Published in CSP Daily News March 31, 2014
Alleges racketeering for illegally shipping 80 million contraband cigarettes
ALBANY, N.Y. — New York State Attorney General Eric T. Schneiderman said that his office has filed a $70 million lawsuit against Federal Express Corp. for unlawfully shipping nearly 80 million contraband cigarettes to consumers across the state in violation of federal and state laws. The lawsuit joins and expands upon a complaint filed in December in Manhattan federal court by the City of New York and adds extensive claims of FedEx’s unlawful shipments around the state.
The joint complaint alleges that, between 2006 and 2012, FedEx made nearly 33,000 illegal shipments of cigarettes to consumers in the state of New York, amounting to more than 400,000 cartons of untaxed cigarettes and a direct tax loss to the state of more than $10 million. Each illegal shipment carries a maximum penalty of $5,000.
The shipments were in “clear violation” of an agreement FedEx entered into with the state AG’s Office in 2006, in which it agreed to cease all unlawful cigarette deliveries to consumers both in New York and throughout the country. The lawsuit further alleges that the company engaged in a pattern of racketeering activity with various cigarette retailers to traffic contraband cigarettes in violation of the federal anti-racketeering statute.
“FedEx’s blatant disregard for its longstanding agreement with New York, as well as federal and state law, enabled tens of millions of cheap, untaxed cigarettes to be shipped to New Yorkers,” Schneiderman said. “Not only has FedEx cheated the state out of millions in tax dollars–but many of these cigarettes may have ended up in the hands of teenagers, who are particularly vulnerable to low-priced cigarettes.”
New York City corporation counsel Zachary W. Carter said, “The city is pleased to continue its partnership with Attorney General Schneiderman to eliminate trafficking in bootlegged cigarettes and fight on behalf of New Yorkers to recover millions of dollars in fines and unpaid taxes.”
These shipments by FedEx are prohibited by the federal Contraband Cigarette Trafficking Act (CCTA) and Prevent All Cigarette Trafficking (PACT) Act, as well as by New York State tax and public health laws.
The Attorney General’s investigation and lawsuit is based on documents subpoenaed from FedEx as well as documents received from the federal Bureau of Alcohol, Tobacco, Firearms & Explosives. The documents show that, since 2006, FedEx made thousands of shipments of cigarettes to New York consumers from cigarette vendors in Kentucky, California and Long Island’s Shinnecock Reservation. All the shipments violated New York Public Health Law 1399-ll, which prohibits direct shipments of cigarettes to consumers in the state. In addition, as these cigarettes did not bear New York state or New York City tax stamps, the shipments violated the federal CCTA, which specifically prohibits shipments of 10,000 or more untaxed cigarettes in a jurisdiction where such taxes are required by state or local law.
With multiple violations of the CCTA, FedEx engaged in a pattern of racketeering activity with the various cigarette retailers. Thus, in addition to the tax loss, New York State is entitled to treble damages under the federal Racketeer Influence & Corrupt Organizations Act, also known as the RICO act, amounting to nearly $35 million in penalties.
Because the federal PACT Act requires shippers to affix specified labels identifying the contents as cigarettes and to report all sales into a state, which FedEx did not do, New York is entitled to significant penalties for these violations. Last, the assurance of compliance agreement reached with FedEx in 2006 provides that that company must pay a stipulated penalty of $1000 per violation, amounting to approximately $34 million.
The case is City of New York v. FedEx Ground Package System Inc. et al, U.S. District Court, Southern District of New York