The Bureau of Alcohol, Tobacco, Firearms and Explosives sure knows how to live it up! According to a New York Times article, employees of the ATF teamed up with the warehouse of a private tobacco company for the ostensible purpose of fighting cigarette smuggling. But, in short order, the arrangement turned into a slush fund.
On its face, the arrangement made some sense:
The A.T.F. tried setting up front companies to infiltrate smuggling rings, but with limited success. Gangs and cartels were too smart to deal with companies that appeared out of thin air. [Veteran ATF agent Thomas] Lesnak had a solution: Rather than pose as a real company, go into business with an existing one.
So, in 2006 Lesnak convinced Jason Carpenter, a small, Alabama-based tobacco distributor, to open a warehouse in Bristol, Virginia, and sell cigarettes to smugglers. The ATF had no authority to do this, something that the higher-ups in the Bureau would admit after the scheme was exposed. The warehouse did make it easier to catch smugglers. It also made it easier for ATF agents to fund whatever they wanted:
For seven years, [ATF] agents…followed an unwritten policy: If you needed to buy something for one of your cases, do not bother asking Washington. Talk to agents in Bristol, Va., who controlled a multimillion-dollar account unrestricted by Congress or the bureaucracy.
Need a flashy BMW for an undercover operation? Call Bristol.
A vending machine with a hidden camera? Bristol.
Travel expenses? Take this credit card. It’s on Bristol.
It is illegal for government officials to use private money to supplement government accounts. But, in this case, money from the illicit sales was deposited into an account controlled by Carpenter, who was all too eager to share the proceeds with the ATF. And, boy, did they ever share! One agent “steered hundreds of thousands of dollars in real estate, electronics and money to his church and his children’s sports teams.” Money from the warehouse was used to “rent a $21,000 suite at a Nascar race, take a trip to Las Vegas and donate money to the school of one of the agents’ children.” Warehouse employees were given cash tax-free, along with items that came into the warehouse like DVD players and televisions.
Mr. Carpenter and his business partner, Christopher Small, cleaned up nicely in this arrangement, making over $6 million. In 2011, Carpenter sold the warehouse to U.S. Tobacco Cooperative. Yet Carpenter and Small still ran the warehouse and, since no one at the ATF was monitoring them, they came up with a clever, if slightly illegal, scheme. They would sell cartons of cigarettes to the ATF for $3 a carton. When the ATF was done with the cigarettes, Christopher and Small would sell them back to U.S. Tobacco Cooperative for $17 per carton. The proceeds were then deposited in a secret ATF account. Carpenter and Small claim they did this at the ATF’s direction.
Documents uncovered by the Times show that this was not just a few ATF agents run amok. Rather, ATF agents from all across the nation tapped funds from the warehouse.
Alas, all good things, even illegal ones, must come to an end. Once U.S. Tobacco Cooperative learned what was going on, it sent a team of lawyers to the warehouse and seized just about everything. Which leads to the funniest paragraph in the Times story:
Agents were outraged. They believed the company had no right to search its own warehouse. “I was very, very upset about that,” said William C. Duke, one of the agents involved.
The U.S. Department of Justice tried to keep all of this secret. The Times filed suit and forced DoJ to release the pertinent documents. Naturally, no government employee has been fired, let along prosecuted. Perhaps Congress will hold hearings in the not-too-distant future.
Here are a few conclusions to be drawn from this:
- If you want to see accountability, the private sector is far better than the government. U.S. Tobacco Cooperative fired Carpenter and Small and are suing them, saying they defrauded the company of $24 million.
- This is a textbook case of why we need much smaller government. This sort of thing will often happen in government since government employees aren’t spending their own money. Civil service protections make it difficult to fire government employees. Bureaucracies will always protect their own. However, smaller government means there are fewer opportunities for such scams.
- Finally, if cigarette smuggling is such a problem, then perhaps state governments should make it less profitable to do so. As the article notes, Virginia levies a $3 tax on a carton of cigarettes, while New York levies one of $43.50. Guess which state has the much bigger smuggling problem? To reduce smuggling, New York would only have to cut its cigarette tax. Because it probably won’t, smuggling will continue indefinitely.