Tobacco: Crime’s new currency

Thomas Lesnak Former ATF Agent
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It may shock you to know that smuggled cigarettes command the same net profit as heroin, and that in dozens of recent government investigations, crooks traded everything from guns, drugs, counterfeit pharmaceuticals and stolen vehicles — including Lamborghinis — for cigarettes. Cigarette trafficking in America has reached epidemic levels, because even in limited quantities cigarettes are worth more than narcotics, and carry less risk of prosecution or meeting a violent death. Most shocking of all, it is our well-intended tobacco control policies that created — and continue to fuel — this vast criminal industry.

I write as a recently retired member of the U.S. Department of Justice, Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF). As a Senior Special Agent, I have over 25 years of worldwide investigative experience. Many of the investigations in which I participated involved looking into the smuggling of contraband, including narcotics, tobacco, money, and counterfeit goods, as well as illegal production and distribution of tobacco products and the financing of criminal organizations and corrupt governments. Not surprisingly, these are all related.

$10 billion. That is the widely accepted figure our government estimates is lost each year from tobacco trafficking schemes. With few federal resources dedicated to stop this fraud, the U.S. taxpayer continues to foot the bill. The money that should be going into state coffers via taxes is instead going to criminals, some with ties to terrorists, drug cartels, and violent street gangs.

Current law enforcement resources are woefully insufficient to handle the problem, and we are experiencing an exponential increase in tobacco-related criminal activity. Within the law enforcement community the culprit is obvious, and it’s not the criminals. It’s well-intentioned, but ill-advised public policy. No better example exists than New York City, where the most stringent tobacco controls in the nation are being considered with an eye toward further tightening.

To ignore the correlation between current tobacco policy trends – aggressive tax increases, minimum price regulations, display bans – and increased crime is to ignore the obvious. Policy makers are fooling themselves. They aren’t fooling those in law enforcement.

Investigations into unlicensed manufacturers and cigarette-diverters have documented time and again that bad guys celebrate tax increases; they don’t pay the taxes now, and each tax hike means the obscene profit margin they already enjoy over legitimate manufacturers and retailers just increases by a commensurate amount.

When politicians say that increasing taxes lowers smoking rates, what they aren’t saying is that higher costs have driven a large percentage of the market – disproportionately youth smokers – to illicit cigarettes. Millions of New Yorkers now reside within a short walk or a cab-ride from smoke shops that sell 200 cigarettes in plain plastic bags for $10. Referred to as “rollies” or “baggies,” they feature no health warnings, and produce no tax revenue.

The law of diminishing returns applies to prohibitive tobacco rules and regulations – a specific point at which the unintended consequences far outweigh any incremental gains one may achieve by simply piling on new regulations. New York City has now reached that point; tobacco taxes and minimum price laws fuel crime, rather than curb smoking.

Today, it is estimated that 60 percent of the cigarettes sold in New York City are illicit. Most of these cigarettes are smuggled in from low-tax states like Virginia, North Carolina and Maryland.

This means that we’re criminalizing tobacco smokers, small and family retailers, and our youth, who are now forced into buying illicit products. If these sound reminiscent of the failures of prohibition, it’s because these are the same problems we faced early in the last century as a result of those similarly veined, well-intended policies. We know exactly how that experiment turned out. And yet, politicians continue to ignore those lessons.

Today, the I-95 corridor is an enormous eight-lane pipeline flowing virtually unimpeded with cheap illicit cigarettes, the currency of the criminal underworld. Supplying that pipeline are – in most cases – well-organized smuggling operations.

At up to $4 million profit per truck, it is a lucrative business with minimal risk, especially as compared to drugs and guns; in almost all cases, the seizure of illicit tobacco results only in a loss of contraband and a minimal fine. For the veteran smuggler, this is simply the (low) cost of doing business.

These illegal operations need to be exposed and shutdown. Penalties need to be increased. The message has to be: “if you’re caught, you’re going to jail.”

The passage of the Prevent All Cigarette Trafficking (PACT) Act in 2009 was a step in the right direction. It expanded the enforcement powers of state and local governments. And, while it has achieved small pockets of success, PACT needs to be much more aggressively applied and implemented. Interstate and state-to-local government enforcement agencies need better cooperation and coordination.

The federal and state agencies that actively investigate tobacco crimes such as ATF, Food and Drug Administration (FDA), Tax and Trade Bureau (TTB) and Customs need the resources to do their jobs. They also need a clear mandate from their leadership that targeting these criminal organizations is a priority.

If our aim is to curb smoking and deter crime, we must embrace a policy of stiffer penalties, well-funded enforcement, and stronger cooperation among agencies, as well as state and local governments. And we need to acknowledge the failures – nearly a hundred years after prohibition – of higher taxes, minimum pricing and display bans.

Thomas Lesnak is a former Special Agent at the Bureau of Alcohol, Tobacco, and Firearms.