Cigarette Smuggling
Federal Law Enforcement Efforts and Seizures Increasing Gao ID: GAO-04-641 May 28, 2004Illegal trafficking in cigarettes can generate enormous profits and is purportedly a multibillion dollar a year enterprise. As cigarette taxes increase, so do the incentives for criminal organizations to smuggle cigarettes into the United States. Cigarette smuggling results in lost tax revenues, undermines government health policy objectives, can attract sophisticated and organized criminal groups, and could be a source of funding for terrorists. Because of these concerns, GAO examined (1) the nature and scope of the problem of smuggled cigarettes entering the United States, including federal tax revenue losses and potential health risks; (2) federal law enforcement agencies'--U.S. Immigration and Customs Enforcement (ICE), U.S. Customs and Border Protection (CBP), and Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF)--efforts to thwart the smuggling of cigarettes into the United States; and (3) legal initiatives being pursued to enhance law enforcement efforts to thwart the smuggling of cigarettes into the United States.
United States is impossible to measure with any certainty. According to ICE and ATF, investigations and intelligence collected indicate cigarette smuggling is a significant problem, particularly the smuggling of counterfeit cigarettes. According to ATF, illegal cigarette trafficking worldwide is a multibillion dollar a year crime phenomenon, with some cigarette smugglers having ties to terrorist groups. Moreover, because smuggled cigarettes are not taxed, federal and state revenues are lost. Smuggled cigarettes, which include counterfeit and genuine brand cigarettes, also pose a public health risk as all cigarettes do, but no studies have been done to determine whether counterfeit cigarettes pose any additional health risk. ICE and ATF have been conducting more cigarette smuggling investigations in recent years. Their investigations are generally larger, more complex, and longer-term than previous investigations. Also, CBP and ICE have been seizing an increasing number of cigarettes, particularly counterfeit cigarettes, as criminals attempt to smuggle them into the United States. Two proposed legal initiatives are intended to enhance law enforcement efforts to thwart the smuggling of cigarettes into the United States. For example, a bill known as the Prevent All Cigarette Trafficking Act would lower the threshold for a cigarette smuggling violation (a felony) from 60,000 to 10,000 cigarettes, increase ATF's authority to enter premises to enforce federal cigarette laws, and provide ATF the authority to use money generated during undercover sting operations to offset investigative expenses. In addition, the Framework Convention on Tobacco Control, a proposed international treaty, includes provisions that seek to eliminate the illicit trade in tobacco products, including cigarette smuggling. The Departments of Homeland Security and Justice reviewed a draft of this report and had no substantive comments. Technical comments were incorporated as appropriate.
GAO-04-641, Cigarette Smuggling: Federal Law Enforcement Efforts and Seizures Increasing
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Report to the Chairman and Ranking Minority Member, Committee on
Government Reform, House of Representatives:
United States General Accounting Office:
GAO:
May 2004:
Cigarette Smuggling:
Federal Law Enforcement Efforts and Seizures Increasing:
GAO-04-641:
GAO Highlights:
Highlights of GAO-04-641, a report to the Chairman and Ranking Minority
Member, Committee on Government Reform, House of Representatives
Why GAO Did This Study:
Illegal trafficking in cigarettes can generate enormous profits and is
purportedly a multibillion dollar a year enterprise. As cigarette taxes
increase, so do the incentives for criminal organizations to smuggle
cigarettes into the United States. Cigarette smuggling results in lost
tax revenues, undermines government health policy objectives, can
attract sophisticated and organized criminal groups, and could be a
source of funding for terrorists.
Because of these concerns, GAO examined
* the nature and scope of the problem of smuggled cigarettes entering
the United States, including federal tax revenue losses and potential
health risks;
* federal law enforcement agencies‘–-U.S. Immigration and Customs
Enforcement (ICE), U.S. Customs and Border Protection (CBP), and
Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF)”efforts to
thwart the smuggling of cigarettes into the United States; and
* legal initiatives being pursued to enhance law enforcement efforts to
thwart the smuggling of cigarettes into the United States.
What GAO Found:
Because of its clandestine nature, the extent of cigarette smuggling
into the United States is impossible to measure with any certainty.
According to ICE and ATF, investigations and intelligence collected
indicate cigarette smuggling is a significant problem, particularly
the smuggling of counterfeit cigarettes. According to ATF, illegal
cigarette trafficking worldwide is a multibillion dollar a year crime
phenomenon, with some cigarette smugglers having ties to terrorist
groups. Moreover, because smuggled cigarettes are not taxed, federal
and state revenues are lost. Smuggled cigarettes, which include
counterfeit and genuine brand cigarettes, also pose a public health
risk as all cigarettes do, but no studies have been done to determine
whether counterfeit cigarettes pose any additional health risk.
ICE and ATF have been conducting more cigarette smuggling
investigations in recent years. Their investigations are generally
larger, more complex, and longer-term than previous investigations.
Also, CBP and ICE have been seizing an increasing number of cigarettes,
particularly counterfeit cigarettes, as criminals attempt to smuggle
them into the United States.
Two proposed legal initiatives are intended to enhance law enforcement
efforts to thwart the smuggling of cigarettes into the United States.
For example, a bill known as the Prevent All Cigarette Trafficking Act
would lower the threshold for a cigarette smuggling violation (a
felony) from 60,000 to 10,000 cigarettes, increase ATF‘s authority to
enter premises to enforce federal cigarette laws, and provide ATF the
authority to use money generated during undercover sting operations to
offset investigative expenses. In addition, the Framework Convention on
Tobacco Control, a proposed international treaty, includes provisions
that seek to eliminate the illicit trade in tobacco products, including
cigarette smuggling.
The Departments of Homeland Security and Justice reviewed a draft of
this report and had no substantive comments. Technical comments were
incorporated as appropriate.
Smuggled Counterfeit Cigarettes Disguised as Legitimate Merchandise:
What GAO Recommends:
www.gao.gov/cgi-bin/getrpt?GAO-04-641.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Paul L. Jones at (202)
512-8777 or jonespl@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Cigarette Smuggling into the United States Considered a Significant
Problem:
Federal Agencies Increased Efforts to Thwart Cigarette Smuggling into
the United States and Increased Seizures:
Legal Initiatives Being Pursued to Help Thwart Cigarette Smuggling:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: Article 15 of the World Health Organization Framework
Convention on Tobacco Control:
Article 15: Illicit Trade in Tobacco Products:
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Table:
Table 1: Seizures of Counterfeit and Genuine Cigarettes, Fiscal Years
1998 through 2003:
Figures:
Figure 1: Domestically Produced and Imported Cigarettes, 1994 through
2003:
Figure 2: A Typical 40-foot Shipping Container at the Los Angeles/Long
Beach Examination Station:
Figure 3: Smuggled Counterfeit Cigarettes Disguised as Legitimate
Merchandise:
Figure 4: Smuggled Counterfeit Cigarettes:
Figure 5: Number of ICE Cigarette-Related Investigations Initiated and
Closed, Fiscal Years 1998 through 2003:
Figure 6: Number of ATF Tobacco Investigations Initiated and Closed,
Fiscal Years 1998 through 2003:
Figure 7: Top Counterfeit Seizures by Commodity, Fiscal Years 2000
through 2003:
Abbreviations:
ATF: Bureau of Alcohol, Tobacco, Firearms and Explosives:
ATS: Automated Targeting System:
CBP: Customs and Border Protection:
CCTA: Contraband Cigarette Trafficking Act:
CDC: Centers for Disease Control and Prevention:
DHS: Department of Homeland Security:
FCTC: Framework Convention on Tobacco Control:
ICE: Immigration and Customs Enforcement:
IPR Center: National Intellectual Property Rights Coordination Center:
IRC: Internal Revenue Code:
MRU: Manifest Review Unit:
PACT Act: Prevent All Cigarette Trafficking Act:
TTB: Alcohol and Tobacco Tax and Trade Bureau:
WHO: World Health Organization:
[End of section]
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protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. However, because
this work may contain copyrighted images or other material, permission
from the copyright holder may be necessary if you wish to reproduce
this material separately.
