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Seizures Increasing' which was released on June 28, 2004.

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Report to the Chairman and Ranking Minority Member, Committee on 
Government Reform, House of Representatives:

United States General Accounting Office:

GAO:

May 2004:

Cigarette Smuggling:

Federal Law Enforcement Efforts and Seizures Increasing:

GAO-04-641:

GAO Highlights:

Highlights of GAO-04-641, a report to the Chairman and Ranking Minority 
Member, Committee on Government Reform, House of Representatives 

Why GAO Did This Study:

Illegal trafficking in cigarettes can generate enormous profits and is 
purportedly a multibillion dollar a year enterprise. As cigarette taxes 
increase, so do the incentives for criminal organizations to smuggle 
cigarettes into the United States. Cigarette smuggling results in lost 
tax revenues, undermines government health policy objectives, can 
attract sophisticated and organized criminal groups, and could be a 
source of funding for terrorists.

Because of these concerns, GAO examined
* the nature and scope of the problem of smuggled cigarettes entering 
the United States, including federal tax revenue losses and potential 
health risks;
* federal law enforcement agencies’–-U.S. Immigration and Customs 
Enforcement (ICE), U.S. Customs and Border Protection (CBP), and 
Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF)—efforts to 
thwart the smuggling of cigarettes into the United States; and
* legal initiatives being pursued to enhance law enforcement efforts to 
thwart the smuggling of cigarettes into the United States.

What GAO Found:

Because of its clandestine nature, the extent of cigarette smuggling 
into the United States is impossible to measure with any certainty. 
According to ICE and ATF, investigations and intelligence collected 
indicate cigarette smuggling is a significant problem, particularly 
the smuggling of counterfeit cigarettes. According to ATF, illegal 
cigarette trafficking worldwide is a multibillion dollar a year crime 
phenomenon, with some cigarette smugglers having ties to terrorist 
groups. Moreover, because smuggled cigarettes are not taxed, federal 
and state revenues are lost. Smuggled cigarettes, which include 
counterfeit and genuine brand cigarettes, also pose a public health 
risk as all cigarettes do, but no studies have been done to determine 
whether counterfeit cigarettes pose any additional health risk.

ICE and ATF have been conducting more cigarette smuggling 
investigations in recent years. Their investigations are generally 
larger, more complex, and longer-term than previous investigations. 
Also, CBP and ICE have been seizing an increasing number of cigarettes, 
particularly counterfeit cigarettes, as criminals attempt to smuggle 
them into the United States.

Two proposed legal initiatives are intended to enhance law enforcement 
efforts to thwart the smuggling of cigarettes into the United States. 
For example, a bill known as the Prevent All Cigarette Trafficking Act 
would lower the threshold for a cigarette smuggling violation (a 
felony) from 60,000 to 10,000 cigarettes, increase ATF’s authority to 
enter premises to enforce federal cigarette laws, and provide ATF the 
authority to use money generated during undercover sting operations to 
offset investigative expenses. In addition, the Framework Convention on 
Tobacco Control, a proposed international treaty, includes provisions 
that seek to eliminate the illicit trade in tobacco products, including 
cigarette smuggling.

The Departments of Homeland Security and Justice reviewed a draft of 
this report and had no substantive comments. Technical comments were 
incorporated as appropriate.

Smuggled Counterfeit Cigarettes Disguised as Legitimate Merchandise: 

What GAO Recommends:

www.gao.gov/cgi-bin/getrpt?GAO-04-641.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Paul L. Jones at (202) 
512-8777 or jonespl@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Cigarette Smuggling into the United States Considered a Significant 
Problem:

Federal Agencies Increased Efforts to Thwart Cigarette Smuggling into 
the United States and Increased Seizures:

Legal Initiatives Being Pursued to Help Thwart Cigarette Smuggling:

Agency Comments:

Appendix I: Scope and Methodology:

Appendix II: Article 15 of the World Health Organization Framework 
Convention on Tobacco Control:

Article 15: Illicit Trade in Tobacco Products:

Appendix III: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Staff Acknowledgments:

Table:

Table 1: Seizures of Counterfeit and Genuine Cigarettes, Fiscal Years 
1998 through 2003:

Figures:

Figure 1: Domestically Produced and Imported Cigarettes, 1994 through 
2003:

Figure 2: A Typical 40-foot Shipping Container at the Los Angeles/Long 
Beach Examination Station:

Figure 3: Smuggled Counterfeit Cigarettes Disguised as Legitimate 
Merchandise:

Figure 4: Smuggled Counterfeit Cigarettes:

Figure 5: Number of ICE Cigarette-Related Investigations Initiated and 
Closed, Fiscal Years 1998 through 2003:

Figure 6: Number of ATF Tobacco Investigations Initiated and Closed, 
Fiscal Years 1998 through 2003:

Figure 7: Top Counterfeit Seizures by Commodity, Fiscal Years 2000 
through 2003:

Abbreviations:

ATF: Bureau of Alcohol, Tobacco, Firearms and Explosives:

ATS: Automated Targeting System:

CBP: Customs and Border Protection:

CCTA: Contraband Cigarette Trafficking Act:

CDC: Centers for Disease Control and Prevention:

DHS: Department of Homeland Security:

FCTC: Framework Convention on Tobacco Control:

ICE: Immigration and Customs Enforcement:

IPR Center: National Intellectual Property Rights Coordination Center:

IRC: Internal Revenue Code:

MRU: Manifest Review Unit:

PACT Act: Prevent All Cigarette Trafficking Act:

TTB: Alcohol and Tobacco Tax and Trade Bureau:

WHO: World Health Organization:

[End of section]

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. However, because 
this work may contain copyrighted images or other material, permission 
from the copyright holder may be necessary if you wish to reproduce 
this material separately.

United States General Accounting Office:

Washington, DC 20548:

May 28, 2004:

The Honorable Tom Davis: 
Chairman, Committee on Government Reform: 
House of Representatives:

The Honorable Henry A. Waxman: 
Ranking Minority Member: 
Committee on Government Reform: 
House of Representatives:

Illegal trafficking in cigarettes can generate enormous profits and is 
purportedly a multibillion dollar a year enterprise. As cigarette taxes 
increase, so do the incentives for criminal organizations, including 
terrorist organizations, to smuggle cigarettes into and throughout the 
United States. Because cigarette smuggling, whether of genuine or 
counterfeit cigarettes,[Footnote 1] results in lost tax revenues, 
undermines government health policy objectives, can attract 
sophisticated and organized criminal groups, and could be a source of 
funding for terrorists, we are providing information about cigarette 
smuggling and efforts to combat it. More specifically, this report:

* addresses the nature and scope of the problem of cigarette smuggling, 
including counterfeit cigarettes, into the United States and its 
consequences, including federal tax revenue losses and potential health 
risks;

* describes federal law enforcement agencies' efforts to thwart the 
smuggling of cigarettes into the United States; and:

* identifies certain legal initiatives being pursued to enhance law 
enforcement efforts to thwart the smuggling of cigarettes into the 
United States.

