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Smuggling cases bring in big money

Asset Forfeiture Money Fiscal Year-End Balances

Shenandoah County:
Federal FY2013: $3,530,229
State FY2013 :$14,882
Federal FY2012: $3,503,053
State FY2012: $11,058
Federal FY2011: $3,628,982
State FY2011: $9,023


Frederick County
Federal FY2013: $26,725
State FY2013: $9,402
Federal FY2012: $25,840
State FY2012: $4,180
Federal FY2011: $8,363
State FY2011: $5,310

Warren County
Federal/State/Local FY2013: $51,216
Federal/State/Local FY2012: $$61,845
Federal/State/Local FY2011: $48,207

Inspector General's Audit

View the September 2013 Office of the Inspector General audit of the Bureau of Alcohol, Tobacco, Firearms and Explosives' Use of Income-Generating, Undercover Operations, Audit Report 13-36 at http://www.justice.gov/oig/reports/atf.htm

Cigarette busts have proven to be a financial boon for Sheriff's Office

By Joe Beck

A trio of hearings Thursday in Shenandoah County Circuit Court provided a glimpse of the Shenandoah County Sheriff's Office's participation in a series of vast but little known undercover operations targeting black market cigarette transactions along much of the East Coast.

The hometowns of the defendants -- New York City for two of them and Elizabeth, N.J., for the other -- and the more than 60 total charges they face hint at the scale of the investigations conducted over at least four years with law enforcement agencies ranging from the federal Bureau of Alcohol, Tobacco, Firearms and Explosives to the Kings County District Attorney's Office in Brooklyn, N.Y.

The transactions between undercover law enforcement officials and suspected cigarette bootleggers have involved eye-popping sums of money -- more than $20 million in one case that was prosecuted in U.S. District Court in Harrisonburg in 2012.

The cigarette cases, combined with a massive drug bust in Edinburg in 2007, have proven to be a financial bonanza for the Sheriff's Office. Asset forfeiture records from the state and federal governments show the Sheriff's Office has reaped well over $4 million in the last three years as a result of cash and property seized in law enforcement actions against criminals involved in drug trafficking and illegal cigarette sales.

The Shenandoah County Sheriff's Office asset forfeiture funds are at least 70 times the amounts found in the same funds for the sheriff's offices in Frederick and Warren counties. Records from the U.S. Justice Department also show that Shenandoah County received the top sum of federal asset forfeiture money among all law enforcement agencies in Virginia in 2011 and the second highest sum in 2013.

It is unclear how much of the asset forfeiture money obtained by the Shenandoah County Sheriff's Office since 2010 is a product of its undercover cigarette operations. Sheriff Timothy C. Carter said sorting out the exact sources of money would require a painstaking case by case review.

But one recent case in Pennsylvania illustrates the significant sums of money that can be available to law enforcement agencies in a successful prosecution of illegal cigarette trafficking. It also shows the leading role the Shenandoah County Sheriff's Office has played in the sprawling multi-state, multi-agency war on cigarette trafficking.

The U.S. Attorney's Office for the middle district of Pennsylvania awarded the Sheriff's Office $847,390 in October 2013 as a result of its participation in an investigation involving eight other state and local law enforcement agencies. The Sheriff's Office was the only agency outside of Pennsylvania to participate in the investigation, and the $847,390 it received was more than three times the second highest amount, which went to several local law enforcement agencies in the Scranton, Pa., area.

The amount also dwarfs the $27,563 the Frederick County Sheriff's Office received from asset forfeitures in fiscal year 2013 and the $51,216 listed as the balance in the Warren County Sheriff's Office asset forfeiture fund as of June 30, 2013.


A political issue

The existence of the undercover investigations into illegal cigarette sales emerged as a political issue earlier this month when Strasburg Police Chief Tim Sutherly announced he was forming an exploratory committee in preparation for a possible campaign against Carter in 2015.

Sutherly accused Carter of committing more personnel to the multi-state campaign against illegal cigarette trafficking than to drug interdiction in Shenandoah County communities.

In later remarks, Sutherly cited the growing ranks of heroin addicts and overdose deaths as a more urgent priority for local enforcement than undercover stings aimed at luring out-of-state cigarette smugglers into the Northern Shenandoah Valley to commit crimes.

Sutherly also questioned the transparency and oversight of massive undercover operations involving millions of dollars passing between law enforcement officials and suspected criminals.


