The Center for Public Integrity

In 2004, Cyprus-based tobacco distributor Tlais Enterprises Limited (TEL) was told it had received a “red card” from British customs, a warning that the company was suspected of cigarette smuggling.

TEL’s owner, Ptolomeos Tlais, was surprised. Born in Lebanon to a wealthy trading family, Tlais was doing, he said, exactly what his supplier, Gallaher Tobacco, had told him to do: quickly dumping large amounts of cigarettes onto developing countries. Everyone involved, he insists, knew that some of these smokes — especially their low-end Sovereign brand — would find their way back to the U.K., where avoidance of high tobacco taxes guaranteed smugglers a windfall.

In fact, Tlais had even signed a unique deal with both Gallaher — the U.K.’s largest cigarette manufacturer — and the U.K. customs service, giving them unprecedented access to his shipping records. In the deal, Tlais agreed to unload tens of millions of moldy cigarettes by mixing them with new cigarettes and selling them overseas. If anyone deserved a red card, Tlais felt, it was Gallaher for coming up with the plan.

Yet just a few months later, in January 2005, Gallaher told Tlais that it could no longer send his company cigarettes because he was involved in smuggling. Each sued the other in the U.K. for breach of contract, with Gallaher claiming it was still owed $3.2 million for cigarettes purchased and Tlais seeking $675 million in lost profits and other damages. Tlais is also pursuing Gallaher — now owned by Japan Tobacco International — in his native Lebanon, where a criminal court case is about to begin against three Gallaher managers and Gallaher itself for fraud. In addition, Tlais has sued U.K. customs in Cyprus for allegedly assisting in smuggling, misrepresentation, and damaging his reputation, a case that started this month.

The investigations had gone on for so long that most Canadians probably wrote them off as another victory for big corporations.

Then suddenly on July 31, after a year of secret negotiations, Canada’s two largest tobacco companies — Imperial Tobacco Canada and Rothmans Inc. — pleaded guilty to aiding and abetting tobacco smuggling from 1989 to 1994, defrauding Canadian governments of more than a billion dollars in unpaid taxes.

The two companies agreed to pay an unprecedented C$1.15 billion (US$1.12 billion) to Canadian governments and to plead to one count of “aiding persons to sell or be in possession of tobacco products manufactured in Canada that were not packaged and were not stamped in conformity with the Excise Act and its amendments and the ministerial regulations.”

Imperial Tobacco, maker of 16 cigarette brands including Canada’s top sellers Players and du Maurier, agreed to pay US$582 million. Rothmans, parent of Rothmans, Benson & Hedges Inc. and maker of 16 cigarette brands, agreed to US$534 million.

Notorious as a haven for smugglers and money launderers, Kaliningrad, Russia, is not a place where it’s safe to ask many questions. In 2006, troops raided a local newspaper office that criticized the police for, among other things, protecting cigarette smugglers. In April 2008, ICIJ reporters went undercover to investigate the source of Europe’s “most disturbing” new development in contraband tobacco: Jin Ling cigarettes. Made in Kaliningrad by the Baltic Tobacco Factory, Jin Lings are flooding the black market across the European Union.

ICIJ reporters, carrying concealed video gear, posed as smugglers and set out to follow the Jin Ling trail.

Sociologist Luk Joossens is one of the world’s top experts on tobacco smuggling. In 1995, he co-authored a paper that alerted the world about a striking disparity between cigarette exports and imports — that billions of cigarettes were missing and likely diverted to black markets in dozens of countries. Today, Joossens is one of six experts advising the World Health Organization’s Framework Convention on Tobacco Control — a global treaty to reduce tobacco use — on how to crack down on the booming underground trade in cigarettes.

In this video interview, conducted by veteran ICIJ reporters Duncan Campbell and Alain Lallemand in Belgium, Joossens talks about some of the most pressing issues in tobacco smuggling, from Russian-made cigarettes pouring into Europe’s black markets to China’s massive cigarette counterfeiting industry.

Thanks to Le Soir in Brussels for this video.
© Pierre-Yves Thienpont/Le Soir

In his more than 30 years in law enforcement, John W. Colledge investigated cigarette smuggling, narcotics, money laundering, and arms trafficking. At the U.S. Customs Service, Colledge developed the International Tobacco Smuggling Program, which he oversaw between 1999 and 2002. In this interview, he talks about the tobacco industry’s complicity in cigarette smuggling; the massive profits that prop up criminal organizations; and the new tobacco black market now booming on the U.S.-Canada border.

Tom Zyckowski was one of four FBI agents who went undercover in parallel cigarette smuggling cases, Operation Royal Charm and Operation Smoking Dragon. The veteran special agent spent 25 years working for the FBI — 20 of them undercover — until he retired from the bureau in 2004. Posing as a Mafia “wise guy,” Zyckowski befriended an unlikely middle-aged couple — Charles and May Liu — who led the FBI through a dizzying world of counterfeit cigarettes and arms trafficking that spanned both U.S. coasts and reached as far as North Korea and China.

The illicit trafficking of tobacco is a multibillion-dollar business today, fueling organized crime and corruption, robbing governments of needed tax money, and spurring addiction to a deadly product. So profitable is the trade that tobacco is the world’s most widely smuggled legal substance. This booming business now stretches from counterfeiters in China and renegade factories in Russia to Indian reservations in New York and warlords in Pakistan and North Africa.