United States General Accounting Office:
Washington, DC 20548:
May 28, 2004:
The Honorable Tom Davis:
Chairman, Committee on Government Reform:
House of Representatives:
The Honorable Henry A. Waxman:
Ranking Minority Member:
Committee on Government Reform:
House of Representatives:
Illegal trafficking in cigarettes can generate enormous profits and is
purportedly a multibillion dollar a year enterprise. As cigarette taxes
increase, so do the incentives for criminal organizations, including
terrorist organizations, to smuggle cigarettes into and throughout the
United States. Because cigarette smuggling, whether of genuine or
counterfeit cigarettes,[Footnote 1] results in lost tax revenues,
undermines government health policy objectives, can attract
sophisticated and organized criminal groups, and could be a source of
funding for terrorists, we are providing information about cigarette
smuggling and efforts to combat it. More specifically, this report:
* addresses the nature and scope of the problem of cigarette smuggling,
including counterfeit cigarettes, into the United States and its
consequences, including federal tax revenue losses and potential health
risks;
* describes federal law enforcement agencies' efforts to thwart the
smuggling of cigarettes into the United States; and:
* identifies certain legal initiatives being pursued to enhance law
enforcement efforts to thwart the smuggling of cigarettes into the
United States.
To determine what is known about the nature and scope of the problem of
smuggled cigarettes and law enforcement efforts to combat the problem,
we obtained information from the Department of Homeland Security's
(DHS) U.S. Immigration and Customs Enforcement (ICE) and U.S. Customs
and Border Protection (CBP), and the Department of Justice's Bureau of
Alcohol, Tobacco, Firearms and Explosives (ATF) officials. We also
obtained information from Justice, State, and Treasury Department
officials on existing legal initiatives proposed to enhance efforts to
thwart cigarette smuggling. To obtain information about the health
consequences of smuggled counterfeit cigarettes, we contacted the
Centers for Disease Control and Prevention (CDC) and officials from the
tobacco industry.
We conducted our work between August 2003 and March 2004 in accordance
with generally accepted government auditing standards. (See app. I for
details about our scope and methodology.)
Results in Brief:
Because of its clandestine nature, the extent of cigarette smuggling
into the United States is impossible to measure with any certainty.
According to ICE and ATF officials, the results of investigations and
intelligence collected indicate cigarette smuggling, particularly of
counterfeit cigarettes, is a significant problem. Illegal cigarette
trafficking worldwide is a multibillion dollar a year crime phenomenon,
according to ATF, with some cigarette smugglers having ties to
terrorist groups.[Footnote 2] Moreover, ICE and ATF officials said that
criminal organizations smuggle cigarettes into the United States,
providing the organizations with the potential to garner large illegal
profits. Correspondingly, because smuggled cigarettes are not taxed,
federal and state revenues are lost. Smuggled cigarettes also pose a
public health risk, as do all cigarettes. However, no studies have been
done to determine whether counterfeit cigarettes pose any additional
health risk.
ICE, ATF, and CBP carry out activities to combat the smuggling of
cigarettes into the United States. ICE and ATF have been conducting
more cigarette smuggling investigations in recent years. Agency
officials describe their current investigations as generally larger,
more complex, and longer-term than previous investigations. In
addition, CBP and ICE have been seizing an increasing number of
cigarettes, particularly counterfeit cigarettes, as criminals attempt
to smuggle them into the United States.
Two proposed legal initiatives are intended to enhance law enforcement
efforts to thwart the smuggling of cigarettes into the United States.
We did not evaluate the merits of these initiatives. A proposed bill
called the Prevent All Cigarette Trafficking (PACT) Act would, among
other things, lower the threshold for violating the Contraband
Cigarette Trafficking Act (CCTA), a felony violation, from 60,000 to
10,000 cigarettes, increase ATF's authority to enter premises to
enforce federal cigarette laws, and provide ATF the authority to use
money generated during undercover sting operations to offset
investigative expenses. Justice generally supports these provisions
because they would enhance the tools to thwart cigarette smuggling. In
addition, as part of the World Health Organization's (WHO) objective to
address the rise and spread of tobacco consumption around the world,
the Framework Convention on Tobacco Control (FCTC), a proposed
international treaty, includes provisions that seek to eliminate the
illicit trade in tobacco products, including cigarette smuggling. Among
other provisions, the convention states that global cooperative action,
including the exchange of cigarette tax information among countries, is
an essential component in the effort to eliminate the illicit tobacco
trade.
DHS and Justice reviewed a draft of this report and had no comments on
the substance of the draft. Technical comments were incorporated as
appropriate.
Background:
Federal and State Excise Taxes Are Levied on Cigarettes Intended for
Sale in the United States:
Tobacco grows in many countries, but the United States has been the
major source of the product for hundreds of years. About 500 billion
genuine cigarettes were produced in domestic factories in 2003, and
cigarettes continue to dominate the manufactured tobacco products
market. Cigarette manufacturing is concentrated in Georgia, Kentucky,
North Carolina, and Virginia.
After manufacture, the general industry pattern is for manufacturers to
deposit cigarettes in warehouses and pay the federal cigarette excise
tax of 39 cents per pack of 20 cigarettes. Next, the cigarettes move to
a wholesaler stamping agent. Stamping agents have authority from states
to affix to cigarette packs evidence of the payment of the appropriate
state tax.[Footnote 3] Once the stamping agent receives the unstamped
cigarettes, it usually does not redistribute them until the state tax
stamp has been affixed. After this is done, the stamping agent usually
sells the cigarettes to other wholesalers (nonstamping agents),
distributors, and retailers. As of January 1, 2004, the state excise
tax rates for a pack of 20 cigarettes ranged from 2.5 cents in Virginia
to $2.05 in New Jersey.
Tobacco products are also exported tax-free (federal and state) from
manufacturers or from export warehouses. An export warehouse is a
bonded warehouse, which stores tobacco products for subsequent shipment
to a foreign country, Puerto Rico, the Virgin Islands, and other
possessions of the United States. Export warehouses are typically
located at the international borders with Mexico and Canada, at
international airports that have a considerable number of international
flights, and at seaports.