How they work

Undercover cigarette operations often reverse the common roles played by law enforcement officials and suspects in sting operations mounted to arrest drug dealers.

In a drug sale, a law enforcement official will pose as a buyer or supervise a confidential informant who makes the purchase in order to gather evidence against a suspected dealer.

A written opinion from former Virginia Attorney General Kenneth Cuccinelli describes the workings of common cigarette stings. The opinion was written in 2013 in reply to a query about a cigarette smuggling investigation elsewhere in the state.

In such operations, a law enforcement official sells untaxed cigarettes by the hundreds or thousands of cartons to a buyer who is being targeted for eventual arrest. Cigarettes are often sold to smugglers through a so-called "churning" operation, which involves the creation of a dummy business. Police use the fictitious business to open bank accounts, obtain credit cards and lease property to conduct their operations. The proceeds from the illicit transactions are then plowed back into the business to pay for expenses resulting from the undercover operation. Any money left over is supposed to be deposited in a bank account to pay for more cigarettes and other expenses related to future transactions.

Interviews with four current or former law enforcement officers in the area found they shared some or all of Sutherly's worries about the targeting of illegal cigarette sales. All of them commented on condition they remain anonymous out of concern their remarks would cause them problems on or off the job.

"It's highly questionable for law enforcement to be involved in what a lot of people would deem to be a shady operation," one of them said.

Sheriff Robert Williamson of Frederick County and Sheriff Daniel McEathron of Warren County said they lacked detailed knowledge of Shenandoah County's cigarette smuggling investigations and declined to comment on them.

Williamson said the black market in cigarettes deserves serious attention from law enforcement, adding that he believed "there are ties to organized crime and terrorism."

But Williamson also said heroin interdiction is the main priority in his county, where three people have died from overdoses in the last month alone.

"Nothing takes priority over human life in my book," Williamson said.

McEathron said cigarette smuggling has played no role in his agency's investigations.

"In order to do those kinds of operations, you have to go across state and county lines," McEathron said. "We're consumed enough with my agents that are assigned to the drug and gang task forces and we concentrate on those crimes in particular.

"I haven't seen a problem in my jurisdiction where I would put any additional resources into (cigarette sales) as a separate investigation, but that's just me."

The Northern Virginia Daily has obtained documents showing that just one of the cases now in Shenandoah County Circuit Court involved the selling of 52,970 cartons of untaxed cigarettes for a total amount of $1.8 million from July 2011 to January 2013. The cigarettes were allegedly sold during that time to Thaer Khashman, a New York City resident now facing 20 felony counts as a result of the investigation.


Cigarette tax rates

Cigarette smuggling is a product of sharp differences in cigarette tax rates among the states and laws banning the transport and sale of cigarette cartons in large numbers across state lines.

Virginia's cigarette tax of $3 per carton is the second lowest in the nation while mid-Atlantic and New England states impose some of the highest cigarette taxes in the nation, according to a report issued in November by the Virginia State Crime Commission.

"Cigarette smuggling and black market cigarettes have existed for decades but recent tax increases in a number of states have greatly increased the potential profits to be made," the report stated, adding, "this tax differential and the geographical proximity of Virginia to these other states has led to Virginia becoming the primary source state for black market cigarettes."

Enormous profits beckon those willing to take a risk on not being arrested by law enforcement.

For example, the crime commission reported it costs $40 to $45 to buy a carton of premium cigarettes in Richmond and $120 to $150 for the same carton in New York City. The price differential means one car load of 750 cartons smuggled from Virginia to New York City can yield a profit of nearly $43,000, according to the crime commission.

The Tax Foundation, a Washington, D.C., based tax research organization, released a study March 19 that reached conclusions similar to the crime commission's. It found Virginia to have the fourth highest rate of outbound cigarette smuggling among the states.

High cigarette taxes have created what the authors describe as a "price prohibition" that has made cigarette smuggling "both a national problem and a lucrative criminal enterprise."

The crime commission's report declared that allowing cigarette smuggling to go unchecked can lead to a range of consequences beyond cheating high tax states out of a significant source of revenue.

"It is an organized crime issue," the report said of the contraband cigarette trade. "Trafficking hurts all legitimate manufacturers, wholesalers and retailers and leads to an increase in attendant crimes such as credit card fraud, money laundering, burglaries, robberies and homicide (and) murder for hire schemes."


