In a legal battle that lasted five years, FedEx has agreed to pay New York City more than $35 million for allegedly delivering illegal cigarettes to residential customers. An investigation into the matter dates back more than a decade ago.
On Dec. 27, FedEx and the City of New York executed a settlement agreement for a multiple-year case alleging the trucking company violated both the Contraband Cigarette Trafficking Act (CCTA) and the Prevent All Cigarette Trafficking Act (PACT Act). According to the settlement, FedEx will:
- Pay New York City $35.4 million.
- Comply with New York Public Health Law, CCTA, PACT Act and other relevant state/federal laws.
- Identify “noncompliant delivery sellers” and confirm to the city that it is no longer providing delivery services for those parties.
- Cease all direct-to-consumer tobacco shipments.
More than 30 provisions in the settlement details measures to be taken by FedEx to prevent the delivery of unstamped cigarettes.
City of New York v. FedEx
In December 2013, New York City filed a lawsuit against FedEx, accusing the company of delivering illegal, unstamped cigarettes to residences.
According to the complaint, the New York Attorney General resolved a 2004 investigation into FedEx in February 2006 for the illegal delivery of cigarettes to New York residences. FedEx entered into an “Assurance of Compliance” agreement, which included ceasing all deliveries of cigarettes to residences. Per the agreement, FedEx would be fined $1,000 for each violation.
From 2005 to 2012, the lawsuit alleges that FedEx broke the agreement by continuing to deliver for a nationwide contraband cigarette trafficking company called the Shinnecock Smoke Shop, based on the Shinnecock Indian reservation in South Hampton, N.Y. Cigarettes were not stamped to indicate paid taxes and did not include federally-mandated disclosures.
While doing business with another cigarette smuggling company called Cigarettes Direct To You, FedEx shipped approximate 70 tons of unstamped cigarettes into New York City. Court documents reveal that FedEx did business with multiple contraband cigarette companies during and after the course of the resolution with the state attorney general.
The City of New York estimates that shipments from Shinnecock Smoke Shop alone resulted in the loss of tax revenue at $15 per carton. In the lawsuit, the city was seeking to recover damages equal to the amount of each missed $15 tax stamp. In addition, the city was seeking to recover damages under the RICO Act equal to three times the amount of each of those missed $15 tax stamps.
According to the lawsuit, Shinnecock Smoke Shop shipped and sold tens of thousands of unstamped cartons to consumers in New York City from December 2005 to January 2012. The lawsuit estimates that approximately 55,000 cartons were delivered by FedEx, a tax loss of $825,000.
The city of New York claims that FedEx knew it was shipping unstamped cigarettes, a direct violation of the 2006 agreement with the attorney general. Employees responsible for business agreements with Shinnecock Smoke Shop are said to have had full knowledge of what kind of illegal business the smoke shop was conducting.
In total, New York City estimated damages of more than $100 million, including nearly $50 million in civil penalties for violating the PACT Act. Another $50 million in damages accounts for violations of New York Public Health Law, which fines $5,000 for each of the nearly 10,000 deliveries identified.
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