ATF lost track of 2.1 million cartons of cigarettes in sting operations, report finds

September 25, 2013

In another black eye for the beleaguered agency that regulates guns and investigates tobacco trafficking, a new report found that federal agents lost track of 2.1 million cartons of cigarettes and paid an informant more than $4.9 million without requiring him to account for his expenses.

“We found a significant lack of oversight and controls to ensure that cash, cigarettes, equipment and other assets used . . . were accurately tracked, properly safeguarded and protected from misuse,” Michael E. Horowitz, the Justice Department inspector general, said in a 68-page report released Wednesday.

The inspector general’s office examined 20 undercover operations by the Bureau of Alcohol, Tobacco, Firearms and Explosives in which the agency generated $162 million in income as it attempted to build cases against cigarette smugglers. The investigations were conducted from 2006 to 2011.

In 2004, ATF was granted the same authority as that held by the FBI and the Drug Enforcement Administration to use proceeds generated from some investigations to offset operational expenses.

Horowitz said that in one case, which operated without proper ATF approval, approximately $15 million worth of cigarettes were sold undercover in an 18-month period and a confidential informant was allowed to keep more than $4.9 million of the $5.2 million in profit generated without submitting adequate documentation supporting his expenses.

The report said ATF could also not account for an additional 2.1 million of 9.9 million cartons of cigarettes, with a retail value of more than $127 million, that were purchased for the investigations.

ATF spokeswoman Ginger Colbrun said that the inspector general’s numbers are inaccurate. She said ATF has determined that 447,218 cartons were unaccounted for, not 2.1 million, after it conducted a more thorough audit of the documentation.

“The OIG report inaccurately implies ATF cannot account for 2.1 million cartons of cigarettes or that the cigarettes are missing,” Colbrun said. “ATF forensic auditors conducted a comprehensive . . . inventory reconciliation of the 2.1 million cigarette cartons in question. The results of our reconstructive inventory are a more thorough and accurate reading . . . than the figure reached by the OIG audit.”

ATF officials also said the agency has since tightened its guidelines for the kinds of cases that were audited, which the agency calls “churning investigations.”

In his report, Horowitz also said that ATF spent funds in ways that appeared “improper, unnecessary and unreasonable.”

The report of lost cigarettes was not good news for ATF, which has been harshly criticized in recent years by Republican lawmakers for losing thousands of guns.

In its Phoenix-based “Fast and Furious” gun operation, ATF lost track of more than 2,000 guns that investigators were monitoring as they were sold to traffickers suspected of arming Mexican drug cartels. The operation to link guns to a cartel fell apart after some of those guns were found at the scene of a shootout that killed a U.S. Border Patrol agent. That led to an 18-month congressional investigation and a vote to hold Attorney General Eric H. Holder Jr. in contempt.

The latest report gave new ammunition to ATF’s most vocal critics.

“The news that the agency somehow lost $127 million worth of cigarettes alone is unfathomable,” said Rep. Darrell Issa (R-Calif.), chairman of the House Oversight and Government Reform Committee. “Today’s disappointing report reiterates what we already know — that ATF management continues to struggle with its day-to-day operations.”

Although ATF is best known for licensing and regulating gun dealers and investigating crimes involving firearms and explosives, the agency also is responsible for the investigation of illegal trafficking of alcohol and tobacco products.

In past years, smugglers with ties to terrorist groups have acquired millions of dollars from illegal cigarette sales and have funneled cash to organizations such as al-Qaeda and Hezbollah, according to federal law enforcement officials.

Officials said the illegal cigarette trade can generate cash to rival the income from drug trafficking, and low penalties can make it an attractive source of criminal funds.

Cigarette diversion is a simple scheme but difficult to stop, law enforcement officials say. Traffickers purchase large volumes of cigarettes in states where the tax is low, such as Virginia and North Carolina, transport them up Interstate 95 to states such as Pennsylvania, New Jersey and New York, and then sell them at a discount without paying the higher cigarette taxes in those states.

State governments lose more than $5 billion every year in tax revenue as a result of tobacco diversion, according to ATF.

During the period that Horowitz investigated, ATF ran 35 “churning” investigations.

“Churning has been and continues to be an effective tool for ATF in combating the illicit trade in tobacco products with a significant impact on violent crime,” Colbrun said.

But Horowitz found that none of the examined cases met ATF’s policy requirements for approval by the agency’s Undercover Review Committee. In fact, Horowitz found, that committee did not meet at all between February 2005 and January 2012.

ATF officials said they have revised their policies and procedures since that time to address nearly all of the 16 recommendations the inspector general made in his report.

“Under current policy, income-generating undercover operations are subject to detailed and rigorous application, review, approval and oversight mechanisms,” ATF said in its response to the report.

Sari Horwitz covers the Justice Department, after 30 years at the paper where she has been an investigative reporter and covered federal law enforcement, crime, education and social services.
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