To determine what is known about the nature and scope of the problem of 
smuggled cigarettes and law enforcement efforts to combat the problem, 
we obtained information from the Department of Homeland Security's 
(DHS) U.S. Immigration and Customs Enforcement (ICE) and U.S. Customs 
and Border Protection (CBP), and the Department of Justice's Bureau of 
Alcohol, Tobacco, Firearms and Explosives (ATF) officials. We also 
obtained information from Justice, State, and Treasury Department 
officials on existing legal initiatives proposed to enhance efforts to 
thwart cigarette smuggling. To obtain information about the health 
consequences of smuggled counterfeit cigarettes, we contacted the 
Centers for Disease Control and Prevention (CDC) and officials from the 
tobacco industry.

We conducted our work between August 2003 and March 2004 in accordance 
with generally accepted government auditing standards. (See app. I for 
details about our scope and methodology.)

Results in Brief:

Because of its clandestine nature, the extent of cigarette smuggling 
into the United States is impossible to measure with any certainty. 
According to ICE and ATF officials, the results of investigations and 
intelligence collected indicate cigarette smuggling, particularly of 
counterfeit cigarettes, is a significant problem. Illegal cigarette 
trafficking worldwide is a multibillion dollar a year crime phenomenon, 
according to ATF, with some cigarette smugglers having ties to 
terrorist groups.[Footnote 2] Moreover, ICE and ATF officials said that 
criminal organizations smuggle cigarettes into the United States, 
providing the organizations with the potential to garner large illegal 
profits. Correspondingly, because smuggled cigarettes are not taxed, 
federal and state revenues are lost. Smuggled cigarettes also pose a 
public health risk, as do all cigarettes. However, no studies have been 
done to determine whether counterfeit cigarettes pose any additional 
health risk.

ICE, ATF, and CBP carry out activities to combat the smuggling of 
cigarettes into the United States. ICE and ATF have been conducting 
more cigarette smuggling investigations in recent years. Agency 
officials describe their current investigations as generally larger, 
more complex, and longer-term than previous investigations. In 
addition, CBP and ICE have been seizing an increasing number of 
cigarettes, particularly counterfeit cigarettes, as criminals attempt 
to smuggle them into the United States.

Two proposed legal initiatives are intended to enhance law enforcement 
efforts to thwart the smuggling of cigarettes into the United States. 
We did not evaluate the merits of these initiatives. A proposed bill 
called the Prevent All Cigarette Trafficking (PACT) Act would, among 
other things, lower the threshold for violating the Contraband 
Cigarette Trafficking Act (CCTA), a felony violation, from 60,000 to 
10,000 cigarettes, increase ATF's authority to enter premises to 
enforce federal cigarette laws, and provide ATF the authority to use 
money generated during undercover sting operations to offset 
investigative expenses. Justice generally supports these provisions 
because they would enhance the tools to thwart cigarette smuggling. In 
addition, as part of the World Health Organization's (WHO) objective to 
address the rise and spread of tobacco consumption around the world, 
the Framework Convention on Tobacco Control (FCTC), a proposed 
international treaty, includes provisions that seek to eliminate the 
illicit trade in tobacco products, including cigarette smuggling. Among 
other provisions, the convention states that global cooperative action, 
including the exchange of cigarette tax information among countries, is 
an essential component in the effort to eliminate the illicit tobacco 
trade.

DHS and Justice reviewed a draft of this report and had no comments on 
the substance of the draft. Technical comments were incorporated as 
appropriate.

Background:

Federal and State Excise Taxes Are Levied on Cigarettes Intended for 
Sale in the United States:

Tobacco grows in many countries, but the United States has been the 
major source of the product for hundreds of years. About 500 billion 
genuine cigarettes were produced in domestic factories in 2003, and 
cigarettes continue to dominate the manufactured tobacco products 
market. Cigarette manufacturing is concentrated in Georgia, Kentucky, 
North Carolina, and Virginia.

After manufacture, the general industry pattern is for manufacturers to 
deposit cigarettes in warehouses and pay the federal cigarette excise 
tax of 39 cents per pack of 20 cigarettes. Next, the cigarettes move to 
a wholesaler stamping agent. Stamping agents have authority from states 
to affix to cigarette packs evidence of the payment of the appropriate 
state tax.[Footnote 3] Once the stamping agent receives the unstamped 
cigarettes, it usually does not redistribute them until the state tax 
stamp has been affixed. After this is done, the stamping agent usually 
sells the cigarettes to other wholesalers (nonstamping agents), 
distributors, and retailers. As of January 1, 2004, the state excise 
tax rates for a pack of 20 cigarettes ranged from 2.5 cents in Virginia 
to $2.05 in New Jersey.

Tobacco products are also exported tax-free (federal and state) from 
manufacturers or from export warehouses. An export warehouse is a 
bonded warehouse, which stores tobacco products for subsequent shipment 
to a foreign country, Puerto Rico, the Virgin Islands, and other 
possessions of the United States. Export warehouses are typically 
located at the international borders with Mexico and Canada, at 
international airports that have a considerable number of international 
flights, and at seaports.

Domestic Cigarette Production Has Declined, While Imported Cigarettes 
Have Increased in Recent Years:

Over the past decade, domestic cigarette production has declined, while 
U.S. imports of cigarettes have grown significantly. Figure 1 shows 
U.S. domestic cigarette production and cigarette imports from 1994 
through 2003. In 2003, for example, cigarette production decreased by 
32 billion cigarettes (6 percent) from 2002, and totaled 500 billion 
cigarettes, down from 532 billion cigarettes in 2002. On the other 
hand, imported cigarettes rose 24 percent to 25.9 billion cigarettes 
when compared with 2002 at 20.9 billion cigarettes.

Figure 1: Domestically Produced and Imported Cigarettes, 1994 through 
2003:

[See PDF for image]

[End of figure]

Cigarettes Can be Diverted from the Distribution System:

Cigarettes can be diverted from the normal distribution system in a 
number of ways, resulting in the evasion of cigarette taxes. According 
to an ATF report,[Footnote 4] for example, "over-the-road" smuggling 
generally includes small purchases (well under 100 cartons; 10 packs 
per carton, 20 cigarettes per pack) in one state for transport to a 
higher-tax state for resale. Also, counterfeit stamping operations and 
manipulation of interstate cigarette distribution reports have been 
identified as potential major sources of revenue loss to the various 
states. These operations are characteristic of larger and more 
sophisticated criminal operations, possibly involving collusion 
between certain wholesalers and firms with outlets such as vending 
machines and retail stores.

Moreover, the illicit trade in smuggling both genuine and counterfeit 
cigarettes into the United States avoids both federal excise tax and 
state taxes on cigarettes. The major types of cigarette smuggling into 
the United States are: (1) smuggling of counterfeit cigarettes 
manufactured overseas and (2) smuggling of genuine cigarettes 
manufactured overseas but diverted to the illicit market. Untaxed, 
domestically produced cigarettes intended for export also can be 
diverted to the illicit market.

