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Financial Crimes
02/23/2018

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2 Los Angeles-area men arrested in scheme to defraud US by avoiding payment of federal excise taxes on cigarettes

LOS ANGELES – Two men have been arrested on charges of scheming to avoid the payment of federal excise taxes on duty-free cigarettes that should have been sent abroad, but instead were diverted to local retail outlets.

Yong “David” Lu, 54, of Arcadia, and Wenzhu Guo, also 54, of Monterey Park, were arrested Thursday morning by federal authorities.

The case against Lu and Guo is being investigated by U.S. Immigration and Customs Enforcement’s (ICE) Homeland Security Investigations (HSI) and IRS-Criminal Investigation, with assistance from the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) and the Alcohol & Tobacco Tax & Trade Bureau (TTB).

Lu and Guo, both Chinese nationals, were named in a one-count indictment returned by a federal grand jury on Wednesday. The indictment charges both men with conspiring to defraud the United States, with Lu allegedly responsible for the diversion of duty-free cigarettes and Guo allegedly acting as his primary distributor of the untaxed cigarettes.

At their arraignments Thursday afternoon, Lu and Guo entered not guilty pleas, were ordered freed on bond, and were ordered to stand trial on April 10.

The arrests in this case are part of a wider investigation into cigarette diversion schemes designed to avoid the payment of excise taxes. In addition to the arrests, federal authorities on Thursday executed 10 search warrants on homes, storage lockers and vehicles in San Gabriel, Arcadia, Rosemead and Monterey Park. As a result of the searches, special agents with HSI, IRS C-I, ATF and TTB seized more than 2 million contraband cigarettes and more than $45,000 in cash.

The case against Lu and Guo focuses on the diversion of untaxed cigarettes from tobacco export warehouses and foreign trade zones (FTZ), and the other two investigations that led to some of Thursday’s searches concern cigarettes being shipped through the mails from China.

Lu operated Great Pacific Coast Corporation, which provided supplies to cargo vessels docked in the Port of Los Angeles, including consumable goods, such as export-only cigarettes, for the personal use of the ship’s crew. Over the past two years, according to the indictment, Lu “made numerous purchases of export-only cigarettes” from two tobacco export warehouses that stored untaxed tobacco products pending their shipment outside the United States. When foreign cigarettes are imported into the United States and warehoused in a tobacco export warehouse or FTZ, the government does not impose excise taxes if they are to be exported or consumed outside the U.S.

Lu purchased the cigarettes from the warehouses under the pretense that they would be exported on ships docked in the port. However, the indictment alleges, the cigarettes were not delivered to cargo vessels, but were instead diverted into the local retail market.

After obtaining the cigarettes from the warehouses, Lu or his associates delivered some or all of the cigarettes to Guo, who in turn distributed the cigarettes, the indictment alleges.

Lu and Guo are not the first to be prosecuted for illegally diverting duty-free cigarettes into the Los Angeles retail market. Un Hag Baeg, a resident of Korea who at the time of the offense resided in Marina Del Rey, pleaded guilty in October to conspiring to defraud the Unites States out of more than $7 million in federal excise taxes by diverting tens of millions of export-only cigarettes to the local retail market. Baeg is scheduled to be sentenced on April 16.

The United States imposes a federal excise tax on all cigarettes meant for consumption within the United States of $50.33 per 1000 cigarettes sticks. TTB is responsible for administering and enforcing federal excise tax laws pertaining to tobacco products, and U.S. Customs and Border Protection Agency is responsible for the assessment and collection of duties, taxes and fees on merchandise imported into the United States.

If they were to be convicted of the conspiracy count alleged in the indictment, Lu and Guo each would face a statutory maximum sentence of five years in federal prison.

The case is being prosecuted by Assistant United States Attorneys James C. Hughes and Valerie Makarewicz of the Tax Division, Central District of California.

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Last Reviewed/Updated: 02/27/2018