Domestic Cigarette Production Has Declined, While Imported Cigarettes
Have Increased in Recent Years:
Over the past decade, domestic cigarette production has declined, while
U.S. imports of cigarettes have grown significantly. Figure 1 shows
U.S. domestic cigarette production and cigarette imports from 1994
through 2003. In 2003, for example, cigarette production decreased by
32 billion cigarettes (6 percent) from 2002, and totaled 500 billion
cigarettes, down from 532 billion cigarettes in 2002. On the other
hand, imported cigarettes rose 24 percent to 25.9 billion cigarettes
when compared with 2002 at 20.9 billion cigarettes.
Figure 1: Domestically Produced and Imported Cigarettes, 1994 through
2003:
[See PDF for image]
[End of figure]
Cigarettes Can be Diverted from the Distribution System:
Cigarettes can be diverted from the normal distribution system in a
number of ways, resulting in the evasion of cigarette taxes. According
to an ATF report,[Footnote 4] for example, "over-the-road" smuggling
generally includes small purchases (well under 100 cartons; 10 packs
per carton, 20 cigarettes per pack) in one state for transport to a
higher-tax state for resale. Also, counterfeit stamping operations and
manipulation of interstate cigarette distribution reports have been
identified as potential major sources of revenue loss to the various
states. These operations are characteristic of larger and more
sophisticated criminal operations, possibly involving collusion
between certain wholesalers and firms with outlets such as vending
machines and retail stores.
Moreover, the illicit trade in smuggling both genuine and counterfeit
cigarettes into the United States avoids both federal excise tax and
state taxes on cigarettes. The major types of cigarette smuggling into
the United States are: (1) smuggling of counterfeit cigarettes
manufactured overseas and (2) smuggling of genuine cigarettes
manufactured overseas but diverted to the illicit market. Untaxed,
domestically produced cigarettes intended for export also can be
diverted to the illicit market.
Cigarette Smuggling into the United States Considered a Significant
Problem:
While the extent of cigarette smuggling into the United States is
unknown, ATF and ICE officials consider it a significant problem.
Officials in these agencies note that cigarette smuggling activities
attract international and domestic criminal groups with the lure of
high profits and relatively low risk. The smuggling of cigarettes into
the United States also results in lost federal and state excise tax
revenue. However, the extent of the total lost tax revenue is unknown.
Smuggled cigarettes, which include counterfeit and genuine brand
cigarettes, also pose a public health risk as all cigarettes do;
though, no studies have been done to determine whether counterfeit
cigarettes pose a greater health risk than genuine brand cigarettes.
Intelligence Indicates Cigarette Smuggling Is a High Profit Crime with
Possible Terrorism Connections:
The smuggling of cigarettes into the United States is part of the
worldwide illegal cigarette traffic, but the full extent of such
smuggling is unknown. ATF and ICE do not have estimates of the quantity
of cigarettes smuggled into the country, nor were we able to find any
studies conducted by other organizations regarding the extent of the
cigarette smuggling problem. There is evidence that both counterfeit
and genuine brand cigarettes are smuggled into the United States and
that criminals divert genuine cigarettes from legitimate distribution
channels intended for sale outside the United States (e.g., foreign
manufactured cigarettes held in U.S. warehouses awaiting trans-shipment
to other countries and domestically manufactured cigarettes to be
exported from the United States, including cigarettes for sale in duty
free stores).
On the basis of cigarette investigations and intelligence collected,
ATF and ICE officials said cigarette smuggling into the United States,
particularly the smuggling of counterfeit cigarettes, is a significant
problem. Indications are that the possibility of making huge profits
has attracted criminals, including international and domestic organized
crime groups, to smuggling. ATF and ICE officials noted that cigarette
smuggling is also attractive to criminals because it is considered to
be a relatively low risk crime, with penalties that are lower than the
penalties for smuggling drugs.
According to an ATF report,[Footnote 5] some cigarette smugglers have
ties with terrorist groups, and there are indications that terrorist
group involvement in illicit cigarette trafficking, as well as the
relationship between criminal groups and terrorist groups, will grow in
the future because of the large profits that can be made. In addition,
according to ATF and ICE, organized crime groups sometimes launder
proceeds of international cigarette smuggling through U.S. financial
institutions.
ATF and ICE officials indicated that cigarettes are smuggled into the
United States from many different countries. For example, according to
ATF and ICE officials, smuggled cigarettes have been identified coming
to the United States from China, Malaysia, Korea, Russia, Latvia,
Mexico, Brazil, Paraguay, Uruguay, and the Philippines.
The ATF report also notes that cigarette trafficking had become big
business by 1999. Many states, as well as many foreign countries, have
increased cigarette taxes, resulting in a large difference in the
wholesale price and the price paid by consumers at the retail level and
creating potential illicit profits of $7 to $13 per carton of
cigarettes. According to an ATF intelligence official, U.S. and
European law enforcement information shows that illicit cigarette
trafficking has become a multibillion dollar a year, worldwide crime
phenomenon.
Cigarette Smuggling Results in Lost Revenues and Public Health Risk:
Cigarette smuggling into the United States results in lost federal and
state revenue. Each pack of cigarettes smuggled into the United States
avoids the payment of $0.39 in federal cigarette excise tax, a median
$0.0375 in customs import duties, and a median $0.60 in state excise
tax.[Footnote 6] The extent of these revenue losses, however, is
unknown, because, as stated earlier, no one knows the extent of
cigarette smuggling into the United States. Additionally, there are no
reliable estimates of the overall amount of revenue that the federal
and state governments are losing because of cigarettes being smuggled
into the United States.
Furthermore, cigarettes, both counterfeit and genuine, pose a public
health risk. There is no safe cigarette, the nation's largest cigarette
manufacturers acknowledge. Since the release in 1964 of the first
Surgeon General's report on smoking and health, scientific knowledge
about the health consequences of tobacco use has greatly increased. As
reported by the CDC, tobacco use, particularly smoking, remains the
number one cause of preventable disease and death in the United States.
Officials at the CDC Office on Smoking and Health said that they have
not done any studies and were not aware of any studies to determine
whether counterfeit cigarettes posed additional risks. In addition, law
enforcement and cigarette manufacturer laboratories that routinely
analyze seized cigarettes do not test seized cigarettes for health
risks.
Federal Agencies Increased Efforts to Thwart Cigarette Smuggling into
the United States and Increased Seizures:
ICE, ATF, and CBP are responsible for law enforcement activities to
combat the smuggling of cigarettes into the United States, as part of
their multifaceted missions. For example, through its Tobacco Program,
ICE works to enforce U.S. laws related to tobacco smuggling for which
it has investigative jurisdiction. ATF, which typically investigates
smuggled cigarettes that have reached the domestic market, also
enforces federal antitobacco smuggling laws, particularly the
CCTA.[Footnote 7] CBP inspectors operate at U.S. ports of entry, to
detect illegal goods, including smuggled cigarettes, which might enter
the country. CBP uses tools such as a targeting system and shipping
manifest reviews to target incoming cargo for further examination. ICE
and ATF officials said they have been conducting more cigarette
smuggling investigations in recent years and described the agencies'
current investigations as generally larger, more complex, and longer-
term than previous investigations. Additionally, a CBP database shows
that the number of cigarette seizures by CBP and ICE have increased
dramatically, from 12 total seizures in 1998 to 191 seizures in 2003.