Cigarette Smuggling into the United States Considered a Significant 
Problem:

While the extent of cigarette smuggling into the United States is 
unknown, ATF and ICE officials consider it a significant problem. 
Officials in these agencies note that cigarette smuggling activities 
attract international and domestic criminal groups with the lure of 
high profits and relatively low risk. The smuggling of cigarettes into 
the United States also results in lost federal and state excise tax 
revenue. However, the extent of the total lost tax revenue is unknown. 
Smuggled cigarettes, which include counterfeit and genuine brand 
cigarettes, also pose a public health risk as all cigarettes do; 
though, no studies have been done to determine whether counterfeit 
cigarettes pose a greater health risk than genuine brand cigarettes.

Intelligence Indicates Cigarette Smuggling Is a High Profit Crime with 
Possible Terrorism Connections:

The smuggling of cigarettes into the United States is part of the 
worldwide illegal cigarette traffic, but the full extent of such 
smuggling is unknown. ATF and ICE do not have estimates of the quantity 
of cigarettes smuggled into the country, nor were we able to find any 
studies conducted by other organizations regarding the extent of the 
cigarette smuggling problem. There is evidence that both counterfeit 
and genuine brand cigarettes are smuggled into the United States and 
that criminals divert genuine cigarettes from legitimate distribution 
channels intended for sale outside the United States (e.g., foreign 
manufactured cigarettes held in U.S. warehouses awaiting trans-shipment 
to other countries and domestically manufactured cigarettes to be 
exported from the United States, including cigarettes for sale in duty 
free stores).

On the basis of cigarette investigations and intelligence collected, 
ATF and ICE officials said cigarette smuggling into the United States, 
particularly the smuggling of counterfeit cigarettes, is a significant 
problem. Indications are that the possibility of making huge profits 
has attracted criminals, including international and domestic organized 
crime groups, to smuggling. ATF and ICE officials noted that cigarette 
smuggling is also attractive to criminals because it is considered to 
be a relatively low risk crime, with penalties that are lower than the 
penalties for smuggling drugs.

According to an ATF report,[Footnote 5] some cigarette smugglers have 
ties with terrorist groups, and there are indications that terrorist 
group involvement in illicit cigarette trafficking, as well as the 
relationship between criminal groups and terrorist groups, will grow in 
the future because of the large profits that can be made. In addition, 
according to ATF and ICE, organized crime groups sometimes launder 
proceeds of international cigarette smuggling through U.S. financial 
institutions.

ATF and ICE officials indicated that cigarettes are smuggled into the 
United States from many different countries. For example, according to 
ATF and ICE officials, smuggled cigarettes have been identified coming 
to the United States from China, Malaysia, Korea, Russia, Latvia, 
Mexico, Brazil, Paraguay, Uruguay, and the Philippines.

The ATF report also notes that cigarette trafficking had become big 
business by 1999. Many states, as well as many foreign countries, have 
increased cigarette taxes, resulting in a large difference in the 
wholesale price and the price paid by consumers at the retail level and 
creating potential illicit profits of $7 to $13 per carton of 
cigarettes. According to an ATF intelligence official, U.S. and 
European law enforcement information shows that illicit cigarette 
trafficking has become a multibillion dollar a year, worldwide crime 
phenomenon.

Cigarette Smuggling Results in Lost Revenues and Public Health Risk:

Cigarette smuggling into the United States results in lost federal and 
state revenue. Each pack of cigarettes smuggled into the United States 
avoids the payment of $0.39 in federal cigarette excise tax, a median 
$0.0375 in customs import duties, and a median $0.60 in state excise 
tax.[Footnote 6] The extent of these revenue losses, however, is 
unknown, because, as stated earlier, no one knows the extent of 
cigarette smuggling into the United States. Additionally, there are no 
reliable estimates of the overall amount of revenue that the federal 
and state governments are losing because of cigarettes being smuggled 
into the United States.

Furthermore, cigarettes, both counterfeit and genuine, pose a public 
health risk. There is no safe cigarette, the nation's largest cigarette 
manufacturers acknowledge. Since the release in 1964 of the first 
Surgeon General's report on smoking and health, scientific knowledge 
about the health consequences of tobacco use has greatly increased. As 
reported by the CDC, tobacco use, particularly smoking, remains the 
number one cause of preventable disease and death in the United States.

Officials at the CDC Office on Smoking and Health said that they have 
not done any studies and were not aware of any studies to determine 
whether counterfeit cigarettes posed additional risks. In addition, law 
enforcement and cigarette manufacturer laboratories that routinely 
analyze seized cigarettes do not test seized cigarettes for health 
risks.

Federal Agencies Increased Efforts to Thwart Cigarette Smuggling into 
the United States and Increased Seizures:

ICE, ATF, and CBP are responsible for law enforcement activities to 
combat the smuggling of cigarettes into the United States, as part of 
their multifaceted missions. For example, through its Tobacco Program, 
ICE works to enforce U.S. laws related to tobacco smuggling for which 
it has investigative jurisdiction. ATF, which typically investigates 
smuggled cigarettes that have reached the domestic market, also 
enforces federal antitobacco smuggling laws, particularly the 
CCTA.[Footnote 7] CBP inspectors operate at U.S. ports of entry, to 
detect illegal goods, including smuggled cigarettes, which might enter 
the country. CBP uses tools such as a targeting system and shipping 
manifest reviews to target incoming cargo for further examination. ICE 
and ATF officials said they have been conducting more cigarette 
smuggling investigations in recent years and described the agencies' 
current investigations as generally larger, more complex, and longer-
term than previous investigations. Additionally, a CBP database shows 
that the number of cigarette seizures by CBP and ICE have increased 
dramatically, from 12 total seizures in 1998 to 191 seizures in 2003.

Several Federal Agency Missions Address Cigarette Smuggling:

ICE, ATF, and CBP are involved in the fight against the illicit tobacco 
trade. Each agency addresses some aspect of cigarette smuggling as part 
of its multifaceted mission.

ICE Efforts to Combat Cigarette Smuggling:

ICE has responsibility for the enforcement of immigration and customs 
laws within the United States. ICE investigates a range of offenses, 
including money laundering, smuggling--including cigarette smuggling--
and fraud--including intellectual property rights (IPR) 
violations.[Footnote 8] To carry out its responsibilities, ICE 
collects, analyzes, investigates, and disseminates intelligence data 
for use by enforcement operations.

ICE operational and tactical control of investigative and intelligence 
operations are divided geographically in the United States by areas of 
responsibility and managed by special agents-in-charge. The special 
agents-in-charge are responsible for the administration and management 
of all investigative customs enforcement activities within the 
geographic boundaries of the office. ICE also has special agents in 34 
offices in 23 countries outside the United States--the special agents 
work with their foreign counterparts to help combat various crimes, 
including cigarette smuggling.

As part of its responsibilities, ICE's National Intellectual Property 
Rights Coordination Center (IPR Center), an interagency effort to 
coordinate a unified federal response regarding IPR violations (i.e., 
counterfeit goods), handled counterfeit tobacco product violations when 
it was started in February 2000.[Footnote 9] In January 2001, 
responsibility for these violations was delegated from the IPR Center 
to a newly formed Tobacco Task Force.[Footnote 10]

According to ICE officials, the former U.S. Customs Service gave 
additional priority to efforts to combat a growing threat--cigarette 
smuggling--when it created the Tobacco Task Force. The task force was 
responsible for addressing the smuggling of both counterfeit and 
genuine cigarettes. The task force was created by the U.S. Customs 
Service in January 2001 with internal funds and was subsequently funded 
by an $800,000 congressional appropriation in fiscal year 2002. In 
fiscal year 2003, although there were no appropriations earmarked for 
the task force, ICE decided to maintain a focus on cigarette smuggling 
and changed the name to the Tobacco Program, according to the Tobacco 
Program Manager.

