Steve Dickey, ATF Special AgentJeff Cohen ATF Associate

Chief Counsel

Steve Dickey ATF Special Steve Dickey ATF Special AgentAgent

Jeff Cohen ATF Associate Jeff Cohen ATF Associate Chief Counsel Chief Counsel

ILLICIT CIGARETTE ILLICIT CIGARETTE TRAFFICKINGTRAFFICKING

Cigarette Cigarette DiversionDiversion

ATF Enforces the Federal ATF Enforces the Federal Criminal Laws Involving Criminal Laws Involving

Illegal Cigarette Trafficking Illegal Cigarette Trafficking Including The Contraband Including The Contraband Cigarette Trafficking Act Cigarette Trafficking Act

(CCTA)(CCTA)

The primary goal of a cigarette diversion scheme is to profit by evading State or Federal cigarette taxes. Criminals worldwide deprive Governments of 50 Billion Dollars a year through cigarette diversion.

Cigarette diversion has been used to finance terrorist activities and organized criminal organizations. Cigarette smugglers have been implicated as Money Launderers for drug cartels.

Cigarette diversion defeats Government Health Initiatives

Cigarette DiversionCigarette Diversion

Criminal Elements Criminal Elements InvolvedInvolved• Latino/Italian Organized Crime (FL, Latino/Italian Organized Crime (FL,

NY, CA, NV, IL)NY, CA, NV, IL)

• Eastern European Organized Crime Eastern European Organized Crime (CA, WA, MD, VA, FL)(CA, WA, MD, VA, FL)

• Middle Eastern Organized Crime (IL, Middle Eastern Organized Crime (IL, MI, MN, WI, CA, NV, FL, NY)MI, MN, WI, CA, NV, FL, NY)

• Asian Organized Crime (TX, CA, OR, Asian Organized Crime (TX, CA, OR, WA, FL, MI, IL, NY/NJ)WA, FL, MI, IL, NY/NJ)

• Mexican Organized Crime [Drug Mexican Organized Crime [Drug Cartels] (TX, KY, CA, FL, NY, NJ)Cartels] (TX, KY, CA, FL, NY, NJ)

Types of DiversionTypes of Diversion•Diversion across state lines from low tax Diversion across state lines from low tax states to high tax states. State taxes on states to high tax states. State taxes on cigarettes range from 7 cigarettes range from 7 ¢ in South Carolina to ¢ in South Carolina to $4.25 in New York City.$4.25 in New York City.

•Cigarettes are smuggled between countries. Cigarettes are smuggled between countries.

•Untaxed Internet sales deprive state Untaxed Internet sales deprive state governments of millions of dollars.governments of millions of dollars.

•Counterfeit cigarettes are produced in Asia Counterfeit cigarettes are produced in Asia and Eastern Europe and smuggled into the and Eastern Europe and smuggled into the U.S. and other countries.U.S. and other countries.

•Untaxed cigarette sales on Indian Untaxed cigarette sales on Indian reservations.reservations.

•MSA Payment Fraud MSA Payment Fraud

Types of Diversion

• Truck Hijacking

Worldwide Cigarette Worldwide Cigarette ActivityActivity

Countries withsmuggling problems

Countries with nosmuggling problems

Countries used for Transit routes

Countries withoutSufficient data recorded

Cigarette Tax Cigarette Tax Variance in the U.S.Variance in the U.S.

NYC, NY, NJ & WA NYC, NY, NJ & WA are High Tax are High Tax StatesStates

SC, KY & VA are SC, KY & VA are Low Tax StatesLow Tax States

Traffickers can Traffickers can Earn $4.18 per Earn $4.18 per Pack of Pack of Cigarettes by Cigarettes by Diverting them Diverting them from SC to NYCfrom SC to NYC

Miami and Port Miami and Port Everglades FTZsEverglades FTZs

El Paso FTZEl Paso FTZ

Laredo FTZLaredo FTZ

Los AngelesLos Angeles

NY & NJ NY & NJ

DetroitDetroit

San FranciscoSan Francisco

ChicagoChicago

SeattleSeattle

Primary U.S. Entry Primary U.S. Entry PointsPoints

Commodity # of Incidents Port of Lading

Plastic Products, Boxes, shoes, Artificial Flowers, furniture, etc.

