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UNEXPECTED VISIT BY THE FEDS

South Boston News
SoVaNow.com / August 26, 2013
Following a search of the premises Thursday by federal agents, Cherokee Tobacco President Kathy Farley said the company is cooperating with authorities even though Cherokee is in the dark about the nature of the investigation.

“We don’t know what is happening” that would have prompted the federal intervention, said Farley. “We don’t know yet.”

She said Cherokee reopened for business at 5:30 a.m. Friday, the day after the search, and resumed normal operations.

On Thursday, agents with the USDA’s Office of Inspector General and the IRS descended on the Riverdale business office and warehouse of Cherokee and Firebird Manufacturing, which makes cigarettes marketed under the Cherokee brand, and seized business records.

Armed agents surrounded the Cherokee building and reportedly took possession of sales and shipment information on Cherokee cigarettes. Employees who were at work at the time were sent home and the business closed for the day.

The operation spanned much of Thursday, with agents spotted in the mid-afternoon milling about in a small metal hut erected next to the Cherokee building.

One agent with the USDA Inspector General’s office referred inquiries to the U.S. Attorney for the Western District of Virginia. A spokesman for the office, Brian McGinn, was unable to comment on the probe or whether the U.S. Attorney’s office is involved.

He noted that under the federal system, the search warrant authorizing the operation would be sealed by the court that issued it.

Efforts this week to reach the USDA Office of the Inspector General were unsuccessful. It also could not determined if the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosive was involved in the operation, although there were no ATF agents visible from the entrance to the Cherokee plant, where agents staked out their outermost positions. The business is located behind CCI on U.S. 58.

The USDA Inspector General’s office has broad jurisdiction to investigate abuse and corruption involving farm programs. OIG police are armed, and agents are authorized to conduct search-and-seizure operations, arrest suspects, initiate asset forfeiture and prevent attacks on U.S. agricultural assets.

The OIG’s investigations range from animal abuse to food stamp program fraud. The agency is responsible for policing some 300 different USDA programs, including some related to tobacco and the cigarette industry.

The agency plays a role in enforcing tobacco industry payments to states under the Master Settlement Agreement, as well as payments by cigarette makers to the Tobacco Transition Payment Program, commonly known as the tobacco buyout.

The USDA-OIG assumed the lead role in the prosecution of NFL quarterback Michael Vick on animal cruelty charges, and agents are frequently called on to investigate fraud involving SNAP payments, the successor to food stamps. The USDA-OIG website can be found at http://www.usda.gov/oig/index.htm

In contrast to its most common probes — typically involving misuse of SNAP payments, violations of food safety rules, and animal abuse cases — agency-led prosecutions of tobacco companies are relatively rare. Its website lists two investigations over the past 15 years that produced convictions.

In 1998, the OIG, working with the IRS, seized a $1.95 million plantation and $3 million in cash from a Fredericksburg, tobacco dealer convicted of fraud. This year, in March, the OIG and IRS coordinated on a case that led to the conviction of a Wilson, N.C. tobacco warehouse operator and agent for Philip Morris USA. The defendant, Jesse Ray “Tommy” Faulkner II, was found guilty of “hiding” production of tobacco that growers subsequently did not report when they filed USDA crop insurance claims, thereby leading to overpayment for losses. Faulkner received 66 months in prison and was ordered to make $13 million in restitution payments for his role in the scheme.

A 2012 study by the Virginia State Crime Commission on the state’s illicit cigarette trade points to the economic and tax incentives that drive parties to cheat. According to the study, commissioned by the General Assembly, manufacturing costs and company profits account for only about $2.00 of the $17.90 price for a carton of low-end cigarettes. The federal excise tax is $10.10 and the Master Settlement Agreement (MSA) imposes about $5.00 per carton in additional costs. Companies also typically add 60 cents to the sales price to cover their obligations to the USDA tobacco buyout program.





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