ICE officials said that ICE's Tobacco Program promotes and assists 
investigations and interdictions of tobacco smuggling, while not 
directly managing investigations. The program monitors, coordinates, 
and provides guidance to ICE, CBP, U.S. Attorneys' Offices, and 
foreign, state, and local law enforcement agencies on international 
smuggling matters. The program also provides training and reference 
material to investigators and works with ICE, CBP, ATF, and Treasury's 
Alcohol and Tobacco Tax and Trade Bureau (TTB) to address legal and 
policy issues related to tobacco smuggling. The program is staffed with 
two special agents and one intelligence analyst at ICE headquarters in 
Washington, D.C.

ATF Investigative Efforts:

ATF is a law enforcement agency within the Department of Justice, 
responsible for enforcing federal laws and regulations relating to 
alcohol, tobacco, firearms, explosives, and arson. Regarding 
cigarettes, ATF seeks to reduce illegal cigarette trafficking in 
particular by enforcing the CCTA,[Footnote 11] divest criminal and 
terrorist organizations of money derived from this illicit activity, 
and significantly reduce tax revenue losses to the states. ATF has 
offices located throughout the United States to conduct these 
investigations and has an array of employees that range from criminal 
investigators to inspectors, auditors, chemists, and other 
professionals.

ATF's tobacco diversion mission is to disrupt and eliminate criminal 
and terrorist organizations by identifying, investigating, and 
arresting offenders who traffic in contraband cigarettes; conduct 
financial investigations in conjunction with tobacco diversion 
investigations in order to seize and deny further access to assets used 
by criminal enterprises and terrorist organizations; prevent criminal 
encroachment of the legitimate tobacco industry by organizations 
trafficking in cigarettes; and assist local, state, and other federal 
agencies with cigarette trafficking investigations.

ATF officials said the agency typically gets involved in cigarette 
smuggling investigations after the smuggled cigarettes enter the 
domestic market. The officials said that ATF investigators attempt to 
determine the source of the smuggled cigarettes; however, ATF does not 
often pursue investigations internationally.[Footnote 12] The 
officials also noted that ATF coordinates its investigative efforts 
with ICE and other federal, state, and local agencies on a case-by-case 
basis.

ATF officials also told us that ATF's intelligence branch increased its 
emphasis on cigarette smuggling in 2000. According to the officials, 
ATF follows a two-pronged approach to tobacco intelligence: (1) 
strategic intelligence, which entails collecting intelligence from a 
variety of sources (such as ATF field offices, other law enforcement 
agencies, and the tobacco industry concerning counterfeit cigarettes), 
looking at cigarette trafficking patterns and trends and international 
terrorism links, and providing the developed intelligence to ATF field 
investigators and others; and (2) tactical intelligence, whereby 
analysts conduct analytical work to support about 20 to 25 
investigations at a time.

CBP Inspection Efforts:

CBP's priority mission is to prevent terrorists and terrorist weapons 
from entering the United States. Other CBP's mission responsibilities 
include: stemming the flow of illegal drugs and other contraband; 
protecting American businesses from theft of their intellectual 
property; regulating and facilitating international trade; collecting 
import duties; and enforcing U.S. trade laws. Thus, combating smuggling 
of both genuine and counterfeit cigarettes falls squarely within CBP's 
mission responsibilities. CBP officials explained that since September 
11, 2001, overall CBP mission priorities for identifying and detecting 
illegal and harmful commodities coming into the country have shifted 
from narcotics smuggling to antiterrorism concerns. The priorities 
currently are:

* #1 - antiterrorism;

* #2 - narcotics smuggling; and:

* #3 - trade commodities violations; textiles, toys, watches, and other 
items, including counterfeit and genuine smuggled cigarettes.

To perform its inspection duties, CBP has inspectors at ports of entry 
into the United States. In addition to staff at CBP's headquarters, 
officials at 20 field operations locations and at more than 300 ports 
of entry oversee the entry of all goods entering the United States. CBP 
also has 5 specific units, called Strategic Trade Centers, 2 of which 
analyze cigarette smuggling and provide information to other CBP units 
to assist in combating the problem.

We previously reported[Footnote 13] that CBP's Commissioner said the 
large volume of imports and its limited resources make it impossible to 
physically inspect all oceangoing containers without disrupting the 
flow of commerce. The Commissioner also said it is unrealistic to 
expect that all containers warrant such inspection because each 
container poses a different level of risk based on a number of factors, 
including the exporter, the transportation providers, and the importer. 
To direct its resources toward higher-risk cargo and to minimize its 
impact on the flow of commerce, CBP has developed a layered approach to 
inspections. This approach includes: a targeting system, to assess the 
risk level of individual containers and to flag high-risk containers 
for physical inspection; a random inspection program; and the selection 
of containers for physical inspection based on a review of the shipping 
manifests and knowledge or intelligence gathered at the local ports. 
While most of the inspectors assigned to seaports perform physical 
inspections of goods entering the country, some are "targeters" - they 
review documents and intelligence reports and determine which cargo 
containers should undergo additional documentary reviews and/or 
physical inspections.

As part of its layered approach, CBP employs its Automated Targeting 
System (ATS) computer model to review documentation on all arriving 
containers to help select or "target" containers for additional 
documentary review and/or physical inspection, such as containers that 
may contain cigarettes being smuggled. The ATS was originally designed 
to help identify illegal narcotics in cargo containers. ATS 
automatically matches its targeting rules against the manifest and 
other available data for every arriving container and assigns a level 
of risk (i.e., low, medium, high) to each container. At the port level, 
inspectors use ATS, as well as other data (e.g., intelligence reports), 
to determine whether to inspect a particular container.

In addition, CBP has a program, called the Supply Chain Stratified 
Examination, which supplements ATS by randomly selecting additional 
containers to be physically examined. The results of the random 
inspection program are to be compared with the results of ATS 
inspections to improve targeting. If CBP officials decide to inspect a 
particular container, they might first use equipment such as the 
Vehicle and Cargo Inspection System that takes a gamma-ray image of the 
container so inspectors can see any visual anomalies. With or without 
this imaging system, inspectors can open a container and physically 
examine its contents.

At the Los Angeles/Long Beach seaport, we interviewed inspectors 
assigned to a unit called the Manifest Review Unit (MRU) that analyzes 
manifests, which list in detail the total cargo of vessels. Manifests 
are issued by carriers or their agents for specific voyages. Examples 
of data elements on a manifest include shipper, consignee, point and 
country of origin of goods, export carrier, port of lading, port of 
discharge, description of packages and goods, and date of lading.

