Te-Ping Chen stories from The Center for Public Integrity

A ravenous appetite for asbestos

China — 2012-02-02T12:09:49-05:00

For China, it seems, the worst is yet to come.

Asbestos wasn’t used extensively in the country until Deng Xiaoping’s reforms in the late 1970s triggered a surge of development. Given the lag time between exposure to asbestos fibers and the onset of disease, health experts say, the country’s prodigious appetite for the mineral will have lethal consequences into the middle of this century.

Jukka Takala, director of the European Agency for Safety and Health at Work, says that the annual death toll from mesothelioma, lung cancer, and other asbestos-related diseases in China may reach 15,000 by 2035. It’s the price the nation will pay for being the world’s top asbestos consumer and for failing until recently to address health risks associated with asbestos mining and manufacture. In 2007, China used 626,000 metric tons of raw fiber — more than twice that of the next largest consumer, India. It is also the world’s second-largest producer, mining some 280,000 metric tons of the mineral in 2008.

“In the future, China will face a public health crisis triggered by the use of asbestos,” says Li Qiang, executive director of China Labor Watch, which monitors workplace violations. “The guidelines that China's government has put forward to protect workers do in fact offer workers protection. But the challenge is Chinese officials don't have any way to effectively implement them. Factories flagrantly fail to respect Chinese law.”

To be sure, workers in China face a multitude of threats, from toxic chemicals to dangerous industrial machines. They die at a higher per capita rate than workers in any other country, according to the International Labor Organization. But asbestos, a known carcinogen, is particularly lethal, scientists say, and China’s broad embrace of the mineral appears likely to produce an epidemic of occupational disease.

Valued for its heat and fire resistance, asbestos was once widely used worldwide, but it is now banned or restricted by at least 52 countries, including Japan, Singapore, and South Korea. Use of the mineral is banned entirely in the European Union. In the United States — where it is blamed for taking some 200,000 lives and the industry has paid out $70 billion in damages and litigation costs — asbestos use is limited to a handful of products, such as automobile brakes and gaskets.

But in China, asbestos use is booming. More than 400 factories turn out 300 million square metersof asbestos sheeting for roofs and walls each year; other factories make asbestos brake pads, gaskets, and cloth. The industry’s main lobby group, the China Non-Metallic Minerals Industry Association, insists that chrysotile, or white, asbestos, the most widely used form of the mineral, can be handled safely and links from its website to materials from Canada’s Chrysotile Institute and Russia’s Chrysotile Association. The Chinese group denounces what it calls "exaggerations” of the fiber’s deleterious effects and says that those who use phrases such as “time bomb” to warn of looming disease outbreaks are biased. The group failed to respond to multiple interview requests.

The first asbestos mine in China was opened by occupying Japanese forces in the 1940s. Today, virtually all of the asbestos mined in, and imported to, China is of the white, or chrysotile, variety. An estimated 1,000 enterprises employing more than a million people are involved in the production and processing of asbestos, and up to 90 million tons of chrysotile are thought to be lodged beneath the soil in 15 provinces, mostly in the western part of the country. The Aksai Kazakh Autonomous County of Gansu Province alone accounts for half of these reserves and boasts an average annual output of 170,000 tons.

While China has tightened its exposure limit for asbestos over the years, unhealthful conditions in many factories are believed to persist. In 2008, for example, officials in the city of Yuyao, in Zhejiang province, gave unsatisfactory evaluations to most of the 100 or so small asbestos workshops they inspected. That same year, a local journalist visited one of the workshops and found extremely dusty conditions and employees wearing disposable masks, which offer little protection against the tiny, airborne asbestos fibers. Of eight workers who had just had chest X-rays, five showed lung abnormalities.

China has taken steps to try to mitigate the looming health crisis. Brown and blue asbestos — believed by some scientists to be more hazardous than white — have been banned, as has the use of all forms of asbestos in automobile brake linings and other friction products. In Beijing, no asbestos-containing materials may be used in construction, but their use is widespread in new buildings across the rest of China. And in both Hong Kong and on the mainland, the government has committed to pay medical and rehabilitation costs for victims of pneumoconiosis, a class of lung diseases that includes asbestosis.

But for many workers, it’s too late. In a glimpse of what may be the mainland’s future, researchers at theChinese University of Hong Kong reported in March that the number of mesothelioma cases in the city was still climbing and might not peak until 2014. This doesn’t bode well for the rest of the country considering that asbestos use in Hong Kong, according to the researchers, reached its zenith in the early 1960s and mesothelioma can take 40 or more years to develop.

Unlike some Western nations, China has been slow to embrace asbestos substitutes such as cellulose fiber-reinforced cement. Still, concern over unbridled asbestos use may be building in the region. Last year, Hong Kong hosted a meeting of anti-asbestos activists from around the world. The meeting gave rise to a declaration calling for a ban on all forms of asbestos in Asia. Whether that message was heard in Beijing remains to be seen.

The counterfeit cops

China — 2012-02-24T14:11:39-05:00

The downstairs study was in shambles that morning, but the maid denied she’d been anywhere inside. A line of footprints muddied the wall surrounding the yard; still, as he stared groggily at the scene, Carl Risheim had trouble comprehending it.

To be sure, as a former law enforcement trainer in Colombia, Risheim had seen his share of personal danger. But since moving his wife and three children to Panama to start work on anti-counterfeiting for Philip Morris International, a top multinational, he thought they would be safe.

“You just never think something like that would happen,” Risheim says. “We’re talking about counterfeit [cigarettes] here.”

It was winter 2003, and Risheim was Philip Morris’s newly appointed brand integrity manager for the region. He’d been on the job just six months, but already seizures of counterfeit Marlboros had spiked. Local smugglers were taking notice, too. Late one night, a group of them approached the Risheims’ home and slipped a nozzle into the air conditioning unit. Clouds of anesthetic swelled within; the Risheims sank into a stupor. The thugs picked the locks and crept inside his home.

