Police aim to smoke out illicit trade
Posted: January 19, 2013
The Winchester Star
Smuggling cigarettes from Virginia to New York has a higher profit margin on the black market than cocaine, heroin, marijuana or firearms.
A pack of cigarettes that costs $4.50 in Winchester sells for $13 in New York City because of the difference in tax rates.
Cigarette traffickers purchase cigarettes in Virginia and sell them in higher-tax states such as New York for a hefty profit.
But cigarette trafficking doesn’t just rob higher-tax states of millions in tax revenue, law enforcement experts say.
According to the Virginia State Crime Commission (VSCC), the tens of millions of dollars made each year through cigarette smuggling often goes to fund organized crime or terrorist organizations.
The profit on a diverted load of 1,500 contraband cartons of cigarettes, taken from Virginia to New York City, can approach $100,000, according to the VSCC.
“It’s like going to Vegas and knowing you’re going to win,” said Paul J. Carey III, chief of enforcement for the Fairfax-based Northern Virginia Cigarette Tax Board.
Local law enforcement leaders say the problem is growing.
In recent months, Winchester and Frederick County officers have confiscated hundreds of cartons of cigarettes worth tens of thousands of dollars.
“Clearly this is such a big issue, not only [nationally], but in the city,” said Commissioner of the Revenue Ann T. Burkholder, who is responsible for tax billings for the city.
Supply and demand
Tobacco diversion has been a problem in New York state for many years.
“It’s a significant problem in New York City,” said Edgar A. Domenech, the city’s sheriff.
New York is the highest net importer of smuggled cigarettes, making up 60.9 percent of the total cigarette market in the state, according to a Jan. 10 report released by the nonprofit, nonpartisan Tax Foundation using 2011 data.
Part of the problem is that Virginia’s 30-cent tax on cigarettes is one of the lowest in the country. Only Missouri at 17 cents has a lower tax.
Meanwhile, New York has the highest cigarette tax in the nation at $4.35 per pack. Smokers in New York City pay an additional $1.50 per pack.
As taxes have increased in recent years, so has smuggling. New York’s cigarette tax rate rose 190 percent since 2006 while smuggling rose 170 percent, according to the Tax Foundation report.
To address the issue, Domenech said, a tobacco enforcement unit was implemented under his direction in August.
Since then, the unit has inspected more than 1,700 retailers in the five boroughs of New York City and found that 43 percent were selling either untaxed or counterfeit taxed cigarettes.
About 6,500 cartons of cigarettes were confiscated during those inspections, Domenech said, for a tax loss of about $300,000 — and that’s just for New York City, he said.
Studies show that New York state loses $180 million to $200 million in tax revenue per year.
“It’s tremendous, the loss,” Domenech said.
And it’s not just government coffers that lose.
Businesses that sell illegal cigarettes undercut legitimate businesses by selling packs at a lower cost to customers.
A pack of Newports or Marlboros that may cost $12 to $13 when properly taxed might sell at a dishonest retailer for $8 to $9.50.
“Where do you think that $3 or $4 is going to go?” asked Domenech, noting that the extra money most likely will return to the same business that sold the improperly taxed cigarettes when the patron decides to buy a sandwich, soft drink or chips.
The financial impact has left New York City businesses with two choices — close down or join the ranks of organized crime.
Cigarette smuggling also creates dangers for law enforcement and creates a market for underage buyers, potentially hurting the health of New York City’s youth.
“I think people have to realize it’s not a victimless crime,” Domenech said.
Smugglers either purchase cigarettes legally, five cartons at a time, from numerous businesses and build up their supply — a practice called “smurfing” — or they find a retailer willing to sell contraband cigarettes in bulk, sometimes for a price that is off the books and benefits the retailer more than a legal sale would.
According to Domenech, Virginia is New York City’s top supplier of contraband cigarettes.
Of the 6,500 cartons confiscated by the tobacco enforcement unit since August, more than 1,800 came from Virginia, he said.
The black market for cigarettes creates criminals and when one crime occurs — especially organized crime — others often follow.