CBP regulations require that manifest data be sent electronically to 
CBP 24 hours before cargo is loaded on a ship at a foreign port for 
shipment to the United States. CBP then determines whether the 
merchandise merits examination or immediate release. MRU is to review 
all manifested cargo for risk, based on ATS's rules and criteria, such 
as shipment from a country known to be a source of counterfeit 
cigarettes. MRU inspectors may also make additional computer queries 
based on their experience and/or specific intelligence about a shipper 
or commodity.

After MRU selects cargo for examination, it is sent to a Centralized 
Examination Station, which is a privately operated facility at which 
imported merchandise identified for physical examination is unloaded 
and made available to CBP examination team inspectors. If an 
examination results in a finding of smuggled cigarettes, a sample is 
taken to determine whether they are counterfeit or genuine, the 
merchandise is seized and forfeited, counterfeit cigarettes are 
destroyed, and genuine cigarettes may be destroyed or auctioned. After 
the examination is complete, the inspectors notify MRU of the results 
of the examination. MRU inspectors may then use the information for 
future targeting of cargo for examination.[Footnote 14]

CBP officials said that although cigarettes are not necessarily being 
targeted as a specific imported commodity to be physically inspected at 
a port, targeting rules or criteria are constantly being updated from 
tips received from many different sources, and consequently many 
illegally imported goods, including cigarettes, are discovered through 
the targeting process.

Figures 2, 3, and 4 show a likeness of the container in which recently 
seized counterfeit cigarettes were shipped, how they were packaged as 
legitimate merchandise, and what they looked like when unloaded and 
inspected.

Figure 2: A Typical 40-foot Shipping Container at the Los Angeles/Long 
Beach Examination Station:

[See PDF for image]

[End of figure]

Figure 3: Smuggled Counterfeit Cigarettes Disguised as Legitimate 
Merchandise:

[See PDF for image]

Note: After unloading the container, two different types of shipping 
boxes were discovered that were labeled as the same type of legitimate 
merchandise. The boxes on the left contained the merchandise, while the 
boxes on the right contained counterfeit cigarettes.

[End of figure]

Figure 4: Smuggled Counterfeit Cigarettes:

[See PDF for image]

[End of figure]

Number of ICE and ATF Investigations into Cigarette Smuggling Have 
Increased and Become Larger and More Complex:

ICE and ATF are responsible for investigating cigarette smuggling. Both 
agencies initiate and carry out their own investigations and sometimes 
work together in conducting joint investigations. ICE investigates 
organized international cigarette smuggling, including illegal 
activities related to the smuggling of cigarettes into the United 
States. ATF's cigarette smuggling investigations usually involve 
interstate smuggling activities. When ATF determines that the smuggled 
cigarettes originated outside the United States, the investigation may 
broaden to pursue criminal activities related to international 
cigarette smuggling.

According to the Tobacco Program Manager, ICE cigarette smuggling 
investigations have increased and become more complex and longer term 
since 2001. ICE officials told us that the Tobacco Program has focused 
on encouraging the development of larger investigations to identify and 
dismantle entire organizations responsible for cigarette smuggling, 
including investigating the potential for ties to terrorist 
groups.[Footnote 15] Figure 5 shows the number of ICE cigarette-related 
investigations initiated and closed for each fiscal year from 1998 
through 2003.[Footnote 16]

Figure 5: Number of ICE Cigarette-Related Investigations Initiated and 
Closed, Fiscal Years 1998 through 2003:

[See PDF for image]

[End of figure]

One large, complex ICE investigation, for example, (supported by CBP, 
ATF, and other agencies) began in the fall of 2000 and concluded in 
January 2004 and was characterized as the largest probe to date 
involving the smuggling of cigarettes into the United States. The 
investigation resulted in a 92-count federal indictment against 
defendants accused of participating in a scheme to smuggle into the 
nation more than 107 million genuine and counterfeit cigarettes with a 
potential street value of $37.5 million.

We also visited with an ICE supervisory special agent in Long Beach, 
who noted there has been a huge increase in counterfeit cigarettes 
seized since early 2002, although it is hard to tell if the volume of 
smuggling has increased or more is being detected because of the 
tightening of security since September 11, 2001. The supervisory 
special agent said that cigarette smuggling investigations have become 
complex and time-consuming, as ICE is taking a long-term approach to 
cigarette smuggling investigations. ICE wants to study and understand 
the whole cycle of smuggling operations so that it can dismantle key 
organizations responsible for cigarette smuggling.

ATF also reported an increase in recent years in the number of tobacco 
investigations. According to ATF officials, nationwide, ATF had about 
260 cigarette smuggling investigations ongoing in August 2003. The 260 
investigations primarily involved the smuggling of cigarettes from 
state-to-state rather than into the United States. Figure 6 shows the 
number of ATF tobacco investigations initiated and closed for each 
fiscal year from 1998 through 2003.[Footnote 17]

Figure 6: Number of ATF Tobacco Investigations Initiated and Closed, 
Fiscal Years 1998 through 2003:

[See PDF for image]

[End of figure]

An ATF official told us that generally, cigarette investigations take 
12 to 24 months, and the investigations are extensive and complex, 
particularly the more recent investigations which are still ongoing. 
The ATF official said that unlike in the past where ATF just seized the 
cigarettes and vehicles because the smuggling was being performed by 
"mom and pop" operations, since about 1999 more cigarette smuggling is 
being carried out by criminal organizations and, therefore, requires 
much more extensive investigation. In addition, ATF reported in August 
2003 that it had identified 8 of its investigations initiated in fiscal 
years 2002 and 2003 as linked to terrorism. ATF officials noted that 
the majority of its counterfeit cigarette investigations involve 
cigarettes smuggled into the United States.

Cigarette Seizures Have Increased:

In addition to the rise in cigarette smuggling investigations by ICE 
and ATF, the number of illegal cigarettes seized by CBP and ICE has 
increased. While the number of seizures (with an estimated value of 
$2,500 or greater) of genuine cigarettes exceeded counterfeit cigarette 
seizures, the quantity and estimated value of counterfeit cigarettes 
seized exceeded genuine cigarettes.[Footnote 18] For example, in fiscal 
year 2003, CBP and ICE made 56 seizures of counterfeit cigarettes, with 
an estimated value of $45.8 million, and 135 seizures of genuine 
cigarettes, with an estimated value of $5.1 million. Table 1 shows the 
number and estimated value of counterfeit and genuine cigarettes seized 
by CBP and ICE in each fiscal year from 1998 through 2003.

Table 1: Seizures of Counterfeit and Genuine Cigarettes, Fiscal Years 
1998 through 2003:

[See PDF for image]

Note: Data include only seizures that have an estimated value of $2,500 
or greater to exclude seizures of cigarettes transported by individuals 
and intended for personal consumption.

[End of figure]

Most counterfeit cigarette seizures were at the Los Angeles/Long Beach 
seaport.[Footnote 19] CBP officials at the Los Angeles/Long Beach 
seaport said that they began to see more counterfeit cigarettes being 
seized near the end of 2001. Specifically, 3 of 10 (30 percent) 
counterfeit cigarette seizures nationwide were made at the Los Angeles/
Long Beach seaport in fiscal year 2001; these increased to 21 of 34 (62 
percent) in fiscal year 2002 and to 26 of 56 (46 percent) in fiscal 
year 2003. The officials said that they believe the increase in 
seizures of counterfeit cigarettes was due to better intelligence and 
better inspections - based on electronic methods such as ATS targeting 
of cargo for inspection and the ICE Tobacco Program, which has helped 
to bring the problem of cigarette smuggling to the forefront and has, 
therefore, led to more seizures.

