Item No. 4 on the agenda seemed routine, even dull: a vote on “Cash Control and Security 2-11 Large Volume Sales Policy Revision.”
But within months, that one policy tweak would bring major changes -- and lots of cash -- to one of New Hampshire's most important money makers: state-run liquor stores.
The change happened in November 2011, during a regular meeting of top state liquor officials. Leadership at the N.H. Liquor Commission unanimously agreed to roll back a rule that required store employees to decide if customers making large all-cash purchases at multiple liquor stores need to report those purchases to the Internal Revenue Service, which monitors large cash transactions for possible money laundering.
The amended policy essentially cleared the way for customers to bounce from store to store in the same day, buying pallet loads of liquor in cash, without facing scrutiny from liquor store employees or attracting the notice of the IRS.
It didn’t take long for the seemingly bureaucratic move to make an impact.
Within the next year, sales of Hennessy Cognac, a favored product of so-called “bootleggers” who buy at New Hampshire liquor stores and then resell alcohol in other states, doubled. Cash sales increased so quickly at one retail store following the policy change that a local banker raised red flags about the surge in deposits. The rule change also caught the eye of IRS investigators, who launched a lengthy investigation into how the Liquor Commission handled large cash transactions.
“The goal was to escalate and encourage out of state sales,” Mark Bodi, who was a Liquor Commissioner at the time, said of the 2011 policy change. “There has been an enormous amount of unintended consequences as a result of the policy, and those now are coming to bear.”
The Liquor Commission’s policies toward cash sales continue to garner scrutiny today.
Earlier this year, Executive Councilor Andru Volinsky asked the state Attorney General’s office to launch an investigation. Volinsky cited Liquor Commission business practices, as well as an eyewitness account of a large purchase of Hennessy broken into several smaller transactions to avoid disclosure rules, as evidence warranting an outside review of the agency.
(You can read NHPR's previous coverage of this topic here.)
In the six months since Volinsky raised his concerns, the Liquor Commission has denied that it is violating any laws when completing these transactions.
The agency declined to answer direct questions about the policy change or its consequences. In a statement, a commission spokesman said it “has strict policies in place regarding the reporting of cash transactions that adhere to state and federal laws. Those policies remain in place, along with a guide to processing sales, designed for employee safety.”
But the 2011 policy change — and the resulting surge in Hennessy sales at state liquor stores — adds to questions of whether state liquor officials have helped ease the way for bootleggers to move large volumes of liquor, and cash, across state lines over the years.
A River of Cognac
Whether the Liquor Commission needs to comply with IRS rules concerning large cash purchases has been an open question for more than a decade. In the wake of the September 11 terror attacks, the IRS created a new form meant to monitor cash transactions in excess of $10,000. Called “Form 8300,” its aim was to better track money laundering and possible funding of terrorists.
As far back as October 2006, the Liquor Commission required employees to have customers complete the form if they spent more than $10,000 in cash in a single transaction. Employees were also supposed to determine if the customer was making multiple smaller cash purchases within a 24-hour period, or travelling to multiple liquor stores, in an effort to avoid having to complete the form. If the cashier decided that the transactions were related, the customer was required to complete Form 8300, according to IRS rules.
On Nov. 30, 2011, with the backing of Liquor Commission Chairman Joseph Mollica and Commissioner Michael Milligan, as well as Bodi, the agency’s large volume sales policy was altered to remove the requirement that employees decide if the transactions are related.
Meeting minutes show no debate about the proposed change; it passed unanimously.
“The expectation is that effective immediately, all stores are to service customer requests for all large volume sales and follow these revised guidelines, with no exception,” Peter Engel, then the director of store operations for the Liquor Commission, wrote in an email to all store managers on Dec. 1, 2011.
Engel, who retired in 2012, would later testify to a New Hampshire House committee created to investigate the Liquor Commission that he opposed the policy change but was complying with his managers’ request.
According to a report produced by the House committee, “[Engel] took the matter very seriously and firmly believed that stores were being used for bootlegging and money laundering.”
In the period immediately following the change in policy, sales of Hennessy cognac, the liquor at the center of numerous bootlegging arrests, surged across New Hampshire. Documents obtained by NHPR show that Hennessy sales, which had been growing at a steady rate prior to 2012, doubled in the year following the policy change to more than 52,000 cases — making it the fourth most popular product at liquor outlets statewide.
By comparison, during the same period, cognac sales nationwide grew at less than 5 percent, according to the Distilled Spirits Council.
Sales of Hennessy have continued to expand since 2012, reaching nearly 75,000 cases in 2015, the first year it outpaced Captain Morgan Spiced Rum as the state’s top-selling spirit. According to publicly available inventories, the Liquor Commission regularly stocks the product in massive quantities at its retail outlets near the state’s southern border, but only stocks a handful of bottles at stores farther from the border.
Cash Rules
Along with the spike in Hennessy sales, the sheer volume of cash transactions appears to have surged as a result of the 2011 policy change, even catching the attention of a local bank.
In an email exchange in early March 2012 -- less than four months after the new rules were implemented-- a senior vice president at RBS Citizens Bank in Manchester questioned state liquor officials about a sudden increase in cash deposits by store employees at one of its branches.
“We are regulated by the U.S. government and trained to understand our customers deposit activity and question and document any changes,” the bank official wrote. “I just want to elevate this change in activity to the commission, and feel comfortable that you are aware it’s going on.”
According to the email exchange, the bank raised its concerns after the retail liquor store in Nashua deposited around $100,000 more in cash than normal in a single week.
“When the [bank] branch manager asked why the deposits were so much, she was told...that it’s because some high end liquor was discounted, and is causing an increase in activity in sales because the ‘bootleggers’ over the border (MA & NY) are coming to the state to purchase,” the bank official wrote.
An employee for the Liquor Commission replied to the bank that she “suggests expecting this increase and over time we will see if it increases more or decreases.”
During this email exchange, the bank vice president raised the question of whether the Liquor Commission considered using an armored car for its higher volume stores.
Similar employee safety concerns were raised by Volinsky in his February 2018 letter to Gov. Chris Sununu, citing the risk of robbery at state-run stores. The State Employees Association, the union that represents many rank and file liquor store employees, has also voiced concern about the large amount of cash on hand, and the large cash deposits its members make during the course of business.
The number of all-cash transactions at retail stores has prompted at least one change in procedure from the Liquor Commission: earlier this year, the agency expanded the use of cash counting machines, installing nearly 30 additional units at locations around the state.
Scrutiny From Law Enforcement
The IRS has scrutinized the Liquor Commission’s handling of large cash purchases for nearly a decade. In 2009, the federal agency attempted to fine the Liquor Commission for failing to file Form 8300. Relying on legal guidance from the state Attorney General’s office, the Liquor Commission disputed the penalty, citing an IRS manual that exempts “governmental units” from having to complete the form.
The IRS appears to have dropped that matter, but in 2012 — after the Liquor Commission changed its large volume purchase policy — the IRS reopened what the AG calls an “extended” investigation into large volume sales.
According to the AG’s office, that investigation included numerous interviews, though it isn’t clear when the IRS ended its inquiry, who agents spoke with, or if it sought a penalty. (The IRS denied a public records request by NHPR.)
In 2015, the Liquor Commission, with the assistance of the attorney general’s office, again revised its policy related to large cash purchases. That version, like the previous one, does not require employees to decide if the customer is making related transactions in an effort to avoid having to alert the IRS.
The adequacy of that policy, which is still in effect today, is the focus of the ongoing investigation by the attorney general’s office.
