When the smoke cleared from Major Case 253, a network of schemers trafficking in contraband cigarettes was dismantled, a Mississippi police department earned a new headquarters, and the FBI gained one more partner in the fight against terrorism.

Those three things might not seem related, but then again, Operation Secondhand Smoke is no ordinary case. It began—as many investigations do—when a person of interest in a criminal matter offered information about a larger criminal enterprise, a massive fraud in the cigarette industry.

Working with the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF), the Tupelo Police Department, and the Marshall County Sheriff’s Office in Mississippi, we began an undercover investigation into a nationwide network of retailers, wholesalers, distributors, importers, and manufacturers who were avoiding cigarette taxes to make millions of dollars in profits.

“The amount of criminal activity in this case to avoid taxes was just phenomenal,” said Special Agent Carl Cuneo, one of the case supervisors based in our Oxford, Mississippi Resident Agency.

In the tobacco industry, the crime is known as “diverting,” and it applies to those who scheme to avoid the various federal and state taxes levied on cigarette sales. Operation Secondhand Smoke involved the so-called fourth-tier market—not well-known cigarette brands, but off-labels such as those manufactured in Armenia.

Taxes represent the majority of the total retail cost of a pack or carton of cigarettes. By illegally avoiding those taxes—through schemes including hiding shipments from auditors and regulators and creating false invoices, bank, and tax records—the crooks pocketed the tax money they should have paid when the cigarettes were sold.

“Every time you avoid a tax, it’s pure profit,” Cuneo said. “You’re talking about as much as a million dollars of profit in just one tractor-trailer of diverted cigarettes.” The subjects in the case—six have pled guilty so far to a variety of federal charges—made so much money they bought mansions, vacation properties, boats, and airplanes. “During the execution of just one search warrant,” Cuneo said, “we seized $12 million in cash and certificates of deposit. They just had it lying around.”

In one 2009 raid on a warehouse, 28 truckloads of contraband cigarettes were seized worth an estimated $15-$20 million—bad news for the criminals, but very good news for law enforcement. That’s because according to federal law, criminal seizures can be legally forfeited so that cash and property may be returned to victims of crimes or used by law enforcement. (See sidebar.)