2010
05.07
Fuel bootlegging, La Cosa Nostra and the Russian Mafia

Category: Uncategorized / Tag: Michael Franzese, Michael Markowitz, Phillip Moskowitz / Add Comment

Immigrant Presence and The “Mob Tax”
Fuel bootlegging, La Cosa Nostra and the Russian Mafia
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Jermyn described a significant presence of immi*grants involved in the motor fuel tax evasion cases:
There was a large number of Turkish immigrants at the retail levels and there were eastern bloc immigrants who became involved all the way up the chain of distribution to the point where they were actually acquiring gasoline terminals as a result of bootlegging activities.
. . . .
There was a language barrier to begin with. Conspiratorial conversations were often in a foreign language. There weren’t many agents that could speak Rumanian, unfortunately, or Russian. There was inability to infiltrate the closely-knit groups by way of informants or police agents and, in addition to that, these individuals were well-educated and oftentimes smarter than law enforcement agencies.
Q. Did you also find the presence or involve*ment of traditional organized crime groups in the motor fuel tax evasion cases?
A. Yes. Just as with any other industry, where there is an opportunity to make money, illegiti*mate traditional organized crime groups infil*trate that industry. In this case, that occurred very early on…
…the immigrants who became involved in businesses were bright enough to realize that they had to pay tribute to traditional organ*ized crime families in order to operate in certain areas, and there was usually a one or two cents per gallon levy by the mob families imposed upon the sale of bootlegged gasoline.
Q. Is that called the “mob tax”?
A. Yes… amounted to millions and millions of dollars.
Jermyn said the investigation revealed the in*volvement of three traditional organized crime fami*lies in the early period of bootlegging between 1981 and 1988 – the Lucchese, Genovese and the Colombo organized crime families. “And later on in the schemes the Gambino family also became involved,” he said.
Jermyn characterized the relationship between traditional organized crime and the eastern bloc immigrants as “very cooperative.”
[O]ne of the abilities of the organizational skills of the principals involved in these schemes was that they were able to forge a very close working relationship. It became almost like a cartel between the traditional organized crime fami*lies and the eastern bloc people, and they were able to monopolize and control the price of unbranded gasoline in the Long Island area for many, many years.
He recalled a surveillance that revealed a “sum*mit meeting” between the bootleggers, the organized crime figures and the eastern bloc people, “sitting at a large conference table in a meeting room in Long Island.”
Q. Who was the most significant organized crime figure you prosecuted?
A. [O]ne of the defendants in the racketeering case, which was prosecuted federally, was a captain in the Colombo organized crime family by the name of Michael Franzese. There were also many organized crime associates who were prosecuted and convicted and were serving lengthy jail terms.
Jermyn described one motor fuels case in which Franzese was involved:
The amount that was actually evaded was in excess of $30 million dollars and it involved a company where a bond was actually obtained for the payment of the taxes and Mr. Franzese bribed the official in the bonding company to issue the bond. The bonding company actually ended up losing additional moneys, so that there were many victims other than just the state and the federal government.
The Violent Side of Fuel Tax Evasion
Testimony was heard from various witnesses about a darker side of fuel tax evasion and an underlying fear among those in the business.
Rackets Chief Jermyn testified:
Where necessary, violent means have been used to expand a particular bootlegger’s sphere of influence. We’ve estimated as many as a dozen murders have taken place in the last seven years as a result of the bad guys infiltrating the mar*ketplace.
Jermyn described the murders of Michael Markowitz and Phillip Moskowitz. Markowitz, he said, was “one of the bigger bootleggers in the New York area.” He was an eastern bloc immigrant who came to this country with virtually no money in 1979 but at the time of his death had “upwards of 30 million dollars just in assets… not even counting various bank accounts over in Austria and Lichtenstein.” Markowitz was shot in the head while sitting in his Rolls Royce in Brooklyn in 1989.
Phillip Moskowitz was murdered after he was indicted and “certain tapes were released in which he compromised the positions of various organized crime families and identified them as being active in the bootlegging business. His body was found in New Jersey,” Jermyn said.
SCI Special Agent Diszler gave testimony based on the Commission’s own investigation.
BY COUNSEL HOEKJE:
Q. Agent Diszler, have you sensed a fear among the witnesses to whom you have spoken?
A. In most instances we have. Most of them are aware, through the media, of course, that there have been violent homicides which have oc*curred in New York and New Jersey concerning this industry.
Witnesses have told me that they can discern certain accents over the telephone quite easily and many times have felt intimidated and threat*ened by the sales pitch which they get. Even bank officers have expressed an underlying fear to me.
Many times these individuals attempt to open bank accounts in New Jersey at local banks and when they fill out the bank applications it is learned that they have no roots to the community whatsoever. If the accounts are opened, within days and sometimes within hours there are wire transfers moving through their accounts which number in the thousands of dollars. These banking people who are not familiar with the businesses involved often become highly suspi*cious and concerned enough to usually contact the local police departments.
BY CHAIRMAN ZAZZALI:
Q. Are you comfortable identifying the type of accents that you referred to before when people got those anonymous calls?
A. Yes, I would be comfortable in saying that itwas definitely a Soviet, Eastern European ac*cent.
. . .

