Transcript
U.S. Department of Justice
Office of the Inspector General
Evaluation and Inspections Division
The Bureau of Alcohol,
Tobacco, Firearms and
Explosives’ Efforts
to Prevent the
Diversion of Tobacco
September 2009
Report Number I-2009-005
EXECUTIVE DIGEST
INTRODUCTION
The Diversion Problem
The U.S. Department of Justice’s (Department) Bureau of Alcohol,
Tobacco, Firearms and Explosives (ATF) is charged with investigating the
diversion of alcohol and tobacco products from the legal distribution system
to evade payment of federal and state excise taxes. This diversion can
include several different types of criminal behavior, such as smuggling
alcohol and tobacco products from a low tax state to sell in a high tax state,
smuggling across international borders, avoiding taxes by pretending to
export products but illegally selling them in the United States, producing
counterfeit products, selling products without tax stamps or with
counterfeit stamps, and selling products illegally over the Internet. In the
United States, federal and state governments estimate that tobacco
diversion costs over $5 billion in revenue from unpaid excise taxes
annually.
1
The primary reason that tobacco diversion is profitable in the
United States is the disparity among the states’ excise taxes. For example,
because South Carolina has the lowest state excise tax at 7 cents per pack
of cigarettes and Rhode Island has the highest at $3.46 per pack,
South Carolina is a source of less expensive cigarettes for criminals to buy
and then resell at a profit in Rhode Island. While most cities or counties do
not impose tobacco taxes, New York City and Chicago do, and those cities
have the highest priced cigarettes in the country because of the additional
city and county taxes.
2
New York City charges $1.50 tax per pack in
addition to a New York State tax of $2.75, resulting in $4.25 added to the
cost of a pack of cigarettes. In Chicago, the combination of a state tax
(98 cents), county tax ($2), and city tax (68 cents) adds a total of $3.66 to
the cost of each pack of cigarettes. In addition to state and local taxes,
federal taxes add another $1.50 to a pack of cigarettes. As of July 2009, the
average retail price per pack of cigarettes across all states was $5.72, with
1
Gary Fields, “States Go to War on Cigarette Smuggling,” The Wall Street Journal,
July 20, 2009, http://online.wsj.com/article/SB124804682785163691.html (accessed
August 3, 2009).
2
Most counties and cities do not have their own cigarette excise taxes and some
states prohibit local cigarette taxes or limit the maximum amounts. However, more than
460 local jurisdictions impose additional cigarette taxes.
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prices ranging from $4.01 to $7.55 due to variations in state taxes and retail
business practices.
3
The incentive to profit by evading payment of taxes rises with each tax
rate hike imposed by federal, state, and local governments. High state
tobacco excise taxes make it profitable for individuals and groups to risk
crossing state borders to smuggle and engage in other illegal sales activities.
For example, solely by purchasing cigarettes in a low tax state and reselling
them in a high tax state a seller can make a profit up to $23,000 on
10 cases of cigarettes (a car load), up to $90,000 on 50 cases (a van load),
and up to $465,000 for 200 cases (a small truck load).
4
The diversion of tobacco can occur anywhere on the production or
supply chain – manufacturers, wholesalers, and retail outlets have been
involved in diverting tobacco products. Counterfeit and authentic
contraband tobacco products are available through illegal “black market”
sources, through the Internet, and at legally operated retail locations.
5
According to ATF, since 2000, organized criminal groups have become
increasingly active in the diversion of tobacco products, particularly
cigarettes, and are running larger scale and more complicated diversion
schemes. The schemes have included the use of counterfeit tax stamps,
counterfeit cigarettes, shell companies, money laundering, and fraudulent
tobacco rebate forms.
According to ATF, alcohol diversion that rises to the level of a federal
offense is not as prevalent as tobacco diversion because alcohol is harder to
transport in larger quantities than tobacco and the manufacturing of illegal
alcohol is limited to specific geographic areas of the country. Consequently,
alcohol diversion is generally investigated by state tax or law enforcement
entities instead of ATF. Therefore, this report focuses predominantly on
tobacco diversion.
3
Ann Boonn, “State Cigarette Tax Rates & Rank, Date of Last Increase, Annual
Pack Sales & Revenues, and Related Data,” Campaign for Tobacco-Free Kids, July 1, 2009.
4
Bureau of Alcohol, Tobacco, Firearms and Explosives, New York Field Division
Presentation, May 2008.
5
A black market is a market where all commerce is conducted without regard to
taxation, law, or regulations of trade.
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ATF’s Alcohol and Tobacco Diversion Program
ATF is either directly, or through partnerships with other law
enforcement agencies, responsible for identifying, investigating, and
presenting for prosecution individuals who violate federal laws involving
firearms, explosives, arson, and alcohol and tobacco diversion.
6
ATF’s
alcohol and tobacco diversion mission is to investigate and arrest offenders
who traffic in contraband cigarettes and illegal liquor; seize and deny
criminals further access to assets and funds; prevent criminal
encroachment into the legitimate alcohol and tobacco industries; and assist
local, state, and other federal law enforcement and tax agencies in
investigating interstate trafficking of contraband cigarettes and liquor.
7
Between fiscal year (FY) 2004 and FY 2008, ATF conducted
645 alcohol and tobacco investigations, of which 257 remained open at the
end of FY 2008. Of those 645 investigations, 88 percent involved tobacco
(566) and 12 percent involved alcohol (79). ATF estimates that from
FY 2004 through FY 2009, approximately 2 percent of its resources
($16.5 million to $20 million) have been allocated to its alcohol and tobacco
diversion mission. Approximately 68 of ATF’s 2,535 Special Agents
nationwide are involved in investigating diversion activities, though not full
time. In its FY 2010 budget submission, ATF requested 28 new positions
and a total of $28.3 million (an $8.56 million increase from its FY 2009
request) to enhance its diversion efforts. However, the Office of
Management and Budget did not approve the additional funds and
positions.
ATF implemented its Alcohol and Tobacco Diversion Program through
its headquarters Alcohol and Tobacco Enforcement Branch (ATEB) and
agents in its 25 field divisions.
8
In January 2009, after completion of our
field work on this review, the ATEB was elevated to division status as the
Alcohol and Tobacco Diversion Division (ATDD), while retaining the same
duties and responsibilities. The ATDD is responsible for general
headquarters support to the field such as providing program guidance,
6
The Homeland Security Act of 2002 transferred ATF’s law enforcement functions
from the Department of the Treasury to the Department of Justice on January 24, 2003.
ATF’s tax and trade functions remained with the Department of the Treasury.
7
Bureau of Alcohol, Tobacco, Firearms and Explosives, “Alcohol and Tobacco
Diversion,” http://www.atf.gov/antdiversion.htm (accessed May 15, 2009).
8
ATF’s Alcohol and Tobacco Diversion Program has been in place since the mid-
1990s.
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assisting with liaison and coordination efforts concerning diversion
investigations within ATF, coordinating with other federal law enforcement
agencies, assisting in the procurement of additional funding for large-scale
investigations, and coordinating with tobacco industry officials to obtain
tobacco products for undercover operations. ATF’s field divisions, each of
which consists of a central office and from three to nine field offices,
conduct investigations in their specific geographic jurisdictions.
RESULTS IN BRIEF
ATF has placed a lower priority on its alcohol and tobacco diversion
mission area compared with its other mission areas involving firearms,
arson, and explosives. Proportionately, ATF commits few resources to its
diversion mission. While ATF is understandably prioritizing violent crime
investigations over diversion investigations, we believe that ATF can take
steps to strengthen its diversion enforcement, even with existing resources.
We found that ATF’s diversion efforts are ad hoc, that ATF personnel we
interviewed lacked a clear understanding of the scope of diversion activity
across field divisions, and that ATF headquarters does not adequately
support the field divisions’ diversion investigations. In addition, we found
that no systematic method exists to share intelligence or information
specifically about diversion between the field and headquarters, which adds
to ATF’s lack of knowledge of the overall level of diversion activity in the
nation.
We discuss these findings in more detail below.
Violent crime, not diversion, is ATF’s priority.
ATF focuses most of its investigative efforts on violent crime (a
Department of Justice priority) involving firearms, arson, and explosives. It
allocates only a small amount of resources to its diversion mission and
conducts few diversion investigations nationwide. Diversion crimes are
predominantly financial in nature and usually do not involve violence
during diversion activities. However, ATF agents told us, although they did
not quantify how often, that their large-scale, long-term diversion
investigations have uncovered links between diversion crimes and more
serious crimes such as terrorism, gun trafficking, or drug trafficking.
Nevertheless, the ATF Special Agents and their supervisors who told us that
violent crime was ATF’s top priority generally did not include the diversion
mission as part of that priority.
From FY 2004 through FY 2008, ATF investigated 79 alcohol and
566 tobacco diversion cases, representing less than 1 percent of ATF’s total
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caseload but 46 percent of the value of total seizures from all types of ATF
investigations. While each of ATF’s 25 field divisions had at least
1 diversion investigation, 49 percent of ATF’s field offices and satellite offices
(the sub-offices of each field division) did not conduct any tobacco or alcohol
diversion investigations during this 5-year period.
We recognize that the number of investigations does not always reflect
the amount of work conducted because diversion cases can be large, include
numerous targets, and can take a long time to develop. However, we found
other indications of ATF’s lack of emphasis on its diversion mission,
including minimal resources and staffing levels for the diversion mission,
and field structures that do not include diversion groups. Consequently,
ATF’s diversion program has neither adequate resources nor an adequate
structure for addressing the significant tax revenue losses to state and
federal governments caused by tobacco diversion and its potential links to
other criminal activities.
Low Funding and Staffing Levels
Over the last 6 years (FY 2004 through FY 2009), the Alcohol and
Tobacco Diversion Program has represented only 2 percent of ATF’s total
budget each year, while the Firearms Program represented 72 percent and
the Arson and Explosives Program represented 26 percent. During this
period, ATF requested slight funding increases each year and no new
positions for its Diversion Program, even though diversion schemes were
becoming more complex and more lucrative. However, as we noted above,
the Office of Management and Budget denied ATF’s request in its FY 2010
budget submission for 28 new positions and for a 43.4-percent increase in
its annual diversion funding from $19.7 million to $28.3 million.
Field Structures Do Not Include Diversion
Because ATF does not have specific investigative groups for alcohol
and tobacco diversion, Special Agents assigned to Arson and Explosives or
Firearms groups are working on diversion cases. Moreover, ATF’s current
staffing structure for field divisions and investigative groups does not
provide the flexibility to create smaller groups to specialize in alcohol and
tobacco diversion.
ATF headquarters does not provide adequate support to the diversion
program.
ATF’s current diversion program does not fully support the field
because the headquarters ATEB (now the ATDD) provided only minimal
services and there is no systematic method for sharing intelligence or
information specifically about diversion among the field divisions and
between the field divisions and headquarters. This lack of intelligence
sharing contributes to reduced knowledge of the level of diversion activity
nationwide.
The Special Agents we interviewed said they rarely communicated
with the ATEB except to use the services of one particular ATEB Program
Analyst. In the absence of a formal information coordination system, the
analyst, with his supervisor’s knowledge, acted as a central point of contact
for the field and tried to coordinate diversion information from various field
divisions. However, all information coordination and sharing accomplished
by the Program Analyst was informal and ad hoc.
