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FedEx unit to pay $35.3 million to New York State to settle cigarette-trafficking charges

Unit says state, local officials not forthcoming about scofflaws (Photo: Freightwaves/Jim Allen)

The ground delivery unit of FedEx Corp. (NYSE: FDX) will pay the state of New York $35.3 million to settle three lawsuits alleging that FedEx partnered with cigarette trafficking companies to ship hundreds of thousands of untaxed cigarettes to New York residents, the state announced today

The state charged that the FedEx unit, FedEx Ground, violated federal anti-cigarette trafficking laws as well as assurances made nearly 13 years ago that it would cease residential cigarette deliveries and comply with the laws barring them. According to FedEx Ground, the state and New York City, the plaintiffs in the case, had originally sought nearly $700 million.

The settlement follows an Oct. 18 ruling by federal District Court Judge Edgardo Ramos that FedEx had “knowingly” violated both the federal statute and its agreement with New York,  the state’s attorney general’s office said. “Not only did FedEx violate laws created to protect the public from the serious health risks associated with cigarettes, but (it) also swindled New York City and State out of millions of dollars in tax revenue,” Attorney General Letitia James said in the statement.

Zachary W. Carter, corporation counsel for New York City, added that FedEx had acted with “apparent indifference to the impact of public health.”

FedEx Ground, which doesn’t ship any tobacco products, said in a statement late today that it repeatedly requested state and local officials to share information about shippers they knew were violating its terms and conditions. However, state and local officials generally refused to do so, the unit said. “On the few occasions that this information was shared with FedEx, evidence in the litigation confirmed that cooperation to be highly effective,” it said. About half of all cigarettes purchased in the state are sold on the black market, the unit said.

Under terms of the settlement, FedEx Ground will cease domestic shipments of tobacco products, with limited exceptions that are outlined in the agreement, the state said. The unit will retain an independent consultant recommended by the city and state to advise and monitor the company’s compliance with the settlement and with all laws governing the shipment of tobacco products. It will be required to implement company-wide communications programs and conduct annual training on tobacco shipments. It will also discipline any employee or contractor who knowingly facilitates the pick-up and delivery of tobacco.

The amount of the settlement is far higher than the foregone tax revenue, the state said. Its size was warranted given FedEx Ground was previously investigated for the same conduct, its actions went on for years and was pervasive throughout the company, and its behavior could negatively impact public health, the state said.

Delivery firms have strict policies ,for the shipping of tobacco products. According to “Shipping Easy,” a website, UPS Inc. (NYSE:UPS) prohibits the shipping of cigarettes, and will only accept tobacco shipments from shippers who hold proper licenses and are authorized under applicable federal and local laws to ship those goods, according to the site.

The U.S. Postal Service bars the shipping of most cigarettes and smokeless tobacco products domestically and internationally, according to the site. USPS will ship cigars internationally if the destination country allows their entry, the site said.

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Mark Solomon, Managing Editor

Formerly the Executive Editor at DC Velocity, Mark Solomon joined FreightWaves as Managing Editor of Freight Markets. Solomon began his journalistic career in 1982 at Traffic World magazine, ran his own public relations firm (Media Based Solutions) from 1994 to 2008, and has been at DC Velocity since then. Over the course of his career, Solomon has covered nearly the whole gamut of the transportation and logistics industry, including trucking, railroads, maritime, 3PLs, and regulatory issues. Solomon witnessed and narrated the rise of Amazon and XPO Logistics and the shift of the U.S. Postal Service from a mail-focused service to parcel, as well as the exponential, e-commerce-driven growth of warehouse square footage and omnichannel fulfillment.
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