Cigarette Smuggling: Federal Law Enforcement Efforts and Seizures
Increasing (28-MAY-04, GAO-04-641).				 
                                                                 
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 (1) the  
nature and scope of the problem of smuggled cigarettes entering  
the United States, including federal tax revenue losses and	 
potential health risks; (2) 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 (3) legal	 
initiatives being pursued to enhance law enforcement efforts to  
thwart the smuggling of cigarettes into the United States.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-641 					        
    ACCNO:   A10240						        
  TITLE:     Cigarette Smuggling: Federal Law Enforcement Efforts and 
Seizures Increasing						 
     DATE:   05/28/2004 
  SUBJECT:   Excise taxes					 
	     Law enforcement					 
	     Proposed legislation				 
	     Smoking						 
	     Smuggling						 
	     State taxes					 
	     Tobacco taxes					 
	     Crime prevention					 
	     Treaties						 
	     Tax losses 					 
	     Framework Convention on Tobacco Control		 

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GAO-04-641

United States General Accounting Office

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

May 2004

                                   CIGARETTE
                                   SMUGGLING

            Federal Law Enforcement Efforts and Seizures Increasing

GAO-04-641

Highlights of GAO-04-641, a report to the Chairman and 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 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

o  	the nature and scope of the problem of smuggled cigarettes entering
the United States, including federal tax revenue losses and potential
health risks;

o  	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

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

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 [email protected].

May 2004

CIGARETTE SMUGGLING

Federal Law Enforcement Efforts and Seizures Increasing

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

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 1

2 3

6

8 23 26

Appendix I Scope and Methodology

      Appendix II    Article 15 of the World Health Organization       
                     Framework Convention on Tobacco Control               29 
                       Article 15: Illicit Trade in Tobacco Products       29 
     Appendix III         GAO Contacts and Staff Acknowledgments           31 
                                       GAO Contacts                        31 
                                   Staff Acknowledgments                   31 

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
5 Figure 2: A Typical 40-foot Shipping Container at the Los Angeles/Long
Beach Examination Station 15 Figure 3: Smuggled Counterfeit Cigarettes
Disguised as Legitimate

Merchandise 16 Figure 4: Smuggled Counterfeit Cigarettes 17 Figure 5:
Number of ICE Cigarette-Related Investigations Initiated

and Closed, Fiscal Years 1998 through 2003 18

Figure 6: Number of ATF Tobacco Investigations Initiated and

Closed, Fiscal Years 1998 through 2003 20 Figure 7: Top Counterfeit
Seizures by Commodity, Fiscal Years

2000 through 2003 22

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

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,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

o  	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;

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

o  	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

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

  Results in Brief

(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.)

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.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.

2See 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).

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.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.

3According 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.

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

Cigarettes (in billions)

                                      800

                                      700

                                      600

                                      500

                                      400

                                      300

200

                                                               100 75 50 25 0

500.0

20.9 25.9

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Domestically produced cigarettes

Imported cigarettes Source: Developed by GAO from data provided by the
Economic Research Service, Department of Agriculture.

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,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.

4Department 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).

  Cigarette Smuggling into the United States Considered a Significant Problem

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.

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,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.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

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

6According 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.

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

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.

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.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

7The 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.)

have increased dramatically, from 12 total seizures in 1998 to 191
seizures in 2003.

Several Federal Agency Missions Address Cigarette Smuggling

ICE Efforts to Combat 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 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.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 2000.9 In January 2001, responsibility for these
violations was delegated from the IPR Center to a newly formed Tobacco
Task Force.10

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

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

10Starting 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.

                           ATF Investigative Efforts

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 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,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

11Justice 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.

                             CBP Inspection Efforts

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.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'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

o  #1 - antiterrorism;

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

o  #2 - narcotics smuggling; and

o  	#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 reported13 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

13U.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).

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.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.

14According 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.

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

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.

Figure 4: Smuggled Counterfeit Cigarettes

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.15

15According 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.

Figure 5 shows the number of ICE cigarette-related investigations
initiated and closed for each fiscal year from 1998 through 2003.16

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

Number of investigations

120 108 103

96

84

72

60

48

36

24

12

0

                         1998 1999 2000 2001 2002 2003

Fiscal year

Investigations initiated Activity Investigations closed

Source: GAO analysis of ICE data.

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.

16Cigarette-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).

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 2003.17

17ATF 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.

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

                            Number of investigations

                                      153

                                      156

                                      144

                                      132

                                      120

                                     108 96

                                       84

                                       72

                                       60

                                       48

                                       36

                                       24

                       12 0 1998 1999 2000 2001 2002 2003

Fiscal year

Investigations initiated

Activity Investigations closed

Source: GAO analysis of ATF data.

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 In addition to the rise in cigarette smuggling
investigations by ICE and

Increased 	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.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

                 Source: Developed by GAO from CBP's database.

Counterfeit cigarettes

Genuine cigarettes

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.

Most counterfeit cigarette seizures were at the Los Angeles/Long Beach
seaport.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

18CBP 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.

19The 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.

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

                    Source: Developed by GAO from CBP data.

Legal Initiatives Being Two legal initiatives have been proposed to
enhance efforts to thwart the

cigarette smuggling problem. We did not evaluate the merits of these
Pursued to Help initiatives. However, the Department of Justice generally
supports certain Thwart Cigarette provisions contained in the PACT Act,20
a bill intended to combat cigarette

smuggling, but has not formally endorsed the Act. In addition, WHO has
Smuggling 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 CCTA21 (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

20The 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.

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

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.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.

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

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

                       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

Appendix I: Scope and Methodology

$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.

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

  Article 15: Illicit Trade 1. in Tobacco Products

2.

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.

3. 	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.

4. 	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;

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

(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.

5. 	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.

6. 	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.

7. 	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.

Appendix III: GAO Contacts and Staff Acknowledgments

GAO Contacts

  Staff Acknowledgments

(440218)

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

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.

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