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 
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. 

Highlights of GAO-04-641, a report to the 

Chairman and Ranking Minority Member, 

Committee on Government Reform, 

House of Representatives 

May 2004

CIGARETTE SMUGGLING 

Federal Law Enforcement Efforts and 

Seizures Increasing 

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 

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. 
Page i GAO-04-641 Cigarette Smuggling 

Letter 1

Results in Brief 2

Background 3

Cigarette Smuggling into the United States Considered a Significant 

Problem 6

Federal Agencies Increased Efforts to Thwart Cigarette Smuggling 

into the United States and Increased Seizures 8

Legal Initiatives Being Pursued to Help Thwart Cigarette Smuggling 23

Agency Comments 26

Appendix I Scope and Methodology 27 

Appendix II Article 15 of the World Health Organization 

Framework Convention on Tobacco Control 29 

Article 15: Illicit Trade in Tobacco Products 29

Appendix III GAO Contacts and Staff Acknowledgments 31 

GAO Contacts 31

Staff Acknowledgments 31

Table 

Table 1: Seizures of Counterfeit and Genuine Cigarettes, Fiscal 

Years 1998 through 2003 21

Figures 

Figure 1: Domestically Produced and Imported Cigarettes, 1994 

through 2003 5

Figure 2: A Typical 40-foot Shipping Container at the Los 

Angeles/Long Beach Examination Station 15

Figure 3: Smuggled Counterfeit Cigarettes Disguised as Legitimate 

Merchandise 16

Figure 4: Smuggled Counterfeit Cigarettes 17

Figure 5: Number of ICE Cigarette-Related Investigations Initiated 

and Closed, Fiscal Years 1998 through 2003 18

Contents 
Page ii GAO-04-641 Cigarette Smuggling 

Figure 6: Number of ATF Tobacco Investigations Initiated and 

Closed, Fiscal Years 1998 through 2003 20

Figure 7: Top Counterfeit Seizures by Commodity, Fiscal Years 

2000 through 2003 22

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 

This is a work of the U.S. government and is not subject to copyright 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. 
Page 1 GAO-04-641 Cigarette Smuggling 

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,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 

 1

Counterfeit cigarettes are cigarettes produced without the authorization of the trademark 

holder. 

United States General Accounting Office 

Washington, DC 20548 
Page 2 GAO-04-641 Cigarette Smuggling 

(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.) 

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.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. 

 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). 

Results in Brief 
Page 3 GAO-04-641 Cigarette Smuggling 

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. 

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 

Background 

Federal and State Excise 

Taxes Are Levied on 

Cigarettes Intended for 

Sale in the United States 
Page 4 GAO-04-641 Cigarette Smuggling 

tax.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. 

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. 

 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. 

Domestic Cigarette 

Production Has Declined, 

While Imported Cigarettes 

Have Increased in Recent 

Years 
Page 5 GAO-04-641 Cigarette Smuggling 

Figure 1: Domestically Produced and Imported Cigarettes, 1994 through 2003 

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,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. 

 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). 

Cigarettes Can be Diverted 

from the Distribution 

System 

200

300

400

500

600

700

800

0

25

50

75

100

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Cigarettes (in billions)

725.5

746.5 754.5

722.8

679.7

606.6 594.6

562.4

532.0

500.0

3.5 3.0 2.8

Imported cigarettes

Source: Developed by GAO from data provided by the Economic Research Service, Department of Agriculture.

Domestically produced cigarettes

3.2 4.3 8.7 11.3 14.7 20.9 25.9
Page 6 GAO-04-641 Cigarette Smuggling 

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. 

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. 

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. 

Cigarette Smuggling 

into the United States 

Considered a 

Significant Problem 

Intelligence Indicates 

Cigarette Smuggling Is a 

High Profit Crime with 

Possible Terrorism 

Connections 
Page 7 GAO-04-641 Cigarette Smuggling 

According to an ATF report,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 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.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 

 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. 

Cigarette Smuggling 

Results in Lost Revenues 

and Public Health Risk 
Page 8 GAO-04-641 Cigarette Smuggling 

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. 

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.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 

 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.) 

Federal Agencies 

Increased Efforts to 

Thwart Cigarette 

Smuggling into the 

United States and 

Increased Seizures 
Page 9 GAO-04-641 Cigarette Smuggling 

have increased dramatically, from 12 total seizures in 1998 to 191 seizures 

in 2003. 

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 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.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 2000.9

 In January 2001, responsibility for these violations was 

delegated from the IPR Center to a newly formed Tobacco Task Force.10

 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. 

10Starting 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. 

Several Federal Agency 

Missions Address Cigarette 

Smuggling 

ICE Efforts to Combat 

Cigarette Smuggling 
Page 10 GAO-04-641 Cigarette Smuggling 

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 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,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 

 11Justice 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. 

ATF Investigative Efforts 
Page 11 GAO-04-641 Cigarette Smuggling 

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.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’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; 

 12ATF could not break out its computerized investigation data to identify the number of 

investigations that were pursued outside the United States. 

CBP Inspection Efforts 
Page 12 GAO-04-641 Cigarette Smuggling 

• #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 reported13 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 

 13U.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). 
Page 13 GAO-04-641 Cigarette Smuggling 

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 
Page 14 GAO-04-641 Cigarette Smuggling 

may then use the information for future targeting of cargo for 

examination.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. 

