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© 2008 by Lawrence Delevingne, All Rights Reserved

Counterfeit Marlboros from China

On June 3, 2008, cigarettes in New York City became the most expensive in the country. State taxes increased by $1.25 to $2.75 per pack. Coupled with a city tax of $1.50, each pack of cigarettes bought in the city have $4.25 in taxes added on for an average cost of around $9.

On the surface, cigarette taxes are a win-win. They raise revenue for the state, including health programs, and reduce smoking. Officials predict that the new taxes will cause 140,000 people to quit smoking; produce more than $5 billion in long-term health care savings; and raise approximately $265 million a year in new state revenues.

“This measure is a major step in improving the health of New Yorkers,” said Governor Paterson in April when announcing the new tax.

Such claims have precedent. The $3 per pack tax increase in 2002 reduced the smoking rate to 17.5 percent of adults in New York, down from 21.5 percent in 2002. In 2007, 8.5 percent of city high school students smoked, down from 17.6 percent in 2001. And in 2006, the city collected $123 million in tax revenues from cigarettes, up significantly from the $30 million collected before the 2002 levy.

A deeper look, however, reveals a dark side to New York’s high cigarette taxes. Since 2002, the black market for cigarettes in New York City has exploded, thanks to the gap between the price of untaxed packs – as little as $2.30, the average cigarette company factory price — and taxed ones, which can be as high as $11.

Tom Stanton, director of tax enforcement for petroleum, alcohol and tobacco at the New York State Department of Taxation and Finance, put it succinctly: “Cigarettes have been worth gold since 2002.”

The typical “butt-legging” operation is simple: buy low or no-tax cigarettes on an Indian reservation, in a low-tax state, on the Internet or from abroad, and then resell them on the black market for a mark-up, usually double what the smuggler paid – $2.50 to $5 per pack, for example. Smokers are happy because they’ve saved two or three dollars without leaving the city, or even their block. If a street vendor, the smallest player on the smuggling pyramid, moves 10 cartons a day at $25 profit each, that amounts to more than $90,000 annually – tax free.

These illegal sales – on street corners in Harlem, in Bronx bodegas and at sidewalk stalls in Chinatown – have significant implications for criminal activity, public health and tax revenues, undermining some of the same goals the high taxes seek to address. There have even been a handful of links to terrorist groups like Hamas.

These side effects are likely to grow worse with the June tax increase.

“It’s no longer cut and dry who’s the bad guy – everybody out there has their hands in it,” said Angela Murray, a Senior Excise Tax Investigator with the New York State Department of Taxation and Finance, referring to the diverse types of criminals in the underground cigarette economy. “Now, with the new cigarette tax, forget about it…it’s definitely going to increase.”

While a black market is inherently impossible to measure accurately, several figures illustrate the unintended consequences of New York City’s high cigarette tax. After the 2002 increase, legitimate cigarette sales fell 42 percent, from 343 million packs in 2002 to 197 million packs in 2003, according to New York City’s Independent Budget Office. Taking into account the record 11 percent decline in the number of smokers in New York City from 2002 to 2003 (22 to 19 percent), nearly 130 million packs were theoretically bought illegally. While tax revenues still went up, hundreds of millions of dollars were effectively transferred from legitimate businesses – stores like bodegas, delicatessens and newsstands – and city government into the hands of criminals.

Some put the figure even higher. The illicit market supplies as much as half of all cigarettes consumed in the city today, according to Patrick Fleenor, chief economist at the Tax Foundation, a nonpartisan tax research group, and author of policy analysis paper “Cigarette Taxes, Black Markets, and Crime: Lessons from New York’s 50-Year Losing Battle.”

While cigarette-related criminal activity has been around since 1938, when New York City implemented its first tax on the product, the 2002 increase led to the largest black market ever. Today, law enforcement agencies have hundreds of ongoing investigations into clandestine cigarette trafficking, compared to a few dozen before 2002.

“It’s a substantial problem,” said Matthew Myerson, a senior attorney with the ATF’s New York field division. “There are so many cases out there, we can take as many cases as there is man power.”

The 2002 tax increase also brought a small increase in cigarette-related violence, although less than some experts predicted. With a tractor-trailer full of cigarettes worth as much as $4.5 million on the street, hijackings and robberies of bulk cigarette have increased slightly, although it is far from epidemic. There have also been several cigarette-related murders, similar to drug-dealing “turf” disputes.

What’s more, smoking rates in communities where untaxed cigarettes are sold remain stubbornly high. In many of New York City’s predominantly poor and minority neighborhoods, like Central and East Harlem, the South Bronx, Washington Heights, East New York, Bedford-Stuyvesant and Bushwick, smokers who would otherwise be sensitive to price increases continue their habit because of the availability of untaxed cigarettes on the street. Citywide, nearly one in ten smokers got their most recent cigarette from another person or a street dealer, according to the city’s 2006 Community Health Survey, and 27 percent of city smokers reported buying under-taxed tobacco sometime within the previous 12 months.