Several Federal Agency Missions Address Cigarette Smuggling:
ICE, ATF, and CBP are involved in the fight against the illicit tobacco
trade. Each agency addresses some aspect of cigarette smuggling as part
of its multifaceted mission.
ICE Efforts to Combat Cigarette Smuggling:
ICE has responsibility for the enforcement of immigration and customs
laws within the United States. ICE investigates a range of offenses,
including money laundering, smuggling--including cigarette smuggling--
and fraud--including intellectual property rights (IPR)
violations.[Footnote 8] To carry out its responsibilities, ICE
collects, analyzes, investigates, and disseminates intelligence data
for use by enforcement operations.
ICE operational and tactical control of investigative and intelligence
operations are divided geographically in the United States by areas of
responsibility and managed by special agents-in-charge. The special
agents-in-charge are responsible for the administration and management
of all investigative customs enforcement activities within the
geographic boundaries of the office. ICE also has special agents in 34
offices in 23 countries outside the United States--the special agents
work with their foreign counterparts to help combat various crimes,
including cigarette smuggling.
As part of its responsibilities, ICE's National Intellectual Property
Rights Coordination Center (IPR Center), an interagency effort to
coordinate a unified federal response regarding IPR violations (i.e.,
counterfeit goods), handled counterfeit tobacco product violations when
it was started in February 2000.[Footnote 9] In January 2001,
responsibility for these violations was delegated from the IPR Center
to a newly formed Tobacco Task Force.[Footnote 10]
According to ICE officials, the former U.S. Customs Service gave
additional priority to efforts to combat a growing threat--cigarette
smuggling--when it created the Tobacco Task Force. The task force was
responsible for addressing the smuggling of both counterfeit and
genuine cigarettes. The task force was created by the U.S. Customs
Service in January 2001 with internal funds and was subsequently funded
by an $800,000 congressional appropriation in fiscal year 2002. In
fiscal year 2003, although there were no appropriations earmarked for
the task force, ICE decided to maintain a focus on cigarette smuggling
and changed the name to the Tobacco Program, according to the Tobacco
Program Manager.
ICE officials said that ICE's Tobacco Program promotes and assists
investigations and interdictions of tobacco smuggling, while not
directly managing investigations. The program monitors, coordinates,
and provides guidance to ICE, CBP, U.S. Attorneys' Offices, and
foreign, state, and local law enforcement agencies on international
smuggling matters. The program also provides training and reference
material to investigators and works with ICE, CBP, ATF, and Treasury's
Alcohol and Tobacco Tax and Trade Bureau (TTB) to address legal and
policy issues related to tobacco smuggling. The program is staffed with
two special agents and one intelligence analyst at ICE headquarters in
Washington, D.C.
ATF Investigative Efforts:
ATF is a law enforcement agency within the Department of Justice,
responsible for enforcing federal laws and regulations relating to
alcohol, tobacco, firearms, explosives, and arson. Regarding
cigarettes, ATF seeks to reduce illegal cigarette trafficking in
particular by enforcing the CCTA,[Footnote 11] divest criminal and
terrorist organizations of money derived from this illicit activity,
and significantly reduce tax revenue losses to the states. ATF has
offices located throughout the United States to conduct these
investigations and has an array of employees that range from criminal
investigators to inspectors, auditors, chemists, and other
professionals.
ATF's tobacco diversion mission is to disrupt and eliminate criminal
and terrorist organizations by identifying, investigating, and
arresting offenders who traffic in contraband cigarettes; conduct
financial investigations in conjunction with tobacco diversion
investigations in order to seize and deny further access to assets used
by criminal enterprises and terrorist organizations; prevent criminal
encroachment of the legitimate tobacco industry by organizations
trafficking in cigarettes; and assist local, state, and other federal
agencies with cigarette trafficking investigations.
ATF officials said the agency typically gets involved in cigarette
smuggling investigations after the smuggled cigarettes enter the
domestic market. The officials said that ATF investigators attempt to
determine the source of the smuggled cigarettes; however, ATF does not
often pursue investigations internationally.[Footnote 12] The
officials also noted that ATF coordinates its investigative efforts
with ICE and other federal, state, and local agencies on a case-by-case
basis.
ATF officials also told us that ATF's intelligence branch increased its
emphasis on cigarette smuggling in 2000. According to the officials,
ATF follows a two-pronged approach to tobacco intelligence: (1)
strategic intelligence, which entails collecting intelligence from a
variety of sources (such as ATF field offices, other law enforcement
agencies, and the tobacco industry concerning counterfeit cigarettes),
looking at cigarette trafficking patterns and trends and international
terrorism links, and providing the developed intelligence to ATF field
investigators and others; and (2) tactical intelligence, whereby
analysts conduct analytical work to support about 20 to 25
investigations at a time.
CBP Inspection Efforts:
CBP's priority mission is to prevent terrorists and terrorist weapons
from entering the United States. Other CBP's mission responsibilities
include: stemming the flow of illegal drugs and other contraband;
protecting American businesses from theft of their intellectual
property; regulating and facilitating international trade; collecting
import duties; and enforcing U.S. trade laws. Thus, combating smuggling
of both genuine and counterfeit cigarettes falls squarely within CBP's
mission responsibilities. CBP officials explained that since September
11, 2001, overall CBP mission priorities for identifying and detecting
illegal and harmful commodities coming into the country have shifted
from narcotics smuggling to antiterrorism concerns. The priorities
currently are:
* #1 - antiterrorism;
* #2 - narcotics smuggling; and:
* #3 - trade commodities violations; textiles, toys, watches, and other
items, including counterfeit and genuine smuggled cigarettes.
To perform its inspection duties, CBP has inspectors at ports of entry
into the United States. In addition to staff at CBP's headquarters,
officials at 20 field operations locations and at more than 300 ports
of entry oversee the entry of all goods entering the United States. CBP
also has 5 specific units, called Strategic Trade Centers, 2 of which
analyze cigarette smuggling and provide information to other CBP units
to assist in combating the problem.
We previously reported[Footnote 13] that CBP's Commissioner said the
large volume of imports and its limited resources make it impossible to
physically inspect all oceangoing containers without disrupting the
flow of commerce. The Commissioner also said it is unrealistic to
expect that all containers warrant such inspection because each
container poses a different level of risk based on a number of factors,
including the exporter, the transportation providers, and the importer.
To direct its resources toward higher-risk cargo and to minimize its
impact on the flow of commerce, CBP has developed a layered approach to
inspections. This approach includes: a targeting system, to assess the
risk level of individual containers and to flag high-risk containers
for physical inspection; a random inspection program; and the selection
of containers for physical inspection based on a review of the shipping
manifests and knowledge or intelligence gathered at the local ports.
While most of the inspectors assigned to seaports perform physical
inspections of goods entering the country, some are "targeters" - they
review documents and intelligence reports and determine which cargo
containers should undergo additional documentary reviews and/or
physical inspections.
