $2.00 per pack) also routinely targets suspected cigarette traffickers as they leave Virginia on Interstate 95: see Table 6-3.
6 Localities have been given authority by the Virginia legislature to create misdemeanor ordinances for the purpose of enforcing the collection of local cigarette taxes (Virginia State Crime Commission, 2013a, p. 22).
TABLE 6-3 Possession and Transportation of Virginia-Stamped Cigarettes into Maryland
|Fiscal Year||Arrests||Packs of Cigarettes||Value ($)||Tax Loss ($)||Convictions of Suspectsa||Acquittals of Suspects|
aThe conviction figures only identify individuals charged with the felony change of “transporting contraband cigarettes in the State of Maryland,” not those charged with misdemeanor possession.
NOTE: Dollar figures have been rounded.
SOURCE: Virginia State Crime Commission (2013a, Fig. 6).
Virginia profits from illicit trade when cigarettes are purchased legally in Virginia and sold elsewhere. One therefore might be surprised by Virginia’s efforts to fight the illicit trade. There are two explanations for this apparent incongruity. First, Virginia’s enforcement efforts may not be as rigorous as they initially appear. Although Virginia has enhanced criminal penalties and engages in tobacco-specific enforcement efforts, there are relatively few seizures and few criminal prosecutions for tobacco crimes. Data from the Virginia Criminal Sentencing Commission indicate that very few charges are filed, and even fewer convictions are obtained, in Virginia courts under any of Virginia’s relevant criminal statutes (Virginia State Crime Commission, 2013a, pp. 14-16); see also Table 6-3, above, on seizures in Maryland. The deterrent effect of these efforts is therefore unknown, but the reported figures for seizures, arrests, and prosecutions when compared with the committee’s estimate of the large number of Virginia cigarettes smuggled to high-tax jurisdictions appear trivial. That is, less than one-sixth of 1 percent (0.16 percent) of the total number of cigarette packs being smuggled out of Virginia are intercepted by Virginia state authorities (see “Risks of Detection,” below).
Second, Virginia officials believe that illicit trade in tobacco harms Virginia’s interests for several reasons. One reason is that traffickers may set up fictional retail businesses to buy the cigarettes in Virginia in bulk and then fail to pay Virginia sales taxes on the cigarettes, as well as failing to pay taxes in the destination jurisdiction. A second reason is that by providing
an incentive to create fake retail businesses and offering the opportunity for low-risk and profitable criminal activity, cigarette trafficking (and the fraudulent businesses associated with it) could bring organized criminal enterprises and attendant crime to the state, such as credit card fraud and money laundering. A third reason (Virginia State Crime Commission, 2013a) is that while traffickers now get their cigarettes from Virginia suppliers, organized traffickers looking for sources of cheap cigarettes could look abroad for alternative sources of inexpensive cigarettes to make even more money. If counterfeit or cheap whites enter the U.S. market, then Virginia as the third largest tobacco grower and second largest domestic producer would lose out economically. Finally, there is concern about the connection between cigarette trafficking and raising funds for terrorist organizations, although there is very little evidence of such a connection (see Chapter 3).
New York State has the nation’s highest cigarette excise taxes (at $4.35 per pack) of any U.S. state, and New York City has the second highest combined state and local excise tax rates in the nation, at $5.85 per pack (Chicago is first, with combined state, county, and city taxes totaling $6.16 per pack).7 In 2009, nearly one-half of all New York smokers reported purchasing cigarettes from low-tax locations, such as Native American reservations, the Internet, duty-free shops, by mail from toll-free telephone numbers, neighboring states, and Canada; approximately one-third of all untaxed cigarettes came from a Native American reservation (Loomis et al., 2010, pp. ES-1, 3-4). A significant share of contraband cigarettes in New York City likely come from Virginia: for example, Davis and colleagues (2013, p. 3) found that of the 75.6 percent of cigarette packs that were missing proper local tax stamps, 44.7 percent came from Virginia (30.9 percent had no stamp at all, and 6.5 percent had stamps from New York State only).
At the state level, the police and the Department of Taxation and Finance are responsible for enforcing anti-contraband policies. The Department of Taxation and Finance enforces the Cigarette Marketing Standards Act (CMSA) and implements regulations that require each retailer, wholesaler, and distributor of cigarettes and tobacco products in the state to register for a license. The CMSA sets minimum cigarette prices in New York by requiring a minimum price markup at each stage of distribution. It is a violation of the law for tax stamping agents, wholesalers, or retailers to advertise, offer to sell, or sell cigarettes below the minimum price. Violators
7In January 2014, a new city law raised the minimum price to $10.50 per pack; see below.
face civil and criminal penalties, including class B misdemeanor charges, license suspensions, and fines of up to $20,000 for the first violation (Center for Public Health and Tobacco Policy, n.d.).
