Cigarette Smuggling: Federal Law Enforcement Efforts and Seizures Increasing
Published: 2004-05-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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 (1) the nature and scope of the problem of smuggled cigarettes entering the United States, including federal tax revenue losses and potential health risks; (2) federal law enforcement agencies'--U.S. Immigration and Customs Enforcement (ICE), U.S. Customs and Border Protection (CBP), and Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF)--efforts to thwart the smuggling of cigarettes into the United States; and (3) legal initiatives being pursued to enhance law enforcement efforts to thwart the smuggling of cigarettes into the United States.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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, results in lost tax revenues, undermines  government health policy objectives, can attract sophisticated and  organized criminal groups, and could be a source of funding for terrorists,  we are providing information about cigarette smuggling and efforts to  combat it. More specifically, this report addresses the nature and scope of the problem of cigarette smuggling,  including counterfeit cigarettes, into the United States and its  consequences, including federal tax revenue losses and potential health  risks;   describes federal law enforcement agencies’ efforts to thwart the  smuggling of cigarettes into the United States; and identifies certain legal initiatives being pursued to enhance law  enforcement efforts to thwart the smuggling of cigarettes into the United  States.
To determine what is known about the nature and scope of the problem of  smuggled cigarettes and law enforcement efforts to combat the problem,  we obtained information from the Department of Homeland Security’s  (DHS) U.S. Immigration and Customs Enforcement (ICE) and U.S.  Customs and Border Protection (CBP), and the Department of Justice’s  Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) officials. We  also obtained information from Justice, State, and Treasury Department  officials on existing legal initiatives proposed to enhance efforts to thwart  cigarette smuggling. To obtain information about the health consequences  of smuggled counterfeit cigarettes, we contacted the Centers for Disease  Control and Prevention (CDC) and officials from the tobacco industry.
We conducted our work between August 2003 and March 2004 in  accordance with generally accepted government auditing standards. (See  app. I for details about our scope and methodology.)
subsections: section_title: Background
paragraphs: 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.
subsections: section_title: Federal and State Excise Taxes Are Levied on Cigarettes Intended for Sale in the United States
paragraphs: Tobacco grows in many countries, but the United States has been the  major source of the product for hundreds of years. About 500 billion  genuine cigarettes were produced in domestic factories in 2003, and  cigarettes continue to dominate the manufactured tobacco products  market. Cigarette manufacturing is concentrated in Georgia, Kentucky,  North Carolina, and Virginia.
After manufacture, the general industry pattern is for manufacturers to  deposit cigarettes in warehouses and pay the federal cigarette excise tax  of 39 cents per pack of 20 cigarettes. Next, the cigarettes move to a  wholesaler stamping agent. Stamping agents have authority from states to  affix to cigarette packs evidence of the payment of the appropriate state  tax. 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.
section_title: Domestic Cigarette Production Has Declined, While Imported Cigarettes Have Increased in Recent Years
paragraphs: 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.
section_title: Cigarettes Can be Diverted from the Distribution System
paragraphs: 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, for example, “over-the-road” smuggling generally includes  small purchases (well under 100 cartons; 10 packs per carton, 20 cigarettes  per pack) in one state for transport to a higher-tax state for resale. Also,  counterfeit stamping operations and manipulation of interstate cigarette  distribution reports have been identified as potential major sources of  revenue loss to the various states. These operations are characteristic of  larger and more sophisticated criminal operations, possibly involving  collusion between certain wholesalers and firms with outlets such as  vending machines and retail stores.
Moreover, the illicit trade in smuggling both genuine and counterfeit  cigarettes into the United States avoids both federal excise tax and state  taxes on cigarettes. The major types of cigarette smuggling into the United  States are: (1) smuggling of counterfeit cigarettes manufactured overseas  and (2) smuggling of genuine cigarettes manufactured overseas but  diverted to the illicit market. Untaxed, domestically produced cigarettes  intended for export also can be diverted to the illicit market.
section_title: Cigarette Smuggling into the United States Considered a Significant Problem
paragraphs: 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.
subsections: section_title: Intelligence Indicates Cigarette Smuggling Is a High Profit Crime with Possible Terrorism Connections
paragraphs: The smuggling of cigarettes into the United States is part of the worldwide  illegal cigarette traffic, but the full extent of such smuggling is unknown.  ATF and ICE do not have estimates of the quantity of cigarettes smuggled  into the country, nor were we able to find any studies conducted by other  organizations regarding the extent of the cigarette smuggling problem.  There is evidence that both counterfeit and genuine brand cigarettes are  smuggled into the United States and that criminals divert genuine  cigarettes from legitimate distribution channels intended for sale outside  the United States (e.g., foreign manufactured cigarettes held in U.S.  warehouses awaiting trans-shipment to other countries and domestically  manufactured cigarettes to be exported from the United States, including  cigarettes for sale in duty free stores).