CBP data also showed a rise in the value of counterfeit cigarette 
seizures compared to other commodities. Figure 7 shows the percent of 
counterfeit cigarettes increasing from 9 percent of commodities seized 
in fiscal year 2000 to 44 percent in fiscal year 2003.

Figure 7: Top Counterfeit Seizures by Commodity, Fiscal Years 2000 
through 2003:

[See PDF for image]

[End of figure]

Legal Initiatives Being Pursued to Help Thwart Cigarette Smuggling:

Two legal initiatives have been proposed to enhance efforts to thwart 
the cigarette smuggling problem. We did not evaluate the merits of 
these initiatives. However, the Department of Justice generally 
supports certain provisions contained in the PACT Act,[Footnote 20] a 
bill intended to combat cigarette smuggling, but has not formally 
endorsed the Act. In addition, WHO has proposed an international 
treaty, the FCTC, to enhance global actions directed against the 
illicit tobacco trade, including cigarette smuggling.

Justice Suggested Three Legal Initiatives to Combat Cigarette 
Smuggling:

In October 2003, Justice suggested that Congress could strengthen the 
enforcement tools for combating cigarette smuggling by: (1) lowering 
the threshold for violating CCTA[Footnote 21] (a felony violation) from 
60,000 to 30,000 cigarettes, (2) giving ATF authority to use money 
generated during undercover sting operations to offset investigative 
expenses, and (3) increasing ATF's authority to enter premises to 
enforce federal cigarette laws.

The PACT Act, a bill intended to combat cigarette smuggling, includes 
some of Justice's suggestions. However, Justice has not formally 
endorsed the PACT Act (or its House companion bill, H.R. 2824). If 
enacted, the PACT Act would broaden the definition of what constitutes 
contraband cigarettes by lowering the CCTA quantity for nontaxed 
cigarettes to be considered contraband from 60,000 to 10,000. This is a 
lower threshold than Justice suggested. But, according to the bill's 
sponsors, lowering the contraband cigarette threshold would allow ATF 
to open more investigations and seek more federal felony prosecutions 
of cigarette smugglers.

Second, the bill would allow ATF to pay expenses of undercover 
investigations with money accrued during such operations. Justice 
supports this provision. For example, as part of an undercover 
investigation, ATF could sell cigarettes to a suspect and use the cash 
to pay informants or buy more cigarettes from traffickers in the 
investigation. This would make ATF's powers more comparable to those of 
other investigative agencies like the Federal Bureau of Investigation 
and the Drug Enforcement Administration, which may use such 
nonappropriated funds to make undercover purchases and pay other 
investigative expenses.

Finally, the bill includes a provision that would authorize ATF to 
enter the property of any person who delivered, shipped, sold, 
distributed, or received more than 10,000 cigarettes a month to inspect 
cigarettes on the premises and any legal records or information on the 
cigarettes required by law. Justice supports increasing ATF's authority 
to enter premises to enforce federal cigarette laws, but it has not 
opined its views on whether the 10,000 cigarette threshold is 
appropriate. Currently, ATF must obtain consent to enter a person's 
property and conduct an inspection. If denied entry, ATF must obtain a 
search warrant by demonstrating probable cause to a U.S. district court 
judge to enter a person's property. Under the bill, if ATF is denied 
entry, its right of inspection could be enforced by a district court 
order with the submission of an affidavit or other evidence that entry 
was denied. As of April 2004, the PACT Act had passed the Senate and 
was referred to the House, where action was pending.

International Initiative Calls for Global Cooperative Action to Reduce 
the Illicit Tobacco Trade:

FCTC seeks to address the rise and spread of tobacco consumption around 
the world through global solutions to a problem that cuts across 
national boundaries, cultures, societies and socioeconomic strata. 
FCTC, if ratified, would be an additional legal instrument addressing 
issues as diverse as tobacco advertising and promotion, agricultural 
diversification, smuggling, taxes, and subsidies.

FCTC was adopted at the World Health Assembly on May 21, 2003, and is 
open to all members of the WHO or the United Nations from June 2003 to 
June 2004 for ratification. At least 40 countries must ratify FCTC for 
it to become law. If FCTC is ratified, those ratifying nations would 
develop protocols, which are separate agreements containing specific 
measures designed to implement the broad goals called for by the FCTC. 
As of April 2004, the United States had not ratified FCTC.[Footnote 22] 
The State Department, with interagency and White House input, was 
reviewing FCTC, including determining whether joining the convention 
would require any new legislation. According to the Director of Health 
Programs, State Department, that deliberative review process was moving 
forward. There is no set time frame for the review process to be 
completed.

As part of its objective, FCTC states that cooperative action is 
necessary to eliminate all forms of illicit trade in cigarettes and 
other tobacco products, including smuggling, illicit manufacturing and 
counterfeiting. Article 15 of FCTC (see app. II) is the only one of 38 
Articles that addresses the illicit trade in tobacco products, 
including cigarette smuggling.

The first of seven measures in Article 15 states that the elimination 
of all forms of illicit trade in tobacco products, including smuggling, 
illicit manufacturing and counterfeiting, and the development and 
implementation of related national law, in addition to subregional, 
regional and global agreements, are essential components of tobacco 
control. The other measures require each ratifying country to, among 
other things, mark packages of tobacco products to control their 
movement, cooperate in investigations and prosecutions, periodically 
report progress made, and adopt other measures as appropriate to 
prevent illicit trade.

The fourth measure requires actions aimed at eliminating illicit trade 
in tobacco products. For example, one action that FCTC will require is 
the exchange of tax information among governments, as appropriate, and 
in accordance with national law and relevant applicable bilateral or 
multilateral agreements. Under present law, Section 6103 of the 
Internal Revenue Code (IRC) of 1986 in general provides that the 
government shall not disclose any taxpayer returns or return 
information. Section 6103(k)(4) of the IRC, however, permits the 
government to disclose such information ". . . to a competent authority 
of a foreign government which has an income tax or gift and estate tax 
convention, or other convention or bilateral agreement relating to the 
exchange of tax information, with the United States but only to the 
extent provided in, and subject to the terms and conditions of, such 
convention or bilateral agreement." According to the Assistant Chief 
Counsel of the Treasury Department's Alcohol and Tobacco Tax and Trade 
Bureau (TTB), FCTC is a convention that under Section 6103(k)(4) would 
allow the government, under the appropriate circumstances, to share 
taxpayer returns or return information with competent authorities of 
foreign governments who are Parties to FCTC.

