Sales of cigarettes were a little slow in Canada. So when a buyer in New Orleans showed up asking to buy 20 cases of duty-free Canadian-made cigarettes, the Brown & Williamson (B&W) sales manager allegedly agreed. One week later the cigarettes were smuggled across the border back into Canada where there was a thriving black market.
As it turned out, the buyer was an undercover US Customs agent. Eddie Jordan Jr., the United States attorney for the Eastern District of Louisiana, recently announced the indictment of that Brown & Williamson executive, Michael Bernstein, the East Coast regional account manager, as well as nine other individuals charged with smuggling cigarettes from 1991 to 1994.
As the indictment illustrates, bootlegging cigarettes remains a problem. According to the Bureau of Alcohol, Tobacco and Firearms (ATF), there are 80 to 100 active investigations, including 35 involving smuggling between the US and Canada. The rest are cases of bootlegging between low-tax states such as Virginia and high-tax states such as New York.
"It's big business, the smuggling is still going on, and someone is making a lot of money," says Joe Green, a spokesman for the ATF in New York.
According to the government, the alleged smugglers in New Orleans made more than $1 million in profits. The government, which infiltrated the ring, says the plan was to make it appear that the cigarettes were being sold to offshore shrimp boats who do not need to pay any taxes. All the indicted individuals proclaimed their innocence.
B&W recently issued a statement that noted: "There are no allegations directed at the company or any of its executives." The company said it would stand by Bernstein and claimed federal agents violated his constitutional rights.
The Royal Canadian Mounted Police (RCMP) believe tobacco smuggling is down from two years ago when it was rampant. Cigarette smuggling in Canada became a major problem after the federal and provincial governments enacted large excise taxes in the 1980s. The taxes, although unpopular with smokers, cut down smoking by adolescents.
Then, in 1992, the legal exports of cigarettes soared. Exported cigarettes were not subject to the sales tax. The Canadian tobacco industry has long maintained it is not involved with the smuggling. However, the cigarettes were not being sold to US consumers, who have different tastes.
"There was a huge PR campaign [by the tobacco industry], and the Canadian government felt it had no choice but to roll back the taxes since the smuggling was fostering a mood of lawlessness," says Matt Myers, counsel to the Coalition on Smoking or HEALTH, an advocacy group in Washington.
The campaign resulted in a roll-back of excise taxes in five of the 10 provinces, including Ontario and Quebec. Now, even though the taxes are reduced, cigarette smuggling continues. Staff Sgt. Jean Bourassa of the Cornwall Detachment of the RCMP says, "Cigarettes have regained their popularity among smugglers." In fact, on March 28, the Mounties announced the arrest of 170 people who were involved in smuggling. The RCMP said there were links to organized crime groups as well as others formed for the sole purpose of smuggling alcohol and tobacco.
Cigarette bootlegging is not unique to Canada. Recently, New York State Assemblyman Jeffrey Klein (D) from the Bronx chaired a hearing on cigarette smuggling. The state estimates it is losing $82 million a year in excise taxes. But Mr. Klein says wholesalers believe the actual loss is closer to $150 million. "The bootleggers are escaping a $7.80 tax per carton and only paying 25 cents per carton," he says.
To try to halt the smuggling, Mr. Klein proposes to license everyone who sells cigarettes. This would include background checks and punishments for offenses. To add substance to licensing, Klein wants to link violations to other licenses, such as the state lottery and the state liquor authority. "The sum and substance of this is that you must go after them monetarily," he says.