The fatal attraction between Crime and Illicit Tobacco

Over the years, many articles, court cases and government reports have highlighted the link between the illicit trade in tobacco products and organized crime. More recently, several U.S. government agencies have reported a convergence between organized crime, terrorist groups, and an increased transnational presence of criminal illicit tobacco networks. Most concerning, these expanded criminal operations appear to become more violent to protect an ever more lucrative illicit business.

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

Some might ask how this is relevant to tax stamps? In short, as illicit trade moves outside the legitimate distribution chain and criminal actors become more violent to protect their illicit business, tax stamps become increasingly ineffective as a tool. And once criminality and violence is established, they are hard to get rid of. This article is to inform, sensitize and activate the tax stamp community on these issues.

To combat this threat and ensure violent criminality can’t thrive, changes in policy, taxation and tax stamps should always be accompanied by corresponding comprehensive increases in enforcement policy, funding resources and tools.

Going forward, this necessitates the focus and cooperation of tax authorities, policy makers, public health officials, tax stamp providers and industry participants.

The irresistible attraction of illicit tobacco Gangs, criminal groups, organized crime groups, transnational crime organizations and terror organizations are attracted by the tremendous profits illicit tobacco trafficking operations can reap in astonishingly short amount of time.

Trafficking in illicit tobacco is a low-risk, high-reward criminal activity. Profit margins rival or exceed the profit margins of many other criminal activities such as trafficking in narcotics or weapons. Most importantly, the risk of detection and harsh punishments is much lower. The illicit profits gained are often used to finance insecurity, instability, corruption and other criminal activities, including money laundering, bulk cash smuggling, and the trafficking in humans, weapons, drugs, antiquities, diamonds, and counterfeit goods. The criminals involved in illicit tobacco trafficking even provide financial support to terrorist organizations.

In the United States, street gangs and organized crime are regular actors in the illicit trade in tobacco products. For example, the Virginia State Crime Commission (VSCC) in 2013 found that the notorious and violent gang MS-13 started to use their narcotics trafficking networks to smuggle cigarettes into New York from Virginia. According to VSCC officials, cigarette smuggling “has just become irresistible for organized crime... MS-13 has discovered how much money they can make on this.”

Other egregious actors in the past included the Racketeering (RICO) conviction of a former crack dealer turned contraband cigarette trafficker, Rodney Morrison, who had amassed illicit profits of over $40mm through his Peace Pipe Smoke Shop on the Poospatuck Indian Reservation in Mastic, NY. To accomplish this, he consorted to firebombing, robbing, battering and even financing the murder of his competitors. 1

In 2013, a large-scale investigation and enforcement action by the New York Police Department (“NYPD”) provided a chilling reminder of the rising involvement of criminal organizations and even potential terror connections. Following a year-long joint investigation with federal authorities, the NYPD arrested 16 individuals and charged them with corruption, money laundering and tax crimes. Even more alarming, some of the defendants have alleged ties to Hamas, Hezbollah and convicted terrorists. Over $80 million were lost in taxes and the criminals laundered more than $55 million in illicit profits, some of which may have been used to fund militant groups. 2 3 In addition, two defendants were charged with conspiracy and criminal solicitation for conspiring from behind bars to murder witnesses who were cooperating with law enforcement. But not only domestic gangs and criminal organizations are attracted by the significant illicit profits to be reaped. Two high-profile cases highlighted the twisted connections between illicit tobacco, transnational crime and terror groups. 4

In 2007, several individuals were sentenced to significant prison sentences for material support to foreign terrorist organizations. The convictions were a result of a multi-year interagency counterterrorism operation codenamed Operation Smokescreen. The task force had arrested nearly 100 individuals running a North Carolina-based Hezbollah terrorist cell. The Hezbollah members raised illegal funds for Hezbollah activities, both foreign and domestic, by smuggling cigarettes between North Carolina and Michigan. The Hezbollah terrorist cell collected a total of $8 million dollars, funneled through 500 different bank accounts. The terrorist cell sent some of the money directly to Hezbollah in Lebanon, but also purchased and shipped night vision goggles, surveying equipment, aircraft analysis and design software, laser rangefinders, and mine detectors. 5

In 2011, the final sentences were handed down for the 87 criminal actors who had been charged as a result of multi-year operations on the U.S. East and West Coast, led by the Federal Bureau of Investigation (FBI) in cooperation with numerous American and Canadian law enforcement agencies. Smugglers shipped approximately $40 million worth of counterfeit cigarettes, ecstasy, methamphetamines, counterfeit pharmaceuticals, surface-to- air missiles and millions of dollars in “supernotes” (very sophisticated and highly deceptive counterfeit U.S. currency $100 bills) into the United States from China and North Korea. As a result, most of the defendants pled guilty or were convicted, and one was even convicted under a 2004 anti-terrorism statute that outlawed the importation of missile systems designed to destroy aircrafts.

In 2015, U.S. Airforce carried out an airstrike against several terrorist targets in eastern Libya killing veteran Al Qaeda kingpin Mokhtar Belmokhta, who orchestrated the deadly 2013 attack on a massive oil complex in Algeria. Belmokhta was notoriously know to run a massive cigarette smuggling ring in Northern Africa to fund his terrorist acts, which had garnered him the nickname “The Marlboro Man” among international counter-terror and intelligence units.