As part of its layered approach, CBP employs its Automated Targeting
System (ATS) computer model to review documentation on all arriving
containers to help select or "target" containers for additional
documentary review and/or physical inspection, such as containers that
may contain cigarettes being smuggled. The ATS was originally designed
to help identify illegal narcotics in cargo containers. ATS
automatically matches its targeting rules against the manifest and
other available data for every arriving container and assigns a level
of risk (i.e., low, medium, high) to each container. At the port level,
inspectors use ATS, as well as other data (e.g., intelligence reports),
to determine whether to inspect a particular container.
In addition, CBP has a program, called the Supply Chain Stratified
Examination, which supplements ATS by randomly selecting additional
containers to be physically examined. The results of the random
inspection program are to be compared with the results of ATS
inspections to improve targeting. If CBP officials decide to inspect a
particular container, they might first use equipment such as the
Vehicle and Cargo Inspection System that takes a gamma-ray image of the
container so inspectors can see any visual anomalies. With or without
this imaging system, inspectors can open a container and physically
examine its contents.
At the Los Angeles/Long Beach seaport, we interviewed inspectors
assigned to a unit called the Manifest Review Unit (MRU) that analyzes
manifests, which list in detail the total cargo of vessels. Manifests
are issued by carriers or their agents for specific voyages. Examples
of data elements on a manifest include shipper, consignee, point and
country of origin of goods, export carrier, port of lading, port of
discharge, description of packages and goods, and date of lading.
CBP regulations require that manifest data be sent electronically to
CBP 24 hours before cargo is loaded on a ship at a foreign port for
shipment to the United States. CBP then determines whether the
merchandise merits examination or immediate release. MRU is to review
all manifested cargo for risk, based on ATS's rules and criteria, such
as shipment from a country known to be a source of counterfeit
cigarettes. MRU inspectors may also make additional computer queries
based on their experience and/or specific intelligence about a shipper
or commodity.
After MRU selects cargo for examination, it is sent to a Centralized
Examination Station, which is a privately operated facility at which
imported merchandise identified for physical examination is unloaded
and made available to CBP examination team inspectors. If an
examination results in a finding of smuggled cigarettes, a sample is
taken to determine whether they are counterfeit or genuine, the
merchandise is seized and forfeited, counterfeit cigarettes are
destroyed, and genuine cigarettes may be destroyed or auctioned. After
the examination is complete, the inspectors notify MRU of the results
of the examination. MRU inspectors may then use the information for
future targeting of cargo for examination.[Footnote 14]
CBP officials said that although cigarettes are not necessarily being
targeted as a specific imported commodity to be physically inspected at
a port, targeting rules or criteria are constantly being updated from
tips received from many different sources, and consequently many
illegally imported goods, including cigarettes, are discovered through
the targeting process.
Figures 2, 3, and 4 show a likeness of the container in which recently
seized counterfeit cigarettes were shipped, how they were packaged as
legitimate merchandise, and what they looked like when unloaded and
inspected.
Figure 2: A Typical 40-foot Shipping Container at the Los Angeles/Long
Beach Examination Station:
[See PDF for image]
[End of figure]
Figure 3: Smuggled Counterfeit Cigarettes Disguised as Legitimate
Merchandise:
[See PDF for image]
Note: After unloading the container, two different types of shipping
boxes were discovered that were labeled as the same type of legitimate
merchandise. The boxes on the left contained the merchandise, while the
boxes on the right contained counterfeit cigarettes.
[End of figure]
Figure 4: Smuggled Counterfeit Cigarettes:
[See PDF for image]
[End of figure]
Number of ICE and ATF Investigations into Cigarette Smuggling Have
Increased and Become Larger and More Complex:
ICE and ATF are responsible for investigating cigarette smuggling. Both
agencies initiate and carry out their own investigations and sometimes
work together in conducting joint investigations. ICE investigates
organized international cigarette smuggling, including illegal
activities related to the smuggling of cigarettes into the United
States. ATF's cigarette smuggling investigations usually involve
interstate smuggling activities. When ATF determines that the smuggled
cigarettes originated outside the United States, the investigation may
broaden to pursue criminal activities related to international
cigarette smuggling.
According to the Tobacco Program Manager, ICE cigarette smuggling
investigations have increased and become more complex and longer term
since 2001. ICE officials told us that the Tobacco Program has focused
on encouraging the development of larger investigations to identify and
dismantle entire organizations responsible for cigarette smuggling,
including investigating the potential for ties to terrorist
groups.[Footnote 15] Figure 5 shows the number of ICE cigarette-related
investigations initiated and closed for each fiscal year from 1998
through 2003.[Footnote 16]
Figure 5: Number of ICE Cigarette-Related Investigations Initiated and
Closed, Fiscal Years 1998 through 2003:
[See PDF for image]
[End of figure]
One large, complex ICE investigation, for example, (supported by CBP,
ATF, and other agencies) began in the fall of 2000 and concluded in
January 2004 and was characterized as the largest probe to date
involving the smuggling of cigarettes into the United States. The
investigation resulted in a 92-count federal indictment against
defendants accused of participating in a scheme to smuggle into the
nation more than 107 million genuine and counterfeit cigarettes with a
potential street value of $37.5 million.
We also visited with an ICE supervisory special agent in Long Beach,
who noted there has been a huge increase in counterfeit cigarettes
seized since early 2002, although it is hard to tell if the volume of
smuggling has increased or more is being detected because of the
tightening of security since September 11, 2001. The supervisory
special agent said that cigarette smuggling investigations have become
complex and time-consuming, as ICE is taking a long-term approach to
cigarette smuggling investigations. ICE wants to study and understand
the whole cycle of smuggling operations so that it can dismantle key
organizations responsible for cigarette smuggling.
ATF also reported an increase in recent years in the number of tobacco
investigations. According to ATF officials, nationwide, ATF had about
260 cigarette smuggling investigations ongoing in August 2003. The 260
investigations primarily involved the smuggling of cigarettes from
state-to-state rather than into the United States. Figure 6 shows the
number of ATF tobacco investigations initiated and closed for each
fiscal year from 1998 through 2003.[Footnote 17]
Figure 6: Number of ATF Tobacco Investigations Initiated and Closed,
Fiscal Years 1998 through 2003:
[See PDF for image]
[End of figure]
An ATF official told us that generally, cigarette investigations take
12 to 24 months, and the investigations are extensive and complex,
particularly the more recent investigations which are still ongoing.
The ATF official said that unlike in the past where ATF just seized the
cigarettes and vehicles because the smuggling was being performed by
"mom and pop" operations, since about 1999 more cigarette smuggling is
being carried out by criminal organizations and, therefore, requires
much more extensive investigation. In addition, ATF reported in August
2003 that it had identified 8 of its investigations initiated in fiscal
years 2002 and 2003 as linked to terrorism. ATF officials noted that
the majority of its counterfeit cigarette investigations involve
cigarettes smuggled into the United States.
Cigarette Seizures Have Increased:
In addition to the rise in cigarette smuggling investigations by ICE
and ATF, the number of illegal cigarettes seized by CBP and ICE has
increased. While the number of seizures (with an estimated value of
$2,500 or greater) of genuine cigarettes exceeded counterfeit cigarette
seizures, the quantity and estimated value of counterfeit cigarettes
seized exceeded genuine cigarettes.[Footnote 18] For example, in fiscal
year 2003, CBP and ICE 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. Table 1 shows the
number and estimated value of counterfeit and genuine cigarettes seized
by CBP and ICE in each fiscal year from 1998 through 2003.