On the basis of cigarette investigations and intelligence collected, ATF and  ICE officials said cigarette smuggling into the United States, particularly  the smuggling of counterfeit cigarettes, is a significant problem.  Indications are that the possibility of making huge profits has attracted  criminals, including international and domestic organized crime groups, to  smuggling. ATF and ICE officials noted that cigarette smuggling is also  attractive to criminals because it is considered to be a relatively low risk  crime, with penalties that are lower than the penalties for smuggling drugs.
According to an ATF report, 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.
section_title: Cigarette Smuggling Results in Lost Revenues and Public Health Risk
paragraphs: 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. The extent  of these revenue losses, however, is unknown, because, as stated earlier,  no one knows the extent of cigarette smuggling into the United States.  Additionally, there are no reliable estimates of the overall amount of  revenue that the federal and state governments are losing because of  cigarettes being smuggled into the United States.
Furthermore, cigarettes, both counterfeit and genuine, pose a public  health risk. There is no safe cigarette, the nation’s largest cigarette  manufacturers acknowledge. Since the release in 1964 of the first Surgeon  General’s report on smoking and health, scientific knowledge about the  health consequences of tobacco use has greatly increased. As reported by  the CDC, tobacco use, particularly smoking, remains the number one  cause of preventable disease and death in the United States.
Officials at the CDC Office on Smoking and Health said that they have not  done any studies and were not aware of any studies to determine whether  counterfeit cigarettes posed additional risks. In addition, law enforcement  and cigarette manufacturer laboratories that routinely analyze seized  cigarettes do not test seized cigarettes for health risks.
section_title: Federal Agencies Increased Efforts to Thwart Cigarette Smuggling into the United States and Increased Seizures
paragraphs: 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. CBP inspectors  operate at U.S. ports of entry, to detect illegal goods, including smuggled  cigarettes, which might enter the country. CBP uses tools such as a  targeting system and shipping manifest reviews to target incoming cargo  for further examination. ICE and ATF officials said they have been  conducting more cigarette smuggling investigations in recent years and  described the agencies’ current investigations as generally larger, more  complex, and longer-term than previous investigations. Additionally, a  CBP database shows that the number of cigarette seizures by CBP and ICE  have increased dramatically, from 12 total seizures in 1998 to 191 seizures  in 2003.
subsections: section_title: Several Federal Agency Missions Address Cigarette Smuggling
paragraphs: 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.
subsections: section_title: ICE Efforts to Combat Cigarette Smuggling
paragraphs: 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. 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. In January 2001, responsibility for these violations was  delegated from the IPR Center to a newly formed Tobacco Task Force.
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.
section_title: ATF Investigative Efforts
paragraphs: 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,  divest criminal and terrorist organizations of money derived from this  illicit activity, and significantly reduce tax revenue losses to the states.  ATF has offices located throughout the United States to conduct these  investigations and has an array of employees that range from criminal  investigators to inspectors, auditors, chemists, and other professionals.
ATF’s tobacco diversion mission is to disrupt and eliminate criminal and  terrorist organizations by identifying, investigating, and arresting offenders  who traffic in contraband cigarettes; conduct financial investigations in  conjunction with tobacco diversion investigations in order to seize and  deny further access to assets used by criminal enterprises and terrorist  organizations; prevent criminal encroachment of the legitimate tobacco  industry by organizations trafficking in cigarettes; and assist local, state,  and other federal agencies with cigarette trafficking investigations.