In New York City, enforcement is the responsibility of the New York City Sheriff’s Office.8 The 2002 increase in the New York City cigarette tax, from $0.08 to $1.50, was a key factor in a thriving black market in illicit cigarettes, with the so-called “$5 men” selling bootlegged cigarettes on street corners, outside subway entrances, near shopping centers, and in other venues across the city (Shelley et al., 2007). More recently, targeted enforcement efforts seem to have driven the illicit market from street sales into retail outlets.9 Targeted enforcement and its high number of inspections have resulted in a high “hit rate,” but the yield in packs has been relatively small and the averted tax losses are therefore not large.
This shift in the supply of illicit cigarettes led to a change in New York City’s enforcement efforts. A representative from the New York City Sheriff’s Office informed the committee that in August 2011 it launched the Tobacco Task Force (TTF), which inspects licensed cigarette retailers, issues summonses and makes arrests of those found in violation of tobacco laws, and issues civil fines to collect lost revenues.10 From August 2011 to November 2013, the TTF conducted 2,423 retail inspections, of which 48.8 percent (1,183) resulted in the seizure of 98,521 packs of illicit cigarettes. TTF also seized contraband products as a result of investigations and warrants. These seizures resulted in the confiscation of 149,110 packs of illicit cigarettes and 202,749 counterfeit tax stamps. In total, during this period, TTF seized 247,631 packs, which represented tax losses to the state and city of $1,649,222. Despite these efforts, recent littered pack surveys suggest the persistence of high rates of tax avoidance and evasion (Chernick and Merriman, 2011; Davis et al., 2013). At the same time, however, overall smoking rates declined sharply during this period, which demonstrates that there can be considerable public health benefits even in the presence of illicit trade. Given declining smoking rates, we note that the share of illicit tobacco use could rise even as the overall level falls.
8 In a presentation to the committee, a representative from the New York City Department of Health and Mental Hygiene indicated that the department funds an intelligence analyst at the Sheriff’s Office so that data can be used to maximize the impact of retail inspection.
9 Von Lampe and colleagues (2014, p. 284) describe how, since the late 2000s, retail sales of illicit cigarettes in New York City have shifted from street vending to “bodega” grocery stores; the bodegas selling contraband cigarettes tend to be located in low-income, minority neighborhoods.
10 According to a representative from the New York City Department of Health, the launch of TTF capitalized on the April 2011 merger of the New York Sheriff’s Office (which is part of the New York City Department of Finance) with the New York City Office of Tax Enforcement, which was the primary city agency for cigarette and criminal tax enforcement in the same department.
In November 2013, New York City passed Local Law 97, known as “sensible tobacco enforcement,” which increases penalties for retailers who evade tobacco taxes or sell tobacco without a license, reduces the possession thresholds for being deemed a retail dealer, increases fines for the concealment of contraband cigarettes, prohibits discounts for tobacco products, requires a minimum price of $10.50 per pack of cigarettes and little cigars, and requires cheap cigars ($3 or less) and cigarillos to be sold in packs of at least four and little cigars to be sold in packs of at least 20 (New York City Department of Health and Mental Hygiene, n.d.); Local Law 97 went into effect in January 2014 (see New York City Department of Finance (n.d., pp. 5-6) for information on the fines for New York City tobacco retailers).
Although it is too soon to determine the deterrent effect of the new law and the task force’s inspections, New York City authorities have sought to strike a balance between maximizing the deterrence potential of enforcement efforts targeting retail outlets selling illicit cigarettes on the one hand and maintaining community support and legitimacy on the other. A representative from the New York City Sherriff’s Office indicated to the committee that this strategy reflected a reluctance to alienate nearby city residents who depend on and appreciate cigarette retailers as neighborhood purveyors of other necessities. Similarly, enforcement efforts tend to be randomized rather than focusing on low-income minority neighborhoods where contraband sales usually occur; the random approach is intended to be consistent with fairness. In other locations as well, enforcement efforts targeted at illicit cigarette retailers or other sellers of illicit cigarettes may be constrained by concerns about perceived fairness and legitimacy and the costs to the community of frequent or high-profile enforcement efforts.
