How Altria Is Winnowing Out Fake Marlboros

The tobacco giant's private cops are going to new lengths to stop contraband smokes

Thorne-Belgand, Altria's director of brand integrity, recently supervised a search for counterfeit cigarettes at Subrina Mini Mart Ethan Hill

By Nanette Byrnes

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On a clear February morning, a team of inspectors marches into the Subrina Mini Mart in the working-class Queens (N.Y.) neighborhood of Woodhaven. The shelves are stacked with instant noodles, Lysol, canned beans, and, of course, cigarettes. The clerk looks nervous.

The inspectors, employees of a private-investigation firm hired by tobacco giant Altria (MO), are searching for counterfeit packs of Marlboros and any that have slipped past New York tax authorities. Three times over the past year this store allegedly sold fake smokes to an undercover agent employed by the Richmond (Va.)-based manufacturer. Altria sued the Mini Mart, one of 35 such suits it has filed in the past 10 months in New York and New Jersey. A federal judge in Brooklyn issued an order allowing the company to inspect the Woodhaven store and a number of others in the area.

After 20 minutes the Altria squad finds no fakes. Of 30 packs of Marlboro, several bear apparently bogus tax markings, explains Michael Thorne-Begland, Altria's director of brand integrity, who supervised the search. The markings indicate that some of the suspect packs probably were shipped from a low-tax state and stamped to look as if they were originally intended for New York, a high-tax jurisdiction.

Altria says it cares about tax dodging because the practice hurts full-price retailers that have signed deals to promote Marlboro—an important form of marketing in an era when most cigarette advertising is banned. Black market activity also exacerbates a cycle of tax shortfalls leading to higher rates. If taxes rise, some people are more prone to quit smoking; that cuts into Altria's bottom line.

The company can't enforce tax laws on its own, so it passes evidence it gathers to law enforcement officials. "What we want is the message out: Don't sell this," says Thorne-Begland. In a phone interview later, Mini Mart owner Miah Mahnan says he obeys the law and stocks only above-board products.

Cigarette smuggling is booming, in part because New York and 21 other states have raised cigarette excise taxes in recent years. On top of that, the U.S. government increased the federal tax on cigarettes last year by 159%, to $1.01 per pack. A pack now typically sells for about $10 in New York City, more than double what it cost 10 years ago, and the state is considering yet another excise increase.

The high levies, meant to help close huge budget gaps and discourage smoking, have had the unintended side effect of spurring the illicit market. One passenger car filled with Marl-boros bought in low-tax Virginia and driven up Interstate 95 to resell in New York can yield more than $30,000 in profit, says Crisanto Perez, a senior official with the U.S. Bureau of Alcohol, Tobacco, Firearms, & Explosives.

In Asia, Altria employees have begun to build an intelligence network to combat the counterfeiting problem. The company cites academic research estimating that factories in China manufacture 400 billion knock-off cigarettes a year. Altria has hired detectives to try to infiltrate the international distributors that sell Chinese fakes to mom-and-pop shops in the U.S. The company says it will funnel the information it gathers to government authorities.

Back in the U.S., Altria has 21 employees in its brand integrity unit, which it created in 2002. They are assisted by outside contractors hired nationwide. The company even has given nearly $2 million over the past eight years to cash-strapped public police departments in such places as Los Angeles and Suffolk County, N.Y., to help fund contraband investigations.

Tax collectors have their own concerns. New York currently loses $1 billion a year because of cigarette tax cheating, according to a 2009 study by the New York Association of Convenience Stores. Across the country, tobacco excise revenue lost annually to smuggling totals $5 billion, the U.S. Justice Dept.'s Inspector General concluded last year.

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