Illicit tobacco fight’s weak link

From: Times Union

Some say federal assets not fully used on low-risk trade that costs state taxpayers

By James M. Odato

A view of what the ATF calls unlicensed tobacco products are seen at the ATF office on Monday, July 22, 2013 in Albany, NY.       (Paul Buckowski / Times Union) Photo: Paul Buckowski / 00023259A

A view of what the ATF calls unlicensed tobacco products are seen at the ATF office on Monday, July 22, 2013 in Albany, NY.       (Paul Buckowski / Times Union)


Just off the main drag of the St. Regis Mohawk Indian reservation hugging the Canadian border, a woman greeted visitors at Another Dam Cigarette Store, one of several tax-free smoke shops on the territory.

She smiled at summertime shoppers paying for gasoline that was 21 cents cheaper per gallon compared to prices in nearby Malone, and offered a free T-shirt or tote bag bearing the logo of a cigarette called Braves to anyone buying a carton at the common reservation price of $23 — less than a third of the price of off-reservation national brand names. She pointed to samples, and invited smokers to light up on the spot.

Braves, one of many native-made labels produced on the reservation, are rolled in a blue windowless building near a racing car auto parts shop. It’s not far from the St. Lawrence River and about 100 feet from the Canadian border, with no customs house or border checkpoint to pass. The plant is one of the bigger Mohawk factories that is not federally licensed. It is on the radar of investigators concerned about illegal trafficking of cigarettes off the reservation.

The plant’s operator, and many others tribal entrepreneurs who produce cigarettes by the box or packaged in unmarked baggies known as “rollies,” could eventually be collared by law enforcement. But such outfits can operate unmolested for years while making substantial profits and making low-cost smokes available in cities throughout the Northeast.

They run in a low-risk, high-reward business that federal authorities say costs New York hundreds of millions of dollars a year in uncollected taxes; nationwide, the cost runs into billions.

Local, state and federal authorities form a tiny army of investigators to inhibit the flow of the contraband. People concerned about this underground economy say the federal agency that should be aggressively involved, the U.S. Bureau of Alcohol Tobacco, Firearms and Explosives, has backed off from most tobacco cases, and an internal document obtained by the Times Union bears that out.

ATF’s agents, these critics argue, know where the illegal factories and distribution sites are, but are unable to do much because of conflicting priorities and policies among state and federal authorities.

“All illicit tobacco business is growing dramatically,” said Thomas Lesnak, an ATF senior agent who retired at the end of 2012 after 20 years of tracking cigarette smugglers. He said their business model is the same as that used by illegal drug and money-laundering schemes — but with much less likelihood of punishment.

Lesnak said ATF needs more people on the beat, particularly because New York state has so many tribally run licensed and unlicensed manufacturers moving untaxed products.

“New York is a very unique state when it comes to cigarettes,” said ATF agent Steve Dickey. “It’s a high-tax, low-enforcement state with many Native American tribes with various treaties. It’s a politically sensitive, sometimes ticking time bomb.”

Asked if New York government is a help or a hindrance, he just stares at the questioner.

Based in Buffalo, Dickey is virtually alone at his agency trying to investigate cigarette crimes, although lawyers representing tribal businesses say he is very active.

A father of two, Dickey said it bugs him that some of the taxes that illegal cigarette businesses are avoiding are supposed to fund health insurance for poor children.

His desk is 320 miles away from Akwesasne, the Mohawk reservation, where many of the cigarette plants are located. But his office is in the region of the Tuscarora and Seneca tribal territories, where tobacco is also very big business, although the native manufacturers are mostly elsewhere — particularly north of the border and at the Mohawk reservation.

Dickey said he has tracked a weekly flow of 10 to 15 tractor trailers leaving the Carolinas with processed tobacco bound for unlicensed tribal rolling factories in Canada and New York. Each load, he said, represents $1 million in lost federal and state taxes on finished cigarettes, most of them sold in New York.

All eight tribes in New York sell the native-made brands. They’ve mostly replaced the national brands that are more expensive and under state law must be tax-stamped by wholesalers. Investigators have spotted, and occasionally stopped, native-made loads moving from the Mohawk territory to the Poospatuck and Shinnecock reservations on Long Island, and to Seneca territory in western New York.

Unkechaug Nation Chief Harry Wallace, at the Poospatuck Reservation, said federal and state authorities should not be targeting Native American businesses.

His tribe’s retailers have been essentially blocked from getting premium brands because of tax-stamping policies.

While not denying that his territory is getting products from distant reservations, he said critics who call the native-made smokes illegal are racists who are “upset that we figured out what we should have done a long time ago, which is fend for ourselves. This policing on Indian territory is really a red herring to hide the fact that they can’t control their own citizenry.”

Dickey and several other current and former investigators with public law enforcement agencies say Akwesasne is the hub of smuggling north and south of the border, with cigarettes among the most common commodities.

They say tobacco is hauled by boat or over land through the Mohawk reservation to Canada. Canadian-grown marijuana, they say, is passing south through the reservation to New York, particularly to New York City.

Dickey, an affable 45-year-old bear of a man, is one of 2,400 ATF agents nationwide. He prefers to stay away from the camera because he’s involved in some undercover work. He is among the few ATF agents that get to work on tobacco cases.

ATF Associate Chief Counsel Jeffrey A. Cohen said tobacco probes take a back seat to cases representing major tax losses.

Asked how he can tell when a case is worth it according to those marching orders, Dickey offers a twist on the old test for pornography: “I know it when I see it.” One problem with the strategy is that a seemingly small case could become bigger. For instance, earlier this year investigators say they stumbled on a large cigarette smuggling ring by watching a suspect dealing stolen baby formula.