At the same time, the recent NYPD policy of targeting the supply side of the illicit tobacco market has come under serious public scrutiny after the death of Eric Garner, who was known to police as a habitual dealer of “loosies” (Marzulli et al., 2014). Despite New Yorkers losing a substantial amount of tax revenue to the illicit tobacco trade, it is not obvious that there is much public appetite for aggressive law enforcement efforts against market participants.
Enforcement efforts may reduce the size of the illicit tobacco market. However, illicit markets have shown to be dynamic in that they tend to adapt to enforcement and regulation. This adaptation produces new market characteristics and new points for possible intervention. For this reason, effective enforcement also needs to increase the risk—or at least the perception of risk—associated with participating in the illicit market, thereby deterring participation. Absent such deterrence, participation in the illicit
tobacco market will continue to be seen as low risk and high reward, encouraging adaptation.
There is a widespread impression among both academic and other observers of illicit markets that cigarette smuggling is a low-risk activity. Yet, a quick review of the literature shows that this impression is not supported by much research. This lack of research is not surprising: estimating the risks of detection (and prosecution and conviction) for illegal activities is a complex task plagued by unreliable data and the piecing together of multiple, hard-to-verify assumptions about the incomplete data that are available (see Chapter 4).
The publicly available data on arrests and prosecution for tobacco offenses are sparse, especially in comparison with offenses involving illicit drugs. The data that are available are limited to special research projects or reports and only in specific states such as Virginia and California (Horton, 2010; Virginia State Crime Commission, 2013a). The arrest and prosecution data from Virginia (see Virginia State Crime Commission, 2013a, and above) suggest that it is a low-risk activity. The annual number of prosecutions seems to be in the double digits for the whole state. Unless these prosecutions are concentrated against the most high-level or biggest participants in the illicit trade (which one cannot determine from the available data), they may prove to be little more than an irritant to most smugglers.
Risks of Detection
Arrest and prosecution have to be preceded by detection. A recent report on the illicit tobacco industry in Canada estimated that at the height of the law enforcement efforts to detect and seize illicit tobacco products, “one out of every 27 packs of illicit cigarettes bought in Canada was seized by law enforcement authorities” (Daudelin et al., 2013, p. 12). Although the authors did not provide details on data and methods, this estimate matches an estimate calculated by the committee using data provided in the 2011 Physicians for a Smoke-Free Canada report and publicly available Royal Canadian Mounted Police (RCMP) seizure data.
In addition to providing estimates of the proportion of users buying from illicit sources at least some of the time, the study by the Physicians for a Smoke-Free Canada (2011) also provides estimates of the amount of cigarettes consumed that come from illegal sources. With those estimates and annual RCMP data on the number of illicit cigarettes and fine-cut tobacco seized (see Table 6-4), the committee calculated an annual risk of detection for the 2003-2010. The basis for our calculation was as follows:
- The number of seized illicit cigarettes was estimated by multiplying the number of cartons by 200 cigarettes.
TABLE 6-4 Illicit Tobacco Detection in Canada, 2003-2010
|Year||RCMP Seizures, Number of Cigarettesa||Fine-cut Tobacco Seized. Number of Cigarettes Equivalentb||Total Seized Cigarettesc||Total Illicit Cigarettes (seized and consumed)d||Percentage of Illicit Cigarettes Seizede|
aCartons seized multiplied by 200.
bQuantity seized divided by 0.7 grams per cigarette.
cThe sum of columns 2 and 3.
dTotal of seized cigarettes from column 4 and total illicit cigarettes consumed from Physicians for a Smoke-Free Canada (2011).
eColumn 4 divided by column 5 and multiplied by 100.
- The quantity of fine-cut tobacco seized by the RCMP was transformed using 0.7 gram per cigarette.
- We then divided the equivalent of the number of illicit cigarettes seized by the sum of the illicit cigarettes actually consumed and the seized cigarettes.
These estimates are based on several assumptions that cannot be verified—-for example, that all seized cigarettes would have been consumed in Canada that year (and were not in transit to another country)—and they are presented for illustrative purposes only. The committee’s results suggest that between 2 and 7 percent of illicit cigarettes available in Canada were seized by the RCMP between 2003 and 2010. The yearly variations in the proportion of illicit cigarettes seized by the RCMP are not significant: seizure data are volatile and influenced by unusually large seizures (random or special operations) for some years. In light of this and other limitations, it is most useful to treat these numbers as a range.
