The Center for Public Integrity

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.

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

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.