The Center for Public Integrity

There’s something odd about PO Box 365, Irving, New York. Located on the Seneca Nation — nestled just at the Empire State’s southwestern tip — the box is the mailing address for at least 10 online vendors registered in far-flung locations, from New York City to Ankara, Turkey. Boasting names like BigChiefCigarettes.com, Smoke2U.com, and EZTobacco.com, the sites bear no apparent affiliation to one another, except that they all sell one product: untaxed cigarettes.

For years, tax-free cigarette sales on New York reservations have made the state among the country’s top destinations for discount smokes — and not surprisingly, either. With New York City home to the nation’s highest cigarette taxes, the tax-free trade offers a prodigious payoff for the enterprising cigarette vendor. (Between state and city taxes, a carton of cigarettes in New York City can cost up to $80; that same carton, untaxed, costs just $40.) There’s one problem, though: The trade is illegal.

In 2007, New York’s reservations — home to fewer than 17,000 people — sold a towering 6.4 billion cigarettes, leaving state revenue officials scrambling. Every year, the state loses nearly $1 billion in city and state taxes from reservation sales. While the Supreme Court has ruled that states can collect taxes on tribal sales to non-natives, ever since a violent Seneca protest beat back then-Governor Pataki’s attempt to enforce such taxes in 1997, successive governors have been loath to entangle themselves in the issue.

For New York Governor David Paterson, there was no good option.

Faced with a crushing state deficit, angry American Indians, and uncooperative tobacco companies, Paterson on December 15 signed into law a bill designed to take on one of America’s most lucrative black markets: the underground trade in cigarettes flowing through the state’s 10 Indian reservations.

New York’s 70-year-old tobacco black market exploded after 2002, as cigarette tax hikes encouraged smuggling from out of state and through reservations. The traffic is part of a nationwide boom in smuggled cigarettes, but the trade has reached a peak in New York. In 2007, one in three cigarettes sold in New York was channeled untaxed through Indian smoke shops, robbing the state and New York City of nearly $1 billion in tax revenue.

Ironically, this illicit trade has been protected in part by the state’s own reluctance to enforce cigarette tax collection on reservations, a policy known as forbearance. Indians protested violently at the state’s last attempt at collecting the tax in 1997, briefly shutting down the New York State Thruway. Since then, New York governors have vowed to end the black market, but ultimately have shied away from enforcing cigarette tax laws on reservation sales.

It remains unclear whether Paterson will be any different from his predecessors. If implemented, the new law will require manufacturers to supply only wholesalers that can certify that cigarettes won’t be re-sold tax-free to reservations.

The stakes are high. The law moves enforcement up the supply chain to the wholesale and manufacturing level, charging tobacco companies with ensuring that their products are not smuggled. “This means cutting off cigarettes at the factory door,” said Russell Sciandra, director of the Center for a Tobacco Free New York.

Here in California, it’s possible to pass within a mile of the Los Angeles-Long Beach port complex and never once suspect it’s there. East of the Palos Verdes Hills, the port’s surrounding warehouses easily obscure the mass of steamers that daily arrive studded with stacks of containers bearing international cargo.

Yet the complex is the busiest in America, the arrival point for nearly half the volume of all U.S. imports. And it’s here that, like so many other smugglers, Charles and May Liu first struck gold.

By all accounts, the Lius were not extraordinary. After emigrating from China around 1980, the pair settled into the Washington, D.C., suburb of Gaithersburg, Maryland. Charles was quiet, a student in political science at New Jersey’s Seton Hall University, where he received a master’s degree. At age 67, he had a professorial look, with chinos and sweaters his preferred attire. May was a romantic, someone the agents who arrested her would later describe as a “true lady,” one who loved ballroom dancing, wore pantsuits, and fastidiously watched her weight.

But the pair wasn’t quite what they appeared. By the time the FBI arrested them in August 2005, the Lius had led a team of agents straight into the heart of a vast Chinese smuggling network — one that sold, among other goods, counterfeit pharmaceuticals, fake $100 bills, and weapons from North Korea. And then there was their real gold mine: cigarettes. Low-grade, brand-name counterfeits. Over a billion of them, all told — more than enough to supply every man, woman, and child in America’s 50 largest cities with a pack.

Since a series of press exposés in 2000-2001 documented the tobacco industry’s extensive history of smuggling, the industry has seemingly retreated from the practice. Yet for Britain’s largest cigarette manufacturer, Gallaher Tobacco, the smuggling may have continued. According to lawsuits brought by former Gallaher distributor Ptolomeos Tlais, the company used companies like his to funnel large quantities of cigarettes to developing countries with no real market — and then smuggle them back into the European Union.

Here are some of the key documents related to the lawsuits:

The Affidavit — Former Gallaher executive Norman Jack reveals how the company set up its smuggling strategy.

The Verdict — A British judge rejected Tlais’s breach of contract suit against Gallaher, but found the company’s practices “gave rise to a risk of smuggling.”

The Dirty Deal — Gallaher arranged with Tlais to dump tons of moldy cigarettes overseas, while U.K. customs officials signed off on the deal.

The Moratorium — When Japan Tobacco International bought Gallaher in 2007, it also got a two-year moratorium on European Union enforcement of smuggling laws against Gallaher.

Read the full story.

Tobacco Underground is a project of the International Consortium of Investigative Journalists. Working with reporters in more than a dozen countries, ICIJ is charting the frontlines of the illicit traffic in cigarettes. In coming months, look for new stories on this ever-shifting trade, from the underground factories of China and America’s Indian reservations to the lawless border lands of northwest Pakistan and southeast Paraguay.