Several government reports have confirmed the extent of these criminal and terror involvements. The latest report “The Global Illicit Trade in Tobacco – A Threat to National Security”, released in December 2015 by the U.S. State Department, in collaboration with various Federal Agencies, including the Department of Justice, Department of Treasury, Department of Homeland Security and the Department of Health and Human Services, detail how criminal networks are expanding their operations, diversifying their activities and converging with transnational threats. One example in the report describes the troubling connection between the IRA, Al Qaeda and an “illicit whites” trafficking ring operated out of Ireland.

MS-13 gang member

The attraction is turning fatal The involvement of gangs, organized crime and transnational crime group has been well established. While many illicit groups have been involved in the past, overt violence was less common and as shown above, violent cases sometimes were years apart. But the convergence of these groups and their transnational interests is troubling. Simultaneously, the unintended consequences of ineffective or short-sighted anti-tobacco policies are increasing the appeal of illicit tobacco trafficking to these groups. For example, higher taxes increase the illicit profit potential and plain packaging enables the smuggling of cigarettes without the need or burden to counterfeit branded packaging, which in turn also limits or eliminates legal civil actions by brand owners.

The convergence of transnational crime groups coupled with these unintended consequences appear to worsen the criminal activities and increase the overall violence associated with illicit tobacco. Over the last year, news reports not only show a continuous increase in organized illicit tobacco trafficking activities, but also an apparent increase in violence. Reports of burglaries, sometimes at gunpoint to steal cigarettes from shops and warehouses have become a daily occurrence.

In August, Hong Kong Customs uncovered a new significant smuggling ring and seized tens of millions in illegal cigarettes. A member of a violent motorcycle gang called the violent and criminal Kingsmen Motorcycle Club (KMC) was convicted on RICO charges to 20 years. Four tobacco smugglers in Vietnam killed a security guard at a warehouse in September 2016.

One of the most vivid examples of this increased violence was the gruesome attempted kidnapping, battery and almost fatal stabbing of a British American Tobacco (BAT) executive outside his home in Sydney, Australia this year. Australian police authorities have linked the crime to a criminal syndicate. Evidence suggests the attack was linked to BAT's support of police efforts to tackle the flood of illegal unbranded plain packaged cigarettes or “illicit whites”, known as “chop-chop”. The BAT executive was a former NSW policeman who had been working closely with law enforcement to combat smuggling.

The increase in violence is akin to the international developments seen in the world of illicit drug trafficking. Some argue that the “War on Drugs”, instead of decreasing demand for illicit drugs in the United States, in actuality has increased the profitability for international drug trafficking organizations. With increased profitability comes increased militarization of cartels and horrific increases in violence. Yet, the Heroin and Opioid Epidemic in the United States has reached tragic, historic and epic proportions.

How to break the fatal attraction

The illicit trade in tobacco products is not yet at this stage, it has not yet reached the violence seen with drug trafficking. But given the actors involved, the attractiveness of these crimes and the easy low-risk illicit profits to be made, public policy needs to reflect this changed risk threat.

Many reports show that the increased violent criminality is corresponding and correlated to the steady increase of illicit tobacco products, which are created, distributed and sold completely outside of the legitimate distribution chain. This will have a lasting impact on the role of tax stamps, even to the point that tax stamps as a tool to combat illicit trade might become increasingly ineffective.

A recent research paper published by Pepperdine University, concluded that once crime and violence are established in illicit markets, they are increasingly difficult to combat. 6 In addition, the growth of illicit tobacco undermines government health policy objectives, deprives anti-smoking campaigns and healthcare programs of funding and illicit, unregulated products do not meet the federal health regulations, and can be lazed with ingredients not fit for human consumption or even toxic.

Tax stamps are an important tool for verification of tax payment. However, this great technical tool, which works well for diversion of legitimate product from within the regulated distribution chain is starting to be poorly matched for the morphing world of illicit trade. As the illicit tobacco trade continues to grow and fester outside the legal distribution chain, actual enforcement resources will continue to become more important. This not only includes more “boots-on- the-ground” through increased enforcement manpower, but also expanded seizure and forfeiture rights.

And these increased enforcement forces will need effective tools to do the job, including expanded comprehensive licensing laws, inspection laws, record keepingand reporting requirements, harsher penalties and effective tax stamps. Such a comprehensive approach will need to examine and measure the unintended consequences anti-tobacco policies have on the illicit tobacco trade and the involvement of organized crime.

Going forward it will be important for tax authorities, governments, policy makers, lawmakers, public health officials, tax stamp providers, technology providers and industry participants to work together to break the links between illicit tobacco and organized crime that allow the illicit tobacco trade to fester and flourish.

1 United States v. Rodney Morrison, 2:04 CR 699 (E.D.N.Y., filed Aug. 8, 2004) 2 http://money.cnn.com/2013/04/16/news/economy/cigarette-smuggling/index.html 3 Press Release, New York Attorney General Eric T. Schneiderman, A.G. Schneiderman & NYPD Commissioner Kelly Announce Take Down of Massive Eastern Seaboard Unstamped Cigarette Trafficking Enterprise (May 16, 2013). 4 Press Release New York Attorney General Eric T. Schneiderman, “A.G. SCHNEIDERMAN ANNOUNCES NEW CHARGES AFTER FOILED MURDER-FOR- HIRE PLOT IN MASSIVE EASTERN SEABOARD CIGARETTE TRAFFICKING CASE” October 17, 2013

5 United States v. Mohamad Youssef Hammoud, 3:00 CR 147 (W.D.N.C., indicted July 20, 2000

6 Pepperdine University, “Unintended Consequences of Cigarette Prohibition, Regulation, and Taxation”, Jonathan D. Kulick et al., July, 13, 2015

Sven Bergmann is a Managing Partner at Venture Global 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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