T To ob ba ac cc co o a an nd d T Te er rr ro or r: :

How Cigarette Smuggling is Funding our Enemies Abroad

Source: New York State Department of 1axation and Iinance

Prepared by the Republican Staff of the
U.S. House Committee on Homeland Security
U.S. Rep. Peter T. King (R-NY), Ranking Member




1
1obacco and 1error
Introduction

It has been well-reported that terrorist and criminal organizations are conducting illicit
business operations within the United States. sending the proits oerseas to inance domestic and
international terrorist and criminal organizations. Recent law enorcement inestigations hae
reealed that these proits. estimated to be in the millions o dollars annuallv in the United States
alone. are generated in part bv illicit cigarette traicking.
listoricallv. the low-risk. high proitabilitv o the illicit cigarette trade sered as a gatewav or
traditional criminal traickers to moe into lucratie and dangerous criminal enterprises such as
monev laundering. arms dealing. and drug traicking. Recent law enorcement inestigations.
howeer. hae directlv linked those inoled in illicit tobacco trade to inamous terrorist
organizations such as lezbollah. lamas. and al Oaeda.
1

1hese startling discoeries led U.S. louse (ommittee on lomeland Securitv Ranking
Member Peter 1. King R-N\, to launch an inestigation o the issue. 1he ollowing sta report-
which will ocus on the estimated millions o dollars in illicit tobacco proits being unneled to
terrorist groups oerseas as well as New \ork State`s reusal to enorce tobacco laws-is the result
o numerous interiews with law enorcement oicials at the local. State. and lederal leel. as well as
open-source research.
It is the hope o Ranking Member King that this report will shed light on a criminal
enterprise that has been largelv ignored or ar too long.




1
Staff interview with New York State Department of Taxation and Finance officials, New York City, December 2007.


2
1obacco and 1error
1he Illicit 1obacco 1rade: Smuggler Operations

Oer the past seeral vears. the illicit tobacco trade has reemerged as one o the most
lucratie smuggling operations in the United States and around the globe. 1he \orld lealth
Organization has estimated that illicit cigarettes account or 10. percent. or approximatelv 600
billion cigarettes. o the more than 5. trillion cigarettes sold globallv each vear.
2
1o put this into
perspectie. the global black market alone would supplv 4.5 packs to each o the planet`s 6.6 billion
inhabitants annuallv. In North America. experts estimate that ie percent o the annual cigarette
market. or some 414 billion cigarettes. are illicit.
3

Domesticallv. the opportunities or illegal proit are abundant. gien the disparitv between
state taxes on cigarettes as well as the discounted sale o cigarettes to speciic segments o the
population. such as Natie Americans. Since 1992. cigarette taxes in the United States hae been on
the rise. increasing more than 65 percent while states` gross tax reenues increased bv onlv 35
percent,.
4
Lxploiting the price disparitv or a single pack o cigarettes between indiidual states has
proen lucratie or well-organized criminal networks. lor example. a pack o cigarettes that costs
>8 in New \ork and New Jersev will onlv cost >4 in tobacco states` like Virginia and North
(arolina. 1he proit on a standard dierted load o 1.500 contraband cartons could be as high as
>60.000.
5

In its operations. the contraband and countereit tobacco trade is erv similar to other tvpes
o illicit actiities. It occurs on all leels. ranging rom large scale smuggling networks to smaller

2
Framework Convention Alliance, How big was the illicit tobacco problem in 2006? Geneva, 2007.
3
Framework Convention Alliance, Factsheet: February 2008. http://www.fctc.org.
4
Bartlett, Bruce. Cigarette Smuggling, National Center for Policy Analysis, Brief Analysis N. 43, October 30,
2002.
5
Staff interview with New York State Department of Taxation and Finance officials, New York City, December
2007.


3
bootleg` actiities. as well as countereiting and illegal manuacturing.
6
Large scale cigarette
smuggling networks in New \ork State are dominated bv tight-knit. nationalitv-based networks.
primarilv amilies through blood or marriage o Lebanese. \emeni. Jordanian. and Palestinian
descent.

