Tobacco’s Second Wind

On the morning of March 30, 2016, 700 U.S. and Canadian agents executed the final takedowns in a massive sting operation they’d code-named Project Mygale. 

The name was a reference to Mygalomorphae trapdoor spiders, which dig small burrows with perfectly camouflaged lids. When their victim is right on top of the traps, they strike with bullet speed and sniper precision. 

In this case, the burrow was years in the making and involved wiretaps, tails, informants, and undercover placements. Then they sprung the trap door. 

Agents simultaneously arrested more than 60 people in dozens of cities across Canada including outlaw bikers, Colombian cartel members, low-level drug runners, and high-level mafiosos, all part of a narcotics smuggling and money laundering empire that spanned from Canada to Peru. Among the seized evidence was $4.5 million (in US dollars) in cash, 1,800 pounds of cocaine, 40 pounds of meth, and 30 pounds of marijuana. 

But the largest haul was 115,000 pounds of tobacco, valued at $13.5 million USD, that had been destined for the Mohawk territories near the US-Canada border. There it would have been manufactured into cigarettes and sold tax-free for a fraction of the price of “legal” cigarettes. Despite Mohawk territories’ insistence on their territorial sovereignty, their customs tax regime remains unresolved: Mohawks claim they owe no tax on goods brought in and out of their territories, while Canada says otherwise. 

The seized amount was but a fraction of the 4.5 million pounds of untaxed tobacco from North Carolina that had crossed the border over the 18-month surveillance period. Much of the raw tobacco for the Mohawk market comes from North Carolina, which became a boon for farmers and brokers who’d been struggling through the long decline of American tobacco markets. They sold truckloads of product to buyers up north and arranged transport over the Canadian border, evading detection with the help of drivers, warehouses, and false paperwork. 

Project Mygale was the first large-scale investigation into cross-border contraband tobacco and its ties to organized crime. Outlaw motorcycle gangs allegedly provided protection for the shipments and their warehousing on both sides of the border. The money paid to enforcers and middlemen was then alleged to have funded cocaine trafficking and money laundering schemes stretching from Colombia to Portugal.

Several North Carolina tobacco brokers were surveilled and targeted as part of the investigation, including Phil C. Howard.

Howard, 57, was suspected to have struck up deals between local tobacco brokers, Mohawk cigarette manufacturers, and truck drivers to create his own supply chain for the Mohawk market. His operation ran for eight years without a hitch, allegedly sending 221 truckloads across the border. 

Though Howard was too far out on the margins of Project Mygale to be arrested during the 2016 raids, his extensive business dealings took center stage for investigators in North Carolina soon after. In 2019, Howard was arrested on charges of criminal conspiracy and tax fraud. Authorities alleged he had masterminded the sale of 6 million pounds of contraband tobacco, resulting in $600 million in Canadian tax loss.

However, a recent decision in a landmark Canadian court case could mean that Mohawk entrepreneurs are fully within their rights to trade tobacco tax free, including across international borders. It’s a decision that has the potential to transform not only the Mohawk economy, but the North Carolina tobacco trade as well. 

Today, Howard is serving a six-year sentence in South Carolina. His legal predicament may be unique, but much of his experience beyond that is familiar in the post-tobacco era in eastern North Carolina. As small farms ceded to larger mechanized enterprises and tobacco warehouses shuttered, men like Howard were forced to either get out or get creative. Howard chose the latter. 

Tobacco’s Crushed Dreams

Phil Howard’s home is a simple affair in Pink Hill’s downtown, guarded by two beefy pit bulls. Howard spent his whole life in this hundred-year-old town of 500 people in Lenoir County. His mother lives across the street and his kids go to school another street over from that. 

Howard is now five hours away at the Federal Correctional Institute in Edgefield, South Carolina. His wife, Amy, and their two daughters have made the trip weekly for the last two years. 

Until Howard’s arrest in 2019, his wife says she had no idea what the hell he was doing or who he was dealing with. But since then, she’s found herself neck deep in documents, trying to make sense of the charges. 

