An unprecedented increase in tobacco taxes this year has made cigarette smuggling one of the most profitable illegal enterprises in America.

        As the new taxes push the cost of cigarettes higher in Ohio and other northern states, smugglers are taking advantage by shipping in truckloads of cheaper cigarettes from southern states, where tax rates are much lower.

Cigarette packs show tax stamps from various states.

        The scheme is as simple as it is lucrative: Buy cigarettes in low-tax states and sell them for much more in high-tax states.

        Because smugglers don't pay the higher taxes, they can sell their packs for less than legal cigarettes and still pocket a tidy profit. Authorities say those profits totaled as much as $2 billion last year, with at least some of that money going to organized crime families, the Russian mob and even Middle East terrorists.

        Now, because of the big jump in tax rates this spring, the smugglers' profit margins are two to three times higher than they were a year ago.

        “It's not unusual for someone to buy $100,000 in cigarettes and turn that into $150,000 or $160,000,” said Chris Tardio, agent in charge of the Bureau of Alcohol, Tobacco and Firearms (ATF) in Cincinnati. “It's mind-staggering how profitable it is.”

        Because Cincinnati is perched on the border of the high-tax northern states and the low-tax southern states, the city is considered a gateway for smugglers looking to cash in on black-market cigarettes. Mr. Tardio said smugglers routinely travel the two major north-south routes that cut through the city, Interstates 75 and 71.

        “If it's going north,” he said, “you can almost guarantee it's going through Cincinnati.”

        Mr. Tardio and other law enforcement officials suspect a growing number of smugglers already are passing through town. Increases in tobacco taxes almost always have led to more smuggling, and the tax increases this year are higher and more widespread than ever.

        Nineteen states either have boosted tobacco taxes or are considering an increase. Ohio went from 31 cents a pack to 55, Indiana from 40 cents to 98, Pennsylvania from 69 cents to $1, and New York from 39 cents to $1.50.

INFOGRAPHIC

• Cigarette taxes rise in many states

        Those increases created an even wider divide between northern states and tobacco-producing states in the south, where lawmakers have been reluctant to raise taxes on one of their biggest cash crops. Kentucky's tax is only 3 cents, Virginia's is 2.5 cents and North Carolina's is 5 cents.

        When smugglers look at those numbers, they see a potential gold mine.

        “Obviously, it creates opportunities to make some money illegally,” said Gary Gudmundson, spokesman for the Ohio Department of Taxation. “There will undoubtedly be people who see it as an opportunity they can't pass up.”

        Some smugglers already are seizing that opportunity, even though the higher taxes have been in place for just a few months.

        ATF records show the agency has launched 97 “major” tobacco smuggling investigations in the United States so far this year, up from 78 investigations in all of 2001. Five years ago, the agency had only six major smuggling investigations.

        “It's going to get big,” said Russ Curry, an ATF agent in Cincinnati who has worked several tobacco smuggling cases. “The incentive is there.”

High reward, low risk

        Simple math shows why that incentive has grown as taxes have risen.

        If smugglers buy cigarettes in Kentucky, they pay a tax of only 3 cents a pack. If they then drive to Ohio, where the tax is 55 cents, they can sell their packs at a 40-cent markup and still beat Ohio's legal price by 15 cents.

        That 37-cent profit on every pack adds up in a hurry if the smuggler sells dozens or even hundreds of cases, each of which contains 1,200 packs.

        “It's damn near more profitable than marijuana,” Mr. Tardio said.

        It's also a lot less risky. Unlike drug trafficking, which can lead to long prison sentences, cigarette smuggling usually carries a possible sentence of no more than five years. Often, the punishment is a fine and the loss of the cigarettes.

        “To them, that's just the price of doing business,” Mr. Curry said of the smugglers. “It's not like they're running dope. The penalties are not as severe and the risks are not as bad.”

        But setting up a major cigarette smuggling business isn't easy. Big-time smugglers must be able to buy large quantities of cigarettes, produce counterfeit tax stamps, move their merchandise across state lines and distribute it to dealers.

        In some ways, the operation is more complicated than drug trafficking. Illegal drugs are sold by dealers on the street, but illegal cigarettes have to find their way back to legitimate businesses, such as convenience stores and gas stations.

        One such operation, based in Kentucky, deprived Michigan of nearly $50 million in tax revenues in 1996 and 1997, authorities say. The smugglers bought their cigarettes wholesale in the Lexington area and shipped them north through Ohio in vans and U-Hauls.

        When authorities broke up the operation, they found computer spreadsheets that revealed as many as 10 different groups working within the same smuggling organization. Each of those groups moved 30 to 60 cases of cigarettes at a time.

        “You actually have to set up a distribution network,” said John D'Angelo, an ATF spokesman in Washington, D.C. “It requires a great deal of organization.”

        And that's where organized crime comes in. Most people who break the tax laws are strictly small time, such as a guy who picks up a few cartons in Fort Thomas on his way home to Blue Ash. But the big players often have ties to large crime syndicates.

        Mr. Curry said the Russian and Canadian mafias, as well as organized crime families in the United States, have been active over the years in cigarette smuggling.

        A recent investigation in North Carolina, dubbed “Operation Smokescreen,” revealed that at least one major smuggling operation had ties to Hezbollah, the Lebanese militia group that the U.S. government considers a terrorist organization. Two of the 18 defendants in the case were convicted last month of conspiring to aid Middle Eastern terrorists.

        The aid, authorities say, came in the form of profits from a multimillion- dollar cigarette smuggling operation.

Police respond

        The North Carolina case suggests the stakes are getting higher for law enforcement.

        With the disparity in tax rates pushing profits higher, smugglers may soon find they have more money than ever to bankroll a wide range of criminal activity, from drug trafficking to terrorism.

        Authorities in Ohio and Greater Cincinnati hope to respond to the threat later this year with new training programs for local police and more emphasis on investigating smuggling operations.

        The Ohio Department of Taxation will sponsor training seminars across the state this year for law enforcement officers, including Cincinnati Police. The department also plans to hire more enforcement officers and to increase monitoring of border traffic, especially in Cincinnati.

        “Cincinnati is an epicenter of smuggling,” Mr. Gudmundson said.

        The city is not necessarily the final destination for smugglers because people looking for cheap cigarettes here can just drive across the river themselves. Although that's technically a misdemeanor offense, state authorities rarely prosecute unless they suspect the buyer is selling the cigarettes for a profit in Ohio.

        For the most part, police focus on the major smugglers. And they know many of them pass through Cincinnati on their way north. “Ohio is kind of a hub for travel throughout the eastern United States, and that includes smugglers,” said Sgt. Rick Zwayar, spokesman for the Ohio State Highway Patrol.

        But no matter what they do to fight it, authorities know the lure of smuggling has never been greater.

        “There's more money to be made,” Mr. D'Angelo said. “And they are in it for the money.”

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