It is important to note that this method of calculation overestimates the risks of detection. For example, the estimated number of illicit cigarettes used by smokers excludes those heavy smokers who are not typically found through general population surveys, such as the homeless and inmates. These excluded populations who are heavy users are most likely to smoke contraband tobacco. In addition, recent studies show that self-reported prevalence rates are lower than those found with other methods (Guindon et al., 2013). Underestimating the number of illicit cigarettes used will overestimate the risk of detection. In addition, the seizure data are likely to overestimate the cigarettes that would actually have been used by Canadians for that year. For example, some of the seized cigarettes (and other tobacco products) on Native reserves may have been destined for the U.S. market. This situation, too, would inflate the risks of detection.
A similar exercise can be conducted to estimate the risks for the illicit U.S. market. In 2010, the Northern Virginia Tobacco Control Board and law enforcement agencies in Maryland seized a total of 328,925 packs of Virginia cigarettes that were being smuggled out of the state, roughly 6.6 million individual cigarettes. Based on our estimates of the “extra” cigarettes being purchased in Virginia, this implies that less than one-sixth of 1 percent (0.16 percent) of total cigarette packs being smuggled out of Virginia are intercepted by state authorities. Adding the cigarettes seized by the New York City Sheriff in 2011 and assuming that 44.7 percent of the seized cigarettes were from Virginia (see above) raises the overall level of risk to only 0.19 percent per pack.
Though risk in the United States and Canada appears to be minimal, the risk of detection in the United States seems to be strikingly lower than in Canada. Even assuming that these numbers overestimate risks, it appears
that the risks of detection in the illicit tobacco industry are consistent with, or even lower than, what research indicates is the risk for illicit drugs. Drawing from capture-recapture methods, for example, Bouchard (2008) estimated that close to 11 percent of the marijuana produced in Quebec in 2002 was seized by law enforcement agencies.
The proportion of illicit cigarettes seized is only one measure of risks. Prosecution and conviction risks for tobacco bootleggers, retail sellers of illicit tobacco, transporters, or even for manufacturers should also be considered. They are likely to be substantially lower for cigarettes than illegal drugs given current law enforcement priorities. For instance, a point of comparison might be the risks involved for individuals charged with possession of illicit substances. Nguyen and Reuter (2012) estimated these risks to be about 1.6 percent per year for marijuana possession in 2008. MacCoun and Reuter (2001) estimated the risk at 6 percent for cocaine users in 1996 in the United States. Bouchard and Tremblay (2005b) found arrest risks to be around 1 percent or less for marijuana and cocaine users in Quebec in 1998.
It is difficult to accurately assess the risks faced by tobacco smugglers, especially given that tobacco-specific conviction data are typically not publicly available, either in the United States or Canada. Nevertheless, other than the special cases where task forces have specifically been created with the goal of eliminating illicit tobacco sales, it appears that the risks of detection, prosecution, and conviction of any kind are negligible.
Not enough data are available to draw definitive conclusions comparing the differential risks of detection for buyers and sellers of illicit cigarettes. The research on illicit drugs suggests that sellers are at a higher risk than buyers, and the situation is likely to be similar for illicit cigarettes.
Risks of Detection and the Size of the U.S. Illegal Market
Given the low risk and high profits (see Chapter 2) of the illicit tobacco trade, an obvious question is why the illicit cigarette market in the United States is not larger. That question may be somewhat misleading, however, because the prevalence of illegal cigarettes is very high in some parts of the country. In Chicago and New York City, in particular, empty pack surveys have found that the proper tax stamps did not appear on more than 70 percent of the packs collected in certain neighborhoods (Merriman, 2010; Kurti et al., 2012). The better question could be: Why are illegal cigarettes more prevalent in some places than in others? This question pertains to the uneven geographical distribution of the illegal cigarette trade, which is a phenomenon that not only characterizes the situation in the United States with its patchwork of different cigarette tax regimes, but also countries such as Germany, Poland, and the United Kingdom, which have nation-
ally uniform cigarette tax rates (von Lampe, 2005, 2006; Ciecierski, 2007; Calderoni et al., 2013, p. 64).
Spatial and temporal variation in the intensity of illicit tobacco markets suggests that a decentralized approach to reduce the market size may be more effective than a national approach. A large body of experimental research in criminology has demonstrated that deploying police in crime “hot spots” will reduce overall crime by more than will a random deployment strategy (Eck, 2002). Intuitively, applying a policy of random enforcement along the I-95 corridor between Virginia and New York City will identify more smuggled cigarettes than random stops between Boston and Portland.
