Steve Dickey, ATF Special Agent

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Steve Dickey, ATF Special Agent Jeff Cohen ATF
Associate Chief Counsel
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ILLICIT CIGARETTE TRAFFICKING
Steve Dickey ATF Special Agent Jeff Cohen ATF
Associate Chief Counsel
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Cigarette Diversion
ATF Enforces the Federal Criminal Laws Involving
Illegal Cigarette Trafficking Including The
Contraband Cigarette Trafficking Act (CCTA)
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Cigarette Diversion
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
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Criminal Elements Involved

• Latino/Italian Organized Crime (FL, NY, CA, NV,
  IL)
• Eastern European Organized Crime (CA, WA, MD,
  VA, FL)
• Middle Eastern Organized Crime (IL, MI, MN, WI,
  CA, NV, FL, NY)
• Asian Organized Crime (TX, CA, OR, WA, FL, MI,
  IL, NY/NJ)
• Mexican Organized Crime Drug Cartels (TX, KY,
  CA, FL, NY, NJ)

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Types of Diversion

• Diversion across state lines from low tax states
  to high tax states. State taxes on cigarettes
  range from 7 in South Carolina to 4.25 in New
  York City.
• Cigarettes are smuggled between countries.
• Untaxed Internet sales deprive state governments
  of millions of dollars.
• Counterfeit cigarettes are produced in Asia and
  Eastern Europe and smuggled into the U.S. and
  other countries.
• Untaxed cigarette sales on Indian reservations.
• MSA Payment Fraud

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Types of Diversion

• Truck Hijacking

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Worldwide Cigarette Activity
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Cigarette Tax Variance in the U.S.
NYC, NY, NJ WA are High Tax States
SC, KY VA are Low Tax States
Traffickers can Earn 4.18 per Pack of Cigarettes
by Diverting them from SC to NYC
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Primary U.S. Entry Points
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US Customs Long Bch-Seizures of Counterfeit
Cigarettes Declared As Other Commodities August
18th, 2001- November 9th 2002
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
Note (11) of the (22) incidents came from
Shanghai, China Port of Lading
Source U.S. Customs
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Cigarette Packaging
One Pack 20 cigarettes One Carton 10 packs
200 cigarettes One Case 60 cartons 600 packs
12,000 cigs CCTA Jurisdiction 10,001
cigarettes .8 case and 1 cigarette
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Where Cigarettes are Sold
Year End 2003
Native American
2.6
Supermarket
Tobacco Stores
11.6
14.9
Balance
13.9
Convenience Store
57.0
Source IRI/Capstone Retail Panel
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Criminal Schemes Involving Counterfeit Tax Stamps

• 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.

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State Tax Stamps
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Counterfeit California Tax Indicia
Counterfeit California Tax Stamp, which was
already attached to cigarettes, seized in
Vancouver, Canada, on April 5, 2001.
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Counterfeit New Jersey Tax Indicia
Counterfeit NJ Tax Indicia intercepted at the
border crossing point in Laredo, TX.
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Cigarette Statutes

• 18 U.S.C. 2342 Contraband Cigarette
  Trafficking Act makes possession of more than
  10,000 unstamped cigarettes in a State which
  requires a tax stamp a felony. Possession of more
  than 500 units of other tobacco products in
  violation of State law
• 18 U.S.C. 2343 If you distribute more than
  10,000 cigarettes than you must keep accurate
  records pertaining to the shipment, receipt, sale
  and distribution of cigarettes 3 yr felony
• 18 U.S.C. 2314/2315 Transportation
  receipt of fraudulent state tax stamps is a felony

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Cigarette Statutes

• 18 U.S.C. 2320 Trafficking of counterfeit
  cigarettes is a felony.
• 15 U.S.C. 375 Jenkins Act makes it illegal to
  ship cigarettes to a non-licensee in a State
  without notifying the State taxation authority.
• The I.R.C. imposes a 39 per pack Federal tax
  and requires a permit for manufacturers and
  importers.
• 26 U.S.C. 5762 failure to pay to the
  tax/illegal manufacture or importation of
  cigarettes.

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Mail Wire Fraud
18 U.S.C. 1341 1343

• Purpose To prevent the instrumentalities of
  interstate commerce be used to facilitate
  criminal activities.
• Unlawful to use U.S. mail, wire, radio or T.V. in
  interstate commerce for the purpose of executing
  a scheme to defraud, including schemes to defraud
  the government of tax revenue.
• Scheme need not be successful.
• Penalty Up to 5 years imprisonment fines.

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Mail Wire Fraud Examples

• 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.