Finally, an October 2007 New York City Budget Office report estimated that roughly $40 million in city revenue was lost in 2006 due to evasion of cigarette taxes, a conservative estimate. Illegal purchases are likely under-reported in city surveys; it’s possible that the number of untaxed cigarettes bought is greater than official statistics.

Increase in criminal activity

Cigarette-related criminal activity in New York City has surged since the 2002 tax increase. From enterprising individuals to small, informal groups to large organized crime operations, “butt-legging” has become a popular source of income for those on the margins of the law. Trafficked primarily by tight immigrant networks, cigarettes are a rare black market because it is so potentially lucrative with relatively little risk.

“The money is too good – it’s not going to stop,” said Stanton from the state tax department. “We know the large players, but you take a ring down and for six months it’s quiet, but then other people fill the void.”

With multiple law- and tax-enforcement agencies working on the issue, there are hundreds of on-going investigations into illegal tobacco sales. While there is no official count, the New York City-area operations that have been busted since 2002 illustrate the nature of the black market.

In August 2006, a nine-month investigation revealed a ring of nine from the Bronx, Brooklyn, Manhattan and Staten Island bought van-loads of untaxed cigarettes on Long Island’s Shinnecock and Poospatuck reservations – sometimes from undercover officers – for about $22 per carton, affixed counterfeit tax stamps, and resold the cartons around New York City for about $52, according to the Suffolk County District Attorney, Thomas Spota.

“That’s better than drug money, quite frankly” Spota said at the press conference announcing the arrests.

The group of immigrants from Jordan, Guinea and Palestine netted an estimated $9 million in profits, but little cash was recovered, prompting concerns about where the money went. In addition to the nine persons arrested, 160 people were charged for the possession of untaxed cigarettes from the reservations.

In November 2006, a nine-month investigation resulted in the arrest of 11 people who were selling approximately 15,000 cartons of untaxed cigarettes a week to businesses and individuals in Nassau, Queens and Bronx counties. Most of the cigarettes were from the “Outpost,” a smoke shop on the Poospatuck Indian Reservation in Mastic, Long Island. Warrants in the Bronx, Mastic Beach, Baldwin and Flushing produced $750,000 in cash, 15 vehicles, a camper, two trailers, four guns and 41,000 cartons of untaxed cigarettes. Also seized were devices used to forge cigarette tax stamps. According to the Nassau County District Attorney, 1,200 to 2,400 cartons of untaxed cigarettes were delivered to the city almost daily, in addition to some Chinese counterfeits, both of which were affixed with fake tax stamps. Ronald Bell, the shop’s Native American owner and ringleader, is also being investigated for conspiracy to commit murder.

In April 2007, New York police seized 243,000 cartons of counterfeit Chinese Marlboros and Newports at a storage facility in College Point, Queens.

In August 2007, a five-month joint investigation by Nassau and Queens authorities led to the seizure of 60,000 cartons of untaxed cigarettes, half of which were counterfeits from China, “Newports” with a street value of $3.4 million. Also found were 125,000 counterfeit tax stamps from Kentucky, Virginia and New York and $350,000 in cash at the warehouse in Corona, Queens. According to the New York Post, the Chinese ringleaders shipped in counterfeit cigarettes for roughly $12 per carton, selling them to restaurants and small stores for $25. Nassau District Attorney Kathleen Rice called the ring one of “unbelievable proportions.”

And this April, the largest confiscation of counterfeit stamps in New York State history was announced: 2,178,306 stamps worth $6.1 million. A Jordanian native, Rafea Al-Nablisi, was selling the stamps for 45 cents apiece and distributing an estimated 12,000 cartons of cigarettes a week in New York City, which would make him one of the largest wholesaler in the city, illegal or legal. That would cost the city and state well over $20 million in lost tax revenue annually, according to Robert Renzulli, a prosecutor with the Brooklyn District Attorney’s office.

Brooklyn District Attorney Charles Hynes noting the hundreds of millions of dollars in potential lost tax revenue at the press conference announcing the bust: “We are in deep trouble in this state financially and this is the kind of hemorrhaging and bleeding that we can ill afford.”

Violence has come too

While the smuggling and sale of under-taxed and counterfeit cigarettes is itself non-violent, some violence has accompanied the activity, as is inherent to a black market. But the tax increase has yet to produce the type of destruction that characterized crack cocaine sales, as some experts predicted. While there are no specifics, anecdotal evidence nonetheless suggests multiple crimes tied to the post-2002 rise of illegal sales.