Periodically, with visits from soliciting attorneys or curious journalists, her kitchen countertop swells with reams of court papers and accounting logbooks. Her husband joins on speakerphone, calling from prison to walk the visitor through the morass. That walk begins with a little tour of history.

Until recently, tobacco dominated Pink Hill, like many towns in the state. You couldn’t take two steps without trodding on boulevards and buildings tobacco built. Very few lives were untouched by the industry and Howard just about reeked of brightleaf. His father was a small-time tobacco farmer, though his bread and butter was tobacco trucking. He and a buddy ran B&H Tobacco Movers, and they lived for the harvest season. 

Beginning in late July, tobacco leaves were harvested by hand every couple weeks. Once they were dried, cured, and baled, the older Howard would swing by farms with the truck and take a load down to the auction house in Kinston. 

Buyers from RJ Reynolds, Phillip Morris, and elsewhere walked down the aisle, following the singsongy chant of the auctioneer, touching and grasping leaves as they went, signaling their bids with a cocked eyebrow or raised finger. And once the sale was made, he would load the tobacco back up and take it down to the buyer’s warehouse. 

These were the fading glimmers of tobacco’s golden days, following the surgeon general’s shattering 1964 conclusion that “cigarette smoking contributes substantially to mortality.” The local tobacco economy began its slow existential decline as smoking rates lowered, local farmers found less political support, and cigarette manufacturers purchased cheaper tobacco overseas.

Despite this, the North Carolina market persisted because of the tobacco price support program. The quota program, as it became known, worked like this: Farmers in tobacco producing regions would be given allotments to grow a certain amount of tobacco in a given year. The government would set and adjust the quota for each farm annually in an effort to maintain a guaranteed price for farmers. If you didn’t have a quota, you could buy or lease one. 

Though the quota program would be watered down over the years, it remained a consistent and protective facet of the tobacco economy, which had become a seller’s market. While the rest of American agriculture was tilting towards mechanization, conglomerated farms—the expertise and labor-intensity that tobacco requires—allowed smaller family operated outfits to compete and even thrive. 

Howard started working over his father’s small tobacco fields in earnest in 1993 and eventually took them over, but by then the heydays were already in the rearview. The biggest blow came in 1998 with the Tobacco Master Settlement Agreement. The MSA held tobacco companies liable for public health damages, drastically curbed their marketing strategies, and demanded they pay $26 billion to state governments over 25 years. 

Not long after, the quota program also ended. Allotment holders were bought out with MSA funds and tobacco companies began contracting directly with tobacco farmers. Contracts were renegotiated annually and placed all risk on the farmer. Smaller producers could no longer compete. It was a sea change for a formerly protected class of yeoman farmers. 

Howard thought his dreams of being a tobacco man like his father had been crushed, along with those of the entire region. 

The Gray Market

But Phil Howard is a resourceful man. He maintained several streams of income by constructing and maintaining farming buildings. He ran heavy equipment, and welded on contracts around town. It was through that sort of odd-jobbery that he met a man who sold trucks and trailers in 2010. 

“He had a junkyard and all, and I was talking to him and told him that I had some people that had money to invest and might want to try to buy some big trucks and try to get him to sell ‘em for us,” he explained over speakerphone on the kitchen countertop.

When the seller found out that Howard had some links in the tobacco world, he told him he had someone he might wanna talk to and a meeting was quickly arranged. That someone turned out to be a Mohawk businessman from the northern territories who was interested in purchasing tobacco. 

This was the latest iteration of a contraband tobacco scheme that had been booming on Mohawk territories since the 1980s. Back then, major cigarette manufacturers like RJ Reynolds used Mohawk smugglers to transport their product into Canada. By selling their products through Mohawk territories that were immune to tax hikes, they could bolster declining sales. Once RJ Reynolds was taken to court on RICO charges for the scheme in the late 1990s, the “butt-legging” operation collapsed. But savvy Mohawk entrepreneurs quickly realized if they could simply import raw tobacco and manufacture cigarettes on-reserve, they could cut out the cigarette suppliers and fatten their profit margins. 

