WASHINGTON, D.C., June 29, 2009 — China leads the world in contraband cigarette production, with Paraguay and Ukraine also fueling billion-dollar black markets, according to a new report by the International Consortium of Investigative Journalists (ICIJ), a project of the Center for Public Integrity in Washington, D.C.

As delegates from nearly 160 countries meet in Geneva this week to negotiate a global protocol to crack down on tobacco smuggling, the new ICIJ series also reveals that terrorist groups are increasingly turning to cigarette smuggling for financing. At least a half-dozen terrorist groups rely on tobacco black markets, including al-Qaeda, the Taliban, the Real IRA, and the Colombian FARC, the project reports.

Terrorist financing through cigarette smuggling is “huge,” says criminologist Louise Shelley, an advisor to the World Economic Forum on illicit trade. “Worldwide — it’s no exaggeration. No one thinks cigarette smuggling is too serious, so law enforcement doesn’t spend resources to go after it.”

The six-part series is part of Tobacco Underground, a year-long investigation by ICIJ into cigarette smuggling — featuring interactive maps, undercover video, online interviews with experts, and links to groups and documents worldwide.

In addition to fueling corruption, organized crime, and terrorism, the illicit trafficking of tobacco robs governments of needed tax money and spurs addiction to a deadly product, the ICIJ series reports. “ICIJ shows again how the illicit trafficking of tobacco is out of control,” said Center Executive Director Bill Buzenberg. “Renegade factories, multinational companies, and weak enforcement all play a role in fueling this multi-billion dollar illegal trade, whose profits rival those of narcotics.”

Experts believe that smuggled cigarettes — either untaxed legitimate brands or counterfeits — account for 12 percent of all cigarette sales, or about 657 billion “sticks” annually, making tobacco the world’s most widely smuggled legal substance. The cost to governments worldwide is massive: an estimated $40 billion to $50 billion in lost tax revenue each year.

ICIJ first exposed the complicity of Big Tobacco in smuggling nine years ago, helping spark lawsuits and government crackdowns around the world.

Among the stories ICIJ is releasing online and in print today:

• Terrorism and Tobacco: Extremists, Insurgents Turn to Cigarette Smuggling. Terrorists are increasingly turning to cigarette smuggling for funding. The move is part of a larger trend toward use of criminal rackets by terrorists, who find trafficking in cigarettes a high-profit, low-risk way to finance operations. Among the groups are Pakistan’s Taliban militias, for whom cigarettes are now second only to heroin as a funding source.

• China’s Marlboro Country: A Massive Underground Industry Makes China the World Leader in Counterfeit Cigarettes. China now produces an unprecedented 400 billion counterfeit cigarettes annually. Cheap Chinese fakes are now sold in major cities worldwide, from New York delis to London storefronts. Officials believe China is the source of 99 percent of U.S. counterfeit cigarettes and up to 80 percent of those in the European Union. Lab tests reveal the Chinese counterfeits release 80 percent more nicotine and 130 percent more carbon monoxide than brand-name cigarettes, and have impurities that include insect eggs and human feces.

• Smuggling Made Easy: Landlocked Paraguay Emerges as a Top Producer of Contraband Tobacco. Paraguay’s renegade factories produce more than 20 times what the country consumes, and are now responsible for 10 percent of the world’s contraband tobacco, experts estimate. The vast majority of the cigarettes — up to 90 percent of production, worth an estimated $1 billion— disappears into an often violent black market, law enforcement officials say.

• Ukraine’s “Lost” Cigarettes Flood Europe: Big Tobacco’s Overproduction Feeds $2 Billion Black Market. Each year, the world’s four top multinational tobacco companies — Philip Morris International, Japan Tobacco International, Imperial Tobacco, and British American Tobacco — produce and import 30 billion cigarettes in Ukraine beyond what the country can consume, fueling a $2 billion black market that reaches across the European Union. Today, Ukraine is rivaled only by Russia as the top source of non-counterfeit cigarettes smuggled to Europe.

This project is supported by the Johns Hopkins School of Public Health, with organizational support provided by Carnegie Corporation of New York, the Ford Foundation, the JEHT Foundation, the John D. and Catherine T. MacArthur Foundation, the Park Foundation, the Rockefeller Brothers Fund and other generous institutional and individual donors.