9 Other, China

Toys 2 China

Cotton T-Shirts 1

Footwear 3 China

Furniture 1 Other, China

Chinaware 1 Other, China

Computer Cases 2 Hong Kong

Computer Cable 2 Hong Kong

Table Lamps 1 Hong Kong

US Customs Long Bch-Seizures of Counterfeit US Customs Long Bch-Seizures of Counterfeit CigarettesCigarettes

Declared As Other Commodities Declared As Other Commodities

August 18August 18thth, 2001- November 9, 2001- November 9thth 2002 2002

Note: (11) of the (22) incidents came from Shanghai, China Port of Lading

Source: U.S. Customs

Cigarette PackagingCigarette Packaging

One Pack = 20 cigarettesOne Pack = 20 cigarettes

One Carton = 10 packs = 200 cigarettesOne Carton = 10 packs = 200 cigarettes

One Case = 60 cartons = 600 packs = 12,000 One Case = 60 cartons = 600 packs = 12,000 cigscigs

CCTA Jurisdiction = 10,001 cigarettes = .8 CCTA Jurisdiction = 10,001 cigarettes = .8 case and 1 cigarettecase and 1 cigarette

Year End 2003

TobaccoTobaccoStoresStores14.9%14.9%

Convenience StoreConvenience Store57.0%57.0%

BalanceBalance13.9%13.9%

Native AmericanNative American2.6%2.6%

SupermarketSupermarket11.6%11.6%

Source: IRI/Capstone Retail Panel

Where Cigarettes are Where Cigarettes are SoldSold

Criminal Schemes Criminal Schemes Involving Counterfeit Tax Involving Counterfeit Tax

StampsStamps• Counterfeit tax stamps are brought into the U.S. for use by Organized Criminal Groups and groups possibly tied to Terrorist Organizations.

•The Stamps are distributed throughout areas of California, New York, Massachusetts, New Jersey, Michigan, Illinois, Oregon, Texas and Florida.

•The Stamps are then attached to contraband cigarettes purchased in low tax states with no tax stamps.

•They are also attached to counterfeit cigarettes smuggled into the U.S. as well as diverted “for export” cigarettes.

State Tax StampsState Tax Stamps

Counterfeit California Counterfeit California Tax IndiciaTax Indicia

Counterfeit Counterfeit California Tax California Tax Stamp, which was Stamp, which was already attached to already attached to cigarettes, seized cigarettes, seized in Vancouver, in Vancouver, Canada, on April 5, Canada, on April 5, 2001.2001.

Counterfeit New Jersey Counterfeit New Jersey Tax IndiciaTax Indicia

Counterfeit Counterfeit NJ Tax Indicia NJ Tax Indicia intercepted intercepted at the border at the border crossing crossing point in point in Laredo, TX.Laredo, TX.

Cigarette StatutesCigarette Statutes• 18 U.S.C. 18 U.S.C. § 2342§ 2342 – Contraband Cigarette – Contraband Cigarette Trafficking ActTrafficking Act makes possession of more than makes possession of more than 10,000 unstamped cigarettes in a State which 10,000 unstamped cigarettes in a State which requires a tax stamp a felony. Possession of requires a tax stamp a felony. Possession of more than 500 units of other tobacco products more than 500 units of other tobacco products in violation of State lawin violation of State law

• 18 U.S.C. § 2343 – If you distribute more than 18 U.S.C. § 2343 – If you distribute more than 10,000 cigarettes than you must keep accurate 10,000 cigarettes than you must keep accurate records pertaining to the shipment, receipt, records pertaining to the shipment, receipt, sale and distribution of cigarettes – 3 yr felonysale and distribution of cigarettes – 3 yr felony

• 18 U.S.C. § § 2314/2315 – Transportation & 18 U.S.C. § § 2314/2315 – Transportation & receipt of fraudulent state tax stamps is a receipt of fraudulent state tax stamps is a felonyfelony

Cigarette StatutesCigarette Statutes•18 U.S.C. § 2320 – Trafficking of 18 U.S.C. § 2320 – Trafficking of counterfeit cigarettes is a felony.counterfeit cigarettes is a felony.