9
We also found that ATF
does not have a centralized system elsewhere in ATF for sharing information
and intelligence on alcohol and tobacco diversion. The lack of a formal
mechanism for information and intelligence sharing could result in missing
important information or intelligence and overlapping diversion
investigations.
While ATF was still under the Department of the Treasury, it had
designated Alcohol and Tobacco Program Coordinators at each of its field
divisions to share diversion information and act as the division’s point of
contact for ATF headquarters on diversion issues. Almost all of the Special
Agents we interviewed either did not know of the Coordinator system or did
not know who the Coordinator was in their field division. In the field
divisions we reviewed, there was no evidence that Coordinators, if they were
still assigned, were actually exchanging information with each other or with
headquarters. Additionally, there was no regular communication from ATF
headquarters (or the ATEB) to the field on diversion issues.
Senior ATF officials responsible for overseeing the Alcohol and
Tobacco Diversion Program acknowledged that ATF does not have a good
sense of the level of tobacco diversion across the country. Unlike other
programs (for example, the Violent Crime Impact Team program) where the
field divisions work with ATF headquarters to develop plans to address a
particular law enforcement problem, a senior official stated that ATF has not
conducted similar strategic planning for tobacco diversion. Because ATF
9
Special Agents also expressed concerns that the ATEB Program Analyst was the
sole or primary source they used for a large amount of historical and institutional
knowledge regarding the diversion program and diversion investigations. Because this
information rests with one individual as opposed to an established system for information
sharing, Special Agents believed that ATF diversion efforts could be adversely affected if this
individual left ATF.
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does not have a systematic method for sharing information about diversion,
we concluded that ATF has limited intelligence on which to base such
planning.
10
Leaders of three of the nine ATF field divisions we interviewed
told us that they did not know the extent of the diversion problem in their
field divisions.
ATF’s diversion efforts are ad hoc among the field divisions.
Although certain field divisions we reviewed were pursuing tobacco
diversion cases with some success, other divisions had little to no
enforcement activity in tobacco diversion. The result is an uneven approach
to reducing diversion crimes across the country. Five of the nine field
divisions that we reviewed were active in investigating diversion and had
Special Agents who were assigned primarily to these investigations. The
remaining four divisions conducted few diversion investigations, and only
two of the four understood the scope of the diversion problem in their
jurisdictions. The Special Agents in Charge of the four field divisions that
either were not actively investigating diversion or were conducting few
diversion investigations told us that their emphasis on violent crime, the
reality of limited resources, and limited diversion activity in certain
geographic areas contributed to their lack of emphasis on diversion
enforcement. Without an assessment of the diversion problem, ATF cannot
adequately judge whether a decision by an individual Special Agent in
Charge to not devote resources to diversion is acceptable or judge how
resources should be allocated among divisions to effectively reduce diversion
crimes.
Additionally, we found that the field divisions that had some of ATF’s
largest-scale, long-term, complex undercover tobacco diversion cases or
were in an area of extremely high diversion criminal activity did not or could
not devote enough Special Agents to the investigations. As a result, the
progress of the investigations was slowed and the initiation of additional
diversion cases was limited, even though these investigations were resulting
in prosecutions of numerous defendants and significant seizures of assets.
CONCLUSION AND RECOMMENDATIONS
ATF’s Alcohol and Tobacco Diversion Program has not kept pace with
the level of diversion activity and increasingly complex diversion schemes.
10
While ATF did develop plans for the ATDD during our review period, this
planning was related to the budget and was for a headquarters-based entity and not a
strategic plan for the Alcohol and Tobacco Diversion Program in the field divisions.
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The program lacks formal mechanisms for coordinating diversion
investigations and sharing intelligence among field divisions, ATF
headquarters, and state and local tax and law enforcement agencies. The
program also does not ensure that ATF plans strategically to address
tobacco diversion.
In January 2009, ATF reorganized the ATEB into the Alcohol and
Tobacco Division and developed plans to centralize diversion information
and intelligence, create teams to assist field divisions without diversion
experience, and operate a centralized undercover warehouse. While ATF
requested FY 2010 funding for the new initiatives, it has not received the
funding and the initiatives were not implemented.
We recognize the competing priorities for ATF’s resources, and the
Department’s priority on violence associated with guns, explosives, and
arson. As a result, significantly increased enforcement efforts for diversion
seem unlikely without an infusion of funding and an increased staffing level.
However, we believe ATF could improve its management of the diversion
mission even within existing resources. For example, ATF could address its
diversion mission more strategically and establish formal coordination and
information sharing among field divisions and headquarters.
Therefore, we recommend that ATF:
1. assess the scope of the diversion problem in each field
division and across the country in developing its
enforcement strategy and resource allocation plan,
2. consider re-instituting the assignment of Program
Coordinator responsibilities to an agent in each field division
for alcohol and tobacco diversion issues, and
3. establish within the Alcohol and Tobacco Diversion Division
a formal point-of-contact position for the field divisions.
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TABLE OF CONTENTS
BACKGROUND ................................................................................... 1
PURPOSE, SCOPE, AND METHODOLOGY
OF THE OIG REVIEW ..................................................................19
RESULTS OF THE REVIEW ..............................................................21
CONCLUSION AND RECOMMENDATIONS........................................35
APPENDIX I: RESPONSIBILITIES OF THE ALCOHOL AND
TOBACCO ENFORCEMENT BRANCH ..........................................37
APPENDIX II: INTERVIEWS CONDUCTED BY THE OIG..................39
APPENDIX III: BUREAU OF ALCOHOL, TOBACCO,
FIREARMS AND EXPLOSIVES’ RESPONSE ................................41
A : OIG’S ANALYSIS OF THE BUREAU OF
ALCOHOL, TOBACCO, FIREARMS AND
EXPLOSIVES’ RESPONSE
PPENDIX IV
............................................................43
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Evaluation and Inspections Division
BACKGROUND
ATF’s Alcohol and Tobacco Diversion Program
The Department of Justice’s (Department) Bureau of Alcohol, Tobacco,
Firearms and Explosives (ATF) either directly, or through partnerships with
other law enforcement agencies, is responsible for identifying, investigating,
and presenting for prosecution individuals who violate federal laws involving
firearms, explosives, arson, and alcohol and tobacco diversion.
11
ATF’s alcohol
and tobacco diversion mission is to:
disrupt and eliminate criminal and terrorist organizations by
identifying, investigating and arresting offenders who traffic in
contraband cigarettes and illegal liquor;
conduct financial investigations in conjunction with alcohol and
tobacco diversion investigations in order to seize and deny
further access to assets and funds used by criminal enterprises
and terrorist organizations;
prevent criminal encroachment into the legitimate alcohol and
tobacco industries by organizations trafficking in counterfeit
and contraband cigarettes and illegal liquor; and
assist local, state, and other federal law enforcement and tax
agencies in order to thoroughly investigate the interstate
trafficking of contraband cigarettes and liquor.
12
Between fiscal year (FY) 2004 and FY 2008, ATF conducted 645 alcohol
and tobacco investigations, of which 257 investigations remained open at the
end of FY 2008. Of those 645 investigations, 88 percent involved tobacco (566)
and only 12 percent involved alcohol (79). According to ATF, alcohol diversion
that rises to the level of a federal offense is not as prevalent because alcohol is
harder to transport in larger quantities than tobacco and the manufacturing of
illegal alcohol is limited to specific geographic areas of the country.
Consequently, alcohol diversion is generally investigated by state tax or law
11
The Homeland Security Act of 2002 transferred ATF’s law enforcement functions from
the Department of the Treasury to the Department of Justice on January 24, 2003. ATF’s tax
and trade functions remained with the Department of the Treasury.
12
Bureau of Alcohol, Tobacco, Firearms and Explosives, “Alcohol and Tobacco
Diversion,” http://www.atf.gov/antdiversion.htm (accessed May 15, 2009).
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enforcement entities instead of ATF. Therefore, our review of ATF’s Alcohol and
Tobacco Diversion Program focuses on tobacco diversion.
ATF estimates that from FY 2004 through FY 2009, approximately
2 percent of its resources (from $16.5 million to $21 million each year) have
been allocated to its alcohol and tobacco diversion mission. Figure 1 shows the
allocation of ATF resources by mission area.
Figure 1: ATF Salaries and Expenses, FY 2009
Firearms, 72%
Arson &
Explosives, 26%
Alcohol &
Tobacco
Diversion, 2%
Source: Department of Justice, Bureau of Alcohol, Tobacco, Firearms and
Explosives, February 2008, Congressional Budget Submission, Fiscal Year 2009,
February 2008.
ATF’s budget for FY 2009 is $1.054 billion, including approximately
$21 million for its Alcohol and Tobacco Diversion Program. In comparison, in
FY 2009, ATF received approximately $759 million for its Firearms Program
and approximately $274 million for its Arson and Explosives Program.
Over the past 6 years, ATF requested only slight funding increases each
year and no new positions for its Diversion Program. Approximately 68
(2.7 percent) of ATF’s 2,535 Special Agents are involved in investigating
diversion activities, though not full time. In its FY 2010 budget submission,
ATF requested 28 new positions (15 Special Agents and 13 support positions)
and a total of $28.4 million (an $8.56 million increase from its FY 2009
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request) to enhance operation of the Alcohol and Tobacco Diversion Program.
13
However, the Office of Management and Budget did not include the requested
increase for Contraband Tobacco Enforcement in the Department’s budget
request to the President.
Alcohol and Tobacco Enforcement Branch
The mission of ATF’s Alcohol and Tobacco Enforcement Branch (ATEB),
which was changed to the Alcohol and Tobacco Diversion Division (ATDD) in
January 2009, is to establish, implement, and coordinate policies and
procedures for the Alcohol and Tobacco Diversion Program.
14
The ATDD
retained all the same staff and responsibilities of the ATEB, which include
general headquarters support such as providing program guidance, assisting
with liaison and coordination efforts concerning diversion investigations within
ATF, coordinating with other federal law enforcement agencies, assisting in the
procurement of additional funding for large-scale investigations, and
coordinating with tobacco industry officials to obtain tobacco products for
undercover operations. Additionally, the ATEB assisted the ATF Office of
Strategic Information and Intelligence (OSII) and the Office of Training and
Professional Development in planning and providing diversion training to local,
state, and federal tax and law enforcement personnel at various sites across
the country. The ATEB was organizationally located within the Firearms
Programs Division, Office of Enforcement Programs and Services, and had eight
staff members: a Branch Chief, a Program Manager, a Project Officer, two
Program Analysts, two ATF Specialists, and an Investigative Assistant (see
Appendix I).
15
These staff members are now part of the ATDD, which is
organizationally under the Office of Field Operations. No additional staff
members have been added to the ATDD since it was established.
13
Department of Justice, Bureau of Alcohol, Tobacco, Firearms and Explosives,
FY 2010 Policy Issue Paper Development Process Funding Request.
14
In January 2009, after OIG fieldwork for this review was completed, ATF created the
Alcohol and Tobacco Diversion Division (ATDD) under the Office of Field Operations to replace
the ATEB. The ATEB staff and responsibilities that are described here were transferred to the
ATDD.
