Black Market Leaves a Black Mark

In March, Washington, D.C.-based The Tax Foundation released a report highlighting the illicit cigarette trade in the United States. Shortly after, New York Gov. Andrew Cuomo announced a new Cigarette Strike Force ? comprised of state, local and federal agencies ? to crack down on illegal tobacco trafficking and sales in the Empire State.

A few months later, Winston-Salem, N.C.-based Reynolds American Inc. (RAI) launched a special website called the ?New Tobacco Road? to draw attention to cigarette smuggling and the issue?s seriousness for the tobacco industry and all its players, including convenience store retailers and wholesalers.

While the black market trade of cigarettes is not a 21st century problem ? it has been around for decades, in fact ? the situation is getting more serious.

This problem ?has been around since the late ?70s when there were studies and research done about this issue. But we have seen it become a more serious issue as organized criminal enterprises look at illicit cigarette trade as part of their portfolio,? explained Bryan Hatchell, director of communications at RAI. ?It is becoming the currency of organized crime.?

The ?New Tobacco Road? refers to Interstate 95 along the Eastern Seaboard and the website is specifically meant to point out this issue. Along the I-95 corridor, criminals are taking advantage of the opportunity to make huge profits from the illicit sale of tobacco products, Hatchell said.

?Reynolds American is taking the lead on this position. This is something we think is absolutely critical to our company and our industry. The cigarette black market undermines one of our company?s main objectives and that is to keep tobacco products out of the hands of minors,? Hatchell added. ?People who are selling cigarettes illegally don?t ask buyers for identification. They sell to anyone with money, including kids.?

RAI is not the only tobacco company taking aim at this problem. Combating the illicit trade also has been a major part of Richmond, Va.-based The Altria Group Inc.?s corporate responsibility platform for several years.

?At the end of the day, it?s a concern for our business; it?s a concern for law enforcement and state and local regulatory agencies; and wholesalers and retailers,? said Brian May, senior manager of communications at Altria, the parent company of Philip Morris.

The Brand & Trade Channel Integrity Department within Altria?s law department works toward an end. Its efforts include communicating to trade members that distribute Altria?s products at wholesale and retail; maintaining a system to monitor compliance and address violations of the terms of trade programs; supporting law enforcement and regulatory agencies at all levels; and investigating those involved in importing and selling illicit cigarettes.

?Those are some big-bucket things we do as a company to protect our business and the legitimate cigarette distribution system,? May said.

THE BIGGER PICTURE

When thinking about the illegal cigarette trade, the image of a regular guy living in New York traveling down south to load up his car with cartons of cigarettes at cheaper prices comes to mind. However, all involved stress that the problem is much more serious than that.

?More and more, we are finding organized crime, ethnic street gangs and even terrorists getting into the game because it?s the new currency for the criminal. It?s more profitable than narcotics,? said Rich Marianos, a retired assistant director with the federal Bureau of Alcohol, Tobacco, Firearms and Explosives. ?It?s a $5.5-billion loss to this country a year in tax avoidance, tax evasion and just plain old stealing from the American taxpayer.?

Marianos, who now works with RAI on the New Tobacco Road, said he feels bad for the convenience stores and other retailers that are being hurt by the illicit trade.

?These convenience stores [and] gas stations play by the rules, pay their taxes and buy all their products legally, and the black market comes in and undercuts the nonsense out of them and hurts their overall profit,? he said. ?This is their livelihood. They are part of the community. They are staples where you can get milk late at night or whatever you need. These illegal traffickers are putting them right out of business.?

The black market for cigarettes is not just an East Coast problem, either. It is happening on the Southwest border, on the New York-Canadian border, and in Los Angeles across the Mexican border. It?s also happening in the Miami area where counterfeit cigarettes are coming off ships.

However, when you look at the illegal sales of legitimate cigarettes, I-95 is one of the best examples, according to Marianos. ?You have places like the Carolinas, Georgia [and] Virginia where they can purchase a ton and use that artery right up to New York State or Massachusetts,? he pointed out.