Table 1: Seizures of Counterfeit and Genuine Cigarettes, Fiscal Years
1998 through 2003:
[See PDF for image]
Note: Data include only seizures that have an estimated value of $2,500
or greater to exclude seizures of cigarettes transported by individuals
and intended for personal consumption.
[End of figure]
Most counterfeit cigarette seizures were at the Los Angeles/Long Beach
seaport.[Footnote 19] CBP officials at the Los Angeles/Long Beach
seaport said that they began to see more counterfeit cigarettes being
seized near the end of 2001. Specifically, 3 of 10 (30 percent)
counterfeit cigarette seizures nationwide were made at the Los Angeles/
Long Beach seaport in fiscal year 2001; these increased to 21 of 34 (62
percent) in fiscal year 2002 and to 26 of 56 (46 percent) in fiscal
year 2003. The officials said that they believe the increase in
seizures of counterfeit cigarettes was due to better intelligence and
better inspections - based on electronic methods such as ATS targeting
of cargo for inspection and the ICE Tobacco Program, which has helped
to bring the problem of cigarette smuggling to the forefront and has,
therefore, led to more seizures.
CBP data also showed a rise in the value of counterfeit cigarette
seizures compared to other commodities. Figure 7 shows the percent of
counterfeit cigarettes increasing from 9 percent of commodities seized
in fiscal year 2000 to 44 percent in fiscal year 2003.
Figure 7: Top Counterfeit Seizures by Commodity, Fiscal Years 2000
through 2003:
[See PDF for image]
[End of figure]
Legal Initiatives Being Pursued to Help Thwart Cigarette Smuggling:
Two legal initiatives have been proposed to enhance efforts to thwart
the cigarette smuggling problem. We did not evaluate the merits of
these initiatives. However, the Department of Justice generally
supports certain provisions contained in the PACT Act,[Footnote 20] a
bill intended to combat cigarette smuggling, but has not formally
endorsed the Act. In addition, WHO has proposed an international
treaty, the FCTC, to enhance global actions directed against the
illicit tobacco trade, including cigarette smuggling.
Justice Suggested Three Legal Initiatives to Combat Cigarette
Smuggling:
In October 2003, Justice suggested that Congress could strengthen the
enforcement tools for combating cigarette smuggling by: (1) lowering
the threshold for violating CCTA[Footnote 21] (a felony violation) from
60,000 to 30,000 cigarettes, (2) giving ATF authority to use money
generated during undercover sting operations to offset investigative
expenses, and (3) increasing ATF's authority to enter premises to
enforce federal cigarette laws.
The PACT Act, a bill intended to combat cigarette smuggling, includes
some of Justice's suggestions. However, Justice has not formally
endorsed the PACT Act (or its House companion bill, H.R. 2824). If
enacted, the PACT Act would broaden the definition of what constitutes
contraband cigarettes by lowering the CCTA quantity for nontaxed
cigarettes to be considered contraband from 60,000 to 10,000. This is a
lower threshold than Justice suggested. But, according to the bill's
sponsors, lowering the contraband cigarette threshold would allow ATF
to open more investigations and seek more federal felony prosecutions
of cigarette smugglers.
Second, the bill would allow ATF to pay expenses of undercover
investigations with money accrued during such operations. Justice
supports this provision. For example, as part of an undercover
investigation, ATF could sell cigarettes to a suspect and use the cash
to pay informants or buy more cigarettes from traffickers in the
investigation. This would make ATF's powers more comparable to those of
other investigative agencies like the Federal Bureau of Investigation
and the Drug Enforcement Administration, which may use such
nonappropriated funds to make undercover purchases and pay other
investigative expenses.
Finally, the bill includes a provision that would authorize ATF to
enter the property of any person who delivered, shipped, sold,
distributed, or received more than 10,000 cigarettes a month to inspect
cigarettes on the premises and any legal records or information on the
cigarettes required by law. Justice supports increasing ATF's authority
to enter premises to enforce federal cigarette laws, but it has not
opined its views on whether the 10,000 cigarette threshold is
appropriate. Currently, ATF must obtain consent to enter a person's
property and conduct an inspection. If denied entry, ATF must obtain a
search warrant by demonstrating probable cause to a U.S. district court
judge to enter a person's property. Under the bill, if ATF is denied
entry, its right of inspection could be enforced by a district court
order with the submission of an affidavit or other evidence that entry
was denied. As of April 2004, the PACT Act had passed the Senate and
was referred to the House, where action was pending.
International Initiative Calls for Global Cooperative Action to Reduce
the Illicit Tobacco Trade:
FCTC seeks to address the rise and spread of tobacco consumption around
the world through global solutions to a problem that cuts across
national boundaries, cultures, societies and socioeconomic strata.
FCTC, if ratified, would be an additional legal instrument addressing
issues as diverse as tobacco advertising and promotion, agricultural
diversification, smuggling, taxes, and subsidies.
FCTC was adopted at the World Health Assembly on May 21, 2003, and is
open to all members of the WHO or the United Nations from June 2003 to
June 2004 for ratification. At least 40 countries must ratify FCTC for
it to become law. If FCTC is ratified, those ratifying nations would
develop protocols, which are separate agreements containing specific
measures designed to implement the broad goals called for by the FCTC.
As of April 2004, the United States had not ratified FCTC.[Footnote 22]
The State Department, with interagency and White House input, was
reviewing FCTC, including determining whether joining the convention
would require any new legislation. According to the Director of Health
Programs, State Department, that deliberative review process was moving
forward. There is no set time frame for the review process to be
completed.
As part of its objective, FCTC states that cooperative action is
necessary to eliminate all forms of illicit trade in cigarettes and
other tobacco products, including smuggling, illicit manufacturing and
counterfeiting. Article 15 of FCTC (see app. II) is the only one of 38
Articles that addresses the illicit trade in tobacco products,
including cigarette smuggling.
The first of seven measures in Article 15 states that the elimination
of all forms of illicit trade in tobacco products, including smuggling,
illicit manufacturing and counterfeiting, and the development and
implementation of related national law, in addition to subregional,
regional and global agreements, are essential components of tobacco
control. The other measures require each ratifying country to, among
other things, mark packages of tobacco products to control their
movement, cooperate in investigations and prosecutions, periodically
report progress made, and adopt other measures as appropriate to
prevent illicit trade.
The fourth measure requires actions aimed at eliminating illicit trade
in tobacco products. For example, one action that FCTC will require is
the exchange of tax information among governments, as appropriate, and
in accordance with national law and relevant applicable bilateral or
multilateral agreements. Under present law, Section 6103 of the
Internal Revenue Code (IRC) of 1986 in general provides that the
government shall not disclose any taxpayer returns or return
information. Section 6103(k)(4) of the IRC, however, permits the
government to disclose such information ". . . to a competent authority
of a foreign government which has an income tax or gift and estate tax
convention, or other convention or bilateral agreement relating to the
exchange of tax information, with the United States but only to the
extent provided in, and subject to the terms and conditions of, such
convention or bilateral agreement." According to the Assistant Chief
Counsel of the Treasury Department's Alcohol and Tobacco Tax and Trade
Bureau (TTB), FCTC is a convention that under Section 6103(k)(4) would
allow the government, under the appropriate circumstances, to share
taxpayer returns or return information with competent authorities of
foreign governments who are Parties to FCTC.