ATF officials said the agency typically gets involved in cigarette smuggling  investigations after the smuggled cigarettes enter the domestic market.  The officials said that ATF investigators attempt to determine the source  of the smuggled cigarettes; however, ATF does not often pursue  investigations internationally. 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.
section_title: CBP Inspection Efforts
paragraphs: CBP’s priority mission is to prevent terrorists and terrorist weapons from  entering the United States. Other CBP’s mission responsibilities include:  stemming the flow of illegal drugs and other contraband; protecting  American businesses from theft of their intellectual property; regulating  and facilitating international trade; collecting import duties; and enforcing  U.S. trade laws. Thus, combating smuggling of both genuine and  counterfeit cigarettes falls squarely within CBP’s mission responsibilities.  CBP officials explained that since September 11, 2001, overall CBP  mission priorities for identifying and detecting illegal and harmful  commodities coming into the country have shifted from narcotics  smuggling to antiterrorism concerns. The priorities currently are    #1 – antiterrorism;    #2 – narcotics smuggling; and   #3 – trade commodities violations; textiles, toys, watches, and other  items, including counterfeit and genuine smuggled cigarettes.
To perform its inspection duties, CBP has inspectors at ports of entry into  the United States. In addition to staff at CBP’s headquarters, officials at   20 field operations locations and at more than 300 ports of entry oversee  the entry of all goods entering the United States. CBP also has 5 specific  units, called Strategic Trade Centers, 2 of which analyze cigarette  smuggling and provide information to other CBP units to assist in  combating the problem.
We previously reported that CBP’s Commissioner said the large volume  of imports and its limited resources make it impossible to physically  inspect all oceangoing containers without disrupting the flow of  commerce. The Commissioner also said it is unrealistic to expect that all  containers warrant such inspection because each container poses a  different level of risk based on a number of factors, including the exporter,  the transportation providers, and the importer. To direct its resources  toward higher-risk cargo and to minimize its impact on the flow of  commerce, CBP has developed a layered approach to inspections. This  approach includes: a targeting system, to assess the risk level of individual  containers and to flag high-risk containers for physical inspection; a  random inspection program; and the selection of containers for physical  inspection based on a review of the shipping manifests and knowledge or  intelligence gathered at the local ports. While most of the inspectors  assigned to seaports perform physical inspections of goods entering the  country, some are “targeters” – they review documents and intelligence  reports and determine which cargo containers should undergo additional  documentary reviews and/or physical inspections.
As part of its layered approach, CBP employs its Automated Targeting  System (ATS) computer model to review documentation on all arriving  containers to help select or “target” containers for additional documentary  review and/or physical inspection, such as containers that may contain  cigarettes being smuggled. The ATS was originally designed to help  identify illegal narcotics in cargo containers. ATS automatically matches  its targeting rules against the manifest and other available data for every  arriving container and assigns a level of risk (i.e., low, medium, high) to  each container. At the port level, inspectors use ATS, as well as other data  (e.g., intelligence reports), to determine whether to inspect a particular  container.
In addition, CBP has a program, called the Supply Chain Stratified  Examination, which supplements ATS by randomly selecting additional  containers to be physically examined. The results of the random  inspection program are to be compared with the results of ATS  inspections to improve targeting. If CBP officials decide to inspect a  particular container, they might first use equipment such as the Vehicle  and Cargo Inspection System that takes a gamma-ray image of the  container so inspectors can see any visual anomalies. With or without this  imaging system, inspectors can open a container and physically examine  its contents.
At the Los Angeles/Long Beach seaport, we interviewed inspectors  assigned to a unit called the Manifest Review Unit (MRU) that analyzes  manifests, which list in detail the total cargo of vessels. Manifests are  issued by carriers or their agents for specific voyages. Examples of data  elements on a manifest include shipper, consignee, point and country of  origin of goods, export carrier, port of lading, port of discharge,  description of packages and goods, and date of lading.
CBP regulations require that manifest data be sent electronically to CBP  24 hours before cargo is loaded on a ship at a foreign port for shipment to  the United States. CBP then determines whether the merchandise merits  examination or immediate release. MRU is to review all manifested cargo  for risk, based on ATS’s rules and criteria, such as shipment from a  country known to be a source of counterfeit cigarettes. MRU inspectors  may also make additional computer queries based on their experience  and/or specific intelligence about a shipper or commodity.