 14According 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. 
Page 15 GAO-04-641 Cigarette Smuggling 

Figure 2: A Typical 40-foot Shipping Container at the Los Angeles/Long Beach 

Examination Station 
Page 16 GAO-04-641 Cigarette Smuggling 

Figure 3: Smuggled Counterfeit Cigarettes Disguised as Legitimate Merchandise 

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. 
Page 17 GAO-04-641 Cigarette Smuggling 

Figure 4: Smuggled Counterfeit Cigarettes 

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.15 

 15According 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. 

Number of ICE and ATF 

Investigations into 

Cigarette Smuggling Have 

Increased and Become 

Larger and More Complex 
Page 18 GAO-04-641 Cigarette Smuggling 

Figure 5 shows the number of ICE cigarette-related investigations initiated 

and closed for each fiscal year from 1998 through 2003.16

Figure 5: Number of ICE Cigarette-Related Investigations Initiated and Closed, 

Fiscal Years 1998 through 2003 

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. 

 16Cigarette-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). 

0

12

24

36

48

60

72

84

96

108

120

1998

7

0

28

8

67

30

59

33

75

41

99 103

1999 2000 2001 2002 2003

Number of investigations

Fiscal year

Investigations initiated

Source: GAO analysis of ICE data.

Investigations closed Activity
Page 19 GAO-04-641 Cigarette Smuggling 

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 2003.17

 17ATF 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. 
Page 20 GAO-04-641 Cigarette Smuggling 

Figure 6: Number of ATF Tobacco Investigations Initiated and Closed, Fiscal Years 

1998 through 2003 

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. 

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 

Cigarette Seizures Have 

Increased 

0

12

24

36

48

60

72

84

96

108

120

132

144

156

1998

9

0

30

3

56

30

77

52

138

54

153

76

1999 2000 2001 2002 2003

Number of investigations

Fiscal year

Investigations initiated

Source: GAO analysis of ATF data.

Investigations closed Activity
Page 21 GAO-04-641 Cigarette Smuggling 

genuine cigarettes.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 

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. 

Most counterfeit cigarette seizures were at the Los Angeles/Long Beach 

seaport.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 

 18CBP 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. 

19The 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. 

Cigarettes 1998

0

0

0

12

$1,383,650

79,277

1999 2000 2001 2002 2003

Number of

seizures

Estimated

value

Estimated

number of

cartons

3

$348,705

19,926

29

$1,136,338

65,794

11

$4,242,232

354,606

39

$1,333,768

96,843

10

$5,787,872

272,939

56

$7,708,890

322,351

34

$34,483,613

1,286,045

163

$7,924,351

554,670

56

$45,817,162

1,797,431

135

$5,075,053

225,981

Counterfeit cigarettes

Source: Developed by GAO from CBP’s database.

Genuine cigarettes
Page 22 GAO-04-641 Cigarette Smuggling 

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 

All other commodities

Cigarettes

Handbags, wallets, etc.

Media

Watches, parts

Apparel

Toys, electronic games, etc.

Commodity

FY 2000

13%

10%

9%

17%

4%

38%

9%

8%

14%

10%

13%

6%

41%

8%

9%

4%

29%

15%

38%

15%

4%

8%

12%

15%

44%

FY 2001 FY 2002 FY 2003

2% 2%

Total: 100%

Source: Developed by GAO from CBP data. 

Total: 100% Total: 100% Total: 100%

3%
Page 23 GAO-04-641 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,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. 

In October 2003, Justice suggested that Congress could strengthen the 

enforcement tools for combating cigarette smuggling by: (1) lowering the 

threshold for violating CCTA21 (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 

 20The 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. 

21P.L. 95-575, Nov. 2, 1978. 

Legal Initiatives Being 

Pursued to Help 

Thwart Cigarette 

Smuggling 

Justice Suggested Three 

Legal Initiatives to Combat 

Cigarette Smuggling 
Page 24 GAO-04-641 Cigarette Smuggling 

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. 

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.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. 

 22As of April 16, 2004, 10 countries had ratified FCTC. 

International Initiative 

Calls for Global 

Cooperative Action to 

Reduce the Illicit Tobacco 

Trade 
Page 25 GAO-04-641 Cigarette Smuggling 

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 
Page 26 GAO-04-641 Cigarette Smuggling 

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. 

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 

Agency Comments 
Appendix I: Scope and Methodology 

Page 27 GAO-04-641 Cigarette Smuggling 

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 

Appendix I: Scope and Methodology 
Appendix I: Scope and Methodology 

Page 28 GAO-04-641 Cigarette Smuggling 

$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. 
Appendix II: Article 15 of the World Health 

Organization Framework Convention on 

Tobacco Control 

Page 29 GAO-04-641 Cigarette Smuggling 

1. 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. 

2. 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. 

3. 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. 

4. 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; 

Appendix II: Article 15 of the World Health 

Organization Framework Convention on 

Tobacco Control 

Article 15: Illicit Trade 

in Tobacco Products 
Appendix II: Article 15 of the World Health 

Organization Framework Convention on 

Tobacco Control 

Page 30 GAO-04-641 Cigarette Smuggling 

(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. 

5. 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. 

6. 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. 

7. 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. 
Appendix III: GAO Contacts and Staff 

Acknowledgments 

Page 31 GAO-04-641 Cigarette Smuggling 

Paul L. Jones (202) 512-8777 

Darryl W. Dutton (213) 830-1086 

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. 

Appendix III: GAO Contacts and Staff 

Acknowledgments 

GAO Contacts 

Staff 

Acknowledgments 

(440218) 
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