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Currency Reporting Act

• Currency transaction reports must be filed with
  the I.R.S. by businesses for currency
  transactions over 10,000.
• To avoid government scrutiny, criminals in
  cigarette diversion cases often structure
  transactions to avoid the 10,000 level.
• Structuring is unlawful.
• Note that pursuant to Ratzlaf v. United States,
  510 U.S. 135 (1994), the government, in a
  structuring case, must prove that the defendant
  knew the specific legal requirements of
  structuring statute.

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Money Laundering

• General purpose is to penalize the use of
  proceeds from one crime to facilitate another
  crime.
• 18 U.S.C. 1956 makes it unlawful to conduct or
  attempt to conduct a financial transaction which
  involves the proceeds of a Specified Unlawful
  Activity (CCTA, mail/wire fraud), with the intent
  to

• promote the carrying on of a SUA, or
• to violate the IRC (tax evasion), or
• to conceal or disguise the nature, source, or
  ownership or control of the proceeds of a SUA, or
• to avoid a Federal/State transaction reporting
  requirement.

Example CCTA trafficker uses proceeds of CCTA
violation to promote business by purchasing more
cigarettes.
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Simple Money Laundering

• Engaging in monetary transactions in property
  derived from a specified unlawful activity.
• 18 U.S.C. 1957(a) makes it unlawful to engage
  in a monetary transaction with criminally derived
  property over 10,000.
• There is no willfulness or intent requirement.

Examples Wire transfer of funds that are the
proceeds of a CCTA scheme. CCTA trafficker
deposits 10,001 of proceeds in the bank.
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Racketeering Influenced Corrupt Organizations
(RICO)

• Unlawful for a person who received income
  through a pattern of racketeering activity or an
  unlawful debt collection to

• use or invest the money towards any enterprise
  that affects interstate commerce (aimed at mob
  infiltration of legitimate business).

• Unlawful for a person to be employed or
  associated with an enterprise which affects
  interstate commerce and to conduct a pattern of
  racketeering activity.
• Unlawful to conspire in such activities.
• Previously identified Federal crimes are a
  racketeering activity.
• Used in cases where criminal organizations are
  engaged in large scale trafficking.
• Note that a pattern of activities is 2 or more
  unlawful activities w/in 10 years, although AUSAs
  may require more.

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Aiding Abetting
Whoever aids in the commission of a crime can be
punished as the principal. This may include
parties that knowingly supply traffickers.
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Conspiracy

• Conspiracy requires
• Intent to commit the crime
• An act in furtherance of the crime
• Crime need not succeed

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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

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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.

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Native American Issues

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

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Seizure Forfeiture Issues

• For most violations involving smuggling/diversion
  , the conveyance used and profits gained are
  subject to seizure forfeiture.
• Conveyances and proceeds may be seized either
  civilly or criminally.
• In certain instances, U.S. can sell cigarettes
  seized or confiscate proceeds associated with
  illegal cigarette trafficking and share the
  proceeds with participating State, local or
  foreign law enforcement agencies.

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Civil Forfeiture

• Divests property without prosecuting a
  defendant.
• CAFRA applies it requires that ATF notify the
  person from whom property was seized within 60
  days and to then bring to court within 90 days of
  claim.
• Two Types of Civil Forfeiture
• Administrative used for property valued at
  less than 500k and where ATF has primary
  jurisdiction.
• Judicial used for property valued at more than
  500k or where ATF has ancillary jurisdiction.
• ATF Special Agent may be affiant in warrant.
• Assets are deposited in Forfeiture fund.

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Criminal Forfeiture
Provides for a forfeiture count in indictments of
persons charged with crimes.
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Case Examples
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Otamedia/Yes Smoke Case

• Largest ATF Seizure /Foreign Internet Sales

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Indian Cigarette Sales
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Cigarettes Terrorism
Mohamad Hammoud Immigration Fraud Guilty Immigr
ation Fraud/False Statements Guilty Conspiracy
to Smuggle Cigarettes Guilty Cigarette
Smuggling Guilty Conspiracy to Money
Launder Guilty Conspiracy to Commit Credit Card
Fraud Guilty Credit Card Fraud Guilty Rackete
ering Guilty Conspiracy to Support
Hezbollah Guilty Providing Support to
Hezbollah Guilty Chawki Hammoud Conspiracy to
Smuggle Cigarettes Guilty Cigarette
Smuggling Guilty Conspiracy to Money
Launder Guilty Credit Card Fraud Guilty Rack
eteering Guilty
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Summary

• ATF is committed to assisting State foreign
  governments in fighting cigarette diversion and
  to preventing cigarette diversion proceeds from
  being used as a source of terrorist and organized
  criminal activities.
• ATF is also committed to working with the
  business community to eliminate tax evasion and
  counterfeiting associated with cigarette
  diversion.