Risheim says his family was lucky to have woken up at all. “The [anesthesia] could have killed us,” he says. He didn’t quit, but in the days to come, he took no chances. He moved his family into another neighborhood, and Philip Morris dispatched 24-hour security to protect them.

$200 Billion of Counterfeits

And with many countries where products are manufactured — such as China or India — unable or unwilling to quell the deluge, often it’s private investigators like Risheim who end up on the front lines. Today, at least 25,000 of them are stationed around the world, fighting counterfeiters in countries from Romania to Uruguay, according to the National Intellectual Property Law Institute’s James Chandler. From fly-by-night operations in China to boutique outfits set up by retired FBI agents, the number of investigators in the field has jumped fourfold since 1995, Chandler says.

Hired as in-house employees by companies, or independent outside contractors, investigators conduct surveillance, collect evidence, and even assist with raids in dozens of nations. They can’t make arrests, but otherwise act as a private police force — that is, one operating on foreign soil, and at the behest of multinational corporations from Colgate to Nike to Louis Vuitton.

The Levinson Case and Other Dangers

Despite the size of the counterfeit industry, the investigative profession has kept a low profile. Which, given the proprietary information involved, is the way that companies like it. Particularly when it comes to fake cigarettes, one of the most lucrative counterfeit items around, investigations can be perilous: a murky world of dubious informants, counter-surveillance, and occasional death threats.

In one particularly chilling case, an investigator in Fujian Province, China, had his arm macheted off by local cigarette counterfeiters. In Ukraine, just prior to the 2005 Orange Revolution, one operative working for a multinational tobacco company was arrested on charges of espionage, and thrown into jail for days. In northern Bolivia, another local cigarette investigator was awakened at 3 a.m. by a staccato knock, and a man delivering a death threat.

The public got a rare window into the risks in March 2007, when the case of Robert Levinson, a former FBI agent turned private investigator, made headlines. Levinson — a 61-year-old father of seven from Coral Springs, Fla. — disappeared on a trip to Kish Island, Iran, where he was investigating cigarette smuggling in the region, according to his wife.

Little is known about Levinson’s specific plans on Kish Island, a free trade zone notorious as a hotbed for smuggling into the Middle East. Before heading to Kish, though, Levinson had stopped en route in Dubai as part of an assignment for the London-based advocacy group, Global Witness, and e-mail records obtained by ICIJ show he also hoped to meet with another Dubai-based trader — Ahmed Barakat, who worked as a consultant for Philip Morris International from 2001 to 2007. Barakat declined to respond to questions from ICIJ.

Since checking out of his hotel the next day on Kish Island, a half-hour plane flight away from Dubai, Levinson has not been publicly heard from, and Iranian authorities deny any knowledge of his whereabouts.

But while Levinson’s story lies on the more dramatic side of the register, he’s hardly alone in the field — or in facing the risks involved.

An Explosion of Investigators

These days, as well, there are any numbers of overseas operators enlisting in the business. In Guangzhou, China — a country that leads the world in counterfeit goods, accounting for up to eight percent of its GDP — some 80 firms are working as contractors for outside corporations. Though brand owners are close-mouthed about how much they’re spending to stop the counterfeit scourge, to take just the tobacco industry as an example, companies like Philip Morris and British American Tobacco work with dozens of investigators and informants around the world.

Of course, getting police in the developing world to see major multinational companies as victims — and to take action — isn’t easy. “Look at a country like Colombia, who’s fighting a civil war on the side, and drug lords,” says Risheim. “You tell them, ‘We’ve got a problem,’ and what’s the response? ‘Get in line!’”

Controversial Ties to Police

In many countries, building relationships with law enforcement means contributing funds, storage space, and equipment such as infrared readers or night-vision goggles. Some industries, like tobacco companies, go still farther, signing cooperative agreements with local customs agencies that — in the case of Uruguay, for example — pledge that local police will coordinate any media releases related to activities along with the affected company. Given the tobacco industry’s history of complicity in smuggling, anti-smoking advocates worry that these relationships jeopardize law enforcement’s ability to stay vigilant against any such corporate malfeasance. “Some of the major tobacco manufacturers have distracted or compromised domestic and international law enforcement efforts, and few agencies are really taking an independent look at what’s going on,” says John Colledge, who oversaw international tobacco smuggling programs at the U.S. Customs Service between 1999 and 2002.

But without such overtures, says Daniel Chow, an Ohio State University law professor and former tobacco industry consultant, local authorities are rarely responsive. In China, he says, investigators have to bring authorities cases “essentially gift-wrapped.” Says Chow, “You have to tell them, ‘Here’s the warehouse, here’s the factory, here’s the evidence.’”

To build his cases, Ted Kavowras — a former New York City cop and 15-year veteran of the field — starts by conducting undercover surveillance and test buys in markets throughout China. He and his colleagues at Panoramic Consulting employ a California-based make-up artist to keep their identities shrouded, with the aid of multiple facial prosthetics, beards, and wigs.

“We pretend to be big buyers,” says Kavowras, who met his wife while monitoring a neighbor’s sales front in Beijing, “and ultimately, they believe us.” (For the first year of their courtship, his wife-to-be thought he was a high-rolling trader from Dubai.)

But while getting the evidence is one thing, persuading authorities to act is another. In South America, investigators in the tobacco industry admit that on occasion they lie to local police, telling them that certain warehouses contain drugs — not just counterfeit cigarettes — because they know police are more likely to raid those that contain the former. In China, cajoling authorities to act often means cultivating them with overtime fees, equipment, or contributions to a local police retirement fund. Such payments, if properly documented, are legal under the Foreign Corrupt Practices Act, and investigators insist they’re necessary to getting any traction on their cases.

“Every time we went to the Public Security Bureau, they’d ask for money to open up a case, or make an arrest,” says Chow. “They were notorious for that.” The average fee per arrest, he adds, was a hefty $7,000.