As Marianos noted, the pervasiveness of the illicit trade is making it difficult for c-stores and other tobacco retailers to compete. RAI?s Hatchell agrees.

?It is incredibly hard for legitimate retailers to compete in an environment where illicit cigarettes are being sold. They cannot competitively compete with those prices,? Hatchell said. ?It is up to retailers to contact their local legislators and law enforcement [officials] and let them know this is an important issue that is hurting their business, hurting their ability to maintain their jobs and for the safety of their employees.?

Altria?s May added that retailers can also protect their businesses by making sure they are buying from reputable wholesalers and that these wholesalers are buying from either other reputable wholesalers or manufacturing the product themselves. This way, retailers can ensure the products they are carrying and selling are in full compliance and legitimate, and that the appropriate taxes are being paid.

FIGHTING FIRE

The black market cigarette trade does not have to be the new normal, though, according to Scott Drenkard, economist and manager of state projects at The Tax Foundation. There are several efforts underway to combat the problem, he said, including:

• Banning common carrier transportation of cigarettes;
• Implementing harder-to-counterfeit tax stamps; and
• Increasing security on highways, especially I-95.

?These have had some effect, but the underlying issue still remains. If the profit motive is there, entrepreneurs ? whether above ground or below ground ? will sell products to move profit,? he said. ?The real solution here is lowering the tobacco taxes to justifiable, rational levels.?

With $5.5 billion on the line, tobacco industry insiders believe there needs to be a three-pronged approach: more support for law enforcement; stricter penalties for the traffickers; and more awareness by the legislators.

?$5.5 billion: this is what we lose in illegal tobacco trafficking a year. Can you imagine what we could fund with that? It could fund preschool care in the entire United States. I try to put it into terms people can grasp,? Marianos said.

?It?s got to be combined: local, state and federal. A lot of the cases lead to major criminal organizations and the states can?t deal with that. This is not an indictment against state authorities, but they can?t go interstate. It has to be looked at as a national approach,? he continued.

Although they cannot go interstate, some states are taking bold steps within their borders. For example, earlier this summer, Rhode Island Gov. Lincoln Chafee signed into law legislation that increases fines and imprisonment periods for illegal cigarette sales by as much as 20 times and reclassifies violations as felonies, according to The Tax Foundation.

In New York, the Cigarette Strike Force in its first six months seized nearly $1.7 million in contraband and cash. The task force also took hold of 2.7 million cigarettes and cigars. The seizures included 12,236 cartons of untaxed cigarettes, 254,873 cigars, 2,061 pounds of loose tobacco and 24,773 counterfeit cigarette tax stamps.

In addition, Gov. Cuomo last year signed legislation authorizing New York?s Tax Department to impose a penalty of up to $600 for each carton of unstamped or unlawfully stamped cigarettes seized. This change increased the penalty from $150 per carton.

NOT A VICTIMLESS CRIME

The seriousness of this issue is not being oversold, industry players emphasize.

?It?s not just somebody coming down and buying 100 cartons from somewhere in a low-excise-tax state and taking them back to New York. It?s often very sophisticated criminal organizations and even organizations that are associated with terrorist groups,? explained May of Altria. ?The cost to society cannot be underestimated. It is and can be a very significant problem.?

RAI?s Hatchell added: ?Lost tax revenue, the law enforcement challenges, there are many, many elements to this problem. Criminals are adding cigarettes to their portfolio, if you will, of illicit drugs, firearms, prostitution. When these criminal enterprises come to town, they bring a lot of bad elements with them. It is much less risky to smuggle cigarettes than it is to smuggle drugs.?

Given all these elements, the black market cigarette trade is far from a victimless crime.

?The victim is the store owner. The victim is the poor community these bad guys go into to buy cigarettes and set up shop. The victims are the under-resourced police officers who have to do more with less. There are victims left and right,? Marianos said.