Rodney Morrison, a multimillionaire married to a Poospatuck Indian, recently stood trial in Federal Court for allegedly murdering a rival for opening another cigarette business on the reservation. Morrison, who owned the Peace Pipe Smoke Shop, is also charged with other crimes – including racketeering, arson and robbery – in what prosecutors have called a “reign of terror” to dominate untaxed cigarette sales near Mastic. Morrison offered to put up $56 million in cash and assets for bail, an indication of the huge profits he had made from cigarette sales. In May, he was convicted for selling millions of cigarettes that ended up on the black market, but was acquitted on the murder charge.

In November 2005, Angel Jimenez, 71, was killed in his Bivona Street apartment in the Bronx, where he ran an informal business selling untaxed cigarettes he had bought on the Internet from a Poospatuck website, the “Smokers Den.”

In May 2005, Njasang Nji stabbed Luis Padilla to death because of a dispute over who could sell cigarettes at 125th Street and St. Nicholas Avenue in Harlem, a popular corner for street vendors.

In November 2004, a street vendor of untaxed cigarettes was killed by competitors in Fulton Mall in Brooklyn. Cody Knox, the victim, had apparently started charging a dollar less per pack close to the others’ turf. The murder took place in broad daylight, in front of horrified shoppers.

2003 saw at least two killings directly tied to disagreements over “butt-legging” turf. Desmond Jordan, 34, was allegedly shot by William Giddens, 45, last May 17 in front of 24 Humboldt St. in Brooklyn. And an unidentified 25-year-old Bronx man was shot at 1304 Miriam Ave. in a similar dispute.

In 2002, A&T Tobacco Sales on Graham Street in Greenpoint, Brooklyn was robbed for $30,000 worth of cigarettes; robbers in the Bronx took $300,000 worth of untaxed cigarettes from the back of an unattended truck on Webster Avenue.

Many types involved

The criminal operations behind the violence are varied. “There’s everything from the guy who goes to Delaware to organized crime using sophisticated networks – a huge spectrum,” said Special Agent Joseph G. Green, an ATF spokesman in New York. “There’s a lot of different nationalities, but they tend to stick together,” he added, explaining how immigrant networks naturally facilitate smuggling and distribution.

The most significant group involved in the black market are Arab immigrants, with significant amounts of Jordanians, Lebanese, Yemenis, Palestinians and Syrians involved, according to State tax investigators. The large-scale smuggling operations tend to be fun by nationality-based, family-bound network. That way, personal and ethnic ties run throughout the supply process, from bulk purchase to transport to sales, often to small, grocery and delis throughout the city (an estimated 60 percent of all convenience retail outlets in the city are Arab-owned, according to law enforcement officials).

Light penalties

The penalties for illegal cigarette sales are relatively light, especially compared to drug dealing.

No matter how many cigarettes are sold, jail is rare. For the sale of fewer than 50 cartons, a first time offender typically receives a fine of $200 per carton, up to $10,000 for an individual and $20,000 for a business. For the sale of more than 50 cartons, repeat offenders receive the same $200 per carton fine, but the limits are pushed to $50,000 for individuals and $250,000 for businesses.

The sale of untaxed cigarettes is a tax law violation or a misdemeanor, not a felony. There is typically no fine for fewer than 1,000 cigarettes (five cartons), a common amount for street vendors, according to the Bronx District Attorney.

Conversely, the sale of cocaine or heroin carries heavy penalties, usually jail time. A non-violent repeat offender typically receives 18 to 24 months in a drug-rehabilitation program or three years in jail; a violent past typically results in five years of jail, according to the Bronx DA. The sale of more than 10 pounds of marijuana typically results in two or three years of jail.

The possession or sale of counterfeit tax stamps usually comes with one to two years in jail and fines of up to $50,000 for an individual and $250,000 for a business, according to the Bronx DA. The possession of one stamp is a felony, but only those caught with large quantities are prosecuted, excluding the bodega owner selling a few cartons with fake stamps, for example.

Tough to enforce

For the most part, the NYPD’s work comes at the precinct level, where officers deal with the bottom of the untaxed cigarette scheme: the street hustlers; the bodega owners; the deli proprietors. Officers hand out fines, issue summons, make arrests and confiscate cartons. But the five-dollar-pack dealer is the small fry.

The NYPD has approximately 12 people working on cigarettes full time, according to Detective Gerard McMahon, the department’s expert on the black market. McMahon, who works in the Vice Unit’s major case squad, is one of three police who work on long-term investigations. Another is an ATF agent from the Tobacco Diversion Unit, a cross-agency collaboration. In addition to the dozen police who work cigarettes full-time, dozens of intelligence officers from various precincts assist with cases in their zone. Typically, the NYPD has two or three major on-going investigations, usually involving undercover surveillance, confidential informants and wiretaps, said McMahon. “There’s always work.”

The New York State Police also work on city cases in addition to their state investigations. Five cigarette units – known as Cigarette Smuggling Enforcement Units – operate out of the Bronx, Long Island, Albany, Syracuse and Buffalo and have dozens of troopers working on cigarettes, although they have other responsibilities.

The New York City Department of Finance and the New York State Department of Taxation and Finance also work on the issue. The state typically has six major undercover investigations running simultaneously, all of which are collaborations with other agencies, like Bronx Smoke Out. Approximately 34 investigators work on cigarettes full-time, 25 of them on New York City cases. Some go on for months and cross state lines, said William Comiskey, the deputy commissioner of tax enforcement. A new class of 30 investigators will join the force by September.

In 2007, the department conducted 5,500 retail inspections, resulting in 900 arrests and 86,000 cartons of cigarettes seized. Wholesalers are also inspected. All of the department’s operations are funded from recovered cash and taxes.

“Stopping a black market in cigarettes…is as important as anything we do,” said Comiskey, but noted the hundreds of millions of dollars lost to cigarettes is a small percentage of the multiple billion dollar-sized tax gap between what is paid and what is owed. “We have to balance that against many enforcement needs.”

The ATF’s New York field division works to combat counterfeit tax stamps, counterfeit cigarettes from aboard, the sale of untaxed cigarettes on Indian reservations and the smuggling of cheap cigarettes from other states. The department declined to provide the number of agents working on cigarette investigations, but said there are more than 100 open cases, an all-time high. Before 2002, there were less than a dozen.

These combined law enforcement efforts fall short, some say. “There isn’t a law enforcement answer because the profits are so huge,” said Fleenor of the Tax Foundation. “It’s impossible to stop. Bust a ring, and supply falls, the price goes up, and other butt-leggers step in.”

While the agencies collaborate with each other on large cases – three or four at a time – there is no central repository for information on the sale of untaxed cigarettes; no lead group directing efforts; no guaranteed communication on overlapping investigations.

Political and legal efforts too

Law-enforcement efforts are bolstered by political and legal efforts to limit the supply of untaxed cigarettes, especially from Indian reservation and Internet sales points.

Indian reservations – technically sovereign nations – are another major source of untaxed cigarettes on the New York City black market.

The Poospatuck reservation, for instance, sold 10.4 million cartons of cigarettes in 2007, the vast majority of which left the nation, likely to be sold in New York City.

Individual smokers, in addition to smugglers, frequent Indian smoke shops close to the city, particularly on Long Island. In 2006, 31 percent of city residents who at times purchased illegal cigarettes did so from reservations, according to the 2007 Budget Office report.

The number of untaxed cigarette packs sold to Native Americans living on New York reservations has risen from 280,065,310 packs in 2002 to 360,145,380 in 2006, an increase of 22 percent, according to an analysis by U.S. Representative Anthony Weiner, a Democrat representing Brooklyn and Queens. Most of those cigarettes are then resold to non-Indians at reservation smoke shops or on the Internet; of the 105 domestic tobacco retail websites, 60 are Native American, according to Weiner.

Internet sales to New York City residents represented six percent of all untaxed sources. Some of the Internet sites are run by Indians in New York State, including, which is based at Rodney Morrison’s former business, the Peace Pipe Cigarettes Shop on the Poospatuck Reservation.

Recently, the state Department of Finance has tried to collect taxes from Internet cigarette vendors that sell to city residents. Between September 1, 2006 and September 1, 2007, it billed $7,160,254 to customers from sites like and, collecting $3,281,679 in unpaid taxes.

In 2003, state law barred cigarettes from being sent by commercial mail carriers like UPS, FedEx and DHL, but U.S. Postal Service shipments continue. In 2005, credit card companies were asked to block illegal Internet cigarette sales, but it is not clear how much purchases have declined.

For years, cigarette sales on reservations have been a contentious issue. Technically, non-Indians are subject to city and state taxes, and a 2005 New York State law called for collection. But enforcement never occurred because of a lack of political will. For many New York Indian nations, including the Shinnecocks and Poospatucks, cigarette sales represent the most important source of income for the tribe.

Retailers are quick to criticize the New York City response to black market, both for raising taxes so high and for failing to collect revenues, giving Internet and Indian sellers an unfair advantage, they say.

“It’s just a drop in the bucket,” said James Calvin, president of the New York Association of Convenience Stores, of cigarette tax enforcement. His members have been significantly affected by untaxed sales, and Calvin estimates that “licensed retail stores are losing upwards of a billion dollars in gross sales as a result of state sanctioned tax evasion.” The Association has lobbied aggressively for the state to collect taxes from non-Indians who purchase cigarettes on reservations, so far with little result. Calvin said that untaxed cigarette sales are “an epidemic” that has “devastated the convenience store trade in New York State.”

Like convenience stores, wholesalers are also angry, as cigarettes represent approximately 80 percent of their sales. “Do you think Indians smoke 400 million packs?” said Arthur Katz, executive director of the New York State Association of Wholesale Marketers & Distributors, referring to his calculation for the annual number of untaxed cigarettes sold to New York state reservations. “No way.”

An international trade

International connections abound in the New York City cigarette black market. There are the counterfeits from China, smuggling rings from Russia and Jordan, and cash remittances to Lebanon. Mirroring national trends, a significant amount of illegal cigarettes in the city come from abroad, augmenting the quantities from low-tax states and Indian reservations.

Nearly all law-enforcement officials said the number of counterfeit cigarettes on the U.S. and New York City black market was increasing. However, customs officials said successes in enforcement have lowered the number of smuggled cigarettes entering the country.

“A large number of criminal investigations have taken a lot of people out of play,” said Therese Randazzo, director of intellectual property rights policy and programs with the U.S. Custom’s office of international trade. “Counterfeiters move to another area – sneakers shot up – they don’t care about product, it’s about money.”

Still, the amount of cigarettes seized by customs officials is small and inconsistent. In 2007, $1,265,000 worth of cigarettes were seized; $583,349-worth were counterfeits, according to DHS figures. In 2006, the number was similarly low, under $2 million worth, even as the value of all counterfeit goods seized in 2006 was 83 percent more than 2005, a record high. In 2005, however, $9,648,876 worth of cigarettes was seized at U.S. ports in 2005, representing 10 percent of the total value of fake goods seized that year. Nearly all were from China and the port of JFK accounted for more than 48 percent of total seizures.

“The [DHS] numbers fluctuate because they are seizing so little,” said Rob Calia, director of the Global Intellectual Property Center at the U.S. Chamber of Commerce, explaining how one or two big seizures can skew the yearly figures. In general, he said that record numbers of cigarettes, especially counterfeits, were being smuggling into the U.S.

According to a recent book by Peter Navarro, “The Coming China Wars,” “China churns out 65 percent of the world’s counterfeit cigarettes. Of the more than 35 billion cigarettes sticks it produces each year, almost 30 billion of them are exported.” A 2001 estimate from the World Customs Organization puts the number as high as 190 billion counterfeits produced each year.

In 2007, Chinese officials seized 9.28 billion counterfeit cigarettes, the government announced, raiding 3,876 counterfeit cigarette warehouses and arresting 7,026 people in connection with the false brands. In 2006, the number of counterfeits was 9.07 billion.

North Korea is also a source of counterfeit cigarettes that make their way to New York City. The country has become a “leading source” of cigarettes with the capacity to produce more than two billion packs a year, tobacco companies say, according to a 2006 Wall Street Journal article citing a confidential industry report. In 2005, U.S. authorities seized more than one billion smuggled counterfeits in California – worth $42 million – many of which were believed to be from North Korea. A 2007 Congressional Research Report to Congress called counterfeit cigarette production in the country “flourishing.”

British American Tobacco, who makes Lucky Strike, Dunhill and other brands, estimated that tobacco companies lose roughly $4 billion a year to counterfeit cigarette sales.

Links to terrorism

For decades, cigarettes have been a product of choice for criminals both in the U.S. and abroad. But the large profit margins resulting from record cigarette taxes have drawn a particularly troubling group of profit-seekers into the black market: terrorists.

“The link to terrorism has been established,” Philip Awe, chief of the ATF’s alcohol and tobacco enforcement branch, told Georgia lawmakers in October 2007.

In April 2008, the study “Tobacco and Terror: How Cigarette Smuggling is Funding our Enemies Abroad” by U.S. Representative Peter King of New York again emphasized the link between the black market and terror.

“Those involved in illicit tobacco trade to infamous terrorist organizations such as Hezbollah, Hamas, and al Qaeda,” the report said, estimating that “millions” is diverted to such groups.

An earlier study was more tangible: “Hizballah [sic] earned an estimated profit of $1.5 million in the United States between 1996 and 2000 by purchasing cigarettes in a low tax state for a lower price and selling them in a high tax state at a higher price,” according to a 2003 Government Accountability Office report on terrorist financing.

In the past six years, several cases have revealed terrorist financing via untaxed cigarette sales in the U.S., according to law enforcement officials. Nearly all of the cases have New York ties. The funds have almost always to gone to Hezbollah, a Lebanese organization deemed terrorist by the U.S., but whose mission involves social services and is not as singularly focused on jihad as Al-Qaeda, for example.

In 2002, a federal jury convicted Mohamad Hammoud for smuggling at least $7.9 million worth of cigarettes from North Carolina to Michigan, where they could be sold at a higher rate. Prosecutors believed that Hammoud, a Lebanese native who ran the operation with his brother, Chawki, sent part of their profits to Hezbollah, although they were only able to prove $3,500 was funneled to the Middle East. Prosecutors described Hammoud as the leader of a terrorist cell.

In 2003, 10 men bought 71,467 cartons of cigarettes from undercover New York tax authorities in Virginia – worth $2.2 million – that they were told had fake New York City and State tax stamps, where the men planned to resell the tobacco. One of the men was arrested in Detroit carrying hundreds of thousands of dollars in wire transfer receipts showing payments to Hezbollah associates.

In another 2003 case, a Detroit man with Hezbollah ties was prosecuted for smuggling untaxed cigarettes from the Seneca Indian reservation in Cattaraugus to Michigan. According to prosecutors, Elias Mohamad Akhdar sent thousands of dollars – but tried to send hundreds of thousands – to the group he had fought for in Lebanon. Akhdar is serving a 70-month jail sentence.

In 2006, a Canadian man was convicted of smuggling $500,000 worth of cigarettes from the Cattaraugus Indian Reservation in New York State to North Carolina, Kentucky and Michigan each week. Hezbollah received some of the profits, according to the U.S. Justice Department.

“Because of the immense profits in the illicit cigarette trade, as well as the potentially low penalties for getting caught, illicit cigarette trafficking now rivals drug trafficking as the method of choice to fill the bank accounts of terrorists and terrorist groups,” William Billingslea, a senior intelligence analyst with the ATF, wrote in Police Chief Magazine in 2004.

It should be noted however, that the amount of cigarette money linked to terrorist groups, however, is relatively small and is not a critical source of funding for Hezbollah or other groups. Indeed, some experts challenge various U.S. law-enforcement warnings about untaxed cigarettes funding terror.

“Hezbollah’s sources for funding, through their collections of monies from overseas, are well known,” said Mark Perry, a military, intelligence and foreign affairs analyst and director of the Conflicts Forum, a private group that calls for increased dialogue between Western countries and Islamic movements and political parties, in an email. “My own experience, having met with these people and their supporters in the region, is that Hamas, Hezbollah and the Muslim Brotherhood need not cover-up their fundraising trail nor act particularly surreptitiously in gaining funding. Each group enjoys wide support among its constituencies.”

Perry also questioned the government’s claim of Hezbollah’s large presence in the U.S. – 50 “terrorist cells,” according to the director of National Intelligence in 2007 – and the connections made by prosecutors in the U.S. cases linking untaxed cigarette profits to the Lebanese group.

Still, New York-area law enforcement agencies, especially the New York State Department of Taxation and Financed, are concerned about the terrorism and cigarette link.

“The links to terror are real,” said Comiskey, the department’s lead enforcer. “I don’t know of another area where there are so many repeated incidents of organized crime funding terrorists.”

Untaxed cigarettes readily available to smokers

On the corner of 125th Street and Lenox Avenue, the refrain is commonly heard: “Newport, Newport, Newport…Marlboro, Marlboro, Marlboro.” In the daily bustle of Harlem’s main thoroughfare, the chant is seemingly part of the landscape, a rhythmic marketing pitch to passers by. The call is not especially loud; it is just clear enough to compete with the DVD sellers, the incense vendors, the hair-braiders.

Often clutching a black plastic bag full of contraband, the “five dollar man,” as he’s known in Harlem and other New York City neighborhoods, has been a fixture at certain intersections, subway stops and commercials strips since the 2002 tax increase. The five dollar man is an illegal street vendor of untaxed cigarettes, usually selling Newports or Marlboros for $5 pack, or “loosies,” single cigarettes, for 25 or 50 cents apiece. And he – it’s almost always a man – is often the end of the line for untaxed cigarette smuggling and distribution in New York, the black market’s public face.

“Purchasing from the $5 man was the principal behavioral response to the tax increase” in New York City’s poor neighborhoods, an August 2007 study concluded. “The $5 Man: The Underground Economic Response to a Large Cigarette Tax Increase in New York City,” published in the American Journal of Public Health, used Central Harlem as a case study to examine how impoverished New Yorkers responded to the 2002 tax increase. “Although interest in quitting was high, bootleggers created an environment in which reduced-price cigarettes were easier to access than cessation services. This activity continues to undermine the public health goals of the tax increase,” the study said.

A majority of the study’s 104 participants had bought cigarettes on the street; only one said they quit because of the tax increase.

“The five dollar man approaches me everyday like they do everyone else,” said Geoffrey Quinn, sitting on a bench on 125th street, smoking a Marlboro last year. “You can buy cigarettes on any corner,” the 49-year-old from Central Harlem said.

Street vendors were popular in the community: “bootleggers were uniformly viewed as a justifiable and appreciated response to the high price of cigarettes,” the study said.

Untaxed cigarettes keep smoking rates high

The five dollar man, in addition to other illegal purchase points in New York City’s poor neighborhoods, has undermined public health efforts, helping keep the smoking rate high in certain sections of the population.

For instance, Harlem’s smoking rate of 26 percent is approximately 50 percent higher than the New York City average of 17.5 percent, according to the Department of Health’s 2004 Community Health Survey, which provides the most recent smoking data for specific neighborhoods. Excluding Staten Island, where five dollar men are uncommon, the other five neighborhoods with the highest smoking rates are known for untaxed cigarette sales: East Harlem (27 percent), Central Harlem (26 percent), Southeast Bronx (24 percent), Fordham and Bronx Park (24 percent), and Southern Brooklyn (23 percent).

“There’s always going to be high-risk populations that need more help,” said Dr. Donna Shelley, the study’s lead author, referring to the poor neighborhoods popular with street vendors. “Things are stacked against them.”

Those neighborhoods also have some of the highest mortality rates in the city. Per 1,000 people, Morrisania (11.1), Brownsville (10.8), and Central Harlem (10.4) had the most deaths in 2006. Smoking is the leading cause of preventable death in New York, and mortality rates are importantly linked to tobacco use and the illnesses it causes, including heart disease, stroke, emphysema and lung cancer. “It’s pretty stark compared to the city,” said Shelley, former head of the city’s Bureau of Tobacco Control.

Counterfeits especially dangerous

Just as the five dollar man’s presence hurts public health, especially in poor communities, the counterfeit cigarettes that often end up on the black market make matters worse. Few studies have been done on counterfeits, most of which are from China, but it is clear that the cigarette’s make-up is inconsistent at best. In nearly all cases, counterfeit cigarettes are more dangerous.

A 2002 U.K. studied showed that Chinese counterfeit cigarettes sold in London contained twice the level of cancer-causing chemicals, including 75 percent more tar, 28 percent more nicotine and 36 percent more carbon monoxide.

A 2004 Scottish survey, the most significant on counterfeit cigarettes, produced similar results. The St. Andrews University study found an average of five times more cadmium and six times more lead and an elevated level of arsenic. General metal levels were also abnormally high.

In at least one case, however, counterfeit cigarettes from China tested in Virginia had slightly less tar and carbon monoxide then the brand they imitated. But the counterfeit Newport cigarettes seized in August 2007 by Nassau County police also had more nicotine and burned longer, according to U.S. lab testing.

Estimates vary widely on the number of counterfeit cigarettes. McMahon, the NYPD’s cigarette expert, estimated that 30 percent of black market packs in New York City are counterfeit, mostly from China. The New York State Department of Taxation and Finance said that “most” cigarettes are legitimate. Other agencies simply say the amount of fakes has increased over the past few years. Law enforcement officials rarely test confiscated cigarettes and fakes are sometimes mixed in with legitimate cartons, further clouding the issue. Regardless, all agree that the number of counterfeits in New York is at a record high.

The profits on counterfeits are substantial. A pack of Chinese fakes costs 25 cents to manufacture and smuggle into the U.S., said McMahon, and the going rate is $1.20 per pack on the black market. The cigarettes are then sold as legitimate cigarettes on the street for $5 or in small stores for as much as $8.

Counterfeit cigarettes have several common traits. The taste is not an exact replica, although the similarity varies. Marlboros are typically the closest in flavor; Newports are among the worst, said McMahon. Fakes also have cheap plastic wrapping and the tear-strips break easily. The letters on the packaging are also sharper and the cigarettes do not automatically extinguish when left unattended, a New York City law.

Indian sales quasi-legal

Indian vendors typically buy untaxed cigarettes legally from tobacco wholesalers tax free. Usually, the wholesalers buy and place New York tax stamps on packs before selling to businesses, a cost they pass on, soon to be $2.75 for New York State and $4.25 for the city. The Indian exception allow New York tribes to sell cartons at less than half the city’s market retail rate.

Technically, New York has the right to collect tax from Indian sales to non-Indians of more than two cartons because of a 1994 U.S. Supreme Court decision. However, the state has so far refused to enforce the rule, despite a March 2006 state law requiring the collection of those levies. Because the Shinnecock reservation, like other Indian land, is a sovereign nation, enforcement is legally problematic and politically sensitive.

“Cigarette taxation is an odd little world,” said Eric Proshansky, deputy chief of the New York City Law Department’s affirmative litigation division. “The whole black market in cigarettes is made possible by the state of New York because they don’t require wholesalers to put tax stamps on cigarettes.”

Since 2003, Proshansky and his department have filed several cigarette-related suits. One set of lawsuits was to block Internet sites from selling untaxed cigarettes. Some were settled out of court and another was dismissed in Federal District Court in Manhattan, but is currently in appeals. Another case was to prevent tobacco wholesalers from selling cigarettes to reservations without collecting taxes.

In May 2008, the city’s lawsuit against cigarette wholesalers was cleared in federal court, meaning that the vendors can be held liable under the Contraband Cigarette Trafficking Act and state law. It is not yet clear what action the city will take.

Counterfeit tax stamps key

Once smugglers purchase untaxed cigarettes, they have two options for resale. The first is to sell the packs as bought with no proof of taxes paid to the city or state. Some customers – especially the “$5 dollar men” – do not care, or did not want to pay the extra cost of the second option: counterfeit tax stamps.

Inspectors have already seized a record number of counterfeits this year and many more busts are anticipated.

“Counterfeit tax stamps are the big thing now,” said Comiskey of the state tax department. “Stopping them is as important as anything we do to stop cigarette tax evasion.”

Today, counterfeit stamps are common on the black market, thanks to improved printing technology. Fakes, nearly all domestically made, are typically sold in “envelopes,” which contain 42 sheets of 240 red stamps each. An envelope is worth between $350 and $800 on the street, according to McMahon.

“The tax stamp thing is huge,” said Tom Stanton, the lead state tax investigator, explaining a computer program and “butcher’s” wax paper are all that is needed to make decent replicas for as little as 2.5 cents apiece. Stanton’s investigators seized “millions” of stamps in 2007; more than $6 million have been seized already this year.

The financial cost

For politicians nationwide, taxing cigarettes is a popular remedy for budget shortfalls. Like most “sin” taxes, it raises revenue while in theory reducing consumption of a harmful product: a political win-win. But in New York, like other high-cigarette tax areas, the money politicians count on raising is significantly undercut by black market sales.

The 2007 New York City Budget Office report estimated that roughly $40 million in city revenue was lost in 2006 due to evasion of cigarette taxes, a loss greater than what the tax brought in prior to the 2002 increase. In the city, 27 percent of smokers “always” or “sometimes” bought under-taxed cigarettes from any source, according to the report; 71 percent of tax evaders go out of state to purchase cigarettes; Indian reservations are second at 31 percent.

While the 2002 increase did raise city revenues from cigarette sales, 46 percent of the city’s $1.50 per pack goes to New York state because of an agreement needed to pass the levy in the first place. That money is to fund the state’s Health Care Reform Act of 2000, which insures over 1.3 million New York families, children, and seniors. So as more New Yorkers evade taxes, less goes to health programs.

The problem is common across New York State, although estimates of lost cigarette tax revenue vary. According to the State Department of Health’s 2007 Independent Evaluation of New York’s Tobacco Control Program, New York lost between $300 and 388 million to total untaxed cigarette sales in 2006. The State’s 2006 Adult Tobacco Survey produced an even higher estimate: between $419 million and $552 million lost in 2004, the latest statistical year available.

Katz, of the New York State wholesaler’s association, estimates that the state loses over one billion dollars annually to untaxed sales, based on excise tax.

“They are throwing away a billion dollars a year – unbelievable,” said Katz, referring to his calculation for the annual number of untaxed cigarettes sold to New York State reservations If you want to raise to taxes, fine. But collect them.”

One state senator, Martin Golden, a Republican from Brooklyn, wrote in an October 2007 New York Post op-ed – “Indian Butts: Terror’s Take” – that New York loses $20 million a week in revenue or “upward of $1 billion a year,” from reservation-based sales alone. State Senator Jeff Klein, a Democrat from the Bronx and Westchester, said that New York State had “lost approximately $270 million in uncollected cigarette tax revenues from Native-American owned businesses” in his 2007 report “Up in Smoke: Buttlegging, Cybersmokes, and the Disappearance of New York State Tax Revenue.”

Both Golden and Klein, along with numerous other New York politicians, have been active on the issue of untaxed cigarettes, particularly in collecting taxes from Indian reservation and Internet sales.

In the New York Post op-ed, Senator Golden wrote: “Both federal and state laws are already in place, and the courts have reaffirmed their constitutionality. What we need now is a governor with the guts to enforce them. The result of not enforcing the law has transcended the issue of Native American sovereignty into an issue of national security.”

U.S. Representative Anthony Weiner, a Democrat from Brooklyn and Queens, introduced the Prevent All Cigarette Trafficking Act (PACT) in November 2007. The legislation, supported by State Senator Klein, would increase penalties for mail, phone and Internet vendors; end all mail-order cigarettes; and give the ATF increased inspection authority.

Other pending legislation aims to split cigarette tax revenue collected from reservation sales with Indians, which state tribes oppose, like all tax collection measures. Another effort is to modernize tax stamps to make counterfeiting more difficult, which tobacco companies like Philip Morris oppose because of increased cost to them. It is not clear if either has the political legs to go into law.

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