According to law enforcement, the contraband tobacco industry has attracted organized criminal elements to the indigenous territories and undermined Canadian governance. As the Royal Canadian Mounted Police noted in a 2008 report, “The illicit tobacco market is dominated by criminal organizations motivated by the lure of significant profits and relatively low risk. The central role played by organized crime in the contraband tobacco trade in Canada means that this illegal activity is inextricably linked to other kinds of crime.” 

Indigenous leaders argue that such portrayals play into stereotypes of reservations as underworld sanctuaries and conflate the tobacco trade with other illicit activity. “We also don’t want [organized crime] here, we’ve always been willing to cooperate with [law enforcement] and our position is that tobacco is our natural product … all of a sudden it’s illegal for us to have tobacco and produce our own product,” Chief Joe Norton of the Mohawk Council of Kahnawake said in 2016. Chief Ava Hill of Six Nations agreed: “It’s just a taxation issue, so why don’t they just be upfront about it?”

Currently, a carton of name-brand cigarettes at a Montreal convenience store may cost $200. On the reserve, a baggie of 200 cigarettes can be purchased for $20. The economic importance of the tobacco trade is self-evident in the hundreds of smoke shops that line the main roads of Mohawk territories. 

Since Mohawk cigarette manufacturers were primarily concerned with competing on a price basis, they sought out cut rag tobacco. Cut rag, or tobacco leaf that’s been shredded into fine strips and ready to roll into cigarettes, is what’s left over after the big name brands have already made their purchases. It sells at secondary auctions for around $0.20 on the dollar compared to higher-grade leaf tobacco. But for Mohawk cigarette manufacturers whose only concern is price, cut rag is as good as gold. 

As luck would have it, Howard had a good friend with a tobacco warehouse who’d just started selling cut rag, and he found himself in a position to make a hell of a deal as a middleman. But the deal wasn’t without its risks. Since the tax and excise duties surrounding the Mohawk tobacco trade were unresolved in Canadian law, it wasn’t uncommon for Mohawk manufacturers and, to a lesser extent, North Carolinian brokers to be arrested. 

Although this was six years before the Project Mygale raids, authorities weren’t blind to the issue. But as Howard explained in a series of phone interviews, he didn’t see that as his problem. According to him, the buyers hired their own truckers, who handled the border issues themselves. All Howard had to do was secure the product with money the Mohawks provided.

“I sent the money to the warehouse, I sent the rag, [the truck driver] brought back the cash,” Howard said. It was a cut-and-dry win for everyone—warehouses didn’t like dealing directly with the gray market, the buyers got a steady supply of tobacco, and he got paid. Howard felt as if he’d hit upon the first vein in a new gold rush. 

It might have been a short-sighted and somewhat risky solution, but if you squinted hard enough, it had a sheen of honorable self-reliance and ingenuity. As long as business kept steadily rolling in, everyone could keep squinting. 

Luck Runs Out

Since 2008, 44 other North Carolina tobacco brokers and farmers have been arrested in ongoing investigations. These investigations looked into crop insurance fraud and the sale of contraband tobacco, both part of the same set of illicit survival mechanisms that tobacco folks have used to survive in the post-tobacco-quota era. 

In the same amount of time, dozens of Mohawk tobacco runners, manufacturers, and sellers have been charged, hauled to court, and taken plea deals in Canada for their roles on the other side of the border. Among them was Howard’s buyer, who was nabbed after doing 12 loads with Howard. Howard escaped scrutiny, but his only customer was out of business. 

According to court records and Howard’s own testimony, around 2011 he was trying to sell some old tobacco bales his father had left him when he passed away. A friend introduced Howard to a fellow tobacco man named Sam Baker. He already knew a bit about him; Baker’s father, Eddie, was well-known as the founder of Cross Creek Seed, one of the largest suppliers of tobacco seed and plant in the state. Baker didn’t want any of Howard’s tobacco, but the boys got to talking and found they both had a little history with cut rag. 

