Somehow no one knows who authorized the secret bank account.

In February, The New York Times reported that agents from the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) established a secret bank fund filled with millions from “a web of shadowy cigarette sales” before it closed in 2013. No one knows for sure how much entered the account because no one tracked it.

New unsealed records revealed to the NYT that the scheme was more than just a few agents. Instead, it grew to “a highly unorthodox merger of an undercover law enforcement operation and a legitimate operation.”

From The New York Times:

For seven years, agents at the Bureau of Alcohol, Tobacco, Firearms and Explosives followed an unwritten policy: If you needed to buy something for one of your cases, do not bother asking Washington. Talk to agents in Bristol, Va., who controlled a multimillion-dollar account unrestricted by Congress or the bureaucracy. Need a flashy BMW for an undercover operation? Call Bristol. A vending machine with a hidden camera? Bristol. Travel expenses? Take this credit card. It’s on Bristol.

The agency provided two informants with $6 million. Records show that one ATF agent “steered hundreds of thousands of dollars in real estate, electronics and money to his church and his children’s sports teams, records show.”

The money in this account paid for a $21,000 at a NASCAR race and a trip to Las Vegas.

Backstory

It’s against the law to combine government and private money, but that’s exactly what the ATF did. NYT stated that veteran agent Thomas Lesnak, who specialized in tobacco smuggling, used a government building behind a Burger King in Bristol, VA, which is located “near the intersection of Virginia, North Carolina and Tennessee.”

See, states set a tax on tobacco, some of which can be outrageous, which fuels the black market. For some reason, Lesnak decided to “go into business with an existing” real company. NYT explains:

In late 2006, Mr. Lesnak persuaded Jason Carpenter, an established small-time Alabama tobacco distributor, to open a warehouse in Bristol, become an informant and let the A.T.F. operate alongside him. “We basically merged ourselves with a tobacco business,” Mr. Lesnak said last year in a confidential deposition. “The idea was, ‘If you build it, they will come,’” Mr. Carpenter said in a deposition. “And lo and behold,” he said, “they came.” Would-be smugglers appeared, looking to buy untaxed cigarettes. Some offered cash. Others offered to trade stolen property or guns. Mr. Lesnak and Ryan Kaye, one of the agents involved in the operation, worked the floor. “It got to the point where we were, you know, warehouse workers as opposed to criminal investigators,” Mr. Lesnak said.

The ATF hoped this operation would allow Lesnak and Carpenter to capture smugglers. They had no idea what to do with the profits collected by Carpenter, though. So what did they decide? A private account controlled by Carpenter. But no one can remember who authorized this account:

Mr. Kaye testified last year and was asked repeatedly who approved this arrangement and under what authority: “I do not recall exactly who authorized that.” “I wouldn’t call it ‘authorization.’ I would call it an ‘understanding.’” “No authorization was needed.” “I don’t know of a specific law that authorizes those specific activities.” The secret fund became known as a “management account,” and word spread quickly among A.T.F. agents that if you needed something, Mr. Lesnak could get it without red tape. As Mr. Lesnak described it, senior officials in Washington frequently sent agents to him for untraceable license plates, credit cards and more. Automobiles, particularly luxury cars, were hot items. “We had so many vehicles that we actually set up a company just for leasing,” Mr. [Christopher] Small [Carpenter’s business partner] said in a deposition. Agents relied on the management account for routine expenses, and Mr. Small said hotel bills and gas alone could run to $23,000 a month. “We had 14 or 15 agents carrying American Express cards that we paid the bill on,” Mr. Small said.

Small’s and Carpenter’s company Big South Wholesale eventually “became the national warehouse for all of A.T.F.’s smuggling investigations.”

Change of Hands

The records show that the ATF gave Carpenter and Small a part in a case to investigate Paraguayan tobacco magnate Horacio Cates, who owns Tabesca, which is a cigarette producer:

That A.T.F. wanted Tabesa’s tobacco in a “place that they could control,” Mr. Carpenter said. So he said he struck up a relationship with Mr. Cartes, posing as someone who could smuggle cigarettes into foreign countries. The Big South warehouse in Virginia became a major distributor for Palermo cigarettes, a Tabesa brand.

Then Carpenter and Small sold Big South to the farmer-owned cigarette manufacturer U.S. Tobacco Cooperative, but the co-op allowed the two men to stay on the job, “an arrangement that gave them the power to buy and sell on the cooperative’s behalf.” That didn’t work out too well:

U.S. Tobacco now accuses them of using that authority to defraud millions from the company. And documents from this period show Mr. Carpenter and Mr. Small making money in ways that have no obvious connection to A.T.F. investigations. In one such transaction, court records show, U.S. Tobacco sold cigarettes for $3 a carton, then bought back those same cigarettes at nearly $17. Mr. Carpenter and Mr. Small were both buyers and sellers, making nearly $600,000 for the A.T.F. management account. “I smell cash??” Mr. Small wrote in an email. “Ka-Ching!” Mr. Carpenter replied.

That’s where the Paraguay company comes in:

More complicated transactions produced the same result. Court records show that, to keep up the ruse in Paraguay, Mr. Carpenter and Mr. Small bought large amounts of untaxed Palermo cigarettes, then sold them at a markup to their employer. One such sale made $519,000 for the secret A.T.F. account.

Crash in 2013

It all came to an end in 2013 due to the appointment of Stuart Thompson as U.S. Tobacco CFO since he raised questions about the large market size. That’s when Brandon Moore, the warehouse manager, picked up the phone. From The New York Times:

On March 8, 2013, the warehouse manager called Mr. Thompson. “He started telling me that A.T.F. was doing operations in our warehouse,” Mr. Thompson recalled. Company lawyers descended on the warehouse, seizing everything. A tobacco company had just raided the A.T.F. Agents were outraged. They believed the company had no right to search its own warehouse. “I was very, very upset about that,” said William C. Duke, one of the agents involved.

Three years later, the U.S. Cooperative cannot escape the government because now the Treasury Department has started an investigation. All of those sales “should have been taxed.”

The Justice Department

The Justice Department (DOJ), which oversees the ATF, has fought tooth and nail to keep records secret. The NYT began asking questions last summer and wants the courts to make all records public:

Since last summer, The Times has fought to make all the documents public, but the Justice Department has argued successfully in court to keep them secret. Crucial details, however, have been revealed through poor redaction, documents that were filed publicly by mistake and the sheer difficulty of keeping so much a secret for so long.

Big South bookkeeper said she managed the secret account on a QuickBooks file, but hasn’t responded to any correspondence.