15
The OSII, located at ATF headquarters, is responsible for providing intelligence
through the collection and analysis of information. OSII has two Intelligence Research
Specialists assigned to conduct strategic intelligence analysis on alcohol and tobacco diversion,
one on a full-time basis and the second on a part-time basis.
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ATF’s Field Divisions
ATF has 25 field divisions, each of which has a central office and from
3 to 9 field offices. Each division has jurisdiction for a specific geographic area.
Figure 2 shows the geographic jurisdiction for each of ATF’s 25 field divisions.
Figure 2: ATF’s Field Divisions
Source: ATF website, http://www.atf.gov/field/index.htm.
Each field division is headed by a Special Agent in Charge (SAC) and
Assistant Special Agents in Charge (ASAC), with Special Agents organized in
investigative groups for either Firearms or Arson and Explosives. There are no
investigative groups for alcohol and tobacco diversion. Field offices within the
field division jurisdiction are headed by a Resident Agent in Charge and may
have the same investigative group structure as the central office for the field
division. Some field offices do not have investigative groups, in which case
each Special Agent is responsible for investigating crimes from all of ATF’s
mission areas.
ATF Field Support Personnel to Assist Diversion Investigations
Diversion investigations are conducted in the field by ATF Special Agents
and support personnel who include:
Intelligence Research Specialists – Intelligence Research
Specialists are assigned to Field Intelligence Groups in each
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field division and are responsible for collecting, analyzing, and
disseminating information and intelligence within their
respective division.
16
The Intelligence Research Specialists
support diversion investigations by providing tactical
intelligence analysis, database queries, and analytical products.
Investigative Assistants or Analysts – Each investigative group
within a field division has an Investigative Assistant (sometimes
called an Investigative Analyst) who conducts research and
database queries, generates informational reports and trend
analyses, and provides administrative support to the Special
Agents.
Forensic Auditors – Forensic Auditors are assigned regionally by
the Financial Investigation Services Division in ATF
headquarters.
17
The Forensic Auditors provide financial
auditing assistance to Special Agents and prosecutors that
include analyzing financial records, preparing audit reports,
preparing subpoenas for financial records, and providing expert
witness testimony in court.
Asset Forfeiture Special Investigators – Asset Forfeiture Special
Investigators are contract employees assigned to field divisions.
The Special Investigator at each division conducts detailed
examinations of financial and investigative information for the
purpose of identifying the personal and business assets of a
targeted criminal or criminal organization.
18
16
ATF headquarters’ Office of Strategic Information and Intelligence (OSII) also has two
Intelligence Research Specialists (one full-time and one part-time) who provide strategic
intelligence analysis on alcohol and tobacco diversion for use by the field divisions.
17
While the Financial Investigation Services Division is in ATF headquarters, the
Forensic Auditors from the division are assigned to 1 of ATF’s 3 regions and are located in over
40 cities around the United States. The Forensic Auditors work in a specific field division and
provide support to various field divisions in their region.
18
The Department’s Justice Assets Forfeiture Program provided funding to ATF to hire
the Asset Forfeiture Special Investigators. The positions are funded for 7 years, from March
2008, through September 30, 2014, and the contract is managed by ATF’s Asset Forfeiture and
Seized Property Branch.
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ATF Funding Programs to Assist Diversion Investigations
Tobacco diversion investigations can be complex, take several years to
complete, and require a significant investment of resources. When field
divisions need financial support for diversion investigations, they can request
resources from the following ATF programs:
Major Case Funding – ATF’s Major Case Program provides
funding to supplement a significant investigation with the
potential to seize assets that otherwise will place an
extraordinary financial burden on a field division and adversely
affect other investigations.
19
Special Agents who receive major
case funding must provide reports to ATF headquarters on a
regular basis and justify the need for continued funding.
Thirty-seven tobacco investigations received major case funding
between FY 2004 and FY 2008.
Churning Authority – Churning authority allows ATF to use the
financial proceeds obtained through an undercover operation to
further that specific investigation. This authority is intended to
offset the expenses incurred in long-term, complex undercover
investigations so the operations may continue. ATF began
using churning authority in 2006 and has granted the authority
to 21 tobacco diversion investigations.
20
Special Agents using
churning authority must provide reports and financial
statements to ATF headquarters on a regular basis.
Cigarette Fronting Program – One of the major tobacco
manufacturers provides cigarettes to ATF for use in undercover
operations. ATF then uses the proceeds obtained from selling
the cigarettes in undercover operations to reimburse the
tobacco manufacturer. This program allows ATF to expand its
investigations and conduct more complex operations. Between
FY 2004 and FY 2008, ATF used the fronting program for
26 investigations and obtained “fronted” cigarettes 52 times.
19
ATF’s Major Case Program is funded through direct appropriation and is
administered by ATF’s Case Management Branch, Field Management Staff.
20
On December 8, 2004, ATF was granted churning authority by an amendment to
Public Law 102-395, section 102(b). As of May 2009, ATF had used churning authority only
for tobacco diversion investigations.
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ATF’s Partners in Diversion Investigations
ATF has developed relationships with federal, state, and local law and tax
enforcement agencies, at both headquarters and in the field, to exchange
information and work jointly on diversion investigations. ATF interacts most
frequently with state and local law and tax enforcement agencies because many
diversion cases involve the movement of tobacco or alcohol across state lines.
State and local law and tax enforcement officers are often the first to encounter
diversion-related criminal activity through, for example, traffic stops of trucks
containing diverted tobacco products. They also receive tips from the public on
suspected diversion activity.
ATF interacts less frequently with other federal law enforcement agencies
on diversion investigations. ATF at times requests investigative assistance
from, or works jointly with, other federal law enforcement agencies depending
on the characteristics of the case. On diversion investigations, ATF interacts
primarily with the following federal agencies:
Federal Bureau of Investigation (FBI);
Internal Revenue Service’s (IRS) Criminal Investigation Division,
Department of the Treasury;
Alcohol and Tobacco Tax and Trade Bureau (TTB), Department of the
Treasury;
Immigration and Customs Enforcement (ICE), Department of
Homeland Security (DHS); and
Customs and Border Protection (CBP), DHS.
21
The Diversion Problem
ATF describes the diversion of tobacco as a global problem and believes
illegal cigarettes are the number one black market commodity in the world.
22
21
The IRS is a bureau of the Department of the Treasury that administers and
enforces the internal revenue laws. http://www.irs.gov/irs/article/%200,,id=98141,00.html
(accessed July 16, 2009). TTB, also a bureau of the Department of the Treasury, collects
alcohol, tobacco, firearms, and ammunition excise taxes and ensures that these products are
labeled, advertised, and marketed in accordance with the law. http://www.ttb.gov/about/
index.shtml (accessed July 16, 2009). ICE’s missions include protecting national security and
upholding public safety by targeting criminal networks and terrorist organizations that seek to
exploit vulnerabilities and do harm to the U.S. immigration system, financial networks, along
its borders, and at federal facilities. http://www.ice.gov/pi/ topics/index.htm (accessed April
1, 2009). CBP’s mission is to keep terrorists and their weapons out of the United States. It
also has responsibility for securing and facilitating trade and travel while enforcing U.S.
regulations. http://www.cbp.gov/xp/cgov/about/ (accessed April 24, 2009).
U.S. Department of Justice 7
Office of the Inspector General
Evaluation and Inspections Division
The World Health Organization Framework Convention on Tobacco Control
estimated the worldwide tax loss to governments to be between $40 billion and
$50 billion each year.
23
In the United States, federal and state governments
estimate that tobacco diversion costs over $5 billion in revenue from unpaid
excise taxes annually.
Tobacco products are diverted from the legal distribution system in a
variety of ways to evade payment of federal and state excise taxes. This
diversion can include several different types of criminal behavior, as outlined
below.
Smuggling from a low tax state to a high tax state – Individuals
and organized crime groups purchase or obtain, either through
legal or illegal means, quantities of tobacco in a state or
jurisdiction where the state excise tax is low. The contraband
product is then transported across state lines with the intent of
selling it in a higher tax state for the same price as legal
products, thus generating a larger profit than could be earned
through legal trade.
24
Faking export of tobacco products – Federal and state excise
taxes are not imposed on tobacco products manufactured in the
United States for export. Criminals will avoid excise taxes by
fabricating paperwork to indicate that a product is intended for
export and then illegally sell the product in the United States.
Counterfeit products – Counterfeit tobacco products sold in the
United States are primarily manufactured in China and Eastern
Europe, smuggled into the United States, and then sold through
both illegal and legitimate retail outlets. The counterfeit products
use the trade names and packaging similar to the legally
manufactured products, and the legitimate outlets may not
realize the products they are selling are counterfeit. Quality
22
Bureau of Alcohol, Tobacco, Firearms and Explosives’ Press Release, “Cigarette
Smuggling – States Lose Millions in Tax Revenue,” March 18, 2008.
23
Framework Convention Alliance, Building Support for Global Tobacco Control, “How
big was the global illicit tobacco trade in 2006?” Second Session of the Conference of the
Parties to the World Health Organization Framework Convention on Tobacco Control,
June 30 – July 6, 2007.
24
Contraband products are goods or merchandise whose importation, exportation, or
possession is illegal. Contraband products also are defined as smuggled products.
U.S. Department of Justice 8
Office of the Inspector General
Evaluation and Inspections Division
control and oversight is generally lacking in the manufacture of
these counterfeit products, which also raises health concerns.
Smuggling across international borders – Individuals or organized
crime groups illegally move contraband and counterfeit tobacco
products across international boundaries through established
smuggling methods and routes. Criminals profit by selling the
counterfeit or authentic products without paying the taxes.
Selling products without tax stamps or with counterfeit tax
stamps – All states except three require tobacco products to have
tax stamps or markings before they can be sold at the retail
level.
25
In states that require tax stamps, criminals may sell
products without the tax stamp or affix a counterfeit tax stamp,
thereby avoiding the payment of the excise tax.
Internet sales – Criminal groups have used the Internet to sell
tobacco to customers in the United States without adhering to
the tobacco tax and trade laws.
26
ATF officials also told us that
some Native American tribes and reservations are using the
Internet to sell cigarettes without paying the requisite federal and
state excise taxes.
27
These Native American websites advertise
that consumers do not have to pay the excise tax, which is not
legal for non-Native American consumers, and use checks or
cash transfers to process the orders.
Significant Increases in Tax Rates and the Master Settlement Agreement
Criminals and organized criminal groups can acquire large profits by
avoiding the payment of state and federal excise taxes on cigarettes. In the
United States, a primary reason that tobacco diversion is profitable is the
difference among the states’ excise taxes. For example, South Carolina has the
lowest state excise tax at 7 cents per pack of cigarettes, while Rhode Island has
25
South Carolina, North Carolina, and North Dakota do not require a tax stamp on
tobacco products.
26
According to ATF, an investigation it conducted in 2004 resulted in numerous
convictions against the criminal groups illegally selling tobacco on European websites. In
addition, the major credit card companies agreed to not process transactions for these
websites, which effectively shut them down.
