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ATF lost $127 million worth of cigarettes: Report

Mark Schone, NBC News
Wednesday, 25 Sep 2013 | 2:04 PM ET
Stepan Popov | E+ | Getty Images

The federal agency responsible for policing tobacco sales had a "serious lack of oversight" and couldn't provide proper records for $127 million worth of cigarettes used in undercover operations, according to a just released report from the Justice Department's Inspector General.

"(D)ue to inadequate documentation of cigarette inventories, when we reviewed records," said the audit of the Bureau of Alcohol, Tobacco and Firearms, "we were unable to reconcile the disposition of 2.1 million of the more than 9.9 million cartons … purchased for [those] investigations." The report estimated that the retail value of the missing cigarettes was $127 million.

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The report also alleged that local field offices often disregarded guidance about how to conduct undercover "churning" investigations, in which the ATF sold cigarettes to criminal targets, and sometimes "misused the proceeds." In one instance, said the IG's report, a confidential informant was allowed to keep more than $4.9 million of the $5.2 million generated by selling cigarettes as part of a churning operation.

"We found that the more than $4.9 million covered more than just the business expenses related to ATF activity," said the report, "including 100 percent of the confidential informant's total business operating overhead and more than $2.3 million in profit."

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According to the report, the IG's office made 17 separate recommendations to the DOJ and the ATF on how to improve oversight of undercover sales operations. "ATF officials told us that ATF had begun to take corrective actions to address many of the deficiencies we identified," said the report.

In a response to the report, the ATF said it had recognized issues with how its income-generating investigations were conducted in 2011, and that had taken steps to address the problems: "Readers of the report may inaccurately conclude that these historical problems continue to the current day. They do not."

(Read more: NY prosecutors report deal on cigarette trucking)

The ATF also objected to the IG's estimate of the value of the allegedly missing cigarettes. The ATF said it was able to account for 85 percent of the cartons that the IG report couldn't locate, and that it was misleading to use the retail value of the cigarettes to compute their cost, since they were generally sold at wholesale prices to black marketeers. The ATF said that its figures showed that under half a million cigarettes were undocumented, with a wholesale value of $7.3 million.

—By Mark Schone, NBC News