Trade In Black-Market Cigarettes: Hot, Dangerous

toggle caption Chuck Burton/AP

Black-market cigarettes are costing many states hundreds of millions of dollars a year in lost tax revenue. And the lucrative, illicit trade is attracting violent criminal gangs that can be lethally ruthless.

The rewards, and the risks, of dealing in contraband cigarettes became quite clear recently in northern Virginia, says Capt. Dennis Wilson of the Fairfax County Police Department.

Undercover investigators working with his department "had two cases where contacts that we were working with had asked us to murder their competition," Wilson says. "We were able to fake the murder of the individuals."

The clandestine operation came filled with drama.

"Well, we used some theatrical make up, photographs of the individual on the pavement with blood around the head," Wilson Says. "That was sufficient for them."

The investigation resulted in the November 2009 arrest of 14 people tied to the contraband cigarette ring. Investigators say that murder-for-hire is a logical extension of the trade in black-market cigarettes.

Across the nation, organized crime groups with ties to Vietnam, Russia, Korea and China are all competing for a share of the profits, says Edgar Domenech, who leads the Washington, D.C., field office of the Bureau of Alcohol, Tobacco, Firearms and Explosives.

"Depending on the quantities of cigarettes that you're purchasing, you're talking in the hundreds of thousands to the millions of dollars," Domenech says. So the stakes are high.

How It Works

Criminals buy cigarettes in bulk, in states with relatively low taxes such as Virginia or North Carolina. They load the cigarettes into tractor-trailers or rented trucks and drive them north, for example, to New York. They follow the same routes they would use to traffic illegal drugs.

Police say a carton that costs less than $40 including tax in a store in Virginia goes for more than $100 in a store in New York City.

"The excise tax for upstate New York is $4.35 cents per pack," says Brad Maione, of the New York State Department of Taxation and Finance. "And New York City, I think you add a dollar fifty to that."

Because of high taxes in the city, selling contraband cigarettes at rates even slightly lower than their value in the store can mean big money for criminals.

New York doesn't give estimates of how much money it loses each year through the sale of untaxed cigarettes. But California does. "We estimate that about $182 million a year is lost in unpaid excise taxes on cigarettes," says Anita Gore of the state's tax collection agency.

Gore says California has invented a new high-tech tax stamp that's tougher to counterfeit and easier to spot for inspectors who visit stores where tobacco is sold. But often the black-market cigarettes move through a hidden economy.

"They can be sold from ... the back of a van on the corner. They can be brought in through big trucks across the border and taken to warehouses and distributed from there," Gore says.

Easier Than Dealing In Drugs

Investigators say the penalties for trafficking in black-market cigarettes are at most only about five years in prison compared with mandatory sentences for illegal drugs that carry a base line term of five or 10 years behind bars.

Fairfax County's Wilson says cigarettes are in some cases worth more money to criminals than illegal drugs. Undercover officers, he says, have "even been able to trade large amounts of illicit drugs for the cigarettes."

For instance, the ATF and Virginia police broke up a smuggling ring last winter where traffickers traded cocaine, thousands of Ecstacy tablets and firearms for nearly 400,000 cartons of cigarettes. The cigarettes were worth more than $8 million on the black market.

Investigators say they expect to see more of those schemes as long as the benefits of trafficking cigarettes outweigh the risks.