•15 U.S.C. § 375 – Jenkins Act makes it 15 U.S.C. § 375 – Jenkins Act makes it illegal to ship cigarettes to a non-licensee illegal to ship cigarettes to a non-licensee in a State without notifying the State in a State without notifying the State taxation authority.taxation authority.

• The I.R.C. imposes a 39¢ per pack The I.R.C. imposes a 39¢ per pack Federal tax and requires a permit for Federal tax and requires a permit for manufacturers and importers.manufacturers and importers.

• 26 U.S.C. § 5762 – failure to pay to the 26 U.S.C. § 5762 – failure to pay to the tax/illegal manufacture or importation of tax/illegal manufacture or importation of cigarettes.cigarettes.

Mail & Wire FraudMail & Wire Fraud18 U.S.C. 18 U.S.C. §§ 1341 & 1343§§ 1341 & 1343

• Purpose: To prevent the instrumentalities Purpose: To prevent the instrumentalities of interstate commerce be used to facilitate of interstate commerce be used to facilitate criminal activities.criminal activities.

•Unlawful to use U.S. mail, wire, radio or Unlawful to use U.S. mail, wire, radio or T.V. in interstate commerce for the purpose T.V. in interstate commerce for the purpose of executing a scheme to defraud, including of executing a scheme to defraud, including schemes to defraud the government of tax schemes to defraud the government of tax revenue.revenue.

•Scheme need not be successful.Scheme need not be successful.

•Penalty: Up to 5 years imprisonment & Penalty: Up to 5 years imprisonment & fines.fines.

Mail & Wire Fraud Mail & Wire Fraud ExamplesExamples• In a scheme to transport cigarettes from NC

to NY, phone calls made to a bank serve as the basis of wire fraud charge.

•Wire fraud statute used to seize untaxed cigarettes offered for sale over the Internet.

•Wire fraud statute used by ATF in scheme to defraud Canada of cigarette taxes during the 1990s when Canada raised taxes to discourage smoking and finance health care.

•Mail fraud statute used to prosecute individuals who distributed untaxed cigarettes through the mails.

Currency Reporting Currency Reporting ActAct• Currency transaction reports must be filed Currency transaction reports must be filed

with the I.R.S. by businesses for currency with the I.R.S. by businesses for currency transactions over $10,000.transactions over $10,000.

• To avoid government scrutiny, criminals in To avoid government scrutiny, criminals in cigarette diversion cases often structure cigarette diversion cases often structure transactions to avoid the $10,000 level.transactions to avoid the $10,000 level.

• Structuring is unlawful.Structuring is unlawful.

• Note that pursuant to Note that pursuant to Ratzlaf v. United Ratzlaf v. United StatesStates, 510 U.S. 135 (1994), the government, , 510 U.S. 135 (1994), the government, in a structuring case, must prove that the in a structuring case, must prove that the defendant knew the specific legal defendant knew the specific legal requirements of structuring statute.requirements of structuring statute.

Money LaunderingMoney Laundering• General purpose is to penalize the use of General purpose is to penalize the use of proceeds from one crime to facilitate another proceeds from one crime to facilitate another crime.crime.

• 18 U.S.C. 18 U.S.C. § 1956 makes it unlawful to conduct or § 1956 makes it unlawful to conduct or attempt to conduct a financial transaction which attempt to conduct a financial transaction which involves the proceeds of a Specified Unlawful involves the proceeds of a Specified Unlawful Activity (CCTA, mail/wire fraud), with the intent to:Activity (CCTA, mail/wire fraud), with the intent to:• promote the carrying on of a SUA, orpromote the carrying on of a SUA, or• to violate the IRC (tax evasion), orto violate the IRC (tax evasion), or• to conceal or disguise the nature, source, or to conceal or disguise the nature, source, or ownership or control of the proceeds of a SUA, orownership or control of the proceeds of a SUA, or• to avoid a Federal/State transaction reporting to avoid a Federal/State transaction reporting requirement.requirement.