In interviews with investigators, Baker explained that a few Mohawk businessmen came down to visit in 2008. He introduced them to the New Duplin tobacco warehouse, and they cracked a deal to ship cut rag north. The Bakers would act as middle men. 

At first blush, it might seem a little strange that Baker would cut Howard in on his sweet gig, but Mohawk buyers insisted on multiple supply streams to mitigate disruptions. “One of them told me,” Howard says, “They never wanted to put all their eggs in one basket.” 

The tobacco was still coming from the same place, a company called Tobacco Rag Processors. Companies like this were experiencing a resurgence; when leaf didn’t meet corporate buyers’ exacting standards, it could be sold as cut rag or to overseas buyers. The scheme worked like this: A Mohawk buyer would place an order with Howard, who would then purchase cut rag from Baker for a small per-pound premium. Baker would place an order with the processors, and then Howard would have truckers pick it up from their warehouse and take it to the Canadian border. They would use fake bills of lading (documents detailing content and destination) at border checkpoints, claiming that their trucks were loaded with furniture, diapers, cabbage, or what have you. 

At over-congested border crossings, the ploy worked more often than not, according to two police investigators in upstate New York who spoke on the condition of anonymity. And to the Canadian and Quebec governments, each truck represented a $3 million tax loss. 

Most loads were taken to the Akwesasne Mohawk Territory, which straddles the US-Canadian border. There, truckers would deliver tobacco to warehouses on the American side of the territory, where the load would be broken down into heavy-duty plastic garbage bags and smuggled across the St. Lawrence river by boat or skidoo, depending on the season. 

In the Project Mygale ring, which Baker participated in, once the rag was in Canada, the loads would be transported, warehoused, and delivered under the protection of the Hell’s Angels, who received a flat fee for each truck that entered their territory. It was a complex operation that brought several criminal organizations together, which made it a prime target for law enforcement. 

But for Baker and Howard, the deal was working out well. Over the course of the next 3 years, Howard purchased more than $10 million of cut rag through Baker, according to court filings. Every week or so, they would meet up in a parking lot to hand off duffel bags of cash, but after the first few dozen loads, even that lost its thrill. 

As stated on internal data obtained by The Assembly from Tobacco Rag Processors, Baker’s cut rag supplier, Mohawk buyers became the processing company’s biggest revenue stream, outdoing even large, legitimate tobacco companies like Swisher Sweets. By this point, Howard had also developed his own network of drivers to conduct the shipping to Canada, though he said in an interview that the drivers were responsible for crossing the border and that he never falsified paperwork for that purpose. 

As far as Howard was concerned, he wasn’t doing anything illegal. Mohawk entrepreneurs had a legal right to purchase and sell goods tax-free, and he was not sending any goods to Canada, he was only sending them to Mohawk territories. “I sold tobacco to the Indians in Akwesasne on the American side,” Howard repeated in phone interviews. “I’ve never been to Canada. I’ve never sold any tobacco to Canada. I’ve never sold tobacco to a Canadian.” He even said as much to a polygraph operator, twice, and passed. 

But Baker’s operation had been compromised. One of his buyers on the Canadian side, who brokered between Mohawk buyers and biker gangs, was a well-known underworld middleman named Sylvain Ethier who was under law enforcement surveillance on both sides of the border and was the primary tobacco target in Project Mygale. Undercover officers and informants had infiltrated his organization.

When law enforcement finally carried out its takedown in March 2016, Baker’s home in Laurinburg, North Carolina, was searched and his bank accounts were frozen. Authorities had warrants to search Baker’s home safe and SUV. All told, they seized more than $100,000. 

Howard recalled a frantic phone call from Baker, “He said, ‘Hey man, they’ve come up here, they’ve raided me, they’ve took all my records, everything.’ He said, ‘I’m outta business.’” 

Howard seemed to have gotten lucky. None of his Mohawk buyers had been under surveillance or been roped into the Mygale raids. The only Mohawk tobacco dealer who’d been arrested was a NASCAR driver named Derek White, and he had dealt primarily with Baker. 