Sixteen reputed members of a tobacco ring that stretched from the Albany area to Virginia were charged with trafficking, and federal agents noted that some suspects seemed to have ties to terrorist figures with Hamas and Hezbollah.

ATF has preferred to use litigation to force compliance, though it can take years. Cohen said the results have been significant. The three big manufacturers at Akwesasne, for example, have become licensed in recent years.

In 2005, all the tribal operations were unlawful, Cohen said. But starting in 2006, ATF threatened tax-evasion charges that could have imposed multimillion-dollar payments. The tactic forced federal licenses on the three factories, obliging them to pay federal but not state taxes and pay a substantial penalty.

That took care of Mohawk makers of products called Signal, Native and Discount. And a company that made Tomohawk and a $17-per-bag cigarettes marketed as 222s (the number of rollies in the plastic bag) was recently closed because the operator decided to quit rather than fight federal tax collectors, according to the company’s attorney. Some investigators, however, aren’t convinced the place is shuttered.

At the Seneca reservations in western New York and the Oneida tribe’s operation in the central part of the state, licensed operators are now the norm and sales through the mail and Internet have been curbed by recent laws and court decisions, Cohen said. Still, the Onondaga near Syracuse are now in the business of making cigarettes. Their lawyer said discussions with federal authorities are ongoing.

But with New York and Canadian taxes so high on legal products, dozens of unlicensed manufacturers are flourishing while the big licensed tribal operators try to compete, according to multiple sources tracking shipments.

Smuggling is easy to get away with, said former agent Lesnak and others, because of the scant resources devoted to the problem by ATF and other agencies. Those at ATF nationwide who are policing this activity have been hampered by policy that was formalized shortly before Lesnak retired at the end of 2012.

A sign of the proliferation is the increased presence of rollies in New York City, said Lesnak, now a consultant for companies concerned with contraband. He purchased plastic bags of the loose cigarettes a few weeks ago for $10 at the Shinnecock and Poospatuck reservations. A carton of national-brand taxed cigarettes sells for $120 in New York City, Lesnak said.

Even upstate, where cartons of taxed cigarettes sell for almost $100 a carton, anyone with a vehicle can get in the trafficking business. In July, two Fulton County women were charged with a felony for transporting more than 10,000 untaxed, unstamped cigarettes, including rollies and Native brand cigarettes. After their car was stopped near Saranac Lake, they told police they bought the smokes at Akwesasne.

Even relatively small operators can make big money. In January, the U.S. Attorney arrested a Mohawk man, now a fugitive, and his partner for making cigarettes called Smokin’ Arrows, and won convictions that required the pair to forfeit $5 million in profits and face prison.

Despite the arrests, many operators go unchecked, even as drivers leaving reservations in panel trucks, rental vehicles and vans full of cigarettes have been tracked by investigators who have been unable to interest state authorities. Dickey said he has tried to mobilize the state in some cases, but has not found partners.

A lone ATF agent can only do so much: A July 2012 memo from Assistant ATF Director Ronald B. Turk, obtained by the Times Union, shows that the bureau wants to limit resources on tobacco enforcement.

“All investigations need a nexus to violent crime,” the memo alerts all Special Agents in Charge. The exception: “A SAC may authorize an investigation with no violent crime nexus if it involves large-scale fraud perpetrated by organized criminal enterprises and results in a significant loss of federal or state revenues.”

Franklin County District Attorney Derek Champagne, whose jurisdiction includes the Akwasasne region, said the letter in the middle of ATF has become “a small T.”

“There’s just not enough agents to deal with anything but the huge distribution,” Champagne said. His research has found 29 Mohawk manufacturers producing products that move off-reservation. The problem: “Who is going to do a search warrant on the reservation of one of these facilities when the first thing your going to get hit with is, ‘We’re sovereign and we’re selling to Native Americans,'” Champagne said. Mohawk government officials declined requests by the Times Union for information and interviews.

Champagne said ATF’s Dickey is trying, but “he’s got one hand tied behind his back.”

Cohen, the ATF lawyer, said the state Department of Taxation & Finance could help, but doesn’t seem to be stepping up. “If New York state is not going to enforce the law, with our 30 agents we are not going to do that,” he said.

Tax department spokesman Geoffrey Gloak said the state is actively pursuing tobacco trafficking, but he would not say how many cigarette tax evasion investigators the state employs, or how much money is budgeted for such probes.

Investigators say Long Island native reservations are key destinations for illegal tribal cigarettes sold to non-natives, often for eventual resale. Combined with an influx of national-brand, untaxed cigarettes coming up from southern states, New York City is being flooded with illegal product, they say.

The difference, Lesnak notes, is that while it’s difficult to stop every vehicle on a major north-south artery such as I-95, law enforcement knows where the native factories and smoke shops are located.

Investigators say the volume going to native shops is so vast that every man, woman and child on the tribal rolls couldn’t burn through the deliveries if they smoked non-stop all day long, every day. The Unkechaug Nation at the Poospatuck Reservation has just 400 tribal members, but their shops receive millions of cartons annually.

“It’s like World War I,” said ATF attorney Cohen. “A long war of attrition.”


About this series

The is the first of a three-part series examining the inner-workings of the Bureau of Alcohol, Tobacco, Firearms and Explosives. Parts 2 and 3 will appear on Monday and Tuesday.



One Response to Illicit tobacco fight’s weak link

  1. Anonymous says:

    Honor Indian Treaties, Dont Tax what don’t belong to you.Tobacco Products are owned by the First People Of North America. Thank You

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