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Gangs, Terrorists, Mafia Make Huge Profits Selling...Cigarettes

Friday, 25 Feb 2011 | 4:28 PM ET

There's no better example of the law of unintended consequences than cigarette taxes in the United States.

Each state sets its own rate, and the disparity is huge. Missouri's state cigarette tax is 17 cents. It's $4.35 in New York.

What's the unintended consequence? Crime.

According to the Bureau of Alcohol, Tobacco, Firearms and Explosives, the United States loses $5 billion in tax revenue every year from the trafficking of illegal cigarettes. Worldwide, it's a $100 billion problem, and it's the No. 1 economic crime in Europe.

"We haven't outlawed cigarettes yet, but it's taxed to the point where the criminals know they make a lot of money trafficking." -Special Agent, Bureau of Alcohol, Tobacco, Firearms and Explosives, Ashan Benedict

"We liken it to the new prohibition era," Special Agent Ashan Benedict told CNBC for the upcoming documentary Cigarette Wars. "We haven't outlawed cigarettes yet, but it's taxed to the point where the criminals know they make a lot of money trafficking."

The crime has several variations, but it's extremely simple. The most common way: Buy cigarettes in a low-tax state and sell them in a high tax state. The tax disparity is straight profit.

"A carton of cigarettes in Virginia is $30," Benedict said. "In New York City, it can be $90 or more. That's just one carton.

Cigarette Trafficking: A $5 Billion American Business
Each year the U.S. is cheated out of $5 billion dollars in cigarette taxes. Agents of the Bureau of Alcohol, Tobacco and Firearms are on the front lines battling the profitable cigarette smuggling operations.

"You start dealing with hundreds and hundreds of cartons, and folks are making more money selling cigarettes up north than drugs."

One truckload can translate into $1 million in cash.

Historically, the crime is considered a common racket executed by the mafia. But in 2011, the criminals range from gangs to terrorist groups. There are cases of illegal cigarette sales with ties to groups like Hezbollah and the Irish Republican Army.

"We have made cases, notably, the Charlotte Hezbollah case, where a cell out of Lebanon was trafficking cigarettes from North Carolina (a low-tax state) to Michigan (a high-tax state", said Jeff Cohen, a lawyer for the ATF. "They were using the proceeds to buy military armaments in Lebanon."

Albeit rare, those cases demonstrate that it's gone well beyond a mafia trade.

Piet Mall | Getty Images

"The organizations are much more complex involving cigarette trafficking," Cohen said.

But the crime also happens on Main Street ... every day.

CNBC found one such example while following a multi-agency sting operation (ICE, ATF, FBI, local police) in Hampton, Virginia. A local convenience store owner was selling contraband cigarettes that did not have the proper tax stamps. That basically means the taxes weren't paid.

The owner was found guilty on four counts.

Again, the law of unintended consequences comes into play. A government that raises taxes, mainly in an effort to deter smoking. However, it has become so dependent on the tax revenue that law enforcement is going out to get that illicit money back and stop the trade.

"There are inherent contradictions," Cohen admitted. "You're taxing it to finance your programs and allegedly to make sure that people don't smoke.

"And at the same, you're saying, 'Oh, we're going to catch all the bad guys doing this.'"

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  • Shactman joined CNBC in 2007 as a general assignment reporter and fill-in anchor for CNBC's business day programming.