ExampleExample: CCTA trafficker uses proceeds of CCTA : CCTA trafficker uses proceeds of CCTA violation to promote business by purchasing more violation to promote business by purchasing more cigarettes.cigarettes.

Simple Money Simple Money LaunderingLaundering• Engaging in monetary transactions in Engaging in monetary transactions in

property derived from a specified unlawful property derived from a specified unlawful activity.activity.

• 18 U.S.C. 18 U.S.C. § 1957(a) makes it unlawful to § 1957(a) makes it unlawful to engage in a monetary transaction with engage in a monetary transaction with criminally derived property over $10,000.criminally derived property over $10,000.

• There is no willfulness or intent There is no willfulness or intent requirement.requirement.ExamplesExamples:: Wire transfer of funds that are Wire transfer of funds that are the the proceeds of a CCTA proceeds of a CCTA scheme.scheme.

CCTA trafficker deposits $10,001 CCTA trafficker deposits $10,001 of of proceeds in the bank.proceeds in the bank.

Racketeering Influenced & Racketeering Influenced & Corrupt Organizations (RICO)Corrupt Organizations (RICO)

• Unlawful for a person who received income through a Unlawful for a person who received income through a pattern of racketeering activity or an unlawful debt pattern of racketeering activity or an unlawful debt collection to:collection to:- use or invest the money towards any enterprise that affects use or invest the money towards any enterprise that affects

interstate commerce (aimed at mob infiltration of legitimate interstate commerce (aimed at mob infiltration of legitimate business).business).• Unlawful for a person to be employed or associated Unlawful for a person to be employed or associated

with an enterprise which affects interstate commerce with an enterprise which affects interstate commerce and to conduct a pattern of racketeering activity.and to conduct a pattern of racketeering activity.

• Unlawful to conspire in such activities.Unlawful to conspire in such activities.

• Previously identified Federal crimes are a racketeering Previously identified Federal crimes are a racketeering activity.activity.

• Used in cases where criminal organizations are Used in cases where criminal organizations are engaged in large scale trafficking.engaged in large scale trafficking.

NoteNote that a pattern of activities is 2 or more unlawful that a pattern of activities is 2 or more unlawful activities w/in 10 years, although AUSAs may require activities w/in 10 years, although AUSAs may require more.more.

Aiding & AbettingAiding & Abetting

Whoever aids in the commission of Whoever aids in the commission of a crime can be punished as the a crime can be punished as the principal.principal.

This may include parties that This may include parties that knowingly supply traffickers.knowingly supply traffickers.

ConspiracyConspiracy

Conspiracy requires:Conspiracy requires:

• Intent to commit the crimeIntent to commit the crime

• An act in furtherance of the crimeAn act in furtherance of the crime

• Crime need not succeedCrime need not succeed

NATIVE AMERICAN ISSUES

• Under Washington v. Confederated Tribes of Colville Indians, 447 US 134 (1980, Native Americans can possess and distribute untaxed cigarettes for tribal members personal consumption on the reservation.

• Natives Americans can also regulate and tax sales on the Reservation.

• All other Native sales are subject to State tax

Native American Issues

• Under S. Ct Attea case, States can regulate sales to reservation.

• CCTA is a statute of general applicability and applies to Native Americans.

• ATF believes that Jenkins Act applies to Native Americans

• With exception of Yakima Indians Right to travel Treaty, generally, treaties have not been defense to criminal violations by Native Americans.

