The Center for Public Integrity

Montenegrins may have been surprised late last year to learn that the global financial crisis had arrived in their tiny Balkan country. Newspapers, the Internet, and even a James Bond film painted Montenegro as the Monte Carlo of Eastern Europe. The nation’s mountainous, tree-lined coast, medieval walled cities, and stone ruins set the scene for a boom in luxury hotels and private villas.

In December, the administration of Prime Minister Milo Djukanovic announced that Montenegro would bail out First Bank (Prva banka), one of the country’s largest financial institutions and a major investor in the Montenegrin boom. First Bank is majority owned by Djukanovic, two siblings, and a close friend.

Members of local watchdog groups, opposition parties, and journalists say this is just another example of the government’s interests aligning with the financial interests of the first family. They say their small country — fewer than 700,000 people in less space than the U.S. state of Connecticut — seems at times like the private corporation of the prime minister and his family. With Djukanovic’s political party handily winning elections at the end of March, the prime minister is expected to remain in power for another two years.

Montenegro is a lawless country,” charges Milka Tadic, editor of the country’s influential Monitor magazine. “And if you are part of the government or close to its circles you can do whatever you want.”

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.