Tobacco Underground: Fraud, Criminality and Government Complicity

For anyone who is interested in the extent to which the lucrative cigarette black market is run in NY State, the report done by the Center for Public Integrity is a must read-it is a harrowing tale of greed and criminality. As the report points out: "Consider these findings:

*As New York state struggled with a massive fiscal crisis in 2007, Lorillard, Philip Morris, and R.J. Reynolds funneled 4.3 billion tax-free cigarettes to smoke shops on New York Indian reservations — more than 25 percent of the companies’ combined total sales in the state.

*Although 43 manufacturers supplied reservations in New York last year, two-thirds of those cigarettes came from Lorillard, Philip Morris, and R.J. Reynolds, an analysis of tax data by ICIJ shows. Lorillard, maker of the popular Newport brand, sold 40 percent of its cigarettes in New York through reservations — more than any other manufacturer...

*Bootleggers and online vendors working with the reservations have netted, conservatively, an average of $500 million annually since 2000, according to ICIJ’s analysis."

And in the process the state's tax payers have been thoroughly ripped off while a succession of governors have acted as silent partners in these criminal enterprises. Today, however, with a multi-billion dollar budget deficit, we simply can't afford for this fraud to be allowed to continue: "The cost of this trade is considerable: In 2007, New York state and New York City lost more than $850 million in cigarette tax revenue, according to an analysis by ICIJ. That money would have cut the state’s 2008 fiscal deficit by half." And that was two years ago. The problem has only gotten much worse.

The vast majority of the untaxed smokes is coming out of Indian reservations-with the big tobacco manufacturers acting as co-conspirators: "The sparsely populated New York reservations, in particular, have embraced the tobacco trade. With fewer than 17,000 residents, the state’s reservations cannot possibly absorb the huge numbers of Marlboros, Camels, and Newports, among other brands, shipped to smoke shops in their territories — 6.4 billion in 2007. Each resident — from newborn to nonagenarian — on New York’s 10 reservations would have had to smoke 1,060 cigarettes per day to consume what their smoke shops purchased. The bulk end up sold over the Internet or bootlegged — largely by minivan — to New York City for sale, tax free, in bodegas and on the streets. A low-level smuggler can walk away with up to $7,000 a day."

The Seneca tribe in upstate New York leads the way-egged on by manufacturers delighted to push more lower priced product: "Every shop is a smoke shop on the Seneca Nation’s 34-square mile Cattaraugus reservation, bordered on one side by Lake Erie, and three sides by hardwood forest and farms laden in summer with concord grapes, tomatoes, and sweet corn...“Lorillard and the folks who sell Sonoma and USA Gold most want their products sold,” said Nikki Jimerson at the Seneca’s Cloud Company Smoke Shop in Salamanca. “They talk to us more. [They ask,] ‘What can we do to promote these cigarettes? What ideas do you have?’”

For an underground economy, this is a scam that hides in plain sight: “The cigarette black market in New York is enormous, and it’s brazen, and it’s carried out right under the nose of the government,” said Eric Proshansky, an attorney for New York City who has filed lawsuits against wholesalers and Indian vendors for their role in the illicit cigarette trade." And still the governor remains unmoved.

But don't let a false sense of compassion overcome common sense and decency in this matter. The 17,000 Indians (according to the Center) in New york State don't really benefit from the smuggling-that honor goes to the thieves like Rodney Morrison: "The Poospatuck gained notoriety in 2004, after Rodney Morrison — owner of the reservation’s lucrative Peace Pipe Smoke Shop — was charged with firebombing a competitor’s car, beating and robbing another, and financing the murder of a third. A jury found the 41-year-old Costa Rica native not guilty on everything, except for a firearms charge and conspiracy to smuggle untaxed tobacco. He is appealing the conviction, which could net him up to 30 years in prison. Morrison — built like a brick, with a shaved head, owlish coke-bottle glasses, and plenty of bling — had for years sold millions of cigarettes to smugglers, who turned big profits on New York City streets. In the process he became a multimillionaire, with $30 million tucked away in foreign bank accounts, another $8 million in real estate, and nearly $4.5 million in jewelry, coins, pens, and watches, according to court records."

And the smuggling from the reservations to the streets of New York is extensive indeed: "At the reservation, the shippers stuff as many as 20 cases — 12,000 packs — into black trash bags and cram them into their vans. As an added precaution, they toss a blanket over the top, then drive off the reservation, often times on the phone with a smoke shop employee who acts as a lookout for nearby law enforcement. In Suffolk County, Long Island, police arrested 81 people between March 2007 and November 2008 who later pleaded guilty to illegally purchasing untaxed cigarettes from the Poospatuck reservation. The City of New York offered evidence in court that the average person was stopped carrying more than 10,000 packs of cigarettes."

Once in NYC, a network of illegal street merchants is activated-and if you're wondered where your uncollected tax dollars are going, read the following and weep: "Once back in New York City, the drivers unload their stash on a ring of street-level peddlers who affix counterfeit tax stamps and sell the cigarettes to established customers at bodegas and markets in New York’s poorest neighborhoods. For each trip, smugglers easily double their investment. “We had so much money we wouldn’t know what to do with it sometimes,” said the former New York City smuggler. “It got to the point we would just open the glove box and throw it in. It went to casinos, cars — a lot of cars. . . . We blew a lot in the casinos. We would go in there and blow it on girls, drink the good stuff — Hennessy and Grey Goose.”

So, if you are concerned about cuts to education or to local health clinics and the like, consider the policy known as, "forbearance," that allows smuggling empires to flourish. Instead of more teachers, we have party time at local casinos. But, at the end of the day, we really can't fault the crooks, when it is the highest official in the state whose timidity allows the criminals to act with impunity.

Governor Paterson now claims he is going to go after the so called special interests. Not one of the interests that he probably has in mind is literally stealing $1.6 billion from the state treasury every year. Until he's willing to go after these scammers, Paterson needs to stop posturing in an effort to pretend that he is some kind of Clint Eastwood. While the governor goes after the women and children, the real tough guys are laughing all the way to the off shore bank accounts.

Update

Just when you think that the governor couldn't possibly make himself look worse, he comes up with the following: "As he prepares to unveil his 2009-10 budget proposal on Jan. 19, Paterson Sunday morning raised the possibility of again raising the state's $2.75 per pack cigarette excise tax, the third highest in the country. "We're not increasing any personal income taxes," Paterson told 106.9 FM in Syracuse. "If things get rough, we might go back to a cigarette tax that would be devoted to health care. We would think about doing that." New York last hiked its cigarette excise tax by $1.25 in June 2008. That's on top of the $1.50 per pack the city charges and $1.01 per pack federal excise tax. The average pack in New York City is now close to $10."

So, too timid to enforce the law against the Indian tax cheats, Davis Paterson is now contemplating raising the cigarette tax once again-giving smokers more of a reason to buy from the Indians; and giving the black marketers a better price differential to scam the state even more. What a disgrace!