Forfeiture fund

A significant part of the approximately $3.5 million in the Shenandoah County Sheriff's Office asset forfeiture fund listed for fiscal year 2013 is traceable to a $3.5 million sum received from the U.S. Department of Justice in fiscal year 2011, the highest amount for any local law enforcement agency in the state that year. Carter said $1.1 million of the $3.5 million was obtained as the result of a successful drug investigation and prosecution with federal authorities. Part of that money has been carried over to subsequent years.

Carter said much of the remaining money from the $3.5 million in 2011 came from what he described as an open case that he declined to discuss. He cited the need to protect law enforcement personnel, sources and the overall sensitivity of the operations as his reasons for declining to discuss the details of individual cases.

The Sheriff's Office also did well two years later, in fiscal year 2013, when it received $855,911 from the U.S. Department of Justice, the second highest amount among local law enforcement agencies in that year.

The federal government is the source of most of the forfeiture money received by Shenandoah County.

In recent year-end balances for money received from the state show much smaller balances ranging from $9,000 to almost $15,000.

U.S. Treasury Department rules limit what the forfeiture money can be used to buy. Body armor, guns, radios, cell phones and vehicles and other kinds of equipment used in law enforcement operations are examples of permissible uses cited in the guidelines.

The money can also be used to pay for overtime and, under certain conditions, other salary obligations, according to the guidelines.

Carter is required to submit his expenditures from the asset forfeiture funds to the Board of Supervisors for approval. He budgeted $608,927 expenditures in fiscal year 2014. They included $162,506 for four school resource officers; $240,960 for patrol vehicles equipped with cameras and computers; $110,802 for SWAT team equipment, including new rifles; and $36,000 for body cameras.

Carter's budget proposal for fiscal year 2015 includes $706,823 in asset forfeiture funds. Expenditures of $142,827 for school resource officers and $294,432 for patrol vehicles again top the list.

Carter obtained special permission from the U.S. Department of Justice to use the asset forfeiture money for the hiring of the school resource officers. They fell under a category that allows the funds to be used for officers assigned to non-traditional positions in specialized programs, according to a Justice Department letter to Carter.

Carter calls the asset forfeiture funds "a significant benefit to the taxpayers of our county" but strenuously denies conducting undercover operations as a money-making venture.

"We don't work cases for money," Carter said. "Asset forfeiture is a tool that law enforcement can use to dismantle criminal organizations."

The Sheriff's Office each year submits reports to the federal justice and treasury departments summarizing forfeiture money received, earned and spent. The county treasurer is the custodian of the money, which is kept in a separate fund and is subject to an annual review by an independent auditor.

The asset forfeiture program was also subjected recently to a random federal audit, according to Carter's budget memo for fiscal year 2015.


The inspector general's report

The need for such safeguards is illustrated by illegal actions and accusations of mishandled money that have plagued other law enforcement agencies involved in undercover cigarette selling operations. The troubled agencies include the Bureau of Alcohol, Tobacco, Firearms and Explosives, which was a partner of the Sheriff's Office in some early investigations prosecuted in federal court.

An inspector general's report issued late last year delivered a scathing review of the ATF's undercover churning operations. The report identified what it described as "substantial weaknesses" in oversight and management of investigations targeting cigarette traffickers.

Examples cited included auditors' inability to account for 2.1 million cartons of tobacco products that were purchased for use in 20 churning investigations. The report estimated the value of the missing cartons at $127 million.

The report also found "significant issues" with ATF controls over cash flow during investigations.

"Specifically, we are concerned that field division and field office supervisors did not always ensure special agents received authorization prior to using churning funds and did not always receive a detailed description of the use of churned funds," the report said.

The report did not identify any specific investigations or local law enforcement agencies affiliated with the ATF investigations.

In a written reply to the inspector general, ATF Director B. Todd Jones contended that auditors from his own agency had accounted for most of the missing 2.1 million cigarette cartons by using a fuller range of documentation in their review.

Jones said the "the serious findings set forth in the (inspector general's) report do not accurately present the complete picture of ATF today. Under current policy, churning operations are conducted in a manner consistent with the (inspector general's) recommendations and more importantly, in a manner that fulfills ATF's core values of safety and accountability."

Contact staff writer Joe Beck at 540-465-5137 ext. 142, or jbeck@nvdaily.com


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