PROJECT STAFF
Editor: David E. Kaplan
Deputy Editor: Marina Walker Guevara
Web Editor: Andrew Green
Deputy Web Editor: Cole Goins
Multimedia Editor: Ariel Olson Surowidjojo
Audio Editor: Sarah Laskow
Research Editor: Peter Newbatt Smith
Fact-Checking: Laura Cheek, Paulette Garthoff
Copy Editor: Sara Bularzik
Additional Editing: Gordon Witkin, Tom Stites
Communications: Steve Carpinelli

REPORTING TEAM
Stefan Candea (Romania), Duncan Campbell (United Kingdom), Patricia Chan (Hong Kong), Te-Ping Chen (United States), Gong Jing (China), Alain Lallemand (Belgium), Aamir Latif (Pakistan), Vlad Lavrov (Ukraine), William Marsden (Canada), Paul Christian Radu (Romania), Mabel Rehnfeldt (Paraguay), Roman Shleynov (Russia), Leo Sisti (Italy), Daniel Santoro (Argentina), Marcelo Soares (Brazil), Drew Sullivan (Bosnia-Herzegovina), Kate Willson (United States).

DESIGNERS
Interactive Map/Homepage Design: Stephen Rountree
www.rountreegraphics.com
Web Site Design: Top Dead Center Design
www.tdcdesign.com

ADDITIONAL THANKS
El Paso Inc.
Le Soir
Novye Kolesa
ABC Color

Europe is being flooded by smuggled Russian-made cigarettes worth at least $1 billion a year, an international investigation has discovered.

A network of factories and routes has been put together across Europe since 2004, following large-scale smuggling routes previously supplied by major multinational tobacco companies. The new underground smoking trade involves only one brand, Jin Ling, which is turning up in more cities and countries across Europe every month.

Jin Ling, virtually unknown to the authorities three years ago, has grown so rapidly that law enforcement officials say it now rivals Marlboro as the top smuggled brand being seized in the European Union.

The organization behind this fast expanding black market, the Baltic Tobacco Factory (BTF) of Kaliningrad, Russia, has links to two of the world’s largest tobacco companies. Its factory network in Russia and Ukraine was previously owned and run by subsidiaries of Japan Tobacco International (JTI) Group, the world’s number three producer.

The investigation has identified a network of Russian and East European companies, including 5 factories believed to play roles in manufacturing the contraband cigarettes being smuggled to the West. The Russian-run factory network now claims to be able to produce more than 24 billion cigarettes annually. This would be equivalent to 7 percent of legal EU cigarette imports.

Originally imported from China, Jin Ling features a king-size packet design that closely resembles the legal Camel brand in color, typestyle, and layout. Instead of a camel, the packs are illustrated with a mountain goat.

Jin Ling cigarettes have no legal market in any European country, according to customs officials. The brand is never advertised and cannot be bought in shops. It is only sold illegally — smuggled by gangs who hope to pocket immense profits by selling unlicensed, untaxed cigarettes on black markets across Europe.

ICIJ’s reporters went to Russia to uncover the truth about the billions of black market Jin Ling cigarettes turning up across Europe. They quickly learned that packets of Jin Ling could not be purchased even in the shops, markets, or street stalls of the Russian city where they are made, Kaliningrad. But Jin Ling was available to smugglers, in huge quantities, from its manufacturer, the Baltic Tobacco Factory.

Kaliningrad can be a dangerous place to ask questions about smuggling. The Russian territory, sandwiched between Poland and Lithuania, went into rapid and cataclysmic decline after the break up of the Soviet Union, but has since profited immensely from its close proximity and excellent transport to the European Union. It has also gained a reputation as a haven for smugglers and money launderers, and for a police force accommodating to smugglers’ interests. The city is home to a noisy night life and frontier atmosphere, with luxury limousines a frequent sight on the streets.

Russian journalists working in Kaliningrad know that to openly ask about the cigarette contraband trade is a risky business. In 2006, after criticizing the police — including the protection they give to smugglers — the local Novye Kolesa newspaper was raided and its newspapers confiscated. The paper’s co-founder, Igor Rudnikov, was then prosecuted for “beating 22 police officers.” “In Kaliningrad there were even contract killings of tobacco businessmen,” says Rudnikov, a local parliamentary deputy. “But not one of those crimes was disclosed. And it is hard to imagine that law enforcement does not know what is going on.”

Jorge Abraham sits in his parents’ living room in a single-story rental on a rutted street in El Paso, Texas. His soft, sloping shoulders twitch involuntarily. His head and contorted right hand are the only parts of Abraham’s morbidly obese frame that move by volition — the result of a 1988 motorcycle accident that left him quadriplegic.

Behind him, the living room is stacked nearly to the ceiling with belongings — including three horse saddles — that once decorated Abraham’s former home, an expansive custom-built mansion.

Abraham, now 38, lived a luxurious life until 2004, with an ever-present entourage of bodyguards and personal assistants, and at one point owning four late-model vehicles. Not everyone believed he made his fortune legally operating his import-export businesses in El Paso and across the border in Juarez. Drug dealers in Mexico and FBI agents in Texas suspected he made his millions smuggling narcotics. But Abraham had a deal that was sweeter than dope.

Abraham was the unlikely kingpin of one of America’s biggest ever cigarette smuggling rings — a racket that spanned three continents and six states and moved as many as a half-billion contraband cigarettes across the United States. As lucrative as narcotics, but with far less onerous penalties, tobacco smuggling is booming around the country — and around the world. Abraham, released from federal custody in June, recently talked for the first time publicly about his operation, the cheap, illegal smokes that Americans increasingly crave, and the bungled case against him that led from Chinese counterfeiters and American Indian smoke shops to a chilling Mexican house of death.

“This was an extremely important case,” said John W. Colledge III, former program manager for international tobacco smuggling at U.S. Customs Service. “Very sophisticated… probably one of the two most significant [federal cigarette] cases.”