“Does Winchester want to have those individuals come into its community?” Domenech asked.
More Interstate 81 traffic
Carey said his agency has seen huge spikes in the number of smugglers and underhanded retailers along Interstate 81 because of increased federal patrols on I-95 and U.S. 301.
The additional patrols on the eastern side of Virginia have led to criminals traveling to Winchester and surrounding localities to purchase contraband cigarettes and then travel to New York to make a high profit.
In addition, local law enforcement officers may not be as familiar with these smuggling schemes as their colleagues on the I-95 corridor.
“A lot of these officers have run into this and don’t know what they see when they see it,” Carey said. “They see cigarettes, they don’t know that it’s against the local code, it’s against the state code now.”
But local officers are learning fast. Carey has been holding multiple training sessions with the Winchester Police Department.
“One of the things that we’ve been doing is just going out and letting officers know what they are seeing when they see it,” he said.
On Jan. 11, not long after a recent training session, the department confiscated nearly 500 cartons of untaxed cigarettes from a New York man’s car and motel room.
Heng Ping Li, 44, of Brooklyn was charged with possession of untaxed cigarettes in the biggest arrest of its kind in Winchester, according to local authorities.
“For us to have the training and right after that have an officer spot it, identify it and act on it is just, I think, just a tremendous reinforcement to the quality of the team we have here,” Burkholder said.
She and Carey also confiscated slightly more than $10,000 worth of cigarettes Thursday during unannounced inspections to local stores.
“We visited four sites and we seized cigarettes in those four sites,” Burkholder said.
The purpose of the visits was not to find and punish store owners. Burkholder and Carey spent time with the retailers, educating them and their employees about cigarette-tax stamps.
“I think we’re taking a big step” in combating cigarette trafficking, she said.
40 million cigarettes
One of the first widely publicized local cases took place last year when a Berryville Quick Mart owner and his wife pleaded guilty to involvement in an alleged multimillion-dollar conspiracy to sell contraband cigarettes.
The case, prosecuted in U.S. District Court in Harrisonburg over several months, involved numerous co-conspirators who participated in the purchase from law enforcement officials of at least 200,000 cartons of untaxed cigarettes — 40 million individual cigarettes — on numerous occasions from 2009 to 2011.
The crime was investigated through the federal Bureau of Alcohol, Tobacco, Firearms and Explosives. Court documents reported the tax loss to New York was $5.5 million.
Frederick County has also had major arrests recently. Deputies arrested seven people on charges involving cigarette trafficking in two incidents late last year.
“It’s been one of those things that fly under the radar because the tangible good that you’re dealing with is a legal, obtainable tangible good,” said Capt. Allen Sibert of the county Sheriff’s Office.
Rafael Najarro, 57, of the 600 block of Smithfield Avenue in Winchester; Andres Abraham Benitez-Correa, 23, of the first block of East Commerce Street in Chambersburg, Pa.; Francisco Jose Anaya-Ramos, 33, of the 200 block of Douglas Street in Reading, Pa.; and Jose Alberto Brea, 39, of the 900 block of Pear Street in Reading are charged in Frederick County General District Court with one count of money-laundering and one count of cigarette smuggling after an Oct. 31 arrest in which deputies discovered about 100 cartons of cigarettes.
Nearly two weeks later, Guane Rong Chen, 36, Yu Ting Gua, 25, and Xue Wen Guan, 53, all of Winchester, were charged with one count each of possession of contraband cigarettes with intent to distribute. They were caught after allegedly buying large quantities of cigarettes from a local Sheetz convenience store.
“This crime is just recently starting to be investigated due to its prevalence,” Sibert said. “And it’s starting to become more known.”
Still, some skeptics don’t agree that cigarette smuggling is Virginia’s issue or that law enforcement resources should be spent on tracking a legal product.
“I’ve gotten judges in Fairfax who look at it and say, ‘Hey, it’s New York’s problem, it’s not our problem,’” Carey said. “Even though it’s against the local code, they don’t look at it that way.”
Cigarette trafficking hurts all legitimate manufacturers, wholesalers and retailers who face unfair competition, officials said.
