Purchasers and Exporters of Duty- Free Cigarettes at the Southwest Border Are Subject to U.S. and Mexican Requirements; Agencies Identified Schemes and Practices That Facilitate Illicit Trade

Duty-free stores may sell tax-exempt cigarettes in any quantity to  passengers departing the United States for Mexico at a port on the land  border; agencies have identified schemes and practices associated with  duty-free sales that are used to evade U.S. and Mexican taxes. U.S.  regulations require duty-free stores to have procedures to provide  reasonable assurance that duty-free merchandise sold will be exported  and requires the exporter to report information on the export of  commercial cargo, which CBP considers to be transactions valued at  more than $2,500. Census data indicate that about 18,500 such  transactions occurred from 2010 through 2015 at duty-free stores on the  southwest border. U.S.  agencies identified three schemes used to evade cigarette-related taxes  and other legal requirements in the United States and Mexico:  (1) diverting cigarettes from the store directly into U.S. commerce; (2)  smuggling duty-free cigarettes into Mexico through U.S. ports of entry by  concealing them, while potentially also bribing Mexican customs officials  to evade payment of Mexican taxes; and (3) smuggling duty-free  cigarettes back into the United States after first smuggling them into  Mexico. Smuggling of Duty- Free Cigarettes across the Southwest Border Is Reportedly Linked to Organized Crime and Supplies the Illicit Tobacco Market in Mexico; U.S. Efforts to Counter This Illicit Activity Face Challenges

U.S. agency officials said that some smuggling of duty-free cigarettes  across the southwest border has links to organized crime, supplies the  illicit tobacco market in Mexico, and poses oversight challenges. ICE  officials told us that transnational criminal organizations use smuggled,  duty-free cigarettes to launder money and generate revenue. U.S. Officials’ Efforts to Counter Illicit Trade in Duty-Free Cigarettes Face Challenges

			Agencies Cite the Ability to Buy Unlimited Quantities of Duty- Free Cigarettes at the U.S. Land Border as a Factor That Facilitates Smuggling

CBP and ICE officials in Laredo said that the ability to buy unlimited  quantities of duty-free cigarettes at the land border facilitates large  shipments of these goods to be clandestinely smuggled into Mexico. Selected Export Data Reported by Duty- Free Stores Show Irregularities, Which CBP Has Taken Some Steps to Address

		Multiple Duty-Free Stores Are Filing Some Noncompliant Information on Cigarette Exports

According to CBP, in many cases duty-free stores on the southwest  border are filing some noncompliant information that they are required to  report on cigarette exports valued at more than $2,500. According to CBP officials, this duty-free store operator continues to  identify itself as the exporter and to use its postdeparture filing privilege. Without accurate data, including  correct and complete information on the exporter, agencies may lack the  information they need to enhance their enforcement and intelligence  efforts related to the illicit trade of duty-free cigarettes on the southwest  border. Recommendation for Agency Action

The Commissioner of the U.S. Customs and Border Protection should  take steps to strengthen compliance with export reporting requirements  related to duty-free cigarette sales on the southwest border, such as  issuing guidance to all duty-free store operators. Appendix I: Objectives, Scope, and Methodology

This report examines (1) requirements that govern the lawful sale and  export of cigarettes from duty-free stores on the southwest border and  schemes for illicit trade in such cigarettes that agencies identified, (2)  U.S. agency observations about these duty-free cigarette exports and  efforts to counter illicit trade, and (3) the extent to which selected cigarette  transaction data submitted by duty-free stores indicate compliance issues  with reporting requirements. We also interviewed officials from the Department of  Commerce’s U.S. Census Bureau (Census); the Department of  Homeland Security’s U.S. Customs and Border Protection (CBP) and  U.S. Immigration and Customs Enforcement (ICE); the Department of  Justice’s Bureau of Alcohol, Tobacco, Firearms, and Explosives; the  Department of the Treasury’s Alcohol and Tobacco Tax and Trade  Bureau; and tax-collection officials from the state of California. We spoke with U.S. agency officials in Nogales,  Arizona, and in the Washington, D.C., area.
Why GAO Did This Study

Since the 1970s, U.S. agencies have recognized that high-volume cigarette sales at duty-free stores near the U.S.–Mexico land border, although lawful, could be related to illicit activity. In 1988, U.S. law limited the quantity of duty-free tobacco products an individual can purchase at stores located in airports, restricting the sale of tobacco products to quantities consistent with personal use. This requirement, however, does not apply to land border duty-free stores.
GAO was asked to review information on sales of cigarettes at duty-free stores along the southwest border. CBP identified 88 such stores and warehouses. This report describes (1) requirements that govern the lawful sale and export of cigarettes from duty-free stores on the southwest border and schemes for illicit trade in such cigarettes, (2) U.S. agency observations about these exports and efforts to counter illicit trade, (3) the extent to which selected cigarette transaction data submitted by duty-free stores indicate compliance issues. GAO analyzed Census data on these exports; reviewed CBP, ICE, and Department of the Treasury documents; and interviewed agency officials in Washington, D.C., and in several ports along the southwest border, including Laredo, Texas, and the San Diego, California, area.

What GAO Found

Duty-free stores at the southwest border may sell tax-exempt cigarettes in any quantity to passengers departing the United States for Mexico; agencies have identified schemes associated with duty-free cigarette sales used to evade U.S. and Mexican taxes. U.S. Customs and Border Protection (CBP), an agency within the Department of Homeland Security (DHS), regulates duty-free stores. U.S. regulations require the stores to have procedures to provide reasonable assurance of export of cigarettes and the exporter to report export information on transactions valued at over $2,500. U.S. Census Bureau (Census) data show that about 18,500 such transactions involving cigarettes occurred from 2010 to 2015. According to information from U.S. and Mexican officials, the Mexican government limits the amount of duty-free cigarettes that can be brought into Mexico (see figure). U.S. agencies identified three schemes to evade U.S. and Mexican cigarette-related tax and other laws: (1) diversion from a duty-free store into U.S. commerce; (2) smuggling into Mexico through U.S. ports; and (3) smuggling back into the United States after export to Mexico.
U.S. agency officials said that some smuggling of duty-free cigarettes across the southwest border has links to organized crime, supplies the illicit tobacco market in Mexico, and poses oversight and enforcement challenges. U.S. Immigration and Customs Enforcement (ICE) officials said they have identified links between the smuggling of large quantities of duty-free cigarettes and transnational criminal organizations that use the smuggled cigarettes to launder money and generate revenue. Inexpensive cigarettes made in the United States are part of the trade in duty-free cigarettes along the southwest border, including brands that a Mexican official stated are prohibited for sale in Mexico. U.S. officials reported that their efforts to counter the illicit trade in duty-free cigarettes face challenges, primarily due to the ability to buy unlimited quantities of duty-free cigarettes at the land border.
According to CBP, in many cases, duty-free stores on the southwest border are filing noncompliant information that they are required to report on cigarette exports valued at more than $2,500. For example, officials had compliance concerns with filings in which stores identify themselves, and not the purchaser, as the exporter. CBP and Census have met with representatives of one of the largest operators of duty-free stores on the southwest border to clarify regulatory requirements. However, CBP officials said that this duty-free store operator continues to make incorrect filings. CBP has not issued guidance to all operators to clarify the correct procedure. Without accurate export data, agencies may lack the information they need to enhance their enforcement and intelligence efforts.

What GAO Recommends

CBP should take steps to strengthen compliance with export reporting requirements for duty-free cigarette sales on the southwest border, such as issuing guidance to all duty-free store operators. DHS agreed and noted CBP plans to address the recommendation.