Of course, deploying law enforcement selectively in hot spots means identifying where the hot spots are. Although there is little systematic research that explains these geographical variations, the available research suggest that the emergence of cigarette black markets is the result of a convergence of a number of factors. One set of factors is high cigarette taxes in relation to the income levels of smokers and the theoretical availability of suppliers to sell cheap, illegal cigarettes. But simply comparing geographic variation in the monetary incentives for illicit tobacco market participation, rather than the overall incentives, will not identify hot spots of market activity. The relative concentration of the cigarette black market during certain time periods, for example, in the northwest of England or the northeast of Germany, with the notable exception of West Berlin, cannot be explained that simply (von Lampe, 2005, 2006).
In order to develop understanding of hot spots, research would have to focus on determinants of the large spatial variation in demand and supply of illicit cigarettes, beyond the simplest variation in potential revenue generated by tax differentials and income. State-to-state and city-to-city variation in the effectiveness of law enforcement, which imposes costs on both consumers and suppliers, is an additional source of geographic variation in market size. The difficulty with which illegal supply networks and retail infrastructures are formed is very important in understanding the emergence of illegal cigarette markets, and “supply costs” can be as important—or even more important—than tax differentials. And although the social networks that can prop up illicit markets are time consuming and difficult to establish, they may be particularly resilient to government regulation.
Policing the illicit cigarette trade depends on the capacity of law enforcement to take advantage of the available opportunities to intervene in that trade. That capacity is a function of resources, information, motivation, and legal authority. Although there are several significant challenges that face enforcement capacity to police the illicit cigarette trade, these
challenges are hardly unique to the illicit cigarette trade, nor are they insurmountable.
The first challenge is that the illegal trade in tobacco (like most criminal activity) is dynamic. Participants in the market face changing regulatory and political environments, economic incentives, technologies of production and transportation, and competition, and they respond accordingly. As discussed in Chapter 2, for example, enforcement shifted illicit sales away from Native American reservations in New York State and toward interstate bootlegging between Virginia and New York City. Similarly, in Brazil, an export tax on cigarettes that successfully reduced the number of cigarettes exported to neighboring Paraguay and then smuggled back into the country also had the effect of increasing the number of manufacturing operations in Paraguay that produced cigarettes for the illicit market in Brazil (Sweeting et al., 2009, p. 43).
Moreover, as noted in Chapter 2, the illicit trade in tobacco can be affected by changes in law enforcement against other crimes, such as intellectual property theft and drug crimes. Although enforcement efforts may effectively reduce the size of the illicit tobacco market, the market may adapt and reemerge in the absence of interventions that are comprehensive and coordinated. Enforcement activities also have to be flexible and responsive, both to focus on the aspects of the trade that present the greatest problems and to those that are capable of being counteracted. In addition, flexible enforcement can allow enforcement that takes advantage of the instability that faces illegal participants, intervening before participants firmly establish new markets or reorganize business enterprises.
The second challenge is coordination, which is also generally problematic for enforcement against other crimes crossing state lines, such as drug trafficking and intellectual property theft. Many agencies and people are involved in enforcing tobacco laws, taxes, and regulations, creating immense coordination challenges for effective intervention in the illicit tobacco trade. Local, state, federal, and international agencies play overlapping roles in regulating, taxing, and enforcing laws on cigarette production and sales, with different levels of government having distinct interests in enforcement. Different levels of government also have different enforcement strengths: local agencies have the most access to information about retailers, state agencies may have the most familiarity with transport routes and methods, and the federal government has the greatest resources and range of enforcement powers. At the same time, the benefits of enforcement are different in different states, and the fact that, for example, Virginia has a negative incentive to enforce New York excise taxes gives rise to an important problem of coordinated action.
Even in a single jurisdiction, cigarette regulation operates across a range of government agencies and programs. At the federal level alone (as detailed
above), ICE and CBP in the U.S. Department of Homeland Security, ATF in the U.S. Department of Justice, and TTB in the U.S. Department of the Treasury have varying incentives, tools, and resources to attack the illicit tobacco trade. At the state and local levels, health and tax agencies, among others, are also involved. Internationally, there are both many countries and international bodies involved.