According to TTB, the sharing of cigarette tax information with other 
countries could help government agencies determine when cigarette 
exports are diverted from legitimate distribution channels. Presently, 
when a U.S. company exports cigarettes to another country, the exporter 
files a document with TTB disclosing the type and quantity of 
cigarettes being exported with no federal cigarette excise taxes due or 
paid--this is considered taxpayer information. Currently, IRC does not 
allow TTB to provide this information to the country to which the 
cigarettes are shipped. The convention would allow the information to 
be provided and used to determine whether the quantity of cigarettes 
declared as imports matches the quantity of cigarettes exported. If the 
imported quantity is less than the exported quantity, this may indicate 
that some of the cigarettes were diverted to be smuggled into that or 
some other country, or back to the United States, without the payment 
of cigarette taxes and import duties.

Agency Comments:

We provided a draft copy of this report to DHS and Justice. DHS and 
Justice had no comments on the substance of our draft. However, DHS and 
Justice provided technical comments which we have incorporated, as 
appropriate.

As agreed, unless you publicly announce the contents of this report 
earlier, we plan no further distribution of it until 30 days from the 
date of this letter. We will then send copies to others who are 
interested and make copies available to others who request them. In 
addition, the report will be available at no charge on GAO's Web site 
at http://www.gao.gov.

If you or your staffs have any questions regarding this report, please 
contact Darryl W. Dutton at (213) 830-1086 or me at (202) 512-8777. Key 
contributors to this report are listed in appendix III.

Paul L. Jones, Director: 
Homeland Security and Justice Issues:

[End of section]

Appendix I: Scope and Methodology:

To determine what is known about the nature and scope of the problem of 
smuggled cigarettes, including counterfeit cigarettes, entering the 
United States, we obtained information from the Department of Homeland 
Security's (DHS) U.S. Immigration and Customs Enforcement (ICE) and the 
Department of Justice's Bureau of Alcohol, Tobacco, Firearms and 
Explosives (ATF). We interviewed ICE and ATF headquarters officials in 
Washington, D.C., and we collected and reviewed pertinent 
documentation, such as an ATF report on cigarette trafficking and 
terrorism issued in July 2003.

We also contacted officials of various organizations to obtain 
information about the consequences of cigarette smuggling. To determine 
federal and state tax revenue losses due to the smuggling of 
cigarettes, including counterfeit cigarettes, into the United States, 
we interviewed headquarters officials in Washington, D.C., representing 
ICE, ATF, and the Department of the Treasury's Alcohol and Tobacco Tax 
and Trade Bureau (TTB); collected and reviewed available ATF 
documentation; and conducted an Internet search using a major Internet 
search engine (Google). To determine potential health risks due to the 
smuggling of cigarettes, including counterfeit cigarettes, into the 
United States, we interviewed officials representing TTB, DHS's U.S. 
Customs and Border Protection (CBP), the Centers for Disease Control 
and Prevention (CDC), and three tobacco manufacturers (Philip Morris 
U.S.A., Brown and Williamson Tobacco Corporation, and R. J. Reynolds 
Tobacco Company), and we collected information from CDC.

To determine federal law enforcement agencies' efforts to thwart the 
smuggling of cigarettes into the United States, we interviewed ICE, 
ATF, and CBP headquarters officials in Washington, D.C., and we 
collected and reviewed pertinent documentation, including data on the 
number of ICE cigarette-related investigations and ATF tobacco 
investigations initiated and closed and CBP and ICE cigarette seizures 
for selected fiscal years. We also interviewed an ICE official at a 
field office in Long Beach, California, ATF officials at the Los 
Angeles Field Division, and CBP officials at the Los Angeles/Long Beach 
seaport, which was identified as having the largest number of cigarette 
seizures in the country.

To assess the reliability of the ICE and ATF investigation data, we (1) 
reviewed existing information about the data and systems that produced 
them and (2) interviewed agency officials knowledgeable about the data 
as necessary. For the CBP and ICE seizure data, which CBP maintains in 
a database, CBP officials updated and provided us with data on the more 
significant cigarette seizures with estimated values of $2,500 or 
greater. We focused on these seizures because CBP reported that smaller 
cigarette seizures are more likely to be instances of individuals 
transporting cigarettes intended for personal consumption rather than 
organized smuggling. To assess the reliability of the CBP and ICE 
seizure data, we (1) performed electronic testing for obvious errors in 
accuracy and completeness, (2) reviewed existing information about the 
data and systems that produced them, and (3) interviewed agency 
officials knowledgeable about the data. We determined that the 
investigation and seizure data were sufficiently reliable for this 
report.

To obtain information on certain legal initiatives being pursued to 
enhance law enforcement efforts to thwart the smuggling of cigarettes 
into the United States, we obtained information from the Justice 
Department in Washington, D.C., regarding the Prevent All Trafficking 
Act (S. 1177), a bill introduced in Congress with action pending at the 
time of our review, and we interviewed an ATF headquarters official. We 
also interviewed headquarters officials at the Department of State and 
TTB in Washington, D.C., and obtained information from the World Health 
Organization Web site regarding the Framework Convention on Tobacco 
Control, a proposed treaty initiated by the World Health Assembly.

For the background section, we obtained data on the number of 
cigarettes manufactured in the United States and the number of imported 
cigarettes from the Economic Research Service, U.S. Department of 
Agriculture, Web site; state cigarette excise tax rates from the 
Federation of Tax Administrators' Web site; the number of states using 
tax stamps as evidence that state cigarette taxes were paid from a 
Federation of Tax Administrators official; and the federal cigarette 
excise tax rate from ICE. The data were used for background purposes 
and were not verified.

We conducted our work between August 2003 and March 2004 in accordance 
with generally accepted government auditing standards.

[End of section]

Appendix II: Article 15 of the World Health Organization Framework 
Convention on Tobacco Control:

Article 15: Illicit Trade in Tobacco Products:

The Parties recognize that the elimination of all forms of illicit 
trade in tobacco products, including smuggling, illicit manufacturing 
and counterfeiting, and the development and implementation of related 
national law, in addition to subregional, regional and global 
agreements, are essential components of tobacco control.

Each Party shall adopt and implement effective legislative, executive, 
administrative or other measures to ensure that all unit packets and 
packages of tobacco products and any outside packaging of such products 
are marked to assist Parties in determining the origin of tobacco 
products, and in accordance with national law and relevant bilateral or 
multilateral agreements, assist Parties in determining the point of 
diversion and monitor, document and control the movement of tobacco 
products and their legal status. In addition, each Party shall:

(a) require that unit packets and packages of tobacco products for 
retail and wholesale use that are sold on its domestic market carry the 
statement: "Sales only allowed jn (insert name of the country, 
subnational, regional or federal unit)" or carry any other effective 
marking indicating the final destination or which would assist 
authorities in determining whether the product is legally for sale on 
the domestic market; and:

(b) consider, as appropriate, developing a practical tracking and 
tracing regime that would further secure the distribution system and 
assist in the investigation of illicit trade.

Each Party shall require that the packaging information or marking 
specified in paragraph 2 of this Article shall be presented in legible 
form and/or appear in its principal language or languages.

With a view to eliminating illicit trade in tobacco products, each 
Party shall:

(a) monitor and collect data on cross-border trade in tobacco products, 
including illicit trade, and exchange information among customs, tax 
and other authorities, as appropriate, and in accordance with national 
law and relevant applicable bilateral or multilateral agreements;

(b) enact or strengthen legislation, with appropriate penalties and 
remedies, against illicit trade in tobacco products, including 
counterfeit and contraband cigarettes;

(c) take appropriate steps to ensure that all confiscated manufacturing 
equipment, counterfeit and contraband cigarettes and other tobacco 
products are destroyed, using environmentally-friendly methods where 
feasible, or disposed of in accordance with national law;

(d) adopt and implement measures to monitor, document and control the 
storage and distribution of tobacco products held or moving under 
suspension of taxes or duties within its jurisdiction; and:

(e) adopt measures as appropriate to enable the confiscation of 
proceeds derived from the illicit trade in tobacco products.

Information collected pursuant to subparagraphs 4(a) and 4(d) of this 
Article shall, as appropriate, be provided in aggregate form by the 
Parties in their periodic reports to the Conference of the Parties, in 
accordance with Article 21.

The Parties shall, as appropriate and in accordance with national law, 
promote cooperation between national agencies, as well as relevant 
regional and international intergovernmental organizations as it 
relates to investigations, prosecutions and proceedings, with a view to 
eliminating illicit trade in tobacco products. Special emphasis shall 
be placed on cooperation at regional and subregional levels to combat 
illicit trade of tobacco products.

Each Party shall endeavour to adopt and implement further measures 
including licensing, where appropriate, to control or regulate the 
production and distribution of tobacco products in order to prevent 
illicit trade.

[End of section]

Appendix III: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Paul L. Jones (202) 512-8777 Darryl W. Dutton (213) 830-1086:

Staff Acknowledgments:

In addition to the above, Ronald G. Viereck, Daniel R. Garcia, Brian J. 
Lipman, Kathryn G. Young, Michelle C. Fejfar, Charles W. Bausell Jr., 
and Shirley A. Jones made key contributions to this report.

FOOTNOTES

[1] Counterfeit cigarettes are cigarettes produced without the 
authorization of the trademark holder.

[2] See U.S. General Accounting Office, Terrorist Financing: U.S. 
Agencies Should Systematically Assess Terrorists' Use of Alternative 
Financing Mechanisms, GAO-04-163 (Washington, D.C.: November 2003).

[3] According to a Federation of Tax Administrators official, as of 
April 2004, 47 states required that tax stamps be placed on cigarette 
packages as evidence that state cigarette taxes were paid. North 
Dakota, North Carolina, and South Carolina do not require tax stamps.

[4] Department of the Treasury, Bureau of Alcohol, Tobacco and 
Firearms, An Introduction to: the Bureau of Alcohol, Tobacco and 
Firearms and the Regulated Industries (ATF P 5000.13, 12/98).

[5] Bureau of Alcohol, Tobacco, Firearms and Explosives, Illicit 
Cigarette Trafficking and the Funding of Terrorism, July 22, 2003.

[6] According to ICE officials, states with higher cigarette excise 
taxes are generally the states that lose cigarette tax revenue due to 
smuggling. States could also lose other revenue. The Master Settlement 
Agreement, signed in November 1998 by the attorneys general of 46 
states, the District of Columbia, and the 5 U.S. territories, requires 
four of the nation's largest tobacco companies to make annual payments 
to states as reimbursement for health care costs related to tobacco 
use. The annual payments are to be adjusted downward when a cigarette 
manufacturer's sales volume decreases, such as lost sales because 
consumers purchased smuggled cigarettes instead of legitimate 
cigarettes.

[7] The CCTA (18 U.S.C. 2342) makes it unlawful (a felony) for any 
person to ship, transport, receive, possess, sell, distribute, or 
purchase more than 60,000 cigarettes that bear no evidence of state 
cigarette tax payment in the state in which the cigarettes are found, 
if such state requires a stamp or other indicia to be placed on 
cigarette packages to demonstrate payment of taxes. Certain persons, 
including permit holders under the Internal Revenue Code, common 
carriers with proper bills of lading, or individuals licensed by the 
state where the cigarettes are found, may possess these cigarettes. 
(See also 18 U.S.C. 2341.)

[8] IPR violations include trademark, trade name, and copyright 
violations, such as when cigarettes are clandestinely manufactured and 
given the label of a genuine brand name.

[9] The IPR Center was created before the U.S. Customs Service was 
transferred to DHS in March 2003.

[10] Starting in November 2003, the IPR Center was again given 
responsibility for addressing counterfeit cigarette violations. 
According to ICE officials, the Center coordinates its activities 
regarding counterfeit cigarettes with ICE's Tobacco Program.

[11] Justice noted that on September 10, 2003, the Attorney General 
delegated to the Director of ATF authority to investigate violations 
under the Jenkins Act. The Jenkins Act (15 U.S.C. 375-378) requires any 
person who sells and ships cigarettes across a state line to a buyer, 
other than a licensed distributor, to report the sale to the buyer's 
state tobacco tax administrator.

[12] ATF could not break out its computerized investigation data to 
identify the number of investigations that were pursued outside the 
United States.

[13] U.S. General Accounting Office, Homeland Security: Preliminary 
Observations on Efforts to Target Security Inspections of Cargo 
Containers, GAO-04-325T (Washington, D.C.: December 2003).

[14] According to ICE officials, an ICE investigation may also be 
initiated in this process. In addition, the officials said active ICE 
investigations develop information that results in seizures by CBP or 
ICE.

[15] According to ICE officials, as of May 2004, ICE was not aware of 
any indictments that connected material support of terrorism to the 
smuggling of cigarettes into or out of the United States.

[16] Cigarette-related investigations include the smuggling of 
counterfeit or genuine cigarettes into the United States, smuggling 
cigarettes into foreign countries, smuggling cigarettes in violation of 
embargoes, and international money laundering when one of the 
underlying crimes is tobacco-related (e.g., cigarette smuggling, 
trafficking in counterfeit cigarettes, trafficking in stolen 
cigarettes, and interstate smuggling to avoid state cigarette taxes).

[17] ATF tobacco investigations primarily involve cigarettes. Some 
investigations involve the smuggling of counterfeit or genuine 
cigarettes into the United States, and some involve only domestic, 
interstate cigarette smuggling. ATF could not break out its 
computerized investigation data to identify the number of 
investigations that involved cigarette smuggling into the United States 
and to identify those that involved counterfeit and genuine cigarettes.

[18] CBP and ICE seize genuine cigarettes that are diverted from 
legitimate distribution channels and are being smuggled into the United 
States to avoid the payment of taxes.

[19] The Los Angeles/Long Beach seaport is the busiest port in the 
United States, with over 2.8 million 40-foot containers in-bound per 
year. Forty-three percent of containers coming in to the United States 
passes through the Los Angeles/Long Beach seaport; approximately 9,000 
per day.

[20] The proposed PACT Act (S. 1177), a bill introduced on June 3, 
2003, by Senators Orrin G. Hatch and Herb Kohl, contains provisions 
intended to, among other things, prevent tobacco smuggling and ensure 
the collection of all tobacco taxes.

[21] P.L. 95-575, Nov. 2, 1978.

[22] As of April 16, 2004, 10 countries had ratified FCTC.

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