<center>Russian Organized Criminal Activities in California</center> Russian organized crime in California is involved in extortion, narcotics, murder, auto theft, and loan sharking, as well as insurance, fuel, telecommunication, and credit card frauds. The following cases are examples of several different crime categories.
Extortion - Five members of an Armenian organized crime group in Los Angeles were convicted in 1994 for extortion, kidnaping, and attempted murder. They forcibly detained and threatened victims and their families with great bodily harm unless they paid the suspects money. This group is believed to have extorted the Armenian community in the Los Angeles area for the last 13 years.
Fuel Frauds - Fuel frauds, mostly in Los Angeles and New York, cost both the federal and state governments approximately $2 billion annually in tax revenue. The majority of the fuel frauds are committed by Russian and Armenian organized crime groups operating in Southern California. There are a variety of schemes involving the fuel fraud including falsifying state and federal tax forms, use of fictitious companies, known as a "burn" company, extending fuel by blending tax free additives such as transmix or alcohol, rigging fuel pumps, manipulating dyed fuels designated for off-road purposes, and selling lower grade fuel as a premium product.
The "daisy chain" scheme is the predominate method of fuel tax fraud. The daisy chain scheme starts with a string of companies created by Russian and Armenian organized crime groups and is designed to create a massive paper trail. In the daisy chain, a "burn" company is created and exists only on paper. By the time auditors and investigators unravel the series of transactions to determine the tax liability, the "burn" company has disappeared without a trace of records or assets. These groups are pocketing up to 50 cents per gallon in federal and state taxes which enables them to sell the petroleum products below cost. Selling fuel below cost forces the legitimate operators out of business. Often these groups force legitimate businesses out of business using intimidation tactics through kidnaping, assaults, and bombings.
On September 13, 1995, 13 Russian Armenian subjects were arrested and charged with racketeering, including multiple acts of mail and wire fraud, money laundering, extortion, and distribution of heroin and other narcotic controlled substances. The Russian Armenian group, called the Mikaelian Organization, after the group's leader and self professed "godfather" of the Russian Mafia, Hovsep Mikaelian, ran a black market diesel fuel network that supplied gas stations and truck stops throughout Southern California. They defrauded the Internal Revenue Service and the California Board of Equalization through various fraudulent schemes, by purchasing millions of gallons of diesel fuel and avoiding a huge tax liability.
The Mikaelian Organization used wholesale permits obtained fraudulently to purchase tax-free diesel fuel that was intended to be used solely for off-road purposes such as farming and construction. The fuel was then diverted and sold at numerous independent diesel fuel stations, several of which were controlled by this organization. Up to 42 cents per gallon of the federal and state tax collected at the time of sale was pocketed by this organized crime group.
This group was also involved in gaining control, through threats and extortion, of a large segment of the independent diesel fuel wholesale and retail service station and truck stop markets. Permits were also obtained by submitting fraudulent paperwork. In some cases, jet fuel, which can be purchased tax free, was added to the diesel fuel and sold at the service stations and truck stops.
According to the U.S. Aftorney in Los Angeles, this group managed to avoid paying $3.6 million in taxes in just one year. The arrests culminated a two-year joint task force investigation conducted by the Federal Bureau of Investigation, the Internal Revenue Service, the Los Angeles Police Department, the Long Beach Police Department, the California Department of Justice, the Department of Defense, and the Department of Transportation. The task force confiscated more than $2 million in cash and property, including a BMW, Jaguar, and two Rolls Royces.
In order to counter the diesel tax frauds, Senate Bill 840, introduced by former Senator Robert Presley and former Assembly member Johan Klehs, was passed into law and took effect July 1, 1995. The purpose of the new law, which now parallels federal law, is to reduce diesel fuel frauds by imposing tax collection at a higher point (terminal level) in the distribution chain. Under the new law, taxes will be collected on tax exempt fuel by the terminal operator and refunded by the state (tax refund). A terminal is defined as a storage facility where fuel is stored and delivered to buyers. Fuel is delivered to the terminal directly from the refinery which is the first level in the distribution chain.