After  MRU selects cargo for examination, it is sent to a Centralized  Examination Station, which is a privately operated facility at which  imported merchandise identified for physical examination is unloaded and  made available to CBP examination team inspectors. If an examination  results in a finding of smuggled cigarettes, a sample is taken to determine  whether they are counterfeit or genuine, the merchandise is seized and  forfeited, counterfeit cigarettes are destroyed, and genuine cigarettes may  be destroyed or auctioned. After the examination is complete, the  inspectors notify MRU of the results of the examination. MRU inspectors  may then use the information for future targeting of cargo for  examination.
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.
section_title: Number of ICE and ATF Investigations into Cigarette Smuggling Have Increased and Become Larger and More Complex
paragraphs: 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.
Figure 5 shows the number of ICE cigarette-related investigations initiated  and closed for each fiscal year from 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.
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.
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.
section_title: Cigarette Seizures Have Increased
paragraphs: In addition to the rise in cigarette smuggling investigations by ICE and  ATF, the number of illegal cigarettes seized by CBP and ICE has increased.  While the number of seizures (with an estimated value of $2,500 or  greater) of genuine cigarettes exceeded counterfeit cigarette seizures, the  quantity and estimated value of counterfeit cigarettes seized exceeded  genuine cigarettes. 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.
Most counterfeit cigarette seizures were at the Los Angeles/Long Beach  seaport. CBP officials at the Los Angeles/Long Beach seaport said that  they began to see more counterfeit cigarettes being seized near the end of  2001. Specifically, 3 of 10 (30 percent) counterfeit cigarette seizures  nationwide were made at the Los Angeles/Long Beach seaport in fiscal  year 2001; these increased to 21 of 34 (62 percent) in fiscal year 2002 and  to 26 of 56 (46 percent) in fiscal year 2003. The officials said that they  believe the increase in seizures of counterfeit cigarettes was due to better  intelligence and better inspections – based on electronic methods such as  ATS targeting of cargo for inspection and the ICE Tobacco Program,  which has helped to bring the problem of cigarette smuggling to the  forefront and has, therefore, led to more seizures.
CBP data also showed a rise in the value of counterfeit cigarette seizures  compared to other commodities. Figure 7 shows the percent of counterfeit  cigarettes increasing from 9 percent of commodities seized in fiscal year  2000 to 44 percent in fiscal year 2003.
section_title: Legal Initiatives Being Pursued to Help Thwart Cigarette Smuggling
paragraphs: 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, 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.
subsections: section_title: Justice Suggested Three Legal Initiatives to Combat Cigarette Smuggling
paragraphs: In October 2003, Justice suggested that Congress could strengthen the  enforcement tools for combating cigarette smuggling by: (1) lowering the  threshold for violating CCTA (a felony violation) from 60,000 to   30,000 cigarettes, (2) giving ATF authority to use money generated during  undercover sting operations to offset investigative expenses, and   (3) increasing ATF’s authority to enter premises to enforce federal  cigarette laws.
The PACT Act, a bill intended to combat cigarette smuggling, includes  some of Justice’s suggestions. However, Justice has not formally endorsed  the PACT Act (or its House companion bill, H.R. 2824). If enacted, the  PACT Act would broaden the definition of what constitutes contraband  cigarettes by lowering the CCTA quantity for nontaxed cigarettes to be  considered contraband from 60,000 to 10,000. This is a lower threshold  than Justice suggested. But, according to the bill’s sponsors, lowering the  contraband cigarette threshold would allow ATF to open more  investigations and seek more federal felony prosecutions of cigarette  smugglers.
Second, the bill would allow ATF to pay expenses of undercover  investigations with money accrued during such operations. Justice  supports this provision. For example, as part of an undercover  investigation, ATF could sell cigarettes to a suspect and use the cash to  pay informants or buy more cigarettes from traffickers in the investigation.  This would make ATF’s powers more comparable to those of other  investigative agencies like the Federal Bureau of Investigation and the  Drug Enforcement Administration, which may use such nonappropriated  funds to make undercover purchases and pay other investigative  expenses.