Native American Issues

• Illegal manufacturing/Smuggling on St. Regis Reservation. Canada losing billion dollars in taxes

Seizure & Forfeiture Seizure & Forfeiture IssuesIssues

• For most violations involving For most violations involving smuggling/diversion, the conveyance used and smuggling/diversion, the conveyance used and profits gained are subject to seizure & profits gained are subject to seizure & forfeiture.forfeiture.

• Conveyances and proceeds may be seized Conveyances and proceeds may be seized either civilly or criminally.either civilly or criminally.

• In certain instances, U.S. can sell cigarettes In certain instances, U.S. can sell cigarettes seized or confiscate proceeds associated with seized or confiscate proceeds associated with illegal cigarette trafficking and share the illegal cigarette trafficking and share the proceeds with participating State, local or proceeds with participating State, local or foreign law enforcement agencies. foreign law enforcement agencies.

Civil ForfeitureCivil Forfeiture• Divests property without prosecuting a Divests property without prosecuting a defendant.defendant.

• CAFRA applies – it requires that ATF notify the CAFRA applies – it requires that ATF notify the person from whom property was seized within 60 person from whom property was seized within 60 days and to then bring to court within 90 days of days and to then bring to court within 90 days of claim.claim.

• Two Types of Civil ForfeitureTwo Types of Civil Forfeiture::

• Administrative – used for property valued at Administrative – used for property valued at less than $500k and where ATF has primary less than $500k and where ATF has primary jurisdiction.jurisdiction.

• Judicial – used for property valued at more Judicial – used for property valued at more than $500k or where ATF has ancillary than $500k or where ATF has ancillary jurisdiction. jurisdiction.

• ATF Special Agent may be affiant in ATF Special Agent may be affiant in warrant.warrant.

• Assets are deposited in Forfeiture fund.Assets are deposited in Forfeiture fund.

Criminal ForfeitureCriminal ForfeitureProvides for a forfeiture count in Provides for a forfeiture count in indictments of persons charged with indictments of persons charged with crimes.crimes.

Case ExamplesCase Examples

Otamedia/Yes Smoke Case

• Largest ATF Seizure /Foreign Internet Sales

Indian Cigarette SalesIndian Cigarette Sales

Cigarettes & TerrorismCigarettes & TerrorismMohamad HammoudMohamad Hammoud

Immigration FraudImmigration Fraud GuiltyGuilty

Immigration Fraud/False StatementsImmigration Fraud/False Statements GuiltyGuilty

Conspiracy to Smuggle CigarettesConspiracy to Smuggle CigarettesGuiltyGuilty

Cigarette SmugglingCigarette Smuggling GuiltyGuilty

Conspiracy to Money LaunderConspiracy to Money Launder GuiltyGuilty

Conspiracy to Commit Credit Card FraudConspiracy to Commit Credit Card FraudGuiltyGuilty

Credit Card FraudCredit Card FraudGuiltyGuilty

RacketeeringRacketeering GuiltyGuilty

Conspiracy to Support HezbollahConspiracy to Support HezbollahGuiltyGuilty

Providing Support to HezbollahProviding Support to Hezbollah GuiltyGuilty

Chawki HammoudChawki Hammoud

Conspiracy to Smuggle CigarettesConspiracy to Smuggle CigarettesGuiltyGuilty

Cigarette SmugglingCigarette Smuggling GuiltyGuilty

Conspiracy to Money LaunderConspiracy to Money Launder GuiltyGuilty

Credit Card FraudCredit Card FraudGuiltyGuilty

RacketeeringRacketeering GuiltyGuilty

SummarySummary

• ATF is committed to assisting State & ATF is committed to assisting State & foreign governments in fighting cigarette foreign governments in fighting cigarette diversion and to preventing cigarette diversion and to preventing cigarette diversion proceeds from being used as a diversion proceeds from being used as a source of terrorist and organized criminal source of terrorist and organized criminal activities.activities.

• ATF is also committed to working with the ATF is also committed to working with the business community to eliminate tax evasion business community to eliminate tax evasion and counterfeiting associated with cigarette and counterfeiting associated with cigarette diversion.diversion.