27
It is legal for Native American tribes to sell cigarettes to Native Americans for
personal use without imposing an excise tax. However, if the cigarettes are sold to non-Native
Americans or for commercial purposes, the tribe must collect the cigarette excise taxes.
U.S. Department of Justice 9
Office of the Inspector General
Evaluation and Inspections Division
the highest at $3.46 per pack. This disparity gives criminals an incentive to
buy cigarettes in a low tax state such as South Carolina and resell at a profit in
a high tax state such as Rhode Island. In addition, more than 460 local
jurisdictions impose additional cigarette taxes. New York City and Chicago
have the highest priced cigarettes in the country because of the additional city
and county taxes.
28
New York City charges $1.50 tax in addition to a New York
State tax of $2.75, resulting in $4.25 added to the cost of a pack of cigarettes.
In Chicago, the combination of a state tax (98 cents), county tax ($2), and city
tax (68 cents), adds a total of $3.66 to the cost of each pack of cigarettes.
Figure 3 shows the tax rates for each state as of July 2009.
Figure 3: State Tobacco Tax Rates Per Pack of Cigarettes
Source: Campaign for Tobacco-Free Kids, July 2009.
While historically there have always been disparities in tobacco tax rates
between individual states, in the 1990s states began significantly raising excise
taxes on cigarettes in an attempt to recoup the cost of providing health care for
28
The majority of counties and cities do not impose taxes on cigarettes, and some
states prohibit local cigarette tax rates or limit the maximum amounts a jurisdiction can
collect.
U.S. Department of Justice 10
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Evaluation and Inspections Division
people with smoking-related illnesses and to generally discourage smoking.
This upward trend continued and rose dramatically after 2001. Since
January 1, 2002, 44 states, Washington D.C., and Puerto Rico have
implemented or passed 85 cigarette tax rate increases.
29
In addition to state and local excise taxes, the federal excise tax adds to
the cost of cigarettes and the potential profits by criminals who avoid payment
of the taxes. The federal excise tax on a pack of cigarettes has historically been
low. For example, in 1999, the tax was 24 cents, in 2000 the tax was 34 cents,
and in 2002 the tax was 39 cents. However, on February 4, 2009, the federal
government raised the federal tax significantly from 39 cents to $1.01 a pack
as a part of the State Children’s Health Insurance Plan Act. Figure 4 shows the
average state and federal cigarette excise taxes from December 31, 1995, to
April 1, 2009.
29
Campaign for Tobacco-Free Kids, “State Cigarette Tax Rates & Rank, Date of Last
Increase, Annual Pack Sales & Revenues, and Related Data,” April 13, 2009.
U.S. Department of Justice 11
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Evaluation and Inspections Division
Figure 4: State and Federal Cigarette Excise Taxes, by Year –
United States, December 31, 1995, to April 1, 2009
Note: This figure includes all 50 states and the District of Columbia.
Source: The Centers for Disease Control and Prevention, “Federal and State Cigarette
Excise Taxes – United States, 1995-2009,” Mortality and Morbidity Weekly Report, May 22,
2009, http://www.cdc.gov/mmwr/preview/mmwrhtml/mm5819a2.htm (accessed
August 10, 2009).
Cigarette manufacturers also add a fee to cigarettes to cover the cost of a
civil court agreement. In 1998, after a number of states initiated lawsuits
against the tobacco companies seeking to recover the cost of medical expenses
for people with smoking-related illnesses, the Attorneys General of 46 states,
Washington, D.C., 5 U.S. territories, and the 4 largest tobacco manufacturers
negotiated the Master Settlement Agreement.
30
The agreement required the
manufacturers to make payments to the states and imposed restrictions on the
manufacturers’ advertising and lobbying as well as on youth access to
tobacco.
31
ATF estimates that the cigarette manufacturers add approximately
30
Florida, Mississippi, Minnesota, and Texas negotiated individual agreements with the
tobacco companies.
31
Because the cost of the tobacco products would rise to cover the payments made
under the agreement, the agreement included provisions for participating tobacco
manufacturers to receive relief from portions of the payment if they can prove a loss of market
share to the non-participating manufacturers.
U.S. Department of Justice 12
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Evaluation and Inspections Division
$5 to a carton of cigarettes to recoup the payments associated with the Master
Settlement Agreement.
32
Profitability of Diversion
Tobacco diversion is attractive to criminals because it can provide large
profits and the criminal penalties are less than the penalties for smuggling
drugs. According to an ATF official testifying before Congress on May 1, 2008:
Throughout the years, ATF has seen the development and
advancement of this criminal activity due to the potential for
enormous profits. Let me give you an example. The federal excise
tax on a carton of cigarettes amounts to $3.90, while state and
local excise taxes can be as high as $30 per carton, with additional
built-in costs amounting to approximately $5 per carton.
Therefore, a person who avoids paying these expenses on 3,000
cartons of contraband cigarettes, which is roughly a minivan-full
load, and sells them in New York City at the same price as a legal
vendor could reap as much as $115,000 more in profit than that
legal vendor.
33
The diversion of tobacco can occur anywhere on the production or supply
chain – manufacturers, wholesalers, and retail outlets have been involved in
diverting tobacco products. Counterfeit and authentic contraband tobacco
products are available through black market sources, through the Internet,
and at legally operated retail locations. These activities lead to decreased
federal and state tax revenues. ATF has estimated a criminal can make the
following profit solely by purchasing cigarettes in a low tax area and re-selling
them in a high tax area:
A car can haul 10 cases for approximately $18,000 –
$23,000 in profit.
A van can haul 50 cases for approximately $90,000 –
$115,000 in profit.
32
Bureau of Alcohol, Tobacco, Firearms and Explosives, “DOJ Budget Briefing,” slide
show presentation, July 23, 2008.
33
William Hoover, Assistant Director for Field Operations, ATF, before the United
States House of Representatives Committee on the Judiciary Hearing titled H.R. 4081, “The
Prevent All Cigarette Trafficking Act of 2007”; and H.R. 5689, “The Smuggled Tobacco
Prevention Act of 2008” (May 1, 2008).
U.S. Department of Justice 13
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Evaluation and Inspections Division
A small rental truck can haul 200 cases for approximately
$360,000 – $465,000 in profit.
34
Laws Pertaining to Diversion
The primary law governing tobacco diversion is the Contraband Cigarette
Trafficking Act.
35
Enacted in 1978, this law makes it a felony for any person to
ship, transport, receive, possess, sell, distribute, or purchase more than
60,000 cigarettes (3,000 packs) that bear no evidence of state cigarette tax
payment in the state in which the cigarettes are found if the state requires a
stamp to be placed on cigarette packages to demonstrate payment of taxes.
36
The maximum penalty for violating the Contraband Cigarette Trafficking Act is
5 years in prison and a fine. In March 2006, the Contraband Cigarette
Trafficking Act was amended to lower the threshold from 60,000 to 10,000
cigarettes (500 packs) per month as part of the reauthorization of the Uniting
and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism (USA PATRIOT) Act of 2001.
37
ATF’s law enforcement functions were transferred on January 24, 2003,
from the Department of the Treasury to the Department of Justice under the
Homeland Security Act of 2002. ATF’s tax and trade functions remained with
the Department of the Treasury. After its transfer, ATF was given authority to
investigate misdemeanor violations under the Jenkins Act, which 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.
38
Violators can be fined up to $1,000, imprisoned for up to
6 months, or both.
34
Bureau of Alcohol, Tobacco, Firearms and Explosives, New York Field Division
Presentation, May 2008.
35
As of July 2009, there was one bill before Congress – the Prevent All Cigarette
Trafficking (PACT) Act – that could affect ATF’s jurisdiction in tobacco diversion and its Alcohol
and Tobacco Diversion Program if enacted. The PACT Act was originally introduced in 2003,
introduced for a second time in 2007, and again in 2009. The current version (HR 1676)
would, among other things, impose shipping and record-keeping requirements on those selling
cigarettes and smokeless tobacco over the telephone or through the mail or Internet, and make
failure to comply with state tax laws for tobacco a felony (it is currently a misdemeanor).
36
18 U.S.C. § 2341-2346 (2008).
37
18 U.S.C. § 2341-2346 (2008).
38
15 U.S.C. § 375-378 (2008).
U.S. Department of Justice 14
Office of the Inspector General
Evaluation and Inspections Division
ATF’s Diversion Investigations
As tobacco diversion has become more profitable because of increases in
tobacco taxes, ATF has encountered a more sophisticated and increased level
of criminal diversion activity. While individuals and organized crime groups
have been involved with tobacco diversion for decades, ATF officials told us that
organized criminal groups have become increasingly active in what is termed
“commercial” diversion of tobacco products, particularly cigarettes, and are
running larger scale and more complicated diversion schemes. In the past,
tobacco diversion was typically conducted by individuals selling to a single
smoker crossing a state border to purchase a small amount of cigarettes for
personal use and to evade the higher excise tax. Also, “mom and pop” retail
store owners would cross state borders to purchase a small amount of
cigarettes to resell in their stores. As state taxes became significantly higher,
increasing numbers of large-scale organized groups became involved in
commercial enterprises involving the diversion of considerable quantities of
cigarettes and ancillary crimes.
39
ATF has uncovered Armenian, Chinese,
Middle Eastern, Russian, Taiwanese, Ukrainian, and Native American
organized crime groups participating in the diversion of contraband and
counterfeit cigarettes and counterfeit tax stamps. According to ATF, the large-
scale diversion of cigarettes “involves a structured business model which
mirrors the movement of cigarettes in the legitimate market: that is, a source
(genuine or counterfeit product), a warehousing system, shipping network, and
finally a retail outlet.”
40
The schemes also have included the use of counterfeit
tax stamps, counterfeit cigarettes, shell companies, money laundering, and
fraudulent tobacco rebate forms.
ATF investigations also have revealed that some criminal organizations
are using the proceeds from tobacco diversion to fund other criminal activities,
including drugs, weapons, identity theft, and various types of fraud. For
example, two ATF investigations, worked jointly with the FBI, uncovered
criminals engaged in diversion activities to fund the Hezbollah terrorist
organization and its activities. The first investigation resulted in the 2002
convictions in North Carolina of 20 defendants for racketeering, with 2 of those
20 also convicted of providing material support to a terrorist organization. In
2003, the second investigation resulted in the conviction in Michigan of 19
39
Michael Lafaive, Patrick Fleenor, and Todd Nesbit, Cigarette Taxes and Smuggling: A
Statistical Analysis and Historical Review, Mackinac Center for Public Policy, 2008, page 4.
40
William Hoover, Assistant Director for Field Operations, ATF, before the United
States House of Representatives Committee on the Judiciary Hearing titled. H.R. 4081, “The
Prevent All Cigarette Trafficking Act of 2007”; and H.R. 5689, “The Smuggled Tobacco
Prevention Act of 2008” (May 1, 2008).
U.S. Department of Justice 15
Office of the Inspector General
Evaluation and Inspections Division
defendants for racketeering, with 1 defendant also convicted of providing
material support to a terrorist organization.
41
As crime groups have become involved in tobacco diversion, ATF has had
to develop large-scale, long-term undercover operations to investigate the
diversion crimes. Additionally, ATF is working with the U.S. Attorneys’ Offices
to charge defendants with additional crimes such as money laundering, fraud,
and tax evasion. Previously, criminals prosecuted under the Contraband
Cigarette Trafficking Act received minimal, if any, prison time and fines that did
not affect their operations.