Finally, the bill includes a provision that would authorize ATF to enter the  property of any person who delivered, shipped, sold, distributed, or  received more than 10,000 cigarettes a month to inspect cigarettes on the  premises and any legal records or information on the cigarettes required  by law. Justice supports increasing ATF’s authority to enter premises to  enforce federal cigarette laws, but it has not opined its views on whether  the 10,000 cigarette threshold is appropriate. Currently, ATF must obtain  consent to enter a person’s property and conduct an inspection. If denied  entry, ATF must obtain a search warrant by demonstrating probable cause  to a U.S. district court judge to enter a person’s property. Under the bill, if  ATF is denied entry, its right of inspection could be enforced by a district  court order with the submission of an affidavit or other evidence that  entry was denied. As of April 2004, the PACT Act had passed the Senate  and was referred to the House, where action was pending.
section_title: International Initiative Calls for Global Cooperative Action to Reduce the Illicit Tobacco Trade
paragraphs: 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. The State Department,  with interagency and White House input, was reviewing FCTC, including  determining whether joining the convention would require any new  legislation. According to the Director of Health Programs, State  Department, that deliberative review process was moving forward. There  is no set time frame for the review process to be completed.
As part of its objective, FCTC states that cooperative action is necessary  to eliminate all forms of illicit trade in cigarettes and other tobacco  products, including smuggling, illicit manufacturing and counterfeiting.  Article 15 of FCTC (see app. II) is the only one of 38 Articles that  addresses the illicit trade in tobacco products, including cigarette  smuggling.
The first of seven measures in Article 15 states that the elimination of all  forms of illicit trade in tobacco products, including smuggling, illicit  manufacturing and counterfeiting, and the development and  implementation of related national law, in addition to subregional, regional  and global agreements, are essential components of tobacco control. The  other measures require each ratifying country to, among other things,  mark packages of tobacco products to control their movement, cooperate  in investigations and prosecutions, periodically report progress made, and  adopt other measures as appropriate to prevent illicit trade.
The fourth measure requires actions aimed at eliminating illicit trade in  tobacco products. For example, one action that FCTC will require is the  exchange of tax information among governments, as appropriate, and in  accordance with national law and relevant applicable bilateral or  multilateral agreements. Under present law, Section 6103 of the Internal  Revenue Code (IRC) of 1986 in general provides that the government shall  not disclose any taxpayer returns or return information. Section  6103(k)(4) of the IRC, however, permits the government to disclose such  information “. . . to a competent authority of a foreign government which  has an income tax or gift and estate tax convention, or other convention or  bilateral agreement relating to the exchange of tax information, with the  United States but only to the extent provided in, and subject to the terms  and conditions of, such convention or bilateral agreement.” According to  the Assistant Chief Counsel of the Treasury Department’s Alcohol and  Tobacco Tax and Trade Bureau (TTB), FCTC is a convention that under  Section 6103(k)(4) would allow the government, under the appropriate  circumstances, to share taxpayer returns or return information with  competent authorities of foreign governments who are Parties to FCTC.
According to TTB, the sharing of cigarette tax information with other  countries could help government agencies determine when cigarette  exports are diverted from legitimate distribution channels. Presently,  when a U.S. company exports cigarettes to another country, the exporter  files a document with TTB disclosing the type and quantity of cigarettes  being exported with no federal cigarette excise taxes due or paid—this is  considered taxpayer information. Currently, IRC does not allow TTB to  provide this information to the country to which the cigarettes are  shipped. The convention would allow the information to be provided and  used to determine whether the quantity of cigarettes declared as imports  matches the quantity of cigarettes exported. If the imported quantity is less  than the exported quantity, this may indicate that some of the cigarettes  were diverted to be smuggled into that or some other country, or back to  the United States, without the payment of cigarette taxes and import  duties.
section_title: Agency Comments
paragraphs: 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.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine what is known about the nature and scope of the problem of  smuggled cigarettes, including counterfeit cigarettes, entering the United  States, we obtained information from the Department of Homeland  Security’s (DHS) U.S. Immigration and Customs Enforcement (ICE) and  the Department of Justice’s Bureau of Alcohol, Tobacco, Firearms and  Explosives (ATF). We interviewed ICE and ATF headquarters officials in  Washington, D.C., and we collected and reviewed pertinent  documentation, such as an ATF report on cigarette trafficking and  terrorism issued in July 2003.