Death Threats and Dirty Tricks

In Eastern Europe, an American who handled cigarette investigations in Latvia recounts how the police frequently wiretapped his office to keep tabs on his activities. “Cigarette counterfeiting would always go up during election time, for campaign money, so everyone would be watching us,” he says. The counterfeiters would tap his office phones, too, as would other consultants receiving commissions from the investigations industry. At one point, the investigator says, he received a death threat from a Russian general allied with a Latvian investigations company, who felt that the American was stealing their business.

In China, source of two-thirds of the world’s counterfeit goods, the private investigations field is particularly notorious for corruption. Numerous Chinese fronts acting as investigators are fly-by-night operations: “cockroach companies” with little or no scruples, as one Western investigator describes them. With no regulation or licensing, there are currently some 1,000 China-based brokers vying for fees from multinationals, estimates Keith Tsang of the China Association of Industry Security Professionals (CAISP). Some are composed of former members of the Chinese enforcement agencies, others just enterprising youth looking for a buck.

Local companies, of course, are cheaper to retain than big-name Western outfits (which subcontract out much of their work to such firms anyway). A successful raid might cost $1,800, with bonuses for additional seized products, and another $7,300 commission if followed by a criminal conviction. But on the flip side, it’s very hard for companies to know what’s happening on the ground.

Investigative companies looking to fleece multinationals use any number of stand-by tricks. Pawning off recycled photos of old counterfeit seizures as evidence in new cases is a favorite. (In one case, a Chinese company went so far as to film a faux-raid as evidence of a counterfeit sting operation.) Crooked investigators are known to tamper with police lists of seized goods, as well; one easy ruse is to add an extra digit on the number of seized goods: 109 quickly becomes 1,090, for example. Some companies have even been known to place orders with counterfeiting factories before launching raids, to increase the number of products seized (and in turn, their commission).

Investigators also sometimes extort bribes from the counterfeiters — in cooperation with the police, according to Daniel Plane, in-house intellectual property counsel at Gide Loyrette Nouel’s law offices in Hong Kong. “During a raid, the investigator says, ‘Pay us 40,000 RMB [almost $6,000], and we’ll tell the brand owner that everything got shipped out the night before the raid,’” he says. “The brand owner never knows, and the investigator and cop split the fee.” Plane says he’s even heard of cases in which counterfeiters gain contract work as investigators, and use their position to raid the factories of their competitors.

“Frankly, a lot of [brand owners] have their heads in the sand about what’s actually going on here,” Plane says.

Few companies are immune to the seedy side of the business. A number of years ago, unbeknownst to cigarette companies that had hired a well-known Western firm to conduct anti-counterfeit work in China, a local manager for that firm had developed close ties to the official State Tobacco Monopoly Administration, which itself is charged with investigating counterfeit cigarettes. Through that manager, the STMA would pass tips to the investigative firm, which in turn would charge its clients to investigate the information — neatly outsourcing its own work on the tobacco companies’ dime.

To keep his own investigators honest, Kavowras’s team of 30 covertly records all interactions with their targets. “I believe them, and I trust them,” Kavowras says. “But I trust them a lot more when I have it on tape.”

“It’s a real double-edged sword,” Plane adds. While investigations in China can be done cheaply, he says, “a bribe might be paid in your name, and after a raid, your investigators might be buying the police prostitutes. … You just don’t know.”

The high stakes and stress contribute to high levels of burnout in the business. For some, the risks are simply too high, and the profits aren’t there. Take, for example, the undercover informants that companies hire to investigate suspected factories, who pose as workers for months on end. For such informants — who in Fujian, China, earn as little as $5 a day — the task is “very dangerous” as well as poorly paid, according to a Xiamen-based lawyer whose firm contracts with such laborers. “If the factory finds out who they work for, they’ll be badly beaten,” he says.

Mario Loaiza, whose company conducts investigations in Latin America for several large brand owners, says he knows it’s a dangerous game. “We’re talking about organized crime here, big business, in some cases just as profitable as selling drugs,” says Loaiza, a former criminal investigator with the U.S. Department of Defense. But when it comes to his 17 investigators, he explains that he does what he can to keep them safe — for one, by never asking them to do something he wouldn’t be willing to do himself.

“I tell them, it’s just a damn pack of cigarettes,” Loaiza says. “It’s just a pair of jeans. … Your life is more important than that.”

China’s Marlboro Country

China — 2012-02-24T14:29:13-05:00

On first approach, Yunxiao seems like any other Chinese backwater caught in uneasy industrial transition. Faded advertisements line the streets downtown, where motorcyclists wearing bamboo-frond hats determinedly vie for passengers in a riot of honking. A cheerful red banner in the city center exhorts citizens to develop the local economy — and yet the message seems ironic. After all, since the 1990s, Yunxiao has already sprouted its own league of millionaires, famous throughout China.

But you won’t find their activity downtown.

Ringed by thickly forested mountains, illicit cigarette factories dot the countryside: carved deeply into caves, high into the hills, and even buried meters beneath the earth. By one tally, some 200 operations are hidden in Yunxiao, a southwestern Fujian county about twice the area of New York City. Over the past ten years, production of counterfeit cigarettes in China has soared, jumping eightfold since 1997 and making China the world leader in fake smokes. Chinese counterfeit cigarette factories now churn out an unprecedented 400 billion cigarettes a year, enough to supply every U.S. smoker with 460 packs a year. Yunxiao — once famed for its bright yellow loquat fruit — is the trade’s heartland: the source of half such production, officials say.

Today, China’s fake cigarettes fuel a multi-billion dollar black market and are even more hazardous for smokers, yet the industry is little-known. From New York delis to London storefronts, China’s brand rip-offs are now sold in cities around the world. While a pack of fake Marlboros costs $0.20 to make in China, in the United States, it can fetch up to twenty times that amount, even when sold at cut rates. Spurred by global crime rings, the counterfeit trade has exploded, propping up addiction and robbing governments of billions in annual tax revenue. Officials can only guess at the size of the industry here in the United States, but to give a sense of scale, from 1999-2005, one ring smuggled a billion fake cigarettes into Los Angeles and New Jersey. Fully 99 percent of the U.S. counterfeit market is supplied by China, and up to 80 percent of that in the European Union. Meanwhile, Chinese government efforts to stop the trade are met by street riots, machete-armed manufacturers and retaliation killings.

“Most factories are underground,” confides a Yunxiao cigarette broker in hushed tones. “They’re under buildings, unimaginably well-hidden, with secret doors from the basements.” Even the village temple — topped with a lilting red roof and twisting, frescoed spires — conceals a factory below, she says.

Sixty Versions of Marlboro

Though a nearly invisible industry, cigarette counterfeiting is an immensely lucrative one, with profits rivaling those of the narcotics trade, officials say. While one 40-foot container of cigarettes (containing 10 million sticks) can be produced in China for just $100,000, the street value of such a container smuggled into the United States is up to $2 million. And though a drug trafficker might land a life sentence if caught, a cigarette counterfeiter receives a comparative slap on the wrist — a handful of years in jail, or possibly a fine.

Interviews with law enforcement officials, tobacco industry investigators, and the smugglers themselves reveal the Chinese business is booming, with no shortage of groups vying to enter the trade. The Chinese diaspora plays a major role in distribution, with groups particularly active around New York City, Vancouver, Rotterdam, Le Havre, Valencia and Hamburg. The industry has also attracted a sprawling network of middlemen and smugglers, notably from the Middle East and Eastern Europe.

“In the last few years, pretty much every market has been targeted,” says Andrew Robinson, who directs the brand integrity division for Philip Morris International (PMI). In 2001, Chinese manufacturers were producing eight different varieties of counterfeit Marlboros. As of last year, though, PMI reports, Chinese counterfeiters were manufacturing separate versions of Marlboro tailored for some 60 countries — down to the specific detail of tax stamps and regional health warnings.

“Ten years ago, [there were] almost no counterfeit cigarettes,” says Austin Rowan, who heads cigarette fraud investigations for the EU’s Anti-Fraud Office, known as OLAF. Last September, though, the tide of fake smokes flooding the European Union — most of them Marlboros from China — prompted OLAF to post its first-ever officer to Beijing. In the United Kingdom alone, the illicit trade costs the government nearly $5 billion a year. “People are hungry for these products,” says Rowan.

Inhaling the knock-off cigarettes, however, may do even more damage than their legitimate counterparts. Lab tests show that Chinese counterfeits emit higher levels of dangerous chemicals than brand-name cigarettes: 80 percent more nicotine and 130 percent more carbon monoxide, and contain impurities that include insect eggs and human feces. And by targeting smokers with cheap cigarettes, health authorities fear the counterfeit influx diminishes incentives to quit. (Centers for Disease Control studies show that every 10 percent increase in cigarette prices causes a 4 percent drop in consumption.)

Back in the 1990s, counterfeit packs from China often came riddled with easy giveaways: misspelled health warnings, blurred lettering. These days, OLAF reports that sophisticated industry forensics are needed to identify China’s counterfeits. In the United Kingdom, where authorities in some areas report that up to one-third of all cigarettes sold are fake, mostly from China, customs officers have deployed a trained dog to try and sniff out counterfeits on the streets.

When it comes to the source of top-quality fakes like these, all roads lead back to Yunxiao. The area’s cigarettes are so renowned that Yunxiao has become a watchword among China’s counterfeiters, with manufacturers from other regions even claiming their cigarettes originate in the area — a kind of double-layer decoy.

Last December, China’s Ministry of Public Security announced the bust of one of the largest international schemes in years, a network of 27 suspects that reportedly smuggled at least 600 million fake cigarettes around the globe. While the cigarettes — mostly counterfeit Marlboros and 555s — were shipped as far as South Africa, Greece, Indonesia and the United Kingdom, they’d all been manufactured in southwest Fujian, deep in rugged mountains.

Fujian’s cigarettes also lay behind a massive U.S. smuggling network the FBI busted in 2005. Two sting operations code-named “Operation Royal Charm” and “Operation Smoking Dragon” netted a group of 62 ethnic Chinese who smuggled one billion cigarettes into the Los Angeles-Long Beach and Newark ports, using false descriptions such as “wicker furniture” and toys. The counterfeits, largely Marlboros and Newports, were in turn sold on the streets of Los Angeles, Chicago, and New York City.

“Any brand or quality, Yunxiao can help you make it,” says a former cigarette smuggler from Fujian. “You just need to name your price.”

A Flood of Fakes

It’s hard to overstate the ubiquity of tobacco in China, a country home to one of the world’s most elaborate and entrenched smoking cultures. Here, the introductory exchange of cigarettes is as ritualized as a handshake, while expensive packs moonlight as everything from wedding gifts to bribes — even offerings on ancestors’ tombs.

As an official from the tobacco company Rothmans once put it, “Thinking about Chinese smoking statistics is like trying to think about the limits of space.” Every year, China’s smokers consume one-third of the world’s tobacco: an overwhelming 2.2 trillion cigarettes. Cigarette-related mortality levels, too, are equally staggering, with fully one-third of all Chinese men under age 30 predicted to die from the pandemic.

Like anything else related to tobacco in China, the number of counterfeits flooding the domestic market is similarly off the charts. “Each of us has come up with our own strategy to deal with it by now,” says one Beijing smoker, who personally refuses to buy at locations where he doesn’t know the owner. The problem is so bad that on trains, conductors roam the aisles, industriously hawking 75 cent keychain lights that purportedly reveal fake packs.

After all, while the West is the most lucrative counterfeit market, for smugglers, it’s also the riskiest. Inside China, local ties and protectionism afford some degree of control: a friendly $10,000 tribute, one customs official confides, has been the going rate to bribe a container out of the Xiamen ports in recent years. (And even without payment, inspection rates at China’s ports are a low one to two percent) Beyond China’s borders, though, containers are more vulnerable to detection by outside law enforcement, many of them newly vigilant against the fake trade.

“We’re seeing seizures all the time,” says PMI’s Robinson. In May, UK authorities seized over 20 million counterfeit Regals (valued at $8.6 million) imported from China into Southampton. Likewise that month, Spanish authorities grabbed 20 million fake Marlboros — falsely described as mattresses — imported from the Chinese ports of Chiwan and Shekou. Also in May, French customs intercepted more than 15 million made-in-China fake Marlboros outside Paris, some bearing Vietnamese as well as Arabic and French health warnings.

Nevertheless, says OLAF’s Rowan, such seizures are just “the tip of the iceberg.” Smugglers frequently ship cigarettes through an array of destinations such as Dubai and Singapore to mask a container’s origin, with some spending up to three months at sea before delivery. And even if a container is seized, given exorbitant per-container profits, the loss is a slim deterrent. “With nine containers seized in ten,” Rowan says, “[smugglers] still would not be losing money.”

For counterfeiters, the rewards are especially prodigious. According to manufacturers, state-of-the-art cigarette machines (available online from sites like Alibaba.com) can fetch a pricey $1.5 to $3 million. “But everyone knows that the investment can be recouped in just a few months of manufacturing,” says a Yunxiao broker. Some factories boast up to 500 workers and over $100 million in annual sales.

With so much profit at stake, this underground industry has cultivated a notably violent set of players. Past factory raids have yielded semi-automatic rifles and met with armed resistance, and every year, several state and private investigators are killed in their efforts to penetrate the trade. The average raid is carried out by hundreds of Chinese police. During one 2003 operation, says a security consultant at ZIC, fully 5,000 officers were deployed. (ZIC no longer takes on cigarette cases, according to the consultant, because the risks have become too great.)

In the 1990s, Chinese counterfeiters relied heavily on Macao, Taiwan, and Hong Kong for technical expertise, as well as high-quality packaging. These days, though, China’s counterfeiters source the majority of their supplies from the mainland: tobacco from Yunnan province in the west, packaging from Dongguan and Shantou in nearby Guangdong province, and cast-off machines bought online from underground manufacturers or recently shuttered state facilities. (Over the past decade, China’s legal cigarette industry has been consolidated, with the number of factories shrinking from 185 to 31 since 2001.) Counterfeiters have not only acquired the technology to mimic holograms used to distinguish real packs, but also the rounded-corner packaging the tobacco industry has introduced in recent years.

And as manufacturing technology has improved, so, too, has the speed with which counterfeiters respond to shifting markets. This December, when Irish authorities seized a shipment of 20 million counterfeit cigarettes, they found the made-in-China packs bore exact replicas of Ireland’s latest tax stamps, which had been in circulation only a few months.

With the advent of the Internet, counterfeiters have become more brazen as well. Many openly court clients through online storefronts, touting quality guarantees and their equipment’s international caliber. One Yunxiao operation, established in 1993, assures customers of its experience exporting to Asia and Africa, and says it maintains its own tobacco leaf fields in Laos. The company — which churns out some 80 million cigarettes a week—promises a six-day manufacturing turnaround, door-to-door delivery for certain overseas clients, and impeccable customer service.

The tone is reassuring and gently instructive. For tentative buyers, the owners guarantee that for the U.S. in particular, it’s a “profit business.” Reads their website: “We strive to build and maintain a total honesty management culture, and will appreciate the chance to do business with you.”

James Bond and Pig Pens

In China, as elsewhere, a successful business relies on more than just technology — it requires serious support from investors and brokers. Men, for example, like Tony Tung.

Originally a fishmonger from Fujian, for the past 15 years, Tung — square-jawed, middle-aged, with a thick coif of black hair — has ranked among China’s most notorious cigarette dealers. Tung, though, didn’t start out smuggling fakes. In the early 1990s, he found gold in the genuine product: Marlboros and 555s smuggled into China from abroad.

For years, the Chinese government has worked strenuously to keep foreign cigarette companies at bay, capping imports and levying tariffs as high as 430 percent. That, though, didn’t deter companies like British American Tobacco from smuggling their products into China — or Chinese enterprisers like Tung, who made millions smuggling legally produced cigarettes in the Philippines into China.

But when China cracked down on the trade in the 1990s, Tung turned his sights to the next industry bonanza: counterfeiting. Tung built up factories in Fujian, as well as in the Philippines (closed by authorities in 2005) and the free-trade zone of Rajin, North Korea. In recent years, his enterprise has reportedly shipped up to 50 containers a month — or 500 million cigarettes — to markets throughout the United States, Europe and Asia. Tung continues to elude authorities, shuttling between Singapore and nearby countries, according to a tobacco industry source familiar with Asia. Recently, his syndicate has started using fishing boats to smuggle its product around Asia, the better to dodge inquisitive customs officials.

Tung and his fellow counterfeiters employ an impressive bag of tricks to avoid scrutiny. One manufacturer (arrested in 2001) constructed a factory that masqueraded as a People’s Liberation Army compound, complete with 20 laborers — dressed in cast-off military uniforms — who would conduct faux-army drills and sing the national anthem in the yard every morning. Other machines have been lodged on ships, inside concrete bunkers, and even under a lake.

“Finding these guys is like a James Bond movie,” says Keith Tsang of the China Association of Industry Security Professionals. “You’d never believe it was for real.”

In Yunxiao, factories are frequently hidden in dim, bricked-in facilities underground, accessible only via trapdoor and ladder. The turf masks the tobacco scent, while nearby sentries are used to monitor passersby. Workers staff production lines in teams of six or seven, feeding tobacco into large, heavy machines anchored in concrete foundations. Above ground, manufacturers use other ploys to hide the tell-tale aroma: double-paned glass and cotton quilts tacked to the walls, with pig pens sited nearby. In Yunxiao, investigators say, the easiest way to find a factory is often by searching for signs of industrial power sources.

Like many industries, China’s counterfeit operations are distributed: tobacco cutting and drying at one site, cigarette rolling at another location, and packing still elsewhere. These days, the packing — usually managed outside port cities, just prior to shipment — is the only process that hasn’t yet been mechanized. In major distribution centers like the city of Guangzhou, 300 miles west of Yunxiao, laborers still fill and seal the branded packs by hand. In one city corridor crammed with wholesalers, teenage girls from Fujian stroll arm-in-arm in the quiet pre-dawn darkness, awaiting their next shift.

Twenty-five years ago when multinational tobacco companies’ smuggling activities took off, Chinese smokers flocked to foreign brands. Now, cigarette vendors say fake Marlboro and 555s are so common that many Chinese simply choose to avoid them altogether. As one former cigarette smuggler from Shenzhen explains, “Nobody can tell anymore whether they’re real.”

The Mountains Are High

Since its accession to the World Trade Organization, China’s lackluster efforts to protect intellectual property rights have attracted sharp criticism. But with regard to tobacco, Beijing has waged a more aggressive war. All legal manufacture and distribution of cigarettes is state-owned, and in a nation of 400 million smokers, that’s big business. (Local governments are zealous about defending it, too: until this May, officials in Hubei were required to smoke a collective 230,000 packs of regional brands a year.) With cigarette sales accounting for nearly 8 percent of China’s budget in 2007, the state has a strong motive to keep its supply counterfeit-free.

Certainly the relevant authority, the State Tobacco Monopoly Administration, has spared no resources in trying. By 1995, long before multinational tobacco companies had seriously mobilized on the issue, the STMA had already dedicated $12 million to combating counterfeiters. The agency today fields 50,000 agents to fight the fakes, according to industry sources. Meanwhile, this year, according to a police officer in the Yunxiao region, the STMA has dispatched some 150 officers directly to the region for up to year-long postings.

Last year, officials say, the STMA raided 3,312 production sites throughout China, apprehending 7,128 people in the process and seizing 8.3 billion counterfeit cigarettes. The STMA also regularly holds public “destruction ceremonies” to demolish seized cigarette equipment, hoisting the machines up into the air by crane before dashing them onto concrete below.

“China devotes a huge amount to enforcement,” agrees Martin Dimitrov, a professor at Dartmouth College who has studied the issue. “The puzzle is that there seems to be little effect.”

It’s not that manufacturers don’t feel the pressure. One manufacturer reports that local counterfeiters are losing up to $300,000 a day in seized materials, and phone calls to a handful of different counterfeiters suggest a number are currently laying low, hesitant to expose themselves to new buyers.

But when it comes to Yunxiao’s factories, an old Chinese idiom seems particularly fitting: The mountains are high, and the emperor is far away. Yunxiao villagers, too, quote their own motto: “Any official can absolutely be bought within half a month.” In some cases, a gift of just $1,500 can buy a counterfeiter a license to operate and some official breathing room. Last year, 28 officials werereportedly detained in connection with cigarette counterfeiting on charges such as dereliction of duty, cover-ups, or actually participating in the trade.

From another perspective, the counterfeit industry is also a boon for local employment, which some officials are loath to suppress. “The question for authorities now, with the economic slowdown, is: Do you really want to shut these places down?” says Tim Trainer, who heads the Global Intellectual Property Strategy Center in Washington, D.C.

For some, it seems, the answer is no. Last year, though China’s Administration of Industry and Commerce completed 13 percent more intellectual property raids than in 2007, the number of such cases transferred for criminal prosecution dropped 40 percent. This January, the Guangdong prosecutor’s office instructed prosecutors to “cautiously choose whether cases should be brought,” and with less serious criminal cases, “postpone enforcement where appropriate.” Likewise in December, the deputy minister of Shandong’s public security bureau (recently arrested for corruption) pressed police to avoid “aggravating” businesses’ production problems, for fear of “increas[ing] the likelihood of mass protests.”

No matter Beijing’s intentions, national priorities can only filter down so far. One police officer based just outside Yunxiao, who asks to remain anonymous, reports that his superiors deliberately downplay fighting those in the trade, and that an arrest is an anomaly. Most workers caught will “just pay some fines,” and even if arrested, their bosses will bribe or bail them out. As for catching production bosses, he says, it’s “impossible.” They’re too deeply insulated, he says, and too adept at hiding: some hold as many as 100 fake identity cards from China’s 22 different provinces.

Even if caught, the maximum sentence a cigarette counterfeiter can expect is just seven years. Three years is the minimum and more common sentence, says CAISP’s Tsang. To put someone in jail for even that long, authorities have to seize over $36,800 in contracts or goods, a threshold counterfeiters try to duck by scattering storage and production efforts.

“It’s impossible to root out this business,” says the police officer. “Even though there are crackdowns, I don’t see any long-term plan to eradicate the industry.” While the STMA pays any police division up to 15 percent of the retail price of any goods seized, those incentives, he explains, are useless in nabbing those involved. “When cars [with cigarettes] are stopped, the drivers run away, but the police don’t care, because they’ll get a reward anyway,” he says.

In the last five years, one multinational tobacco company has altered its tactics on the mainland, choosing to focus its efforts on seizing goods as they leave China, rather than on identifying production sites. “In an ideal world, we’d be able to go after them, but that became too hard,” says a tobacco industry official. There are simply too many—and besides, as he asks, “At the end of the day, are we really going to convince the provincial authorities in Fujian to crack down?”

The Shanghai Professor

Few in Yunxiao will talk openly about the village’s main industry. One knowledgeable resident, a 30-year-old woman and sometimes cigarette broker, tried to explain why the trade flourishes so well in her community. The counterfeiting industry, she told visitors, is more than just a business, it’s a brotherhood. Only those whose entire family tree can be traced to the area are permitted to work in production. Regional markets are divided by family, and once established, firmly respected — spurring others, in turn, to develop their own new markets. Unity is fierce, she says: that’s why Yunxiao is so well-protected.

Surveillance is heavy in Yunxiao’s narrow side streets and in its hotels, and outsiders are frequently tailed. Though authorities offer rewards of up to several thousand dollars for information, few residents dare to take them, she says. “Even if you get the money, you won’t have any life left to enjoy it in afterwards.”

But when it comes to production, she adds, Yunxiao people are nothing less than business-minded “professionals.” She tells the story of one Shanghai chemistry professor, who manufacturers collectively enlisted five years ago to help them better mimic the popular Chinese cigarette brand Hongtashan. Counterfeiters paid him $15,000, and have rewarded him with royalties ever since. Similarly, in years past, she says, local counterfeiters have invited retired workers from the state-owned Shanghai Cigarette Factory — home to some of China’s top brands — to tour Yunxiao for a month, helping fine-tune local recipes.

As they battle with Beijing, Yunxiao’s manufacturers show no signs of backing down. Some have stepped up investment in new factories outside the area, including the cities of Pinghe and Zhangpu. Others are shifting production outside of China altogether, as far away as Vietnam and Burma. Meanwhile, overseas law enforcement facing the counterfeit influx is baffled by the trade: tracing a seized container to its producers, industry officials say. is “almost impossible,” given that the majority of company names used on accompanying records are also fake.

Yunxiao might someday change, but such a transition would take many years, says the broker. One manufacturer she knows invested $2.5 million to start another legitimate business elsewhere, but recently quit and returned — disappointed, she reports, because “the profits could never match counterfeit.”

Still, though, she hopes the industry will make a shift: “We locals hope we can work together to build up a real factory someday.”

Patricia Chan in Hong Kong and Alain Lallemand in Brussels contributed to this report.

SMOKE2U

New York,United States — 2012-02-27T12:54:38-05:00

There’s something odd about PO Box 365, Irving, New York. Located on the Seneca Nation — nestled just at the Empire State’s southwestern tip — the box is the mailing address for at least 10 online vendors registered in far-flung locations, from New York City to Ankara, Turkey. Boasting names like BigChiefCigarettes.com, Smoke2U.com, and EZTobacco.com, the sites bear no apparent affiliation to one another, except that they all sell one product: untaxed cigarettes.

For years, tax-free cigarette sales on New York reservations have made the state among the country’s top destinations for discount smokes — and not surprisingly, either. With New York City home to the nation’s highest cigarette taxes, the tax-free trade offers a prodigious payoff for the enterprising cigarette vendor. (Between state and city taxes, a carton of cigarettes in New York City can cost up to $80; that same carton, untaxed, costs just $40.) There’s one problem, though: The trade is illegal.

In 2007, New York’s reservations — home to fewer than 17,000 people — sold a towering 6.4 billion cigarettes, leaving state revenue officials scrambling. Every year, the state loses nearly $1 billion in city and state taxes from reservation sales. While the Supreme Court has ruled that states can collect taxes on tribal sales to non-natives, ever since a violent Seneca protest beat back then-Governor Pataki’s attempt to enforce such taxes in 1997, successive governors have been loath to entangle themselves in the issue.

On December 15, though, with the state facing a projected $51 billion budget shortfall over the next four years, Governor David Paterson signed a law that mandates tax collection on reservation tobacco sales. Specifically, the law requires that cigarette manufacturers supply only wholesalers that certify their products won’t be resold, tax-free, to reservations (and in turn distributed through smoke shops and online vendors). But the bill’s impact remains to be seen. State officials would have to overcome past reluctance to collect taxes on reservation cigarette sales; Indian leaders this week, meanwhile, expressed vigorous opposition to the new law. The law, also, does not stop tribes from selling untaxed, native-manufactured brands.

The United States’ patchwork of state cigarette tax laws has long spurred a brisk industry of cross-state smuggling. It’s not hard to see why: While the tax in a tobacco state like South Carolina is a low 7 cents per pack, the rates in a high-tax state like New Jersey are up to 36 times higher. In the 1960s, mobsters such as John Gotti — the flamboyant “Dapper Don” of Mafia fame — were known to capitalize on the trade’s vast profit margins, bootlegging cigarettes across state lines.

But these days, with the advent of the Internet, it has become a lot easier to jump into the bootlegging game: All it takes is a modem and access to a post office. Likewise for smokers, tax-free cigarettes are just a handful of clicks away.

Over the past decade, as cigarette taxes have soared throughout the United States — rising an average of nearly 90 percent between 1998 and 2002 alone — websites catering to tax-dodging smokers have proliferated. In 2006, an estimated 772 sites were selling to U.S. consumers, up from just 88 in 2000. According to Jeff Cohen, associate chief counsel for the Bureau of Alcohol, Tobacco, Firearms and Explosives’ (ATF) Northeast division, it’s common for entrepreneurs to maintain five or six differently branded websites to drive traffic, “even though they’re just shipping from one address.”

Some sites are based in low-tax states such as the Carolinas; others sell duty-free packs from overseas. Increasingly, overseas cigarette vendors drive traffic: The number of sites based overseas jumped from at least 10 percent in 2003 to over 45 percent by 2006, according to Kurt Ribisl, an associate professor at the University of North Carolina’s Gillings School of Global Public Health, who has extensively studied online sale patterns.

In the United States, the real action is taking place on Indian reservations. As of 2005, nearly two-thirds of websites had some apparent affiliation with Indian reservations. For western New York’s Seneca Nation, in particular, the online business has developed into the tribe’s cash cow. Together, two Seneca reservations accounted for over three-quarters of all Indian websites in 2005. A 2003 tribal study found that fully 95 percent of Seneca sales were conducted over the web or phone (the rest were sold over-the-counter in reservation shops).

The opportunities are such that even those who cannot claim tribal heritage have allegedly sought to exploit the status it confers. This September, shopping plaza developer and former New York City bus driver Joseph Roosa was charged with using a resident of the Allegany reservation as a front for an online cigarette business that sold $4.9 million worth of tax-free cigarettes throughout New Jersey. (The case is still pending.) This July in another case, Lloyd Long pleaded guilty to using a similar ruse to purchase tax-free cigarettes for sale on two online sites, EZsmokin.com and MightySmokes.com.

Websites catering to tax-dodging U.S. smokers jumped from just 88 in 2000 to some 772 in 2006.

Beyond lower prices, online sales also offer smokers broader options, including popular discount brands such as Seneca and Niagara. That, in part, may help account for why Philip Morris has been among online sellers’ chief opponents, filing more than 20 different suits against such retailers in recent years. The company has also actively pushed model legislation to curb online sales in states around the nation. Over the past decade, about 40 states have passed laws to limit or ban the direct shipment of tobacco products to consumers, to varying effect. (In 2007, the Supreme Court, citing concern about interstate commerce interference, struck down a Maine law that required shipping companies to verify a recipient’s age before delivering tobacco to a home address.)

To fight the trade, meanwhile, state officials have turned to the obscure 1949 federal Jenkins Act, which requires all vendors to report cigarette sales to the relevant state tax authorities. Failure to submit reports, though, is only a misdemeanor. Accordingly, almost no cigarette vendors bother to file, and once the packs are delivered, few consumers remit the owed taxes, either. Some do not realize they are still required to pay taxes on Internet purchases, while others take a more generally cavalier attitude toward the law. As Patrick Fleenor, chief economist at nonpartisan research group the Tax Foundation, puts it, buying untaxed cigarettes online “is still not really considered a crime, but more like a form of bargain shopping.”

But opponents of the online cigarette trade charge that sales aren’t so innocuous, and that they can spur addiction among underage smokers: “We spend all this time trying to stop kids from buying cigarettes at 7-Eleven, when they could more easily be at home buying cigarettes with their mom’s credit card,” said Marlene Trestman, special assistant to Maryland’s attorney general. Few online vendors verify purchasers’ ages, and one 2005 western New York study found 6.5 percent of ninth graders had made at least one cigarette purchase online. Likewise, opponents say, low online prices discourage smokers who might otherwise be pushed by high taxes to kick the habit.

And though thumbing your nose at the taxman may be a quintessential American sport, the overall tax losses add up — particularly at a time when at least 43 states are facing budget shortfalls. “There’s a mad dash right now to get money into state coffers,” said Timothy Quirin, an analyst at CCH, a private research group that tracks tax laws. “States are looking at any revenue stream they can tap into.” In 2005, online sales cost states an estimated $2 billion in lost taxes, according to ATF’s Cohen.

Virtually all online cigarette sales are illegal, for one or more reasons: Vendors do not take sufficient steps to confirm customers’ ages, fail to report their shipments under federal law, or — depending where they ship — they break laws prohibiting direct cigarette shipments to individual consumers.

Questions of jurisdiction continue to hamstring state efforts to reduce sales, especially given the prominence of reservation-based vendors. While the Supreme Court has ruled states have the legal right to require that cigarette retailers on reservations collect taxes on cigarettes sold to non-tribal members — and keep records for each sale — tribal sovereign immunity bars states from directly suing tribal governments for lost revenue.

Accordingly, states have sought alternate routes, cobbling together a strategy of pressure on retailers and consumers, as well as the shippers and credit card companies that help supply them. States such as California have used outreach to vendors, encouraging them to report their sales, or — in the event that strategy fails — subpoenaing or suing them to winnow out customer information. Using data gleaned from these efforts, in recent years over a dozen states have gone so far as to bill customers directly for unpaid taxes. Alaska, for example, has sent letters to roughly 5,000 delinquent taxpayers (including some tax bills for up to $30,000). Since 2005, Pennsylvania has billed 31,000 smokers for $26.3 million in unpaid taxes, and so far has retrieved $16 million in payment. Likewise, Connecticut has recouped at least $2.48 million through such efforts; Michigan, $12.5 million (out of a total owed $36 million); Wisconsin, at least $1.4 million; Oregon over $2 million. Those amounts, too, are only the tip of what is owed, given that states are only contacting customers of sites that have given up their information. The $26.3 million Pennsylvania is currently seeking, for example, represents losses from just a half-dozen sites.

Tax bills appear to have had some deterrent effect: Oregon officials report that while in 2005, about 2,500 smokers a month were frequenting two sites sued by the state — Smartsmoker.com and Ordersmokesdirect.com — today, that figure has dropped by more than half.

Authorities say it is difficult to know if the smokers simply switched websites, so they are also targeting vendors’ ability to ship and receive payment. In 2005, state attorneys general won a commitment from credit card companies and common carriers such as DHL and UPS to stop allowing their services to facilitate the trade. At the New York Department of Taxation and Finance, spokesman Thomas Bergin observes some successes from the agreement, noting that since hitting a high of 47.6 million cartons per year in 2005, overall shipments to reservations slowed to 31.9 million in 2007. One study likewise found that in the year following the agreement, the Internet purchase rate among smokers fell from 1.2 percent to 0.4 percent.

The crackdown has hit the Seneca reservation, where 1,500 people were once employed by the online business. Since 2005, though, Rick Jemison, spokesman for the Seneca Sovereign Partnership, said that many online shops have folded, leaving hundreds out of work.

Increasingly, overseas cigarette vendors drive traffic: The number of non-U.S. sites jumped from at least 10 percent in 2003 to over 45 percent by 2006.

Yet while credit card companies have pulled back, consumers can still pay by direct electronic banking transfer or personal check. What’s more, though common carriers have agreed to stop untaxed shipments, to date, the U.S. Postal Service has refused to accede to such an agreement. (Postal officials note that Priority Mail, which handles most cigarette shipments, can’t be inspected without a search warrant, and that “extraordinary resources” would be needed to enforce restrictions on tobacco mailings.)

Thus, even with states’ best diligence, cigarettes continue to slip through. “They [the Internet sellers] are resourceful,” said California Deputy Attorney General Laura Kaplan. “They always seem to be one step ahead of us.” In the latest development, she said, California secured an agreement with First Regional Bank to stop processing unlawful cigarette purchases — to her knowledge, the first of its kind in the nation. But as Kaplan notes, there are thousands of other banks out there who have yet to sign on.

Online sites are also moving offshore, beyond the reach of effective U.S. law enforcement. In one high-profile 2004 case, the ATF raided a cargo plane that touched down at John F. Kennedy Airport bearing 60 million duty-free cigarettes from a Switzerland-based company, Otamedia. The company’