All the same, Howard told his regular customers that he was also out of the tobacco business. Baker had been his only supplier. But with Baker out of the picture, Howard managed to strike up a deal with Tobacco Rag Processors directly. Howard wiped his brow, counted his lucky stars, and started the business back up. He would go on to purchase $1.4 million of cut rag from TRP. 

But Baker had secretly agreed to cooperate with investigators. And over the course of several interviews, he laid out the detail and structure of his business dealings. Those 20 pages of recorded testimony would become integral to the case against Howard. 

Wrongs and Rights

On the morning of January 17, 2019, Amy Howard was at work at a local elementary school when she received a phone call from Raleigh. “And the woman just started talking,” she recalled, “telling me this is so and so and you need to come out to the front of the school.” 

Outside, she found agents parked beside her car. They told her that her husband had been arrested. 

“I was clueless,” she recalled. “I was like, what is going on?”

The following Wednesday, Howard was allowed to return home on house arrest. “And then he started telling me what was going on, what everything was,” she said.

She says it was the first she’d heard anything about his dealings in the Mohawk tobacco trade, Sam Baker, and cut rag.

After more than two years in and out of the courthouse, Howard was charged with conspiring to commit money laundering and filing a false tax return, and sentenced to 78 months in federal prison. Amy and a few friends drove him to South Carolina the following week. “One of his friends said ‘I give him six weeks,’ and we were like ‘six weeks?’ He said, ‘yeah, he’ll be running that place in six weeks.’”

Howard was also ordered to pay $1 million in restitution. Prosecutors estimated that he owed more than that. 

Howard reflected somewhat regretfully from prison that, “If I’d done my taxes right, [the prosecutor] wouldn’t have got me on the tobacco charges. I ain’t gonna lie, I didn’t pay ‘em enough in taxes. And when I get out, I’m gonna pay em what I gotta pay ‘em.” 

As his wife sees it, “The judge wanted to make an example. He wanted to deter others who might choose to engage in that criminal behavior. We don’t have all that money that he’s got to pay back. I have no clue what we’re going to do.”

Though it may be too late to make a difference for Phil Howard, recent developments in a landmark native rights case in Canada could upend the legal framework of the Mohawk tobacco trade. 

White, the Mohawk NASCAR driver arrested in Project Mygale for brokering tobacco on the Canadian side, filed an appeal on his criminal charges in 2019. In his initial trial, he was found guilty of defrauding the Canadian government of half a billion CAD in tax revenue. 

White filed a constitutional challenge to that ruling, claiming that as an indigenous person, he was within his rights to trade tobacco tax free across the border. The judge heard testimonies from native historians, Mohawk legal experts, and spent more than a year reviewing materials before announcing her decision in November 2023. She found that, “Section 42(1) of the Excise Act, 2001, unjustifiably infringes the Aboriginal right and the treaty right of the Applicants. It is of no force and no effect against them.” 

Essentially, the judge agreed with White’s assertion of his indigenous rights. She further said that the Canadian government had failed in its duty to consult with indigenous governments in crafting its tax policy. The case against White was permanently stayed. It’s too soon to tell what the wider implications of the case might be, and whether that means the North Carolina cut rag industry can soon operate above board. But it does represent a landslide victory in a decades long civil rights battle. 

Howard has four years left on his sentence, and he continues to fight his case. Not on the grand picture of his innocence, but rather the extent of his wrongdoing. He has tried to point out inconsistencies between the price that Baker told prosecutors he sold for, and the price Howard says he actually paid. It’s a few dimes per pound, but at scale, it amounts to a discrepancy which could mean the difference between Howard losing everything he has in forfeiture, or coming back with something to start rebuilding his life with. 

It’s too early to tell whether we are witnessing the convulsions of a dying industry, the birth of a new one, or something else entirely. 

But one thing that is certain is that Phil Howard will not be the last, nor the biggest, tobacco man to go down for cut rag. As White said while waiting for his appeal decision, “There is more tobacco up here now than ever before. They think they can stop this, but it’s coming across every day.”