Numerous retailers have been forced out of business by competitors who profit from trafficking, according to anecdotal information gathered by the Virginia State Crime Commission.
“It’s really the issue of tax compliance,” Burkholder said. “Anyone acting outside the bounds is negatively affecting local business.”
She said it is too early to measure the impact cigarette smuggling has on the city.
The city‘s cigarette tax is 25 cents, in addition to the 30-cent state tax. Wholesalers or distributors are responsible for making sure every pack of cigarettes sold in Winchester is properly stamped with the state and city tax. (Frederick and Clarke counties do not have an additional tax.)
Some retailers mix state-stamped cigarettes with city-stamped cigarettes and sell them in bulk. Others may sell cigarettes out the back door, sidestepping the potential sales tax if the product had been sold legally.
Taxpayers are the ones who ultimately pay.
“The state is missing out on those taxes generated by sales tax of selling legitimately rather than a cash deal out the back door,” Sibert said. “Any shortcomings on tax revenue is usually passed on to the citizens of Virginia in higher tax rates.”
Links to terrorism
In addition to the tax problem, Burkholder said, the smuggling raises other, even greater concerns.
Numerous studies, she said, have linked the cash flow from the smuggling business to terrorist groups.
A 2009 case study presented by the International Tax and Investment Center states that terrorists are increasingly turning to cigarette smuggling for funding.
Among the groups are al-Qaida and the Taliban, for whom cigarettes are now second only to heroin as a source of money.
“Cigarette trade is a crime of choice among terrorists because it commands limited attention from law enforcement,” the study states. “Terrorists smuggle cigarettes because the risks of apprehension are low and the profits sufficiently high to fund terrorist groups and purchase arms and even dual use equipment with the proceeds of this criminal activity,” the study states.
“It’s definitely a key funding source [for terrorist organizations],” Burkholder added. “To think that money that went to 9/11 passed through Winchester, that’s a shocking thought.”
Because of relatively light penalties, the illegal cigarette business is also attracting former drug smugglers.
“It’s the proverbial easy money,” Sibert said.
Under federal laws, contraband cigarette trafficking carries a maximum sentence of five years in prison and a fine of $250,000.
Under local codes, possession of untaxed cigarettes is a Class 1 misdemeanor, carrying a penalty of up to one year in jail and up to a $2,500 fine.
“If you do happen to get caught, it’s not as stiff a penalty, of course, as if you got caught with a kilo of cocaine,” Sibert said. “If you’re going to be set to make say $15,000 to $30,000 off a kilo of cocaine, well you know, you could serve some substantial time in either a state or federal penitentiary. If you get caught with $15,000 to $30,000 worth of cigarettes, you’re not really going to see much time.”
Local officers say they must enforce the laws despite the small penalties.
“We uphold the law without pride or prejudice, no matter what the law is — whether it’s a Class 4 misdemeanor or a capital punishment offense felony,” Sibert said.
Similarly, city police Sgt. Frank Myrtle said that even though the crime may be a Class 1 misdemeanor, stopping the source could prevent more serious crimes.
“The money that is benefited [from smuggling cigarettes] supports a larger criminal act,” he said.
The 480 cartons of cigarettes recently confiscated in the city had an estimated value of $21,600 to $25,000, but a resale value on the black market of at least $50,000 to $60,000.
Carey said about $5 billion worth of cigarettes are trafficked through Virginia to New York, New Jersey, Rhode Island and other higher-tax states each year.
Domenech said the way to solve the problem is through law enforcement partnerships. “Only through that can we have long-term success.”
Sibert said two tiers of a three-tier system are located here, so Frederick County officers will focus on finding the suppliers and transporters.
“We’ll attack things from our side and relay as much information as possible to New York and do everything we can to assist their investigations to help the betterment of their community and to eliminate and eradicate criminal organizations,” he said.
Myrtle encouraged residents who spot suspicious activity or know of unscrupulous behavior to report it to local officials.
— Contact Melissa Boughton at firstname.lastname@example.org