After Emigres Began Fuel Scheme, Traditional Mob Families Moved In, Officials Say

By JOHN SULLIVAN

Published: September 15, 1996
NEWARK, Sept. 12— In an elaborate scheme involving shell companies and tax dodges, prosecutors say a group of Russian emigres made millions of dollars selling bootleg gasoline and diesel fuel in New York and New Jersey. But their success quickly drew the unwanted attention of New York's more established organized crime families, which formed a cartel to take over the lucrative operation.
Representatives of the Genovese, Gambino, Lucchese and Columbo crime families formed a group, which they called the Association, to threaten and control the bootleggers, according to an indictment charging three men with racketeering that was filed in New Jersey this week.
''They got wind of the fact that there was this major scheme going on,'' said Robert A. Mintz, deputy chief of the organized crime division for the United States Attorney in Newark. ''They simply muscled in and said if there is money to be made out here, you have to pay us.''
In a series of cases during the last three years, Federal prosecutors in New Jersey have charged about two dozen people, most of the emigres involved in the bootleg scheme, although the two accused ringleaders remain fugitives from tax-evasion and other charges. But with this week's indictment, Federal officials unveiled how traditional organized crime families banded together to wrest control of the operation.
Prosecutors say that the ability of the Mafia to exert influence over emerging organized crime groups is relatively new but increasingly troublesome. And they said the different Mafia families' willingness to work together is something that has not been seen on such a scale since the days of the Commission -- an informal Mafia board that the United States Justice Department says oversaw organized crime in New York until it was broken by a series of prosecutions in the 1980's.
''What is particularly striking is that you have four families getting together to demand this type of control over the bootleggers,'' said Faith S. Hochberg, the United States Attorney for New Jersey. ''During the entire period of time it is estimated that the mob made hundreds of thousands of dollars per month from these payments. And it was split up between the four families.''
Ms. Hochberg said that once the Mafia gained control, they set up a committee that acted like an underground public utilities agency for the bootleggers. She said the group, the Association, set prices, assigned territories and collected a ''mob tax'' from the emigres.
''This did not involve simply the run-of-the-mill protection money,'' Mr. Mintz said. ''They not only extorted a cut of the money, but they actually took an active role in acting as a public utility regulatory body. They would set prices, decide who could sell in what areas. They acted to insure the maximum profit for the mob and the bootleggers.''
The indictment this week charged Daniel Pagano, who prosecutors said is a ranking member of the Genovese family; Anthony Palumbo, and Genaro Dellamonica. Lawyers for Mr. Pagano and the other defendants would not comment. Anthony Morelli, described by prosecutors as a Gambino family representative, has been convicted on related charges.
The bootleggers began their operation in the mid-1980's, taking advantage of a legal loophole that allows fuel wholesalers to sell to other fuel wholesalers without paying sales tax. When a sale is made to a company that will retail the fuel, the tax must be paid. The operation continued until 1993.
Ms. Hochberg said the bootleggers set up a series of fuel wholesale companies and passed the fuel through the firms. One of the firms was set up as the ''burn'' company -- the company from which the Internal Revenue Service would try to collect the tax. When the I.R.S. showed up for its money, the company would simply disappear.
The bootleggers would sell the fuel to retailers, adding on the usual increase to cover the tax, but would pocket that money. Ms. Hochberg said that between 1988 and 1993, the operation cheated the Government out of more than $140 million.