1hese amilv-based smuggling rings can control up to our o the kev stages in the
smuggling process: transportation. storage. retail. and remittance. lederal and New \ork State law
enorcement oicials estimate that nearlv 60 percent o all conenience retail outlets in New \ork
(itv are now Arab-owned. and with the Arab networks compartmentalized bv ethnicitv and amilial
ties. the risk o iniltration bv law enorcement is minimal.
It is possible or these Arab networks to relv on suppliers in lower tax states such as Virginia
and North (arolina as well as lezbollah-linked ront companies in arious ree trade zones around
Latin America.
8
loweer. sources told the (ommittee that in New \ork State the smuggling
networks relv primarilv on access to the Natie American Indian reserations or tax-ree
cigarettes-or obious inancial reasons.
9

According to law enorcement and the New \ork State Department o 1axation and
linance. cigarette manuacturers sell a carton o cigarettes to New \ork wholesalers or >26. 1he
Natie American Indian reseration smoke shops can then purchase that same carton rom the
wholesalers or >2. New \ork (itv retailers. on the other hand. are orced to pav an aerage o
>61. per carton o cigarettes. ater the applicable >18.60 state tax. >15 local tax. and other ees.
1his is more than double the price paid bv State-recognized Natie American tribes.
1his large disparitv has created a tremendous opportunitv or criminal enterprise. Smugglers
can make arrangements with tribal smoke shop owners to purchase an aerage 1.500 carton load at

6
Joossens, L. Combating the Illegal Tobacco Trade from a Public Health Perspective, presentation at the World
Health Organization expert Committee on the Illicit Tobacco Trade, Geneva, September 2006.
7
Staff interview with Federal and NY State law enforcement officers, New York City, December 2007.
8
Billingslea, William, Senior Intelligence Analyst, Bureau of Alcohol, Tobacco, Firearms, and Explosives. Illicit
Cigarette Trafficking and the Funding of Terrorism, The Police Chief, vol. 71, no. 2, February 2004.
9
Staff interview with Federal and NY State law enforcement officers, New York City, December 2007.


4
>30 per carton. 1he smugglers then add countereit tax stamps. which cost them as little as >1 per
carton.
10
Once the countereit tax stamps are in place. the smugglers mav then re-sell the cigarettes
to their network retailers or approximatelv >45 per carton. generating a >14 proit per carton. or
>21.000 per load.
1he incentie or retailers to purchase cigarettes rom these smugglers is obious. In New
\ork (itv. or example. retail outlets must sell a carton o cigarettes or a minimum o >0.
11

generating a proit o no less than >25 per carton on contraband cigarettes. On a load o 1.500
cartons. that`s more than >3.500. Manv o these retail outlets are ailiated with the smuggling rings
that supplv them.
In total. law enorcement oicials in New \ork State estimate that well-organized cigarette
smuggling networks generate between >200.000 - >300.000 per week. A large percentage o the
monev is belieed to be sent back to the Middle Last. where it directlv or indirectlv inances groups
such as lezbollah. lamas. and al Oaeda.
12


54,000 cartons of contraband cigarette seized in Queens, New York
by New York State Department of Taxation and Finance and Nassau County Police
Source: New York State Department of Taxation and Finance


10
Staff interview with New York State Department of Taxation and Finance agents, New York City, December
2007.
11
Required by the New York State Cigarette Marketing Standards Act, N.Y. Tax L. 483-484.
12
Staff interviews with New York State Department of Taxation and Finance agents, New York City, December
2007 and Bureau of Alcohol, Tobacco, Firearms and Explosives, phone, April 2008.


5






6
1obacco and 1error
Recent Cases: Iunding International 1error

\hile law enorcement sources cannot diulge anv inormation pertaining to ongoing
inestigations. seeral recentlv closed cases highlight the dangerous links between cigarette
smugglers and international terrorist groups.
In (harlotte. North (arolina. a criminal enterprise led bv Mohamad lammoud smuggled
cigarettes rom North (arolina. where the tax was 50 cents per carton. to Michigan. where the state
tax was >.50 per carton. Arrested in 2000 and conicted in 2002. lammoud and his associates
made more than >8 million. a sum law enorcement oicials estimate took a mere our vears to
accumulate. Oicials beliee more than >100.000 o that proit was sent to lezbollah.
A case rom 2003 inoles two women rom the Seneca Nation o Indians` (attaraugus
reseration N\, who were sentenced or their role in a smuggling ring which proided tax-ree
cigarettes rom the Seneca reseration smoke shop to another lezbollah-linked network in
Dearborn. Michigan. According to prosecutors. the head o the smuggling ring. Llias Mohamad
Akhdar. is a natie o Lebanon and has direct ties to lezbollah.
In a third example. the inamous Lackawanna Seen` reportedlv receied unding rom an
indiidual named Are Ahmed or their trael rom Bualo to Aghanistan to attend an al Oaeda
training camp.
13
Ahmed was conicted in 2004 on charges o conspiracv to commit monev
laundering and smuggling contraband cigarettes.
\hile there are no direct ties to terror. the case o Rodnev Morrison. co-owner o a
Poospatuck tax-ree smoke shop in Mastic. New \ork. is vet another example o the enormous
proits rom illicit cigarette sales and how thev are being used to und illegal and iolent actiities.
Morrison was arrested on charges o ordering the irebombing o a woman`s car as part o a

13
Staff telephone interview with Bureau of Alcohol, Tobacco, Firearms, & Explosives, November 2007. See also
http://www.usdoj.gov/opa/pr/2004/March/04_ag_141.htm.