According to TTB, the sharing of cigarette tax information with other
countries could help government agencies determine when cigarette
exports are diverted from legitimate distribution channels. Presently,
when a U.S. company exports cigarettes to another country, the exporter
files a document with TTB disclosing the type and quantity of
cigarettes being exported with no federal cigarette excise taxes due or
paid--this is considered taxpayer information. Currently, IRC does not
allow TTB to provide this information to the country to which the
cigarettes are shipped. The convention would allow the information to
be provided and used to determine whether the quantity of cigarettes
declared as imports matches the quantity of cigarettes exported. If the
imported quantity is less than the exported quantity, this may indicate
that some of the cigarettes were diverted to be smuggled into that or
some other country, or back to the United States, without the payment
of cigarette taxes and import duties.
Agency Comments:
We provided a draft copy of this report to DHS and Justice. DHS and
Justice had no comments on the substance of our draft. However, DHS and
Justice provided technical comments which we have incorporated, as
appropriate.
As agreed, unless you publicly announce the contents of this report
earlier, we plan no further distribution of it until 30 days from the
date of this letter. We will then send copies to others who are
interested and make copies available to others who request them. In
addition, the report will be available at no charge on GAO's Web site
at http://www.gao.gov.
If you or your staffs have any questions regarding this report, please
contact Darryl W. Dutton at (213) 830-1086 or me at (202) 512-8777. Key
contributors to this report are listed in appendix III.
Paul L. Jones, Director:
Homeland Security and Justice Issues:
[End of section]
Appendix I: Scope and Methodology:
To determine what is known about the nature and scope of the problem of
smuggled cigarettes, including counterfeit cigarettes, entering the
United States, we obtained information from the Department of Homeland
Security's (DHS) U.S. Immigration and Customs Enforcement (ICE) and the
Department of Justice's Bureau of Alcohol, Tobacco, Firearms and
Explosives (ATF). We interviewed ICE and ATF headquarters officials in
Washington, D.C., and we collected and reviewed pertinent
documentation, such as an ATF report on cigarette trafficking and
terrorism issued in July 2003.
We also contacted officials of various organizations to obtain
information about the consequences of cigarette smuggling. To determine
federal and state tax revenue losses due to the smuggling of
cigarettes, including counterfeit cigarettes, into the United States,
we interviewed headquarters officials in Washington, D.C., representing
ICE, ATF, and the Department of the Treasury's Alcohol and Tobacco Tax
and Trade Bureau (TTB); collected and reviewed available ATF
documentation; and conducted an Internet search using a major Internet
search engine (Google). To determine potential health risks due to the
smuggling of cigarettes, including counterfeit cigarettes, into the
United States, we interviewed officials representing TTB, DHS's U.S.
Customs and Border Protection (CBP), the Centers for Disease Control
and Prevention (CDC), and three tobacco manufacturers (Philip Morris
U.S.A., Brown and Williamson Tobacco Corporation, and R. J. Reynolds
Tobacco Company), and we collected information from CDC.
To determine federal law enforcement agencies' efforts to thwart the
smuggling of cigarettes into the United States, we interviewed ICE,
ATF, and CBP headquarters officials in Washington, D.C., and we
collected and reviewed pertinent documentation, including data on the
number of ICE cigarette-related investigations and ATF tobacco
investigations initiated and closed and CBP and ICE cigarette seizures
for selected fiscal years. We also interviewed an ICE official at a
field office in Long Beach, California, ATF officials at the Los
Angeles Field Division, and CBP officials at the Los Angeles/Long Beach
seaport, which was identified as having the largest number of cigarette
seizures in the country.
To assess the reliability of the ICE and ATF investigation data, we (1)
reviewed existing information about the data and systems that produced
them and (2) interviewed agency officials knowledgeable about the data
as necessary. For the CBP and ICE seizure data, which CBP maintains in
a database, CBP officials updated and provided us with data on the more
significant cigarette seizures with estimated values of $2,500 or
greater. We focused on these seizures because CBP reported that smaller
cigarette seizures are more likely to be instances of individuals
transporting cigarettes intended for personal consumption rather than
organized smuggling. To assess the reliability of the CBP and ICE
seizure data, we (1) performed electronic testing for obvious errors in
accuracy and completeness, (2) reviewed existing information about the
data and systems that produced them, and (3) interviewed agency
officials knowledgeable about the data. We determined that the
investigation and seizure data were sufficiently reliable for this
report.
To obtain information on certain legal initiatives being pursued to
enhance law enforcement efforts to thwart the smuggling of cigarettes
into the United States, we obtained information from the Justice
Department in Washington, D.C., regarding the Prevent All Trafficking
Act (S. 1177), a bill introduced in Congress with action pending at the
time of our review, and we interviewed an ATF headquarters official. We
also interviewed headquarters officials at the Department of State and
TTB in Washington, D.C., and obtained information from the World Health
Organization Web site regarding the Framework Convention on Tobacco
Control, a proposed treaty initiated by the World Health Assembly.
For the background section, we obtained data on the number of
cigarettes manufactured in the United States and the number of imported
cigarettes from the Economic Research Service, U.S. Department of
Agriculture, Web site; state cigarette excise tax rates from the
Federation of Tax Administrators' Web site; the number of states using
tax stamps as evidence that state cigarette taxes were paid from a
Federation of Tax Administrators official; and the federal cigarette
excise tax rate from ICE. The data were used for background purposes
and were not verified.
We conducted our work between August 2003 and March 2004 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Article 15 of the World Health Organization Framework
Convention on Tobacco Control:
Article 15: Illicit Trade in Tobacco Products:
The Parties recognize that the elimination of all forms of illicit
trade in tobacco products, including smuggling, illicit manufacturing
and counterfeiting, and the development and implementation of related
national law, in addition to subregional, regional and global
agreements, are essential components of tobacco control.
Each Party shall adopt and implement effective legislative, executive,
administrative or other measures to ensure that all unit packets and
packages of tobacco products and any outside packaging of such products
are marked to assist Parties in determining the origin of tobacco
products, and in accordance with national law and relevant bilateral or
multilateral agreements, assist Parties in determining the point of
diversion and monitor, document and control the movement of tobacco
products and their legal status. In addition, each Party shall:
(a) require that unit packets and packages of tobacco products for
retail and wholesale use that are sold on its domestic market carry the
statement: "Sales only allowed jn (insert name of the country,
subnational, regional or federal unit)" or carry any other effective
marking indicating the final destination or which would assist
authorities in determining whether the product is legally for sale on
the domestic market; and:
(b) consider, as appropriate, developing a practical tracking and
tracing regime that would further secure the distribution system and
assist in the investigation of illicit trade.
Each Party shall require that the packaging information or marking
specified in paragraph 2 of this Article shall be presented in legible
form and/or appear in its principal language or languages.
With a view to eliminating illicit trade in tobacco products, each
Party shall:
(a) monitor and collect data on cross-border trade in tobacco products,
including illicit trade, and exchange information among customs, tax
and other authorities, as appropriate, and in accordance with national
law and relevant applicable bilateral or multilateral agreements;
(b) enact or strengthen legislation, with appropriate penalties and
remedies, against illicit trade in tobacco products, including
counterfeit and contraband cigarettes;
(c) take appropriate steps to ensure that all confiscated manufacturing
equipment, counterfeit and contraband cigarettes and other tobacco
products are destroyed, using environmentally-friendly methods where
feasible, or disposed of in accordance with national law;
(d) adopt and implement measures to monitor, document and control the
storage and distribution of tobacco products held or moving under
suspension of taxes or duties within its jurisdiction; and:
(e) adopt measures as appropriate to enable the confiscation of
proceeds derived from the illicit trade in tobacco products.
Information collected pursuant to subparagraphs 4(a) and 4(d) of this
Article shall, as appropriate, be provided in aggregate form by the
Parties in their periodic reports to the Conference of the Parties, in
accordance with Article 21.
The Parties shall, as appropriate and in accordance with national law,
promote cooperation between national agencies, as well as relevant
regional and international intergovernmental organizations as it
relates to investigations, prosecutions and proceedings, with a view to
eliminating illicit trade in tobacco products. Special emphasis shall
be placed on cooperation at regional and subregional levels to combat
illicit trade of tobacco products.
Each Party shall endeavour to adopt and implement further measures
including licensing, where appropriate, to control or regulate the
production and distribution of tobacco products in order to prevent
illicit trade.
[End of section]
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Paul L. Jones (202) 512-8777 Darryl W. Dutton (213) 830-1086:
Staff Acknowledgments:
In addition to the above, Ronald G. Viereck, Daniel R. Garcia, Brian J.
Lipman, Kathryn G. Young, Michelle C. Fejfar, Charles W. Bausell Jr.,
and Shirley A. Jones made key contributions to this report.
FOOTNOTES
[1] Counterfeit cigarettes are cigarettes produced without the
authorization of the trademark holder.
[2] See U.S. General Accounting Office, Terrorist Financing: U.S.
Agencies Should Systematically Assess Terrorists' Use of Alternative
Financing Mechanisms, GAO-04-163 (Washington, D.C.: November 2003).
[3] According to a Federation of Tax Administrators official, as of
April 2004, 47 states required that tax stamps be placed on cigarette
packages as evidence that state cigarette taxes were paid. North
Dakota, North Carolina, and South Carolina do not require tax stamps.
[4] Department of the Treasury, Bureau of Alcohol, Tobacco and
Firearms, An Introduction to: the Bureau of Alcohol, Tobacco and
Firearms and the Regulated Industries (ATF P 5000.13, 12/98).
[5] Bureau of Alcohol, Tobacco, Firearms and Explosives, Illicit
Cigarette Trafficking and the Funding of Terrorism, July 22, 2003.
[6] According to ICE officials, states with higher cigarette excise
taxes are generally the states that lose cigarette tax revenue due to
smuggling. States could also lose other revenue. The Master Settlement
Agreement, signed in November 1998 by the attorneys general of 46
states, the District of Columbia, and the 5 U.S. territories, requires
four of the nation's largest tobacco companies to make annual payments
to states as reimbursement for health care costs related to tobacco
use. The annual payments are to be adjusted downward when a cigarette
manufacturer's sales volume decreases, such as lost sales because
consumers purchased smuggled cigarettes instead of legitimate
cigarettes.
[7] The CCTA (18 U.S.C. 2342) makes it unlawful (a felony) for any
person to ship, transport, receive, possess, sell, distribute, or
purchase more than 60,000 cigarettes that bear no evidence of state
cigarette tax payment in the state in which the cigarettes are found,
if such state requires a stamp or other indicia to be placed on
cigarette packages to demonstrate payment of taxes. Certain persons,
including permit holders under the Internal Revenue Code, common
carriers with proper bills of lading, or individuals licensed by the
state where the cigarettes are found, may possess these cigarettes.
(See also 18 U.S.C. 2341.)
[8] IPR violations include trademark, trade name, and copyright
violations, such as when cigarettes are clandestinely manufactured and
given the label of a genuine brand name.
[9] The IPR Center was created before the U.S. Customs Service was
transferred to DHS in March 2003.
[10] Starting in November 2003, the IPR Center was again given
responsibility for addressing counterfeit cigarette violations.
According to ICE officials, the Center coordinates its activities
regarding counterfeit cigarettes with ICE's Tobacco Program.
[11] Justice noted that on September 10, 2003, the Attorney General
delegated to the Director of ATF authority to investigate violations
under the Jenkins Act. The Jenkins Act (15 U.S.C. 375-378) requires any
person who sells and ships cigarettes across a state line to a buyer,
other than a licensed distributor, to report the sale to the buyer's
state tobacco tax administrator.
[12] ATF could not break out its computerized investigation data to
identify the number of investigations that were pursued outside the
United States.
[13] U.S. General Accounting Office, Homeland Security: Preliminary
Observations on Efforts to Target Security Inspections of Cargo
Containers, GAO-04-325T (Washington, D.C.: December 2003).
[14] According to ICE officials, an ICE investigation may also be
initiated in this process. In addition, the officials said active ICE
investigations develop information that results in seizures by CBP or
ICE.
[15] According to ICE officials, as of May 2004, ICE was not aware of
any indictments that connected material support of terrorism to the
smuggling of cigarettes into or out of the United States.
[16] Cigarette-related investigations include the smuggling of
counterfeit or genuine cigarettes into the United States, smuggling
cigarettes into foreign countries, smuggling cigarettes in violation of
embargoes, and international money laundering when one of the
underlying crimes is tobacco-related (e.g., cigarette smuggling,
trafficking in counterfeit cigarettes, trafficking in stolen
cigarettes, and interstate smuggling to avoid state cigarette taxes).
[17] ATF tobacco investigations primarily involve cigarettes. Some
investigations involve the smuggling of counterfeit or genuine
cigarettes into the United States, and some involve only domestic,
interstate cigarette smuggling. ATF could not break out its
computerized investigation data to identify the number of
investigations that involved cigarette smuggling into the United States
and to identify those that involved counterfeit and genuine cigarettes.
[18] CBP and ICE seize genuine cigarettes that are diverted from
legitimate distribution channels and are being smuggled into the United
States to avoid the payment of taxes.
[19] The Los Angeles/Long Beach seaport is the busiest port in the
United States, with over 2.8 million 40-foot containers in-bound per
year. Forty-three percent of containers coming in to the United States
passes through the Los Angeles/Long Beach seaport; approximately 9,000
per day.
[20] The proposed PACT Act (S. 1177), a bill introduced on June 3,
2003, by Senators Orrin G. Hatch and Herb Kohl, contains provisions
intended to, among other things, prevent tobacco smuggling and ensure
the collection of all tobacco taxes.
[21] P.L. 95-575, Nov. 2, 1978.
[22] As of April 16, 2004, 10 countries had ratified FCTC.
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Room LM Washington,
D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director, NelliganJ@gao.gov (202) 512-4800 U.S.
General Accounting Office, 441 G Street NW, Room 7149 Washington, D.C.
20548:
