Vlad Lavrov stories from The Center for Public Integrity

Body brokers leave trail of questions, corruption

2012-07-19T13:06:42-04:00

In April 2003, Robert Ambrosino murdered his ex-fiancée — a 22-year-old aspiring actress — by shooting her in the face with a .45-caliber pistol. Then he turned the gun around and killed himself.

Soon after, Ambrosino’s corpse entered the United States’ vast tissue-donation system, his skin, bones and other body parts destined for use in the manufacture of cutting-edge medical products.

But before they entered the system, Michael Mastromarino, owner of a New Jersey-based tissue recovery firm, needed to solve a couple of problems. He didn’t want to have to report that Ambrosino had perished in a murder-suicide. And he didn’t want anyone to know that Ambrosino’s family hadn’t given permission for his body to be used for tissue donation.

Mastromarino solved both problems the same way: He lied.

Mastromarino was the leader of a now-infamous human tissue trafficking ring that fed an international trade in body parts. Along with tissues from Ambrosino’s corpse, he stole parts from grandmothers, electrical engineers, and factory workers, as well as from the remains of famed journalist Alistair Cooke.

The disgraced dental surgeon from Brooklyn supplied the raw material for products used for a host of surgical operations — from knee repair to plastic surgery and cosmetic implants. He was a ground-level player in an industry that makes its profits by harvesting human tissues mostly from the United States, but also from Slovakia, Estonia, Mexico, and other countries around the world. One of Mastromarino's top buyers was Florida-headquartered RTI Biologics, a processor of American, Canadian and Ukrainian body parts that trades among the high-tech companies on the NASDAQ stock exchange.

Years after Mastromarino was sent to prison and the publicity in his case quieted down, his story has been given new life by a lawsuit filed in a Staten Island courthouse. New York Supreme Court Judge Joseph J. Maltese has given the green light for RTI to stand trial Oct. 22 in a civil case that will delve into what the company knew — or should have known — about Mastromarino’s body snatching.

Human corpses are prize in global drive for profits

2013-04-29T14:42:17-04:00

On Feb. 24, Ukrainian authorities made an alarming discovery: bones and other human tissues crammed into coolers in a grimy white minibus.

Investigators grew even more intrigued when they found, amid the body parts, envelopes stuffed with cash and autopsy results written in English.

What the security service had disrupted was not the work of a serial killer but part of an international pipeline of ingredients for medical and dental products that are routinely implanted into people around the world.

The seized documents suggested that the remains of dead Ukrainians were destined for a factory in Germany belonging to the subsidiary of a U.S. medical products company, Florida-based RTI Biologics.

RTI is one of a growing industry of companies that make profits by turning mortal remains into everything from dental implants to bladder slings to wrinkle cures.

The industry has flourished even as its practices have roused concerns about how tissues are obtained and how well grieving families and transplant patients are informed about the realities and risks of the business.

In the U.S. alone, the biggest market and the biggest supplier, an estimated two million products derived from human tissue are sold each year, a figure that has doubled over the past decade.

It is an industry that promotes treatments and products that literally allow the blind to see (through cornea transplants) and the lame to walk (by recycling tendons and ligaments for use in knee repairs). It's also an industry fueled by powerful appetites for bottom-line profits and fresh human bodies.

Read this ICIJ investigation.

Ukraine’s ‘lost’ cigarettes flood Europe

Ukraine — 2012-02-24T12:11:14-05:00

The hang glider pilot insisted it was a routine flight, and that strong winds had blown him over the border from Hungary into Ukraine. But the man arrested by Ukrainian authorities last July, with his flight suit and night-vision gear, looked suspiciously like other hang-gliding smugglers along the border — smugglers who take off from Ukraine, fly into Hungary, and each drop as much as 100 cartons of contraband cigarettes.

Ukraine is home to some of the world’s cheapest cigarettes — at $1.05 per pack — making the country a bonanza for smugglers, whether by glider or more mundane pathways on the ground. Cars and trucks filled with Ukrainian-made Marlboros and Viceroys get waved through border checkpoints by customs guards who seem more than eager to accommodate, for a price. Loads also move by bus and train, bound for other European countries where high taxes make packs cost as much as $5 (Germany) or $10 (United Kingdom).

The backbone of this underground commerce — the acquisition of the cigarettes themselves — is by far the easiest part of the entire operation. The world’s four leading multinational tobacco companies, Philip Morris International, Japan Tobacco International (JTI), Imperial Tobacco, and British American Tobacco (BAT), have produced billions of excess cigarettes in Ukraine, fueling a teeming black market that reaches across the European Union. Today, Ukraine is rivaled only by Russia as the top source of non-counterfeit brand cigarettes smuggled to Europe, EU officials say.

The booming trade in tobacco smuggling has major consequences, say industry experts. The growing traffic pushes huge supplies of cheap, untaxed, and unregulated cigarettes into the rest of Europe, undercutting otherwise successful attempts to curtail smoking. Worse, officials say, the trade is boosting organized crime gangs, who find the soft penalties and big profits hard to resist.

The numbers tell the story. Each year, Ukraine’s cigarette consumption and legal exports top 100 billion sticks, according to Ukraine’s Ministry of Health. Yet in 2008, tobacco companies manufactured and imported nearly 130 billion cigarettes — 30 percent in excess of what the local market can consume. These “extra” cigarettes disappear in the market, feeding an illicit trade that is worth, conservatively, $2.1 billion annually. Ukrainian cigarette production, meanwhile, has steadily risen since 2003, according to an analysis by ICIJ of data compiled by SOVAT, a tobacco and alcohol industry association, and Ukraine government statistics. In fact, cigarette production in Ukraine increased one-third between 2003 and 2008 — from 96.8 to 129.8 billion — with JTI and Philip Morris leading that trend.

What happens to those 30 billion “lost cigarettes”? The huge surplus has reached such proportions that it has become a parallel industry, experts say, with all sides benefiting from it, from manufacturers to organized crime gangs who control the black market. In addition, hundreds of thousands of Ukrainians, Romanians, Hungarians, and Poles along the border rely on the trafficking of cigarettes for their livelihood, buying the cheap smokes in Ukraine and unloading them tax-free in European countries where prices are far higher.

Distribution of smuggled “discount cigarettes” with Ukrainian excise stamps is also flourishing on the Internet through numerous Moldova-based online stores, which deliver them to customers worldwide.

“Tobacco companies are benefiting from selling to smugglers,” says Kostyantyn Krasovsky, head of the tobacco control unit of the Institute of Strategic Research at Ukraine’s Ministry of Health. “They sell it to them at the same prices they sell to legal wholesalers.” Krasovsky adds that in dealing with smugglers, tobacco companies can potentially gain extra profits when a batch is confiscated by customs and destroyed. “It’s even better for them; another smuggler will come and buy the same quantity.”

Even after recent hikes, cigarette taxes in Ukraine remain among the lowest in Europe. The low price of Ukrainian cigarettes means high profits for smugglers, who have pushed the product all over Europe. Enforcement is lax at best; most big seizures of smuggled Ukrainian smokes take place not in Ukraine but in neighboring Romania, Poland, and Hungary.

Blame Game

Attracted by high smoking rates and the potential for rapid returns on investments, multinational tobacco companies rushed to acquire the state-run cigarette factories after the Soviet regime collapsed in 1991. Today, the big four tobacco companies — Philip Morris, BAT, JTI, and Imperial — control 99 percent of the Ukrainian cigarette market.

The former Soviet Union, particularly the most populous countries such as Russia and Ukraine, represented a massive opportunity for the tobacco companies. Men were already smoking in large numbers but the companies knew they could push many more women to smoke, and they did,” said Dr. Anna Gilmore, a senior public health researcher at the University of Bath, in the UK, who has written extensively about the tobacco industry in the former Soviet Union. “As a result, Eastern Europe is now one of only two regions in the world where both numbers of cigarettes sold and profits are increasing (the other region is Asia), and this makes it extremely important to the industry.”

The Tobacco Atlas, published by the American Cancer Society and the World Lung Foundation, identifies Ukraine as one of the countries with the highest annual rates of cigarette consumption per person in the world: 2,526 cigarettes.

The tobacco companies, for the most part, acknowledge that they are churning out more cigarettes than the local market can absorb, but they say they sell only to licensed distributors and periodically reduce the output of certain brands that are popular among smugglers. Beyond, that, they claim, it’s up to law enforcement to prevent smuggling. “Objectively, we know that our brands produced in Ukraine are found in Europe,” said Dmytro Redko, JTI’s director of corporate affairs in Ukraine. “We do our best to prevent such shipments, although we can’t halt them completely. That is the function of the [Ukraine] government.”

JTI, which is owned in part by the Japanese government, manufactures some of the brands that smugglers cherish the most, including Ronson. Redko says his company is constantly decreasing production of Ronson, though he would not disclose the exact figures of this brand’s output. In 2008, JTI manufactured roughly 37 billion cigarettes in Ukraine, roughly 30 percent of the nation’s total production. According to Redko, when JTI bought British manufacturer Gallaher in 2007, it also inherited what he called Gallaher’s “outflow” issue — smuggled cigarettes — and the company has since tried to correct it.

BAT also has had its share of troubles in Ukraine despite the fact that the company’s output in Ukraine has declined 30 percent since 2003. In a 2007 corporate report the company acknowledged that it had to cease production of its Pall Mall brand in the country after an audit showed that “local production was not proportionate to local demand,” and cigarettes were widely being smuggled to Germany. BAT stated in the report that the company’s actions helped reduce the smuggling of its products from Ukraine by 3 billion cigarettes in 2005 and 2006. “It is our belief that if all manufacturers took this approach, outflows from Ukraine could be significantly reduced,” BAT’s chief of anti-illicit trade, Pat Heneghan, told ICIJ in an e-mail.

Philip Morris, maker of Marlboro, is the top producer of cigarettes in the Ukraine, with 44 billion sticks manufactured in 2008 — an increase in production of more than 85 percent since 2003. Marlboro, EU officials say, remains the number one brand seized in Europe. Ukrainian law enforcement officials say that Philip Morris’ brand L&M is routinely seized at the border. Philip Morris International’s director of brand integrity, Andrew Robinson, told ICIJ that the country does indeed have “an ongoing problem of diversion of genuine products from Ukraine into the EU,” but, he stressed, the company’s production is commensurate with demand. Robinson added that Philip Morris has implemented a sophisticated system of product tracking and tracing in Ukraine, and that it actively cooperates with law enforcement to prevent smuggling.

Imperial Tobacco officials declined to comment for this story. In 2008, Imperial manufactured more than 30 billion cigarettes in Ukraine, according to industry and government statistics, the third largest production after that of Philip Morris and JTI.

Everyone’s Windfall

The big tobacco multinationals in Ukraine are not strangers to the smuggling business — in the 1990s the firms colluded with criminal networks to smuggle cigarettes and gain market share around the world. Since 2004, Philip Morris and JTI have settled lawsuits brought by the EU and publicly committed to fight smuggling. The agreements require both companies to make substantial payments to the member states every time their brands are seized.

Experts say, however, that only a tiny portion of all contraband cigarettes are caught by Ukrainian customs. In 2008, customs officials seized about 66 million cigarettes — less than one percent of what they believe was smuggled out of the country.

Then there’s the problem of corruption. Several of the more than 120 criminal smuggling cases prosecuted in 2008 in the picturesque region of Chernivtsi, on the border with Romania, involve customs agents who aided the smugglers, Ukrainian police say. In just the first two months of this year, three cases have been prosecuted in Chernivtsi in which customs officials “overlooked” the smuggling of 10.3 million cigarettes — more than half of them JTI’s Ronsons.

Tobacco companies say they monitor their wholesalers for suspiciously large sales of cigarettes. Smugglers, in turn, have started to split large purchases into many smaller purchases to avoid detection. “We don’t know really who is buying from the wholesalers, as these are small batches” said JTI’s Redko.

Krasovsky, of the Ministry of Health, says tobacco companies are doing little to stop smuggling. By checking the seized packs’ production dates, he said, manufacturers could monitor where cigarettes have been bought and cut off wholesalers who deal regularly with smugglers. Instead, he adds, “tobacco companies supply cigarettes to a wholesaler that has a huge warehouse in the border with Poland — it’s obvious where those cigarettes are going to go.”

Internet merchants are also making a windfall from Ukraine-made cigarettes. A Web search for “cheap Ukrainian cigarettes” yields about two dozen online stores, most of them located in neighboring Moldova. The sites offer all the well-known brands, from Marlboro to Winston, with Ukrainian tax stamps and health warnings. The price is $22 for a carton (10 packs) of Marlboro — about three times cheaper than prices in the EU. The sellers claim that they will skip customs inspections at the destination country. If customs does try to charge a duty tax, customers are advised to reject the package and ask for their money back. Also plentiful on Ukrainian Internet sites are classified ads offering Ukrainian cigarettes delivered to the EU “in large quantities,” “on constant basis” and “without any paperwork.”

One such ad, posted on January 9, 2009, offered delivery of cigarettes from Ukraine to Europe. In response to an online inquiry, a person who introduced himself as Oleh Dmytruk responded by saying that delivery of red Marlboro can be made to Germany at 18 Euros (about US$25) per carton. The minimum purchase: 1,000 cartons.

In Krasovsky’s view, the only way to halt smuggling is to make the trade unprofitable for manufacturers. He and other tobacco control advocates propose that, much like in the Philip Morris-EU agreement, tobacco companies in Ukraine be forced to buy back their seized cigarettes at market prices.

But the economics of smuggling may be too sweet for at least some tobacco companies to stop. Asked whether the tobacco industry loses money to the illicit trade in Ukraine, JTI’s Redko responded candidly: “What do you mean by loss? From the point of view of a company operating on the market, production of extra goods means extra profits.”

Made to be smuggled

Kaliningrad,Kaliningrad Oblast,Russia — 2012-02-27T12:56:16-05:00

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.

“Jin Ling is the most disturbing new development anywhere in the world in the illegal tobacco trade,” according to Luk Joossens, a World Health Organization expert in tobacco smuggling. “They are flooding into Europe.”

The ten-country investigation of Jin Ling was done by the International Consortium of Investigative Journalists (ICIJ), a non-profit network of independent journalists who first exposed the complicity of Big Tobacco in smuggling eight years ago. Relying on corporate records, customs data, and undercover reporting from inside the main Jin Ling production center, ICIJ’s team has pieced together the unique story of the world’s first ever cigarette brand designed and manufactured only for smuggling.

Operation Baltic

Baltic Tobacco Factory’s headquarters is in Kaliningrad, a slice of Russian territory annexed by the Soviet Union after World War II and wedged between Poland and Lithuania. The freewheeling Russian exclave is known as a hotspot for smuggling and organized crime. In the city of Kaliningrad, the regional capital, Baltic Tobacco’s eight-acre complex of factories, offices and warehouses is discreetly set back from main roads. From the riverbank, an unmarked wandering track leads eventually to the company’s three-story red-brick office block. No signs or nameplates mark or identify the factory or the office buildings.

From Kaliningrad, BTF’s cigarettes are smuggled by the billion directly through Poland, or routed more circuitously through Lithuania, Latvia, Belarus, and Russia. Officials at Baltic Tobacco recommend sea routes to their clients, as they can deliver containers direct and tax-free to Kaliningrad’s port. They also offer shipments from their Lviv factory in Ukraine, through the Black Sea port of Odessa.

Overland to Germany, and from Baltic or Black Sea ports, the cigarettes are passed to criminal networks in at least 12 countries — Germany, the United Kingdom, Poland, Latvia, Romania, Greece, Turkey, Italy, Bulgaria, the Netherlands, Belgium, and France.

None of the packs contains the correct large mandatory health warning notices now compulsory in all EU states, making their illegality clear. Some Jin Ling packs found in Europe, however, sport “duty free” stickers, or meaningless Russian tax paid stamps, apparently as a marketing tactic to confer prestige and credibility on the product. BTF is believed to print the “duty free” labels themselves, to make their black market handiwork appear as leakage to the “gray market” — as if the cigarettes are simply an unauthorized diversion of otherwise legitimate goods.

“Jin Ling cigarettes are being legally manufactured in Russian factories but are intended for the European illegal market,” says smuggling expert Joossens. “It’s a unique new problem.”

The rise in Jin Ling traffic coincides with significant reported falls in seizures of legal but untaxed tobacco products exported from Western producers. Manufacturers such as Philip Morris, JTI-Gallaher, and Britain’s Imperial Tobacco Group have come under intense international, public, and political pressure to “clean up their act” and curb sales to illegal channels and smuggling centers such as Kaliningrad.

The scale and striking growth of Jin Ling smuggling has marked it as a major new development in organized crime, prompting European customs agencies to respond by launching “Operation Baltic” early in 2008. Officials at the EU’s Anti-Fraud Office (OLAF) have assigned an international task force to the Jin Ling problem. The smuggling of Jin Ling has “become a huge problem in the EU causing substantial losses to both national and EU budgets,” OLAF said in response to inquiries from ICIJ.

To investigate the Baltic Tobacco Factory, ICIJ reporters went undercover and visited its Kaliningrad plant in June 2008. Posing as smugglers setting up a new route to the EU, they carried concealed video and recording equipment.

BTF officials proved eager to help their prospective new clients. At the company’s main factory, the undercover team was offered Jin Ling by the container — each one filled with over 10 million cigarettes. “We don’t care” what happens to the cigarettes, Dmitry Gyrja, BTF’s logistics manager told the reporters. “According to Russian law it doesn’t matter. All the transportation arrangements are up to you…” With payment in advance, he added, a container could be ready and waiting in two weeks.

Their price per container: $102,500 (£59,000 or €73,000) — about one cent per cigarette. If the contents of one container reached Sweden or Germany and were sold at full legal price, they would be worth $3.2 million (€2.3 million). In Britain or Norway, where cigarette taxes are high, the same shipment would be worth nearly $6 million (€4 million). Even at half the price — which black market cigarettes usually sell for — the profits would be immense.

The fat profit margins rival those from narcotics and justify elaborate and costly concealments, the use of complex and circuitous routes, the payment of substantial kickbacks to corrupt police and customs officers, and the hiring of enforcers.

Since 2005, European customs agencies monitoring trade across the EU’s eastern borders have seized rapidly increasing quantities of Jin Ling concealed within shipments of nearly every sort: fruit and vegetables, fish, building supplies, peat moss, timber, scrap cardboard, bakery products, paper rolls, and horse food. Lithuanian police have even found Jin Ling built into fitted furniture.

So pervasive have Jin Ling seizures become that Europe-wide, customs officials are reporting it as the “most seized” brand. Reports examined by ICIJ reveal that during 2007, 258 million cigarettes were seized — the equivalent of 25 full container loads, and an 87 percent jump in seizures over the previous year. During 2008, new seizures, routes, and locations have been discovered every week.

Far more is believed to get through, fueling black markets and funding crime across Europe. Customs agencies typically expect to uncover 5 percent to 10 percent of contraband, implying that BTF might be getting up to 5 billion cigarettes into Europe every year. But BTF claims to be making more than three times this amount.

Jin Ling from Kaliningrad started trickling into Lithuania and Poland during 2005. The first large-scale contraband shipment found entering the EU was discovered by Polish border guards patrolling the Lithuanian border on August 10, 2006. A consignment of 8 million cigarettes, worth nearly $3 million (about €2 million) in Western European black markets, was found in a truck supposedly carrying fuel. Two months later, in October 2006, British customs first reported seizing the previously unheard-of brand in the English Midlands.

Polish Customs documents obtained by ICIJ show that the country’s role as smuggling route to the West has become pivotal since its accession to the E.U. The number of smuggled cigarettes seized annually on Poland’s eastern border more than tripled from 243 million in 2003 to 750 million in 2007.

Since August, Jin Ling smugglers have opened a series of new routes through southern Europe. Some cigarettes have come from the Lithuanian port of Klaipėda, 120 km (70 miles) from Kaliningrad, via Cyprus. Others have been ferried to Turkey, and then taken through Greece heading for central Europe. During September, Romanian customs uncovered two containers of Jin Ling en route from Greece. The intended primary destinations for these cigarettes, say officials, are high tobacco tax Western European countries, particularly Germany and the UK.

The international scope of the business was made clear by a September 29 seizure of five million Jin Lings aboard two trucks leaving the port of Venice, Italy. According to Italy’s Guardia di Finanza, the trucks had Bulgarian license plates, the arrested drivers were Greeks of Georgian and Uzbek descent, and the tobacco came from BTF’s Kaliningrad factory. The cigarettes had been moved by road from Kaliningrad through Russia and Lithuania to the Baltic port of Klaipėda, then shipped to Larnaca, Cyprus, then shipped again by sea to the port of Venice.

Delivering ‘The Kids’

German customs officers say they are familiar with the traffic of Jin Ling cigarettes entering and transiting Europe on the “Warsaw Alley” to Berlin and the Ruhr, and then on to the channel ports of Antwerp and Rotterdam.

Their anti-smuggling teams have extensively used mobile phone wiretaps in attempts to block shipments. Jin Ling consignments, they hear the smugglers say, are called “little goats,” referring to the mountain goat on the cigarette pack design. When a consignment goes through, the smugglers are said to message each other to say “the kids have been delivered”.

Cologne, Munich, and Berlin are the German cities most targeted by the Jin Ling smugglers. Berlin is served by a network of 300 black market sales points, most of which offer Jin Ling, officials say. One supply route used involves concealing contraband cigarettes within huge regular food consignments distributed to low-price German supermarket chains from mainland Europe. According to federal statistics, one in three residents of the former East Germany smokes smuggled cigarettes.

German customs and police investigators believe that Jin Ling is being distributed and sold through organized crime networks, including Vietnamese and Lithuanian gangs, and policed by local enforcers. Vietnamese sellers are ordered to sell the packs at the fixed price of €2 a pack ($2.80), or €20 ($28) per carton.

The cigarettes are generally sold by street vendors operating near underground stations. The sellers have been found to have created concealments for their supplies in nearby parks, pavements, or roadside vegetation. Some sellers in Germany carry their merchandise inside bulky clothing.

British customs reported finding the new brand with its distinctive yellow pack, first in Birmingham in 2006 and then in Derbyshire the following year.

Smuggled cigarettes are sold door to door in public housing developments, or from fast food shops or car trunks, according to tobacco control experts. They add that the same channels in Britain and Germany are used in parallel to supply narcotics.

‘We Cannot Meet Demand’

In Russia, the Baltic Tobacco Factory has been a business success story. The company was officially incorporated as Baltiskaya Tabachnaya Fabrika — BTF — in August 1997. Since 2006, BTF has doubled production capacity at its Kaliningrad facility from 6.3 billion to 13 billion cigarettes a year. A second factory, in the Caucasus city of Armavir in southern Russia, was acquired in 2003 and upgraded to produce up to 1.8 billion cigarettes annually.

By April 2007, BTF had installed two new cigarette manufacturing machines in a third factory, at Lviv in Ukraine. The company said that it planned to install 6 more machines during 2007 to bring its capacity in Lviv to nearly 10 billion cigarettes a year.

The director general and apparent owner of Baltic Tobacco is Vladimir Kazakov, a Russian citizen. Kazakov told Russia’s business magazine Kommersant-Dengi in October 2006 that BTF was enjoying a dramatic sales boom. “We cannot meet demand, we have no production space,” he explained.

Kazakov has told the Russian press that BTF produces two dozen different brands for the mid-range domestic market in Russia, and exports 5 percent of its production to markets including the United Arab Emirates, Canada and the United States. He boasted of employing 28 regional representatives to sell his brands across the Russian Federation.

Yet ICIJ’s inquiries in Russia, Europe, and worldwide raise serious questions about Baltic Tobacco’s claim to be producing largely for Russian consumption. Data reported by Business Analytica, a Russian marketing research service, suggest that BTF’s actual Russian retail sales are only 0.1 percent of the Russian domestic market, or about 400 million cigarettes a year. Checks of cigarette vendors in Russian cities found no evidence of Jin Ling cigarettes being sold, even in Kaliningrad. The cigarettes are rarely seen among the heavy-smoking Russians.

As for BTF’s claim of exporting 5 percent of its annual production, that would equal at least 400 million cigarettes, or 40 full containers. But checks of PIERS (Port Import Export Reporting Service) — the most comprehensive source on U.S. waterborne trade data — found no records of Baltic Tobacco shipments to the United States. A check of unofficially published Russian trade data revealed only one small recorded export – to Poland, in 2005.

ICIJ repeatedly contacted the Baltic Tobacco Factory by phone and fax, seeking a response to the various issues raised by this investigation. BTF officials declined to comment.

Ties to Big Tobacco

Despite Baltic Tobacco’s marketing tactics, it has ties to major multinational tobacco companies, including two of the largest cigarette firms in the world — Japan Tobacco International (JTI) and British American Tobacco (BAT).

Although BAT has publicly stated its opposition to cigarette smuggling, the company has supplied Baltic Tobacco with high quality Western-style tobacco. In April 2008, BAT’s Brazilian subsidiary Souza Cruz shipped 21 tons of tobacco leaf direct to BTF’s Kaliningrad plant, according to PIERS. The shipment, according to BAT officials, was one of four by Souza Cruz to BTF since 2003.

In 2007, BAT Chairman Jan du Plessis pledged to “ensure that all our operations are directed only at supporting the legitimate tobacco trade. Our companies… cut off supplies to any customers knowingly or recklessly involved in illicit trade.”

In an email to ICIJ, BAT spokesperson Catherine Armstrong stated that the exports had been routed through a Brazilian agent and were “an oversight” which “has immediately been put right. . . Our anti-illicit trade team is aware of allegations around the Jin Ling brand made by Baltic Tobacco Company. Regrettably, our subsidiary Souza Cruz was not aware until now… we can confirm consequently that no more tobacco will be supplied.”

BAT is not alone in supplying BTF with ingredients suitable for making better quality cigarettes preferred by Western smokers. Russian customs data reveal that Baltic Tobacco has imported such products from around the world — tobacco from Brazil, Panama, Uganda, Zambia, and Zimbabwe; filters from the Baltic republics, paper from Switzerland, Germany, France, and Sweden; glue from the Czech Republic and Baltic republics; flavorings from the United States; and cigarette packs printed in Estonia. Records show that the company has also invested heavily in stock and infrastructure, including brand new machinery from Germany, France, and the Netherlands.

Jin Ling’s origins date back to an obscure Chinese brand exported to Russia. Jin Ling cigarette brand was originally developed by the Chinese state-owned Nanjing Tobacco Factory. (Jin Ling is an old name for the city Nanjing.) In the last years of the Soviet regime, China bartered supplies of Jin Ling cigarettes for Russian machinery. But the trade died out until the brand was re-introduced by the first owners of the BTF factory in 1997.

BTF’s director general, Kazakov, says he took over in 1999, after working with the RJR tobacco company. He told the Russian press that he was RJR’s exclusive Russian distributor for its popular “Pyotr 1” (Czar Peter I) brand cigarettes. BTF’s factories at Lviv and Armavir were formerly owned and operated by RJR.

But in 2004 BTF was linked to another tobacco multinational, UK-based Gallaher. In that year, BTF was owned by PRT, Ltd., a company based at the Polish headquarters of Britain’s Gallaher Group, located in Poddebice near Lodz, according to the Russian company database SKRIN. Gallaher took over the Poddebice operation – Compania Tytoniowa Merkury, a privatized Polish state cigarette factory – on 5 March 2003. A spokesman for Japan Tobacco International (JTI), now owner of Gallaher, stated in an email to ICIJ that BTF and PRT “might have been third-party contractors at some point before 2003” with the Gallaher Group.

According to the Dun and Bradstreet Worldbase database, PRT, Ltd continued to be registered at Gallaher’s Polish offices in Poddebice as recently as August 2008. Following the Gallaher takeover, according to the world trademark registry WIPO, ownership of the Jin Ling trademark was re-registered to BTF in Kaliningrad on 11 September 2003.

PRT Ltd in Poddebice continued to own the Baltic Tobacco Factory until 16 September 2005. Its share value was then raised from 960,000 roubles to 120 million roubles ($5 million). Ownership was transferred to a single unidentified Russian citizen.

Kazakov is now registered as the owner of all of BTF’s shares, according to Russia’s EGRUL information service.

Both RJR, Kazakov’s former supplier, and Gallaher, BTF’s former home, are now part of Japan Tobacco International (JTI). JTI acquired RJR’s non-U.S. tobacco operations in 1999 and bought Gallaher in 2007. In 2004, BTF joined JTI — as well as Philip Morris — in forming the Moscow-based Tobacco Industry Development Council. The industry group’s stated intent was to lobby for more favorable taxes on filtered cigarettes.

The Jin Ling Archipelago

Although unheard of by most European consumers, the black market Jin Ling brand has grown so fast and become so successful that customs officials now believe that 10 companies are producing or marketing the cigarettes. The ICIJ investigation has independently identified five factories, located in northwestern Russia, Ukraine, and in the Krasnodar region of southern Russia, where Kazakov was born.

All but one of the companies are suspected to be run by Kazakov, who claims to have spent $45 million on new machinery. The tenth company, located in the Moldovan capital of Chişinău, may be acting as a “franchise,” officials say.

Moldovan state records, however, suggest that the company is not linked by direct ownership to the Kaliningrad group. The owner of record is Tutun-CTC — which is 90 percent owned by the Moldavan government.

In March 2006, a lawyer acting for a Chişinău resident, Vsevolod Ilcenco, registered trademark rights for the identical brand name and packaging as the Russian brand Jin Ling in Macedonia, Bosnia, Serbia, Montenegro, Croatia, Greece, and Egypt. His patent lawyer, Leonid Cotruta, told an ICIJ reporter that the Moldovan Jin Ling cigarettes were made “only for exporting purposes, in countries different to the Russian manufacturer’s exports.” Brand trademark owner Ilcenco is also the owner of a duty free cigarette trading shop adjoining the EU border with Romania at Sculeni.

The Moldovan Jin Ling plant reportedly only began production recently, but its version of Jin Ling has already turned up in EU countries. When questions were put to Ilcenco about the export routes and methods used, a spokesperson called back and said, “I don’t want to tell you how much we produce or where we export.” But if the press were interested in cigarette smuggling, he added, it was best to write about Western tobacco companies. “They are also involved in contraband.”

Like Baltic Tobacco’s products, the Moldovan brand of Jin Ling has been found only in illegal western markets, not in the legal markets claimed by the company. The advertised retail price for Jin Ling in Moldova is 20 cents per pack.

Another Jin Ling factory uncovered by ICIJ’s reporting team is located in Donetsk, in the eastern Ukraine. Operated by Subsidiary Enterprise Tobacco Company Khamaday, its products have also been found smuggled into Poland and the EU.

Production from the Armavir, Donetsk, Chişinău, and other plants is believed to be modest compared to that of Baltic Tobacco’s sprawling Kaliningrad facility. But the industrial levels of black market cigarettes seen flowing out of the Russian-run factory network have alarmed EU law enforcement.

On October 20, nearly 160 governments from around the world will meet in Geneva under a World Health Organization (WHO) treaty on tobacco control. The meeting will agree on new steps to crack down on the global illicit tobacco trade. Because of the growing European concern, Jin Ling’s burgeoning growth is likely to be a major issue at the conference.

Inconvenient questions may be asked of the Russian government, which has ratified the WHO treaty on tobacco control. “The WHO treaty on tobacco control requires signatories to take action against illicit tobacco trade,” points out Professor Martin Raw of King’s College, London and author of The Smoking Epidemic. “The Russian government must act.”

But Jin Ling’s extraordinary growth also raises troubling questions about the future of tobacco smuggling, which until a few years ago was dominated by big Western companies looking to gain market share. Baltic Tobacco’s operations suggest how easy it may be for new players to step into channels used previously by Big Tobacco, using the same equipment, production standards and styles, and even the same recently vacated factories.

Going undercover

Kaliningrad,Kaliningrad Oblast,Russia — 2012-02-27T12:56:37-05:00

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.”

To investigate the Baltic Tobacco Factory company (BTF) in the high risk environment of Kaliningrad, ICIJ’s reporters went undercover in June 2008, with one posing as a Romanian smuggler setting up a new route to the EU. They carried concealed video and recording equipment to witness all that they saw and heard. (Their video report is available online.)

BTF’s neighborhood, Pravaya Naberejnaya, Kaliningrad (“the Right Bank”), winds along the north bank of the Pregol river past former anchorages of Soviet Baltic fleet frigates and submarines. Number 10, Pravaya Naberejnaya is a large, wooded complex of factories and warehouses adjacent to the town’s distinctive elevating rail bridge, and the home of Baltic Tobacco. The company’s facilities lack addresses or any identifying signs. At one end there is a busy loading pier; at the other, an entrance manned by a security guard watching surveillance monitors.

Jin Ling’s manufacturers welcomed their visitors. At the company’s offices, a guard ushered the reporters into an office to meet Dmitry Gyrja, BTF’s logistics manager. “We haven’t worked with Romania before, but we’d be really happy to do so,” Gyrja said.

Gyrja got straight down to business: “We don’t care” what happens to the cigarettes, the reporters were told. “According to Russian law it doesn’t matter. All the transportation arrangements are up to you…” With payment in advance, he added, a container could be ready and waiting in two weeks. “We sell them for 20.5 US cents a pack, duty free.”

The company’s manager boasted that they could make an entire container of 10 million cigarettes or “sticks” in 8 hours, and that their production lines operated 24 hours a day, 7 days a week. The price of Jin Ling at the factory gate, he was told, was 20.5 cents or € 0.16 per pack. A case would cost $102.50; a full container, $102,500.

The director general of Baltic Tobacco, Vladimir Kazakov, advised the reporters on the quickest and best smuggling routes. Manager Gyrja also offered the would-be smugglers the services of his company’s fleet of 20 brand new Volvo trucks.

The offer was genuine. ICIJ’s reporters passed a transit container lorry lined up and loading as they were shown into and around the factory. BTF’s logistics manager told the reporters that they were manufacturing 120 containers every month – or 1.2 billion cigarettes.

Entering the factory, the reporters were ushered into huge, brightly lit halls filled with modern and sophisticated blending, cutting, filling, rolling, and packing machines. Jin Ling packs could be seen pouring off the production lines, with one line operating at the rate of 400 packs a minute.

A container could be ready and waiting in two weeks, the undercover team was told. It could then be delivered to the Romanian free trade zone of Constanta in less than two months. Full payment had to be made in advance.

Publicly, BTF’s Kazakov has boasted that his company markets a range of Russian brands for sale through a nationwide network. But during their tour of the 14,000-square-meter factory, secretly recorded on video, the reporters saw that every machine was manufacturing Jin Ling, with its distinctive yellow packaging and style. No other brand was being made.

BTF director Kazakov was eager to discuss deals, offering to deliver cigarettes from factories in either Kaliningrad or Lviv in Ukraine.

“We work very well through the port in Kaliningrad, where we can also make the custom clearance,” Kazakov explained. “Transporting the cigarettes from Lviv through Odessa would bring a gain of 3 weeks, but you might waste more time with custom formalities.”

“We guarantee that delivery will be made on time,” he added. “We can manufacture a container in 8 hours.”

BTF, Gyrja added, sold an impressive two containers each month, or about 250 million cigarettes annually, at the two main border crossings into Poland — the same amount of smuggled Jin Lings seized in all of the E.U. last year.

The Road to Europe

From Kaliningrad, a team of ICIJ reporters followed the route of Jin Ling cigarettes and their containers on their journey to the west. Thirty kilometers south of Kaliningrad, at the Polish border crossing of Bagrationovsk, Jin Ling was widely available. Just outside the shabby town, parts of which have been left unrepaired since 1945, smuggling is big business. As at other border crossings between Russia and the EU nations of Poland, Latvia, and Lithuania, cigarettes are not only smuggled through in full container loads; they are also broken down into small quantities by armies of personal smugglers and their managers.

Peddlers’ booths lined the roadside. Reporters observed as Russian customs officers looked on with no apparent concern while lines of Polish-registered cars and their drivers crammed their vehicles with hidden cigarettes bound for the west.

Others, in broad daylight, could be seen taping dozens of packs of Jin Ling to their arms and legs before crossing the border. Their clothing packed and bulging with cigarette packets, their appearance resembled nothing so much as fully equipped and padded American football players.

Discarded Jin Ling cases were left dumped on the street as Russian customs officers looked on. Each empty case seen at the roadside had contained 10,000 cigarettes. Each box would have cost $102.50 at the Kaliningrad factory, but would be worth at least 10 times more if smuggled successfully to Western black markets. Each abandoned box was prominently marked in red and blue with the crest and name, in Cyrillic, of the Baltic Tobacco Factory.