New Study – Old Problem on Illicit Tobacco Products

A new study by New York University (NYU) found that 15% of 830 packs inspected by the New York City Sheriff’s Department carried either out-of- state, counterfeit New York, or counterfeit out-of-state tax stamps. While this number sounds alarming, it is unfortunately not new news. Even more concerning, the estimate appears rather low. The illicit cigarette trade in New York has escalated ever since lawmakers in Albany and City Hall started using tax policy as a tool to accomplish public health goals.

Article originally published in Reconnaissance's Tax Stamp News™.

Since the turn of the millennium, New York State and New York City have increased their combined excise tax more than ten-fold to $5.85 per pack, from $0.55 per pack in 1999. Supported by the WHO doctrine of mPower (a series of measures to assist country-level efforts to reduce tobacco demand), ‘sin-taxes’ have been utilized to drive consumer behavior. The belief, in short, is that smokers will quit if cigarettes are too expensive.

While the goal of tobacco consumption reduction is a laudable and worthwhile goal, tax policy is a very blunt tool, which can unfortunately spark serious unintended consequences – illicit trade. Raising taxes to increase prices on undesirable products, in order to impact consumer behavior, certainly works in a theoretical framework. But it plays out very differently in a state and a city with dozens of neighboring states with lower tax rates, as well as the largest sea and airports in the nation, expansive tax-free Native American reservations and firmly established criminal networks.

As a result, the State and City of New York are confronted by staggering amounts of all forms of illicit cigarettes, including counterfeit, illegal imports, smuggled cigarettes from low-tax states and contraband cigarettes trafficked to and from Native American reservations. Various studies, reports and enforcement initiatives have demonstrated just how prevalent the illicit cigarette trade in New York State and New York City is:

  • A sweep of 1,700 stores by the New York City Sheriff’s Department in 2012 found that 42% were selling some form of illicit cigarettes.

  • In 2012, the New York City Department of Tax and Finance estimated that half the cigarettes sold in New York City were sold with fake tax stamps or no tax stamps at all.

  • New York State’s 2011 evaluation of its own tobacco control program estimated that 30% of all cigarettes consumed in New York State failed to pay the appropriate New York State tax.

By not collecting tax revenues on 30-50% of all cigarettes consumed, the State and the City of New York are experiencing massive tax revenue loss. The New York Association of Convenience Stores (NYACS) estimated in 2011 that ‘New Yorkers purchased 384 million packs of cigarettes from other states, Indian reservations, duty-free shops and military bases. If New York State tax had been collected on all of those purchases, it would have registered $1.67 billion in tax revenue’. And if this number is not staggering enough, this estimate does not include counterfeit, illegal imports and lost New York City tax revenue.

The illegal profit potential attracts criminal organizations and criminals from all walks of life. Law enforcement along the Eastern Seaboard have reported the rapid involvement of criminal organizations in the illicit tobacco trade, including MS-13, which utilizes its established narcotics trafficking networks to smuggle cigarettes into New York from Virginia.

Government and law enforcement across the globe, including the Congressional Research Service, New York Police Department (NYPD) and the Royal Canadian Mounted Police (RCMP) echo the concern that the profits from illicit tobacco trade finance other criminal activities, such as money laundering, as well as gun, drug and human trafficking.

Old Problem – New Solutions needed Many dedicated law enforcement officers battle against the illicit cigarette trade on the streets, alleys and dark corners of New York every day. In particular, the New York Sheriff’s Department and NYPD have demonstrated notable enforcement successes.

For example, after a year-long joint investigation with federal authorities, the NYPD arrested 16 individuals and charged them with corruption, money laundering and related tax crimes. Some of the defendants even had alleged ties to Hamas and Hezbollah. The arrested individuals reportedly bought cigarettes from a wholesaler in Virginia and smuggled them to street sellers in New York. Law enforcement officials estimated the tax revenue loss to New York to be in excess of $80 million.

Given the historic proportions of illicit cigarette trade in New York – and to continue the enforcement momentum – a comprehensive new enforcement approach is required, including: (1) Establishment of a contraband tobacco taskforce, with dedicated funding and resources; (2) Increased resources for law enforcement through appropriations, churning authority (where funds raised in an investigation are pumped

back into the case to cover expenses and keep it going), forfeitures, fines and penalties; (3) Ensuring all necessary civil and criminal enforcement powers are available to tobacco enforcement personnel; (4) Increased licensing, invoicing, recordkeeping and reporting requirements; (5) Increased transparency by establishing and publishing lists of licensed New York tobacco manufacturers, wholesalers and retailers; and (6) Increased fines and penalties, including significantly increased prison sentences for trafficking large quantities and repeat offenders. The State of New York and New York City have the opportunity to turn the tide on cigarette enforcement by trying new approaches to an old problem.

Sven Bergmann is a Managing Partner at Venture Global Consulting and advises brand owners, technology providers and governments on anti-counterfeit strategies, programmes and technologies.

Send your comments to SBergmann@VentureGlobalCo.com.


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