We also contacted officials of various organizations to obtain information  about the consequences of cigarette smuggling. To determine federal and  state tax revenue losses due to the smuggling of cigarettes, including  counterfeit cigarettes, into the United States, we interviewed headquarters  officials in Washington, D.C., representing ICE, ATF, and the Department  of the Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB);  collected and reviewed available ATF documentation; and conducted an  Internet search using a major Internet search engine (Google). To  determine potential health risks due to the smuggling of cigarettes,  including counterfeit cigarettes, into the United States, we interviewed  officials representing TTB, DHS’s U.S. Customs and Border Protection  (CBP), the Centers for Disease Control and Prevention (CDC), and three  tobacco manufacturers (Philip Morris U.S.A., Brown and Williamson  Tobacco Corporation, and R. J. Reynolds Tobacco Company), and we  collected information from CDC.
To determine federal law enforcement agencies’ efforts to thwart the  smuggling of cigarettes into the United States, we interviewed ICE, ATF,  and CBP headquarters officials in Washington, D.C., and we collected and  reviewed pertinent documentation, including data on the number of ICE  cigarette-related investigations and ATF tobacco investigations initiated  and closed and CBP and ICE cigarette seizures for selected fiscal years.  We also interviewed an ICE official at a field office in Long Beach,  California, ATF officials at the Los Angeles Field Division, and CBP  officials at the Los Angeles/Long Beach seaport, which was identified as  having the largest number of cigarette seizures in the country.
To assess the reliability of the ICE and ATF investigation data, we   (1) reviewed existing information about the data and systems that  produced them and (2) interviewed agency officials knowledgeable about  the data as necessary. For the CBP and ICE seizure data, which CBP  maintains in a database, CBP officials updated and provided us with data  on the more significant cigarette seizures with estimated values of   $2,500 or greater. We focused on these seizures because CBP reported that  smaller cigarette seizures are more likely to be instances of individuals  transporting cigarettes intended for personal consumption rather than  organized smuggling. To assess the reliability of the CBP and ICE seizure  data, we (1) performed electronic testing for obvious errors in accuracy  and completeness, (2) reviewed existing information about the data and  systems that produced them, and (3) interviewed agency officials  knowledgeable about the data. We determined that the investigation and  seizure data were sufficiently reliable for this report.
To obtain information on certain legal initiatives being pursued to enhance  law enforcement efforts to thwart the smuggling of cigarettes into the  United States, we obtained information from the Justice Department in  Washington, D.C., regarding the Prevent All Trafficking Act (S. 1177), a bill  introduced in Congress with action pending at the time of our review, and  we interviewed an ATF headquarters official. We also interviewed  headquarters officials at the Department of State and TTB in Washington,  D.C., and obtained information from the World Health Organization Web  site regarding the Framework Convention on Tobacco Control, a proposed  treaty initiated by the World Health Assembly.
For the background section, we obtained data on the number of cigarettes  manufactured in the United States and the number of imported cigarettes  from the Economic Research Service, U.S. Department of Agriculture,  Web site; state cigarette excise tax rates from the Federation of Tax  Administrators’ Web site; the number of states using tax stamps as  evidence that state cigarette taxes were paid from a Federation of Tax  Administrators official; and the federal cigarette excise tax rate from ICE.  The data were used for background purposes and were not verified.
We conducted our work between August 2003 and March 2004 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Article 15 of the World Health Organization Framework Convention on Tobacco Control
subsections: section_title: Article 15: Illicit Trade in Tobacco Products
paragraphs: (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. (a) monitor and collect data on cross-border trade in tobacco products, including illicit  trade, and exchange information among customs, tax and other authorities, as  appropriate, and in accordance with national law and relevant applicable bilateral or  multilateral agreements;  (b) enact or strengthen legislation, with appropriate penalties and remedies, against  illicit trade in tobacco products, including counterfeit and contraband cigarettes;  (c) take appropriate steps to ensure that all confiscated manufacturing equipment,  counterfeit and contraband cigarettes and other tobacco products are destroyed,  using environmentally-friendly methods where feasible, or disposed of in accordance  with national law;  (d) adopt and implement measures to monitor, document and control the storage  and distribution of tobacco products held or moving under suspension of taxes or  duties within its jurisdiction; and  (e) adopt measures as appropriate to enable the confiscation of proceeds derived  from the illicit trade in tobacco products.
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.
section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: 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.