7
campaign to intimidate owners o competing |tax-ree| tobacco shops on the |Unkechaug Nation|
reseration.`
14
le was also under inestigation or ailing to report at least >9 million in income
deposited in banks in his natie (osta Rica.
15
According to New \ork State law enorcement
oicials. Morrison oered to put up a staggering >54 million in assets just to secure his bond.
16








14
Reinholz, Mary. In Brief; U.S. Charges Owner of Indian Smoke Shop, New York Times, August 15, 2004.
15
Ibid.
16
Staff telephone interview with New York State law enforcement officials, December 2007.

Convicted smuggler Mohamad Hammoud

(Clockwise from left) Counting illicit tobacco
profits; as a youth in Lebanon; and meeting with
Hezbollah Leader Hassan Nasrallah


8
1obacco and 1error
New York State: A Safe Haven for Smugglers?

1he illicit tobacco trade is a supplv-drien process. ueled bv tobacco manuacturers and
wholesalers who control the distribution svstem. 1here is simplv no incentie or industrv to
preent illicit cigarette sales. as smuggling actuallv increases market share and boosts the industrv`s
bottom line.
1
A 2002 studv bv the National (enter or 1obacco-lree Kids shows that as the price
goes up. cigarette sales decline. lor eerv 10 percent increase in the price o cigarettes. smoking
decreases our percent among adults and seen percent among teens.
1hat would explain whv manuacturers and distributors continue to lood New \ork`s
Natie American Indian reseration smoke shops with more than 40 million cartons o cigarettes
each vear. ar more than can actuallv be consumed bv reserations themseles. A 1994 estimate
shows that eerv man. woman. and child on a Natie American reseration would hae had to
consume 15 packs o cigarettes per dav to account or the olume o cigarettes that the distributors
sold to the reserations.
18
1his. o course. is in direct contradiction with numerous lederal and State
laws that maintain tax-ree cigarettes are or reseration consumption onlv.
In essence. the New \ork State Lxecutie Branch`s decision to look the other wav` on
sales o untaxed Natie American cigarettes to non-Natie Americans. the so-called policv o
orbearance.`
19
has created a sae haen or illicit smuggling networks. 1he continuation o this
policv allows criminal and terrorist elements to steal hundreds o millions o dollars a vear in

17
Staff interview with New York State Department of Taxation and Finance agents; Bureau of Alcohol, Tobacco,
Firearms , and Explosives agents; and federal interagency task force law enforcement agents, December 2007. See
also http://tobaccofreecenter.org/smuggling_factsresources, Illicit Trade: Questions and Answers.
18
The City of New York v. Milheim Attea & Bros., Inc., Civil Action No. 06-CV 3620, Amended Complaint, Eastern
District of New York, p. 7.
19
New York States policy of forbearance as outlined in a letter from the Office of the Attorney General, State of
New York, to U.S. District Court, Eastern District of New York regarding City of New York v. Milhelm Attea &
Bros., Inc., et al., 06 CV 3620 (CBA) dated September 24, 2007: Since the administration of Governor Pataki, the
Department of Taxation and Finance has pursued what courts have referred to as a policy of non-enforcement, or
forbearance, regarding collection of the excise taxes due on cigarettes sold on Indian reservations to non-tribal
members.


9
untaxed cigarettes alone.
20
lurthermore. thanks to orbearance. New \ork Indian reserations are
now the chie suppliers o a nationwide internet-based tax ree cigarette market.
21
So the policv o
orbearance has not onlv impeded the New \ork State Department o 1axation and linance rom
combating illicit trade within the State itsel. it has actuallv promoted an illicit interstate market.
In a recent interiew. a conicted tobacco smuggler turned conidential source or the State
o New \ork explained the eect o orbearance:
1obacco smugglers` onlv ear is losing a load o cigarettes. \e do not ear law
enorcement. 1hev will pull us oer. seize the load. and mavbe we get arrested: but
most likelv we do not. \orst case scenario. we go to jail or a couple o months
beore returning to smuggling again. 1hink about it. A small ish like me can make
>50.000 a month working onlv a ew hours each week. 1he big ish make hundreds
o thousands a week. most o which goes to the Middle Last in cash or trade
transactions.
22



Obiouslv. there should be tremendous concern oer who is dierting the unds. to whom.
and or what oerseas cause-and law enorcement on the local. State. and lederal leel should
place top prioritv on these inestigations.
But on a lesser leel. gien the State`s budget shortall. the hundreds o millions in lost tax
reenue should be motiation enough to abandon the policv o orbearance. A 2006 report bv the
New \ork State Department o lealth estimated that between >436 million and >56 million in
taxes were lost in New \ork State in 2004 rom the sale o untaxed cigarettes alone.
23
But Albanv
simplv maintains the status quo. despite the act that these illicit proits are leaing the state and
being sent oerseas to Jordan
24
and Lebanon.
25
among other countries.

20
Davis, K., Farrelly, M., Li, Q., & Hyland, A. Cigarette Purchasing Patterns Among New York Smokers,
Implications for Health, Price, and Revenue, for the New York State Department of Health, March 2006.
http://www.health.state.ny.us/prevention/tobacco_Control/docs/cigarette_purchasing_patterns.pdf
21
Staff interview with New York State Department of Taxation and Finance agents, New York City, December
2007.
22
Staff interview with a New York State confidential informant, New York, December 2007.
23
http://www.health.state.ny.us/prevention/tobacco_Control/docs/cigarette_purchasing_patterns.pdf.
24
Khan, Daryl. 28 arrested in cigarette-smuggling operation, New York Newsday, September 2, 2005.
25
Staff interview with a New York State confidential informant, New York, December 2007.


10
Ignoring the Law
1hree cases decided bv the U.S. Supreme (ourt hae made it absolutelv clear that cigarette
sales bv Natie Americans to non-Natie Americans all within State taxation power:
Moe v. Confederated Salish and Kootenai 1ribes 196,: Upheld Montana law
that required Natie American retailers to collect a cigarette tax imposed on sales
to non-Indian consumers.
26


Washington v. Confederated 1ribes of Colville Reservation 1980,: Upheld a
comprehensie \ashington State statute requiring tribal retailers selling goods on
the reseration to collect taxes on sales to nonmembers.
2


Oklahoma 1ax Commission v. Citizen Band Potawatomi Indian 1ribe
1991,: 1ribal sellers are required to collect and remit state taxes on sales to
nonmembers at smoke-shops on reseration lands.
28



1here are urther lederal and State cases that support States` rights to tax cigarette sales bv
Natie Americans to non-Natie Americans. In ^arragav.ett vaiav )ribe r. Rboae .tava. a lederal
circuit court held that the State`s cigarette tax laws are applicable to sales to non-Indian customers
on the settlement lands.`
29
In Deorovae r. ^er Yor/ tate )a Covvi..iov. a New \ork State court
stated it is readilv apparent to us that |41| can be applied |to Natie Americans| in a
constitutionallv alid manner.`
30
(ontraband cigarettes sold in New \ork (itv also iolate N\(RR
6.1a,1, and Admin (ode 11-1302g,. which require a (itv tax stamp to be applied to each
package o cigarettes to be sold in the (itv.
lurthermore. the U.S. Supreme (ourt has made it clear that States hae the authoritv to tax
wholesalers themseles on sales to Natie Americans when the cigarettes are intended or re-sale to
the public. States mav o course collect the sales tax rom cigarette wholesalers. either bv seizing
unstamped cigarettes o the reseration. or bv assessing wholesalers who supplied unstamped

26
Moe v. Confederated Salish and Kootenai Tribes, 425 U.S. 463 (1976).
27
Washington v. Confederated Tribes of Colville Reservation, 447 U.S. 134 (1980).
28
Oklahoma Tax Commission v. Citizen Band Potawatomi Indian Tribe, 498 U.S. 505, 512 (1991).
29
Narragansett Indian Tribe v. Rhode Island, 407 F.3d 450 (1
st
Cir. 2005).
30
DeLoronde v. New York State Tax Commission, 142 A.D.2d 90, 535 N.Y.S.2d 209 (3d Dept 1988).


11
cigarettes to the tribal stores.`
31
As mentioned earlier. wholesalers currentlv sell an estimated 40
million cartons o untaxed cigarettes annuallv to New \ork`s Natie American Indian reseration
smoke shops.
New \ork State`s reusal to collect taxes on these sales is also a clear iolation o the State`s
own laws. New \ork State alreadv imposes and has the authoritv to enorce cigarette excise taxes bv
means o N.\. 1ax Law Sections 41 and 41-e. A New \ork court is on record stating that 41-e
made it plain that all cigarettes sold on Indian reserations to non-members o the nation or tribe
or to non-Indians shall be taxed and eidence o such tax will be bv means o a ixed cigarette tax
stamp.`
32
Additionallv. in that same court case. it was argued that i the |New \ork State| 1axation
Department reokes the policv o orbearance. then it and other stamping agencies will be legallv
obligated to aix stamps on cigarettes sold at wholesale - at wholesale to reseration sellers. It is
not a question o about whether the state can or cannot do it. 1his concedes that the onlv thing that
is inhibiting enorcement is the policv o orbearance.`
33

loweer. in the 14 vears since the U.S. Supreme (ourt ruled that it was within the
constitutional authoritv or the State o New \ork to tax cigarette sales bv Natie Americans to non-
Natie Americans. New \ork State has not collected these taxes. Instead. the State maintains its
policv o orbearance. \hile no clear reason has been gien. it is likelv that Albanv simplv ears
upsetting the State`s Natie American population. Natie Americans hae openlv expressed their
disapproal o anv eorts to collect these taxes. including the April 199 protests that temporarilv
shut down the New \ork State 1hruwav.
34


31
Citizen Band, 498 U.S. at 514.
32
The City of New York v. Milheim Attea & Bros., Inc., Civil Action No. 06-CV 3620, Oral Arguments,
Eastern District of New York, p. 40.
33
The City of New York v. Milheim Attea & Bros., Inc., Civil Action No. 06-CV 3620, Oral Arguments,
Eastern District of New York.
34
ODonnell, Michelle. Tax on Sales at Indian Reservations Blocked, The New York Times, November 16, 2004.


12
New \ork State is also doing a poor job o enorcing anti-smuggling laws. 1he (ontraband
(igarette 1raicking Act makes it unlawul or anv person to knowinglv ship. transport. receie.
possess. sell. distribute. or purchase contraband cigarettes.`
35
(ontraband cigarettes are deined as
a quantitv in excess o 10.000 cigarettes. which bear no eidence o the pavment o applicable state
or local cigarette taxes in the state or localitv where such cigarettes are ound...`
36

In summarv. New \ork`s ailure to uphold ederal laws. as well as the State`s own laws. has
resulted in an enironment where cigarette smuggling rings can operate with irtual impunitv.
Gien the reelation that some o these rings are now unneling monev to international terror
groups. it is clear that the policv o orbearance not onlv costs the State hundreds o millions in tax
dollars but is a threat to our continued securitv.














35
18 U.S.C. 2342.
36
Ibid.


13







free cigarettes

A typical advertisement for duty-free cigarettes
New York Post, Saturday, April 12, 2008


14
1obacco and 1error
Conclusion

Lxperts hae long acknowledged that terrorist organizations such as lezbollah depend on
a wide arietv o criminal enterprises. ranging rom smuggling to raud to drug trade to diamond
trade in regions across the world.`
3
including the United States. 1errorist organizations relv heailv
on their global web o illicit enterprises to inanciallv support their recruiting. training. arming. and
operational objecties. As law enorcement agencies continue to combat terrorist and criminal
undraising schemes. these criminal groups will continue to adapt and exploit emerging
ulnerabilities. 1he abilitv o these groups to engage in low-risk. cash-based schemes such as
cigarette smuggling are critical to the continuation o their operations. 1he more than >50.000 in
proits that smuggling rings can generate rom one contraband load 1.500 cartons, is enough to
und as manv as 10 USS (ole bombing operations. In just two months o illicit cigarette trade
operations. a motiated terrorist cell could generate suicient unds to carrv out another September
11
th
stvle attack. in which operational costs were estimated to be >500.000.
38

Law enorcement agencies ace a daunting task o keeping up with these eer-changing
criminal schemes. Simplv put. thev need more help rom State and lederal goernments. 1he last
ew vears hae seen a boom in cigarette smuggling around the world and here in the United States:
and. thanks to its policv o orbearance. New \ork State is doing more to acilitate this trade than
anv other State in the union. On June 3. 2008. New \ork State taxes on cigarettes are set to increase
bv another >12.50 per carton. 1his will onlv sere to increase the demand or illicitlv smuggled
cigarettes and inlate the proit margin o these smuggling networks.
1his must be brought to an end. It is more than just a matter o hundreds o millions in lost
tax reenue-it is a matter o national securitv.

37
Testimony of Dr. Matthew Levitt, Senior Fellow and Director of Terrorism Studies, The Washington Institute for
Near East Policy, before the Senate Committee on Homeland Security and Governmental Affairs, May 25, 2005.
38
Brisard, Jean-Charles. Terrorism Financing, Report prepared for the President of the Security Council, United
Nations, New York, December 19, 2002, p. 6.