It began with a basic mathematical equation: In 1995 two scholars in Europe found that almost one-third of the world’s cigarette exports had simply vanished. Somehow, billions of cigarettes, once exported, had mysteriously gotten lost in transit.

Only it wasn’t that mysterious. Starting in 1999, a team of reporters from the International Consortium of Investigative Journalists pored over thousands of internal industry documents and uncovered how leading tobacco companies were colluding with criminal networks to divert cigarettes to the world’s black markets. Big Tobacco was doing it for profit — to boost sales and gain market share — as it avoided billions of dollars in taxes while recruiting growing numbers of smokers around the globe. The tobacco industry, as it turned out, did not merely turn a blind eye to the smuggling — it managed the trade at the highest corporate levels.

Cooperative for Assistance and Relief Everywhere Inc. (CARE) debuted in the international humanitarian arena in 1945 to aid survivors of World War II. Over two decades, more than 100 million food parcels, the legendary "CARE packages," were delivered in Europe.

In 1966, CARE started phasing out the food packages as the core of its mission while moving on to other projects. Health, children and poverty are now at the center of its work. But the organization also focuses on education, combating HIV/AIDS and emergency disaster relief. Across the board, CARE strives to give poor women resources because, the organization's literature says, "women have the power to help whole families and entire communities escape poverty."

Among the world's largest private international humanitarian organizations, CARE spent more than $514 million in 2005 on its programs around the world. Its tax returns filed with the Internal Revenue Service between the 2000 and 2004 tax years show that, historically, CARE has obtained the bulk of its funds from governmental agencies such as the U.S. Agency for International Development (USAID). For example, 70 percent of its funds in 2003 and 57 percent for fiscal 2004 (the most recent fiscal-year records available) came from the government.

Care for HIV/AIDS

The relief group started addressing HIV/AIDS in 1987 in Thailand. Today, CARE has more than 150 programs tackling the causes and consequences of the virus in nearly 40 countries and reaching more than 7 million people, according to agency spokeswoman Alina Labrada.

The announcement of the U.S. President's Emergency Plan for AIDS Relief (PEPFAR), a five-year, $15 billion initiative launched in 2003 to fight HIV/AIDS abroad, again infused CARE programs with federal funds.

When George W. Bush proposed his five-year, $15 billion initiative to "turn the tide against AIDS" in the developing world in 2003, he said the availability of low-cost drugs to fight the disease "places a tremendous possibility within our grasp."

Bush told Americans in his State of the Union address that the per-patient cost of antiretroviral drugs (ARVs), which improve the health and extend the lives of people who have HIV/AIDS, had dropped "from $12,000 a year to under $300 a year."

That significant decrease was a result of the competition from generic drug manufacturers. Yet Bush's initiative, the President's Emergency Plan for AIDS Relief (PEPFAR), funded by Congress a few months after that speech, has been slow to embrace funding cheaper generic ARVs.

ARV treatment is a major focus of PEPFAR and similar international programs. In addition to providing the drugs, it typically includes things such as HIV testing, counseling, monitoring for side-effects, lab tests and hospitalization.

Estimates released by PEPFAR reveal that in 2004 and 2005, its first two fully funded years, the plan allocated only about 5 percent of its overall ARV drug budget — less than $15 million — for generic drugs. A key reason for that lies in PEPFAR's own rules: only ARVs approved by the U.S. Food and Drug Administration (or given tentative FDA approval through an expedited review process set up in May 2004) can be procured with the program's funds.

While the president's AIDS initiative was still on the drawing board, that proposed stipulation drew fire from some, including Rep. Henry Waxman of California.

JHPIEGO (its name is not an acronym), a nonprofit health organization affiliated with The Johns Hopkins University, works worldwide to "train trainers" — whether they are hospital employees or African village laymen.

JHPIEGO draws on resources from Johns Hopkins' schools of Public Health, Medicine and Nursing, but doesn't offer medical treatment or family services. The organization trains people overseas to do that instead, and mainly uses local medical practitioners and trainers to run its programs.

"Our focus is on establishing the system," said Sam Dowding, acting director of JHPIEGO's Center of Excellence on HIV/AIDS. "We work in institutions where we train the trainers, so in 5 years, 10 years, it continues to be self-sustained."

The organization's funding largely comes from the federal government, which has backed the organization since its first day in operation.

In 2005, the Presidents Emergency Plan for AIDS Relief, a five-year, $15 billion initiative to fight AIDS abroad, granted the organization $8.2 million for its efforts in Côte d'Ivoire, Ethiopia, Mozambique, South Africa, Tanzania and Zambia. The funding accounted for more than a fifth of JHPIEGO's $37.5 million program expenditures and built on its work in more than 90 countries worldwide.

But at least one of JHPIEGO's programs has been debated in international circles and was not supported by PEPFAR.

Working history with U.S. government

For more than 30 years, JHPIEGO has been working with the U.S. Agency for International Development to improve health care services for women and families in developing countries.

It was founded in 1973 to implement a five-year USAID grant to train obstetricians and gynecologists. After the grant's extension, JHPIEGO expanded its global presence through partnerships with USAID, then with private foundations and other international health organizations.