States appear to have good reason to enforce their own tax schemes. For example, because tax disparities provide incentives for cigarette trafficking, destination states for illicit cigarettes have a strong economic incentive to uncover and prevent the trade in order to collect the taxes they are owed. In an era of shrinking budgets, the illicit tobacco trade has grown increasingly costly to states and municipalities that are looking for sources of revenues. As discussed above, even source states, like Virginia, have reason to make some efforts to discourage cigarette smuggling. Nevertheless, cigarette smuggling is a multijurisdictional activity, and state efforts to enforce their own tax laws are weakened by the difficulties of coordinating efforts across state lines.
The state-level situation suggests at least two key roles for federal action. First, the federal government could promote multijurisdictional coordination to enforce federal and state cigarette laws in ways analogous to its efforts with respect to other interstate crimes, including gun crimes, drug trafficking, human trafficking, intellectual property crime, and terrorism prevention and response. Second, given the diversity of federal, state, and local interests in discouraging cigarette smuggling and smoking, the federal government could facilitate and subsidize collaboration among various government agencies and other anti-smoking stakeholders to work together to address tobacco smuggling. The federal government has similarly promoted collaborative reform with private stakeholders in other contexts with similar obstacles, such as police misconduct and domestic violence.
The third challenge is that the illicit tobacco trade has often been a low enforcement priority for governments. For traditional local law enforcement, tobacco looks like an economic rather than a criminal problem, especially while the trade remains nonviolent, and without training or an easily observable tax stamp or track-and-trace marker, the illicit trade may be hard to detect. Law enforcement efforts attempting to detect and investigate the illicit trade tend to be weak and uneven, and (as discussed above) even when inspections are increased, the number of packs seized fluctuates around very low levels. Moreover, criminal prosecutions of those involved in the illicit tobacco trade are an especially low priority for prosecutors. To the extent that existing enforcement is motivated primarily by financial concerns at both the federal and state levels, there seems to be little incentive for aggressive criminal and nontax investment in enforcement. For states, tax enforcement requires investments that can be difficult to make in
hard economic times, despite their payoffs; in low-tax states, interest in tax enforcement tends to be weak and is usually to the responsibility of noncriminal agencies. For border and customs agents and state patrol officers, tobacco represents less of a problem than drug, gun, or human trafficking.
At all levels of government, the illicit trade in tobacco—which is only weakly opposed by social norms and is subject to rather weak legal remedies—competes with other significant social problems. Diversion is made possible by multiple easy, low-tax sources of cigarettes, and although enforcement can influence diversion—for example, by shifting it from Internet sales to interstate smuggling or from Native American reservations in New York State to bootlegging from Virginia (as discussed in Chapter 2)—diversion is likely to continue as long as there are low-risk alternatives that are relatively easy to access.
Nevertheless, the examples of Canada, the European Union, Spain, and the United Kingdom (see Chapter 7) demonstrate that collaboration across and within jurisdictions, as well the dedication of tobacco-specific enforcement resources, can help to combat the illicit trade, but enforcement efforts need to be able to adapt as the illicit market changes.
Enforcement against the illicit tobacco trade faces familiar problems: the dynamic and adaptive nature of the illicit tobacco markets; the need to coordinate across various agencies, participants, and levels of government; and the fact that the illicit tobacco trade has often been a low enforcement priority for the federal, state, and local governments, particularly when it comes to prosecution. The reasons for this are clear: the illicit tobacco trade tends to be seen almost exclusively as a revenue issue, and prosecutors and most investigative agencies give priority to violent crime and terrorism.
Given this lack of attention, it is not surprising that the data on seizures and penalties levied are sparse, even in jurisdictions such as New York City, which has incentives for enhanced enforcement. Although the paucity of publicly available data makes it difficult to estimate the risks faced by cigarette smugglers, the available evidence strongly suggests that the risk of detection is slight.
RECOMMENDATION 6-1 Because an appropriately scaled and well-targeted enforcement effort against the illicit tobacco trade requires systematic data on the array of current efforts, the U.S. federal government should assemble and publish a periodic report on indicators of the extent of bootlegging, international smuggling, and illicit production, together with indicators of enforcement activities by the relevant fed-
eral agencies. The federal government should also consider developing a voluntary reporting system by state and local governments.
RECOMMENDATION 6-2 Systematic evaluations should be conducted of existing and future enforcement interventions in the illicit tobacco trade in the United States. State- and local-level efforts, such as the tobacco task force led by the New York City Sheriff’s Office, should be evaluated by independent researchers.