42
Now, tobacco diversion investigations can provide opportunities for ATF
to seize a large amount of assets including tobacco products, money, and
property from the criminal or criminal organization. From FY 2004 through
the first quarter of FY 2009, diversion investigations made up less than
1 percent of ATF’s caseload, but accounted for 46 percent of the value of total
seizures from all types of ATF investigations.
43
Moreover, the value of seizures
from tobacco diversion cases more than quadrupled from $6,276,648 in
FY 2004 to $26,680,976 in FY 2008. During that same time period, the value
of tobacco seizures as a percentage of all ATF seizures rose from 30 percent to
50 percent. In addition, the value of seizures from the first quarter of FY 2009
was almost equal to the total for all of FY 2008. Table 1 shows the value of the
assets and funds seized in tobacco diversion investigations.
41
Bureau of Alcohol, Tobacco, Firearms and Explosives, ATF Press Release, “Cigarette
Smuggling – States Lose Millions in Tax Revenue,” March 18, 2008. These have been the only
two ATF diversion investigations that have resulted in convictions for terrorism-related crimes.
42
A Special Agent working a large-scale diversion investigation stated that in the past
he has seen defendants write checks for large fines without any trouble and walk out of court
and continue to divert tobacco.
43
These are assets seized prior to forfeiture proceedings.
U.S. Department of Justice 16
Office of the Inspector General
Evaluation and Inspections Division
U.S. Department of Justice
Office of the Inspector General
Evaluation and Inspections Division
17
Table 1: Seized Assets, FY 2004 – FY 2009
Fiscal
Year
Value of Seizures
from All ATF
Investigations
Value of Seizures
from Tobacco
Diversion
Investigations
Value of Tobacco
Diversion Seizures
as a Percentage of
All ATF Seizures
2004 $21,205,283 $6,276,648 29.6%
2005 $23,377,852 $9,731,791 41.6%
2006 $44,515,040 $22,993,953 51.6%
2007 $45,275,274 $14,371,177 31.7%
2008 $53,147,034 $26,680,976 50.2%
2009* $42,860,073 $25,552,846 59.6%
Total $230,380,556 $105,607,391 45.8%
* First quarter of FY 2009, only.
Source: ATF, Consolidated Asset Tracking System.
In addition to the two diversion investigations that involved material
support to terrorist organizations described above, ATF provided other
examples of successful tobacco diversion investigations, including:
In 2003, two individuals were caught under surveillance in
Virginia purchasing large quantities of cigarettes. ATF Special
Agents confiscated their truckload of cigarettes as they crossed
state lines. This began a 2-year undercover investigation in
which ATF determined that at least 13 people, including
tobacco wholesalers and retailers, were engaged in a smuggling
operation that moved approximately $20 million worth of
cigarettes illegally from Virginia to California, where the
cigarettes were sold without paying the taxes owed. The
investigation ultimately expanded to include over 100 targets,
as smuggling to other states such as Nevada and New York was
uncovered. In January 2009, ATF estimated that the loss in
federal and state excise taxes from this investigation alone
amounted to over $100 million. In addition, this investigation
identified that some of the individuals involved in the smuggling
operation had ties overseas, which supported or spun off an FBI
Joint Terrorism Task Force case, international money
laundering cases, and international organized crime cases.
According to ATF officials, ATF has seized over $8 million in
assets and is still continuing its investigation.
In October 2008, eight individuals were indicted for violations of
numerous federal laws stemming from a violation of the
Contraband Cigarette Trafficking Act. The joint ATF and IRS
investigation was initiated after local police stopped a truck
driver in Kansas with approximately $200,000 worth of
contraband cigarettes. ATF determined the truckload was part
of a scheme involving three different companies to ship low-tax
cigarettes to Oklahoma smoke shops owned by three Native
American tribes. The investigation found that, since January
2005, the defendants had defrauded the state of Oklahoma and
the tribes that have a tax sharing agreement with the state out
of $25 million in taxes. The U.S. government was able to seize
more than $25 million in assets from these defendants.
44
In July 2008, a joint ATF and Fairfax County, Virginia, tobacco
task force executed 15 federal arrest warrants and 10 federal
search warrants for contraband cigarette trafficking. The
defendants, linked to a Korean organized crime group, were not
only conducting illegal diversion of tobacco but also violating
federal laws against identity theft, counterfeit goods, narcotics
trafficking, and money laundering. Seventeen individuals were
prosecuted and convicted in 2009. The investigation uncovered
the distribution of more than 300,000 cartons of contraband
cigarettes with potential tax losses to states and the federal
government of more than $10 million.
ATF and ICE conducted a 3-year investigation into a smuggling
ring in California that distributed over a million packs of
cigarettes with counterfeit tax stamps between August 2002
and January 2005. Thirteen defendants were convicted and at
least seven were sentenced to federal prison for their
involvement in using counterfeit stamps to evade California’s
tobacco tax. The defendants were ordered to pay the state over
$908,000 in restitution.
44
As of August 2009, this case had not gone to trial.
U.S. Department of Justice
Office of the Inspector General
Evaluation and Inspections Division
18
PURPOSE, SCOPE, AND METHODOLOGY OF THE OIG REVIEW
Purpose
The Office of the Inspector General (OIG) examined ATF’s
implementation of its Alcohol and Tobacco Diversion Program as a deterrent
to illegal sales and smuggling of tobacco products.
Scope and Methodology
The review focused on ATF’s headquarters’ oversight of the Alcohol
and Tobacco Diversion Program and the field divisions’ implementation of
the program as they conducted tobacco investigations. We examined the
roles of the following ATF entities in the program:
Alcohol and Tobacco Enforcement Branch (ATEB),
45
Office of Strategic Intelligence and Information (OSII),
Financial Investigative Services Division,
Asset Forfeiture and Seized Property Branch, and
ATF field divisions.
We gathered information related to relevant tobacco legislation,
tobacco diversion studies, policy papers, congressional hearings, tobacco
investigations, and intelligence analyses provided to Special Agents. Our
fieldwork, conducted from May 2008 through November 2008, included in-
person and telephone interviews, data analyses, observation of undercover
operations, and document reviews. We reviewed five field divisions and four
field offices within those field divisions that were actively conducting
diversion investigations. We also interviewed staff at four other field
divisions that were conducting a minimal number of diversion
investigations.
Interviews
We interviewed 67 ATF officials, 21 other federal law enforcement
officials, 14 state and local law and tax enforcement agency representatives,
and 3 tobacco industry officials. Appendix II lists the individuals
interviewed.
45
The ATEB was reorganized as the Alcohol and Tobacco Diversion Division
effective January 2009.
U.S. Department of Justice 19
Office of the Inspector General
Evaluation and Inspections Division
Data Analyses and Document Reviews
We analyzed ATF data on tobacco investigations from FY 2004
through FY 2008. The data included the number of investigations opened,
the number of investigations closed, the number of arrests, the number of
defendants, and the value of property and assets seized.
We reviewed ATF Orders, budget documents, organizational charts,
position descriptions, memoranda, policy guidance, briefing materials, and
intelligence products. Additionally, we reviewed legislation, congressional
testimony, Government Accountability Office reports, Congressional Budget
Office estimates, other studies, and news articles related to tobacco
diversion, smuggling, and counterfeiting.
U.S. Department of Justice
Office of the Inspector General
Evaluation and Inspections Division
20
RESULTS OF THE REVIEW
While ATF field divisions have conducted successful
tobacco diversion investigations over the past several
years, diversion investigations are not an ATF priority
compared with ATF’s investigations of violent crime
through its Firearms and Arson and Explosives Programs.
Overall, ATF has not developed an adequate national
program for diversion, and its diversion enforcement efforts
are ad hoc. While it may be difficult for ATF to dedicate
significant additional resources to diversion because of
other competing priorities, we believe that ATF
nevertheless can improve its diversion program with
existing resources.
Violent crime, not diversion, is ATF’s priority.
ATF focuses most of its investigative efforts on violent crime (a
Department priority) involving firearms, arson, and explosives. It allocates
only a small percentage of its resources to diversion investigations because
diversion crimes are predominantly financial in nature and usually do not
involve violence. However, ATF agents told us that some ATF large-scale,
long-term undercover diversion investigations, although they did not
quantify how often, have uncovered links to more serious crimes such as
terrorism, gun trafficking, or drug trafficking.
From FY 2004 through FY 2008, ATF investigated 79 alcohol and
566 tobacco diversion cases, representing less than 1 percent of ATF’s total
caseload of approximately 107,926 cases. Of these 645 criminal cases,
257 remained open at the end of FY 2008 (233 tobacco and 24 alcohol).
While each of ATF’s 25 field divisions had at least 1 diversion investigation
during the OIG’s review period, 49 percent of ATF’s field offices and satellite
offices (the sub-offices of each field division) did not conduct any tobacco or
alcohol diversion investigations during this 5-year period.
We recognize that the number of investigations does not always reflect
the amount of work conducted because diversion cases can be large, include
numerous targets, and can take a long time to develop. However, we found
other indications of ATF’s lack of emphasis on its diversion mission,
including minimal resources and staffing levels for the diversion mission,
and field structures that do not include diversion groups. Consequently,
ATF’s program has neither adequate resources nor an adequate structure
U.S. Department of Justice 21
Office of the Inspector General
Evaluation and Inspections Division
for addressing the significant tax revenue losses to state and federal
governments caused by tobacco diversion and the potential links to other
criminal activities.
Low Funding and Staffing Levels
Over the last 6 years (FY 2004 through FY 2009), the Alcohol and
Tobacco Diversion Program has represented only 2 percent of ATF’s total
budget each year, while the Firearms Program represented 72 percent and
the Arson and Explosives Program represented 26 percent. During this
period, ATF requested only slight funding increases each year and no new
positions for the Diversion Program even though diversion schemes were
more frequently run by organized crime groups, involved more complex
diversion techniques, and resulted in greater tax losses by the federal and
state governments. In February 2009, ATEB officials stated that only
68 Special Agents in the field (approximately 2.7 percent of ATF’s 2,535
Special Agents) were spending “most of their time or a significant amount of
time, although not full time,” working on alcohol or tobacco investigations.
46
Those 68 Special Agents also were responsible for investigating firearms,
arson, or explosives crimes. In its FY 2010 budget request, ATF sought
28 new positions and a 43.4-percent increase in annual diversion funding,
from $19.7 million to $28.3 million, but the Office of Management and
Budget rejected that request.
While we recognize that ATF may not have additional staff to assign to
diversion investigations due to its finite resources, we believe that ATF could
improve its diversion investigations using its current resources.
Field Structures Do Not Include Diversion
Because ATF does not have specific investigative groups for alcohol
and tobacco diversion, Special Agents assigned to Arson and Explosives or
Firearms groups work on diversion cases. A Group Supervisor told us that
one of the biggest challenges to investigating diversion is not having a
standalone group for alcohol and tobacco diversion. He said that a field
division “cannot adequately focus on diversion activities and investigations
when an investigative group is mixed” with different mission areas. For
example, another Group Supervisor had four of nine Special Agents working
46
Every ATF field division, except for Philadelphia, had at least 1 Special Agent in
the count of 68 working most of the time on alcohol or tobacco diversion. The Washington,
D.C., field division had the highest number (nine) working most of the time on alcohol and
tobacco diversion.
U.S. Department of Justice 22
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U.S. Department of Justice 23
Office of the Inspector General
Evaluation and Inspections Division
diversion investigations in the Arson and Explosives Group, but the four
agents told us that they often responded to arson incidents, putting their
diversion investigations on hold.
ATF’s current staffing structure for field divisions and investigative
groups requires that each group have 10 Special Agents, 1 Group
Supervisor, and 1 administrative position. This structure does not allow the
flexibility to create smaller groups to specialize in alcohol and tobacco
diversion. Of the nine sites we reviewed that were conducting diversion
investigations, three field division central offices had Special Agents
assigned to the Arson and Explosives Group, two other sites (one field
division central office and one field office) had Special Agents assigned to a
Firearms Group, and four of the smaller field offices did not have agents
assigned to groups.
47
ATF does not have an adequate national diversion program.
ATF’s current diversion program does not fully support the field
because the headquarters ATEB provided only minimal services and there is
no system or method to regularly share intelligence or information
specifically about diversion among the field divisions and between the field
divisions and headquarters. This lack of intelligence sharing contributes to
reduced knowledge of the level and scope of diversion activity nationwide.
As one SAC told us, “headquarters does a dismal job” of supporting the field
in alcohol and tobacco diversion investigations and he believes that ATF
suffers from a “lack of vision.”
We found that the ATEB provided limited services to Special Agents
working on diversion investigations such as submitting requests to the
Department of the Treasury’s Alcohol and Tobacco Trade and Tax Bureau
(TTB) to check its database of tobacco licenses and coordinating with
tobacco companies to provide cigarettes for undercover operations.
48
47
Field division headquarters office and larger field offices use the investigative
group structure – broken out by ATF’s mission areas. In smaller field offices, ATF does not
use the investigative group structure and Special Agents are responsible for working all
types of investigations.
48
As of January 21, 2009, the ATEB was transferred to the Office of Field
Operations and became the Alcohol and Tobacco Diversion Division. ATF stated that the
division was created to “improve efficiencies, allow better support and coordination of field
investigative activity, and expand capabilities and capacity on a national level. The
realignment centralizes program oversight and execution within a single directorate. The
change will increase cost effectiveness, improve headquarters-level support to the field,
enhance operational security, and provide dedicated senior-level leadership to a program
Cont’d
Neither the ATEB nor any other organizational element within ATF provided
centralized management of the Alcohol and Tobacco Diversion Program to
ensure that diversion investigative information was shared throughout the
agency and the scope of diversion activity was known.
The Special Agents we interviewed said they rarely communicated
with the ATEB except to use the services of one particular ATEB Program
Analyst. In absence of a formal information coordination system, the
analyst, with his supervisor’s knowledge, acted as a central point of contact
for the field and tried to coordinate diversion information from various field
divisions. However, all information coordination and sharing accomplished
by the program analyst was informal and ad hoc.
49
As one SAC stated, “You
don’t run a program with one [headquarters] person.” Some of the ATF
Special Agents also told us they did not look to the branch as the
centralized location for alcohol and tobacco enforcement program
information.
We also found no centralized system elsewhere in ATF for sharing
information and intelligence on alcohol and tobacco diversion. The Special
Agents we interviewed told us that ATF did not have a systematic method to
connect those working on diversion investigations. ATF’s Office of Strategic
Information and Intelligence (OSII) provides only strategic intelligence
analysis related to diversion, rather than tactical analysis, and Special
Agents told us the strategic analysis was not much help to them in
conducting diversion investigations.
50
Additionally, the Field Intelligence
Groups located in all field divisions are not connected to one another or to a
centralized intelligence sharing structure at headquarters and operate
independently, providing case-specific support only to agents within their
with significant community impact.” ATF Brief 1030.67, Realignment of Alcohol and
Tobacco Diversion Program from Enforcement Programs and Services to Field Operations,
Acting ATF Director Ronnie Carter, January 21, 2009.
49
Special Agents also expressed concerns that the ATEB Program Analyst was the
sole or primary source that they used for a large amount of historical and institutional
knowledge regarding the diversion program and diversion investigations. Because there
was no formal system for information sharing, Special Agents believed that ATF diversion
efforts could be adversely affected if this individual leaves ATF.
50
Tactical intelligence is required for the planning and conduct of investigations or
operations and usually involves information that requires further action – for example, a tip
that a target is purchasing a large amount of cigarettes. Strategic intelligence analysis is
used for forming policy and plans at national levels and usually involves general
information about a topic – for example, the current level and types of counterfeit cigarettes
produced in other countries.
U.S. Department of Justice 24
Office of the Inspector General
Evaluation and Inspections Division
respective divisions. We found that the information and intelligence sharing
related to alcohol and tobacco diversion among agents is informal, which
could result in agents missing important information or intelligence and in
overlapping diversion investigations.
We also found that ATF’s Alcohol and Tobacco Program Coordinator
system was not operating. ATF’s intranet page for the Alcohol and Tobacco
Diversion Program included a document that outlined the duties and
responsibilities for an Alcohol and Tobacco Program Coordinator to be
designated at each of ATF’s field divisions.
51
The Coordinator’s role is to
share diversion information and act as the division’s point of contact for ATF
headquarters on diversion issues. ATF’s intranet also listed names and
contact information for the field divisions’ Program Coordinators, but the
information only included 23 of ATF’s 25 field divisions.
The ATEB Branch Chief told us that after ATF was transferred to the
Department of Justice from the Department of the Treasury and no longer
had alcohol and tobacco tax regulatory authority, some field divisions did
not maintain the Program Coordinator designation. Only one of the Special
Agents we interviewed was aware that he was the designated Program
Coordinator, while the other agents either did not know of the Coordinator
system or did not know who the Coordinator was in their field division.
Moreover, we could find no evidence of Coordinators actually exchanging
information with each other or with headquarters.
We asked ATF staff in the field and at headquarters how a Special
Agent with no prior diversion experience would know who to contact for
assistance if the agent was initiating an investigation. All responded that
the Special Agent would have to call around to other Special Agents to either
obtain assistance or find a contact at headquarters (most likely the ATEB
Program Analyst discussed previously). Special Agents also told us that
there is no formal method of exchanging information with other agents who
are working alcohol and tobacco diversion cases.
Many of the Special Agents we interviewed emphasized the
importance of having a national, centralized, headquarters view of the
tobacco diversion investigations across the country. The Special Agents
stated that ATF’s large-scale tobacco investigations were often linked to
other diversion investigations and one tobacco investigation often generates
additional investigations in other field divisions. For example, one ATF
51
Bureau of Alcohol, Tobacco, Firearms and Explosives, “Alcohol and Tobacco
Coordinator Responsibilities,” updated June 28, 2004.
U.S. Department of Justice 25
Office of the Inspector General
Evaluation and Inspections Division
undercover tobacco diversion investigation resulted in new investigations or
intelligence to support other investigations in 20 other field divisions and
also resulted in an FBI Joint Terrorism Task Force case. Because tobacco
diversion inherently involves activities that are likely to cross field division
jurisdictions, high-level coordination of investigative activities and
intelligence is important.
The lack of a centralized system for exchanging and coordinating
diversion information and intelligence further impairs ATF’s knowledge of
the scope of the diversion problem. Without an understanding of the scope
of the problem, ATF cannot address the problem strategically and optimize
its investigative resources. The Assistant Director of Field Operations, who
oversees the new Alcohol and Tobacco Diversion Division (ATDD) (formerly
the ATEB), told us that ATF does not know the scope of tobacco diversion
across the country. The Assistant Director of Enforcement Programs and
Services, which had responsibility for the ATEB until January 2009, stated
that unlike other programs (for example the Violent Crime Impact Team
program) where the SACs work with ATF headquarters to develop plans to
address a particular law enforcement problem, ATF has not conducted
strategic planning for tobacco diversion at the headquarters or field division
level.
52
ATF’s diversion enforcement efforts are ad hoc.
Despite the lack of a national diversion program at ATF headquarters,
we found certain field divisions pursuing tobacco diversion cases with
success. Yet, other field divisions had little to no current enforcement
activity in tobacco diversion. Nine of the 13 sites (from 5 of 9 field divisions)
that we reviewed were active in investigating diversion and had Special
Agents assigned primarily to these investigations. Five of these nine sites
had large or long-term undercover diversion investigations operating during
our review period. The other four sites had ongoing diversion investigations
that included undercover aspects, but were not as large or as long term.
The remaining 4 of the 13 sites were not active or were less active in
conducting diversion investigations, and two of the SACs stated that they
52
ATF headquarters officials provided us with two ATF Information Papers on
tobacco diversion. In the first paper, ATF estimated tax losses and diverted cigarettes by
state based on 2004 data. In the second paper, ATF compared three studies on tobacco
diversion and concluded that they were “excellent sources for studying and understanding
diversion.” The paper also took a “quick look” at states with histories of diversion problems
and stated that ATF has a “noticeable amount of investigative activity” in those states as
well as some activity in source states and transportation routes. The papers did not
include or recommend plans for ATF to address diversion strategically.
U.S. Department of Justice 26
Office of the Inspector General
Evaluation and Inspections Division
did not know enough about the true level of diversion activity in their
jurisdictions to make informed decisions about investigating diversion.
Additionally, three of the nine field divisions that were working numerous or
large-scale undercover tobacco diversion cases did not or could not fully
staff the investigations with needed Special Agent resources. The result is
an uneven approach to reducing diversion crimes across the country.
Some field divisions were not active in diversion enforcement and did not
know the level of diversion activity in their jurisdictions.
ATEB officials, SACs, and ASACs of four field divisions that either
were not actively investigating diversion or were conducting few diversion
investigations told us that ATF’s emphasis on violent crime, the reality of
limited resources, and limited diversion activity in certain geographic areas
contributed to their lack of emphasis on diversion enforcement. The
reasons they provided were consistent with the difficulties that all SACs said
they faced, even those SACs who managed to assign greater resources to
diversion investigations.
Violent crime is ATF’s number one priority: All ATF staff we
interviewed told us that violent crime is ATF’s number one priority.
Officials said that each field division must address the firearms,
arson, and explosives mission areas, and the recent focus on gun
smuggling along the southwest border has reinforced ATF’s violent
crime priority.
Lack of resources: SACs said they are reluctant to take resources
away from priority mission areas and use the resources for
diversion cases.
53
ATF headquarters officials and SACs also said
they view diversion investigations as long-term, labor intensive
endeavors that do not produce immediate measurable results
when compared with cases in the other mission areas.
Tobacco diversion activity varies: Certain field divisions have more
tobacco diversion activity than others, such as those field divisions
with jurisdictions that include seaports, low or high tax states, or
major smuggling routes. Additionally, some diversion activity may
53
ATF had 2,539 Special Agent positions authorized in FY 2010. In comparison,
the FBI has 13,789 Special Agent positions, Drug Enforcement Administration has 5,312
Special Agent positions, and the U.S. Marshals Service has 4,266 Deputy U.S. Marshal
positions authorized in FY 2010.
U.S. Department of Justice 27
Office of the Inspector General
Evaluation and Inspections Division
not rise to a federal level and is sufficiently investigated by state
law and tax enforcement agencies.
54
All four of the SACs told us that violent crime was their number one priority
and diversion was the lowest priority in their field divisions. As explained
below, two of the four SACs we interviewed stated that they were aware of
the scope of the diversion problem in their field divisions, but the other two
SACs told us that they were not.
Of the four SACs, the first stated that for years most of the tips or
other tobacco diversion information received by his division had been about
violations of state, not federal, law and were appropriately referred to state
tax or law enforcement agencies. However, the SAC planned to conduct a
pilot study to determine the prevalence and types of tobacco diversion in his
jurisdiction so he could evaluate whether a shift in resources was
necessary.
55
The second SAC stated that it was difficult to determine the
real “threat level” of diversion in his jurisdiction because he could only
devote limited resources to diversion investigations. He said the primary
focus of his field division was firearms cases and the numerous violent
crimes related to firearms.
The third SAC told us that the tobacco diversion crimes in his
jurisdiction were mostly due to Native Americans illegally selling untaxed
cigarettes. However, his field division’s priority is firearms crimes, especially
related to trafficking across the southwest border. The SAC further stated
the field division is “stretched thin,” he did not have enough agents to
devote more to diversion, and a “good” tobacco case takes a long time and is
very labor-intensive. The fourth SAC stated that he believed because of the
geographic location of and the low state excise tax in his field division (and
the surrounding states), tobacco diversion is not a large problem in his
jurisdiction.
Although it is generally recognized that field divisions in port areas or
high tax areas are likely to have a high level of diversion criminal activity,
ATF has done no strategic assessment that would explain the differences in
resources devoted to diversion across field divisions. SACs have the
discretion to allocate their field division resources to the different ATF
54
As stated above, because there are no investigative groups specifically for
diversion, ATF does not allocate any Special Agent positions based on the diversion activity
in a geographic area.
55
As of July 2009, the SAC had not conducted the pilot study.
U.S. Department of Justice 28
Office of the Inspector General
Evaluation and Inspections Division
mission areas based on the broad priorities set by ATF headquarters and
the particular enforcement needs of each division’s jurisdiction. All the
SACs and Acting SACs we interviewed stated that tobacco diversion was not
a top priority for their field divisions. However, they also said that it was
important to dedicate some resources to combat tobacco diversion because
of the large losses of federal and state tax revenue and the use of funds from
diversion to support the other activities of organized criminal enterprises
and terrorist organizations. But, without a strategic assessment of the
diversion problem, ATF cannot adequately judge whether an individual
SAC’s decision to not devote resources to diversion is acceptable or judge
how resources should be allocated among divisions to effectively reduce
diversion crimes.
Some field divisions we reviewed did not or could not fully staff their
diversion cases.
In the nine sites (from five field divisions) we reviewed that were
actively investigating tobacco diversion, the SACs generally assigned staff for
analytical support services, such as intelligence and financial analysis, to
diversion investigations. However, in three sites that were actively working
diversion, the SACs did not have additional agents available to assign to the
complex cases, which needed more Special Agents to assist in carrying out
investigative activities. Two of these three sites were working two of ATF’s
largest and most complex undercover tobacco diversion investigations, and
a third site was located in one of the most active areas of diversion crime in
the country. Even though these field divisions had devoted resources to
diversion enforcement, the agents working diversion in these field divisions
told us that the lack of additional agent resources had slowed the progress
and limited the expansion of their cases.
For example, in a small field office within a large field division, one
Special Agent predominantly worked a complex undercover investigation
alone for months after his partner had transferred to another office. The
Resident Agent in Charge of the field office worked intermittently on the
investigation because of its size and because other senior Special Agents
were not available to assign to the case. While the investigation had over
100 targets and 20 spin-off investigations, the Special Agent stated that the
lack of additional agent resources had prevented the expansion of the case
even further. He told us that the type of assistance he needed could not be
met by a support staff member because the work required the criminal
investigation skills of another Special Agent for the undercover operation.
The SAC stated that his field office is understaffed and that he expected that
new agents would be assigned soon. The Special Agent was without a
U.S. Department of Justice 29
Office of the Inspector General
Evaluation and Inspections Division
partner from the end of September 2008 until the field division assigned a
second Special Agent from another field office on a temporary basis in
January 2009. The temporary Special Agent was responsible for preparing
the evidence to prosecute one large target in the investigation.
We heard similar concerns from the two Special Agents working a
complex undercover investigation in another large field division. These two
agents had taken part in 72 undercover transactions, sold 4 million
cigarettes, and were running an undercover black market business. The
Special Agents stated that with
additional agent resources, they
would have more time to expand
their investigations.
In a third large field division
located in a high tax state with
extensive diversion activity, we
found only one Special Agent
assigned to work tobacco diversion
after a 2-year lapse in diversion
coverage. The agent’s Group
Supervisor stated that the field
division did not provide adequate
support for tobacco diversion
because the field division did not
have enough agents to assign to
the diversion mission area. The
Special Agent told us that it was
very difficult to get his job done as
a “one-man team” and that there
was more diversion work than he
could handle alone.
Investigating Diversion Cases
Conducting large-scale, complex
diversion investigations requires all the
normal investigative activities, such as
report writing, organizing case data and
supporting documentation, running or
reviewing database queries, analyzing
information or intelligence gathered,
preparing operational plans, and
conducting surveillance. Diversion cases
also require Special Agents to prepare
requests for funding and for churning
authority, and to obtain fronted or
discounted cigarettes from the tobacco
companies. In addition, if the
investigation includes an undercover
aspect, the Special Agents must conduct
activities associated with running a
“business,” such as accounting,
purchasing, hiring employees, managing
payroll, and loading and unloading
deliveries. Operating a tobacco wholesale
business involves more duties than a
standard undercover storefront operation
typically associated with ATF
investigations.
As stated previously, all the
SACs we interviewed told us that violent crime is their number one priority
and individual SACs have the discretion to allocate resources in their field
division. The SACs of some field divisions had devoted resources to
diversion enforcement and their agents were working some of the largest,
complex undercover diversion investigations in ATF. These investigations
were resulting in prosecutions and seizures of significant amounts of assets,
in addition to generating numerous spin-off investigations. However, even
these field divisions could not provide adequate staffing to their diversion
investigations.
U.S. Department of Justice 30
Office of the Inspector General
Evaluation and Inspections Division
ATF field divisions seek assistance from other agencies to supplement
resources.
At the sites we reviewed that actively conduct diversion investigations,
we found that the ATF field divisions have established beneficial working
relationships with federal, state, and local law and tax enforcement agencies
for tobacco diversion investigations and information exchange. Additionally,
the field divisions sometimes operated tobacco diversion task forces with
state and local law and tax enforcement agencies to investigate diversion in
general or for specific cases.
Four of the nine sites we reviewed that were actively conducting
diversion investigations had established tobacco diversion task forces
consisting of ATF Special Agents and other state or local law and tax
enforcement agents. ATF used the task forces to increase the manpower on
diversion investigations and to facilitate the exchange of information with
the participating members and their agencies.
56
Although there was no
formal tobacco diversion task force established in the other four sites we
reviewed, ATF agents worked jointly with state and local counterparts on
diversion cases. In some instances, ATF created a task force to work a
specific investigation. In one field division, the SAC stated that one case-
specific task force lasted over 2 years.
To further supplement its staffing, ATF may investigate diversion
activity jointly with a state or local law or tax enforcement agency without
establishing a task force. For example, two ATF field divisions led a joint
undercover investigation working with both Virginia and California tax
enforcement agencies to investigate a complex conspiracy that involved the
trafficking of contraband cigarettes from Virginia to California, the illegal
possession and distribution of contraband cigarettes by individuals in
California, and money laundering. Three defendants were sentenced to
federal prison and ordered to pay more than $1.9 million in restitution to
California.
We also found examples of ATF working on diversion investigations
with other federal agencies such as the FBI, CBP, and the IRS. A large ATF
tobacco investigation in one field division resulted in numerous
investigations in other field divisions, including a case with a public
corruption aspect that ATF is jointly working with the FBI. A CBP Sector
56
In two of the sites we reviewed, the task forces had dissolved prior to the end of
our field work because the member agencies reassigned their personnel due to shifting
investigative priorities involving violent crime.
U.S. Department of Justice 31
Office of the Inspector General
Evaluation and Inspections Division
Chief in a different area of the country told us that he assigned one of his
Special Agents to work with an ATF field office specifically to exchange
information and identify and address tobacco issues in that area. ATF
works frequently with the IRS on tobacco diversion cases because IRS
agents have access to banking system and tax databases not generally
available to other law enforcement agencies absent a court order. Between
FY 2004 and FY 2008, the IRS assisted ATF on 86 tobacco diversion
investigations in 11 field divisions.
57
ATF Special Agents told the OIG that
the joint investigative work with the IRS is invaluable in diversion cases,
especially when expanding the charges for prosecution to money laundering
and tax evasion.
ATF Special Agents in all nine sites told us that their relationships
and the partnerships with federal, state, and local law and tax enforcement
agencies have allowed ATF to successfully investigate additional and larger
diversion cases. ATF Special Agents told us that cooperation among the
agencies is mutually beneficial, but that the priorities of other agencies may
change and the assignments of their staff to assist the ATF may be
curtailed. For example, at one ATF site located in an area of high diversion
activity, the IRS agent assigned to work with ATF was re-called to his parent
agency because the IRS office had refocused its priorities to other issues.
ATF has proposed new initiatives to improve the Alcohol and Tobacco
Diversion Program, but funding and implementation of the new
initiatives are uncertain.
In January 2009, after the OIG fieldwork for this review was
completed, ATF reorganized the ATEB into the Alcohol and Tobacco Division
(ATDD) within the Office of Field Operations. ATF’s creation of a new
Division and an increased emphasis on alcohol and tobacco diversion are
positive signs that ATF recognizes that this mission area needs attention.
However, ATF had requested but did not receive funding in the
Department’s FY 2010 budget for initiatives that the new division planned to
undertake, such as establishing regional enforcement teams, a fusion center
for intelligence sharing, and a central undercover warehouse:
Regional Enforcement Teams – The new division hoped to add
Intelligence Research Specialists, Financial Investigators, a liaison
with the tobacco industry, and Special Agents and Industry
57
Thirty-two of those investigations were conducted in one ATF field division’s
jurisdiction, and 29 investigations took place in a second ATF field division’s jurisdiction.
The remaining 25 investigations were spread over the 9 other ATF field divisions.
U.S. Department of Justice 32
Office of the Inspector General
Evaluation and Inspections Division
Operations Investigators to create Regional Enforcement Teams.
The Special Agents on the teams were to be experienced in
investigating alcohol or tobacco diversion and the teams were to be
deployed to field divisions that need assistance in diversion
investigations. Special Agents initiating diversion investigations
could call on the regional teams for assistance and investigative
guidance. ATF officials said the teams would also have helped
those field divisions that need additional agent resources for
diversion investigations.
Fusion Center – The new division intended to establish a fusion
center to centralize information and intelligence on ATF alcohol and
tobacco diversion investigations and to facilitate information
sharing among ATF agents across the nation. The fusion center
also was to have provided ATF with a national perspective on
diversion investigations.
Central Undercover Warehouse – In addition, ATF hoped the new
division would develop a central undercover warehouse to deal
directly with cigarette suppliers, wholesalers, and tobacco
companies and to ship the product to the individual field divisions
conducting investigations. Under such a plan, ATF said it could
increase the security of the undercover operations in the field by
providing this buffer between the commercial entities and the
investigations.
As of August 2009, none of the initiatives had been implemented.
ATF told us that it is working with the Department to draft a budget request
for FY 2011 that includes additional funds and positions for the ATDD, but
the request will not be as ambitious as the FY 2010 budget request given
that it was rejected by the Office of Management and Budget. Additionally,
ATF will pursue funding for the ATDD through the Department’s Asset
Forfeiture Fund.
U.S. Department of Justice 33
Office of the Inspector General
Evaluation and Inspections Division
U.S. Department of Justice
Office of the Inspector General
Evaluation and Inspections Division
34
CONCLUSION AND RECOMMENDATIONS
Tobacco diversion is a crime that is growing increasingly lucrative,
results in the loss of billions of U.S. tax dollars, and has been used to fund
other more violent crimes. However, because of a lack of resources, ATF has
not put a priority on its alcohol and tobacco diversion mission area
compared with its firearms, arson, and explosives responsibilities. From
FY 2004 through FY 2008, alcohol and tobacco diversion investigations
made up less than 1 percent of ATF’s total caseload, and the Alcohol and
Tobacco Diversion Program represented only 2 percent of ATF’s total budget.
However, in the same time period the value of seizures from ATF’s tobacco
diversion cases made up 46 percent (approximately $106 million) of the total
value of seizures (approximately $230 million) from all types of ATF
investigations.
While we recognize that ATF may not be able to assign significant new
resources to the diversion problem due to its limited resources and other
competing priorities, we nevertheless found that ATF could improve its
diversion program without an infusion of resources. We found that
ATF’s diversion efforts are ad hoc because there is no strong national
program for diversion enforcement and ATF lacks a clear understanding of
the scope of diversion activity across its field divisions. Moreover, ATF
headquarters does not fully support the field divisions’ diversion
investigations. In addition, ATF has no systematic method to share
intelligence or information specifically about diversion between the field and
headquarters, which results in ATF’s lack of knowledge of the overall level of
diversion activity. ATF should ensure that the field and headquarters are
communicating on diversion issues and that diversion investigation
intelligence is shared across the agency and with state and local tax and law
enforcement agencies. Further, the newly created Alcohol and Tobacco
Diversion Division (ATDD) should serve as the focus for coordination and
communication of diversion-related intelligence. Further, we believe that
without an understanding of the scope of the problem, ATF cannot
strategically address diversion crime and optimize its limited investigative
resources.
Although certain field divisions we reviewed were pursuing tobacco
diversion cases with success, other divisions had little to no enforcement
activity in tobacco diversion. However, half of these field divisions did not
know the level of diversion activity in their jurisdictions. Also, some of the
field divisions that had large-scale, long-term, complex undercover tobacco
diversion cases could not fully support the investigations with needed
U.S. Department of Justice 35
Office of the Inspector General
Evaluation and Inspections Division
Special Agent resources. This resulted in an uneven approach to reducing
diversion crimes across ATF.
ATF has requested, but not received, additional funding for the ATDD
and accompanying initiatives. While the creation of the division and an
increased emphasis on alcohol and tobacco diversion are positive signs that
ATF recognizes that this mission area needs attention, these initiatives were
not implemented because additional funding in FY 2010 was not provided.
We believe that it is important for ATF to pursue funding for these
initiatives, but we understand that such funding may not materialize
because of the Department’s stronger emphasis on violent crime associated
with guns, explosives, and arson. We do not foresee a change in this trend
in the near term in light of ATF’s responsibilities for firearms and arson and
explosives investigations. However, we believe ATF nevertheless could
accomplish incremental improvements in its management of the diversion
mission even without an infusion of funding and an increased staffing level.
Therefore, we recommend that ATF:
1. assess the scope of the diversion problem in each field division and
across the country in developing its enforcement strategy and
resource allocation plan,
2. consider re-instituting the assignment of Program Coordinator
responsibilities to an agent in each field division for alcohol and
tobacco diversion issues, and
3. establish within the Alcohol and Tobacco Diversion Division a
formal point-of-contact position for the field divisions.
U.S. Department of Justice 36
Office of the Inspector General
Evaluation and Inspections Division
APPENDIX I: RESPONSIBILITIES OF THE ALCOHOL AND TOBACCO
ENFORCEMENT BRANCH
The responsibilities of the Alcohol and Tobacco Enforcement Branch
were subsumed into the new Alcohol and Tobacco Diversion Division, which
was established in January 2009.
Position Number Duties
Branch Chief 1 The Special Agent in Charge of the
Branch has supervisory authority over
the Branch. The position is responsible
for planning, directing, coordinating, and
evaluating all Branch programs and
providing technical assistance on Branch
issues to ATF management.
Program Manager 1 Responsible for policy development,
technical assistance on alcohol and
tobacco diversion investigations to the
field, and liaison and coordination with
outside agencies. Also acted as manager
when Branch Chief position was vacant.
Project Officer 1 Responsible for updating ATF Orders on
tobacco investigations, drafting a guide
for Special Agents to use when
conducting tobacco investigations,
updating ATEB presentations, and acting
as a point-of-contact for an international
law enforcement agency interested in how
ATF investigates diversion.
U.S. Department of Justice 37
Office of the Inspector General
Evaluation and Inspections Division
Position Number Duties
Program Analyst 2 Program Analyst #1 = Responsible for
liaison with outside agencies and law
enforcement agencies, providing support
to the field, providing intelligence to the
field, maintaining a database of requests
to the ATEB for services, and provide
information to OSII for information papers
(related to diversion).
Program Analyst #2 = Responsible for
assisting Branch Chief and Program
Analyst #1, processing requests from the
field to check Treasury databases, and
responding to inquiries from the public or
outside agencies.
ATF Specialist 2 ATF Specialist #1 = Responsible for
operating the “fronting” program,
processes requests for tobacco products
from the field, liaison with the tobacco
companies for the fronting program and
the general purchase of tobacco products,
and responding to inquiries from the
public or outside agencies.
ATF Specialist #2 = Responsible for
conducting database checks, analyzing
results of checks, creating link analysis
charts, conducting financial analysis, and
conducting general intelligence analysis.
Investigative 1 Responsible for conducting database
Assistant checks, responding to requests for
information from the field, and tracking
data on diversion investigations.
Source: ATF position descriptions and interviews.
U.S. Department of Justice 38
Office of the Inspector General
Evaluation and Inspections Division
APPENDIX II: INTERVIEWS CONDUCTED BY THE OIG
Organization Position
ATF, headquarters Assistant Director, Field Operations
Deputy Assistant Director, Field Operations
Assistant Director, Enforcement Programs and
Services
Chief, Field Intelligence Division, OSII
Intelligence Research Specialist, OSII (2)
Chief, Financial Investigation Services Division
Deputy Division Chief, Financial Investigation
Services Division
Associate General Counsel
Resident Agent in Charge, Case Management
Branch, Field Management Staff
Branch Chief, ATEB
Program Manager, ATEB
Project Officer, ATEB
Program Analyst, ATEB (2)
ATF Specialist, ATEB (2)
Investigative Assistant, ATEB
Program Analyst, Field Operations, International
Affairs Office
Branch Chief, National Field Office Case Information
System Branch
Deputy Director, Laboratory Services, ATF National
Laboratory
Laboratory Chief, Forensic Science Laboratory, ATF
National Laboratory
Chemist, ATF National Laboratory
ATF, field divisions Special Agent in Charge (8)
and field offices Assistant Special Agent in Charge (4)
Resident Agent in Charge (3)
Chief Division Counsel
Group Supervisor (7)
Special Agent (10)
Intelligence Research Specialist (4)
Forensic Auditor (4)
Asset Forfeiture Special Investigator (3)
U.S. Department of Justice
Office of the Inspector General
Evaluation and Inspections Division
39
Organization Position
Other federal
agencies,
Deputy Chief, Program Unit, Asset Forfeiture and
Money Laundering Section, Criminal Division
headquarters Supervisory Special Agent, Criminal Investigative
Division, Federal Bureau of Investigation (FBI)
Assistant Section Chief, Criminal Investigative
Division, FBI
Deputy Director, Immigration and Customs
Enforcement (ICE), Department of Homeland
Security (DHS)
National Program Manager, ICE , DHS
Assistant Administrator, Field Operations, Alcohol
and Tobacco Trade and Tax Bureau (TTB),
Department of the Treasury
Division Chief, Trade Analyst and Enforcement
Division, TTB, Department of the Treasury
Director of the Office of Inspection, TTB,
Department of the Treasury
Director, Financial Crimes, Criminal Investigations,
Internal Revenue Service (IRS), Department of the
Treasury
Other federal
agencies, field
Chief of General Crimes Unit, United States
Attorney’s Office (USAO)
Chief of National Security Unit, USAO
Assistant U.S. Attorney, USAO (4)
Supervisory Special Agent, FBI
Special Agent, FBI
Special Agent, IRS, Department of the Treasury (2)
Chief, Border Sector, Customs and Border
Protection (CBP), DHS
Special Agent, ICE, DHS
Other State tax enforcement official (7)
State and local law enforcement official (7)
Tobacco company security official (3)
U.S. Department of Justice
Office of the Inspector General
Evaluation and Inspections Division
40
APPENDIX III: THE BUREAU OF ALCOHOL, TOBACCO, FIREARMS
AND EXPLOSIVES’ RESPONSE
u.s. Dell"rillIDnt or Justice
Bureau of Alcd!ol, Tobacco,
Hrerums aru:1 E,.pl,,"iv,es
Citfice Director
1 7 2009
Mr. Michael n Gulledge
Asslstant General
for and InsF,ecti,ollS
United Slates Depaltment of Justice
1425 New York Avenue, N.W
Slute 6100
Washington, DC 20530
The B'tlfeau of Alcohol, Firearms and Explosives appreciates-the opportunity to
review and comment on the Office ofth. Inspector General's (OIG) draft report entitled, '"The
Bureau of Alcohol. Tobacco, Fireanns and Eff(llts b Prevent tbe Diversion of
Tobacco, '> We apprecillte the professionalism exhibited your statT in working with our
rCl",,,;entatives throu.gh'Dut this audit process.
DIG's Recommendation N!!mber t: We recommend that ATF assesses the of the
dIversion problem in f<1ch i'ield division and across the country in developing its erdim:ernel"ll
strategy and resource allocation plan.
A Tr" concurs with this recOmmt'l1dalion and completed work
;:; reconuncudatiQu. ATF's Alcohol and Tobaooo Diversioll Division (A mD) is
cU1Terltlv w(!fking em the of a project, assisted by the Office ofStrategk
and Information. purPQse of this is to review all significllnt open
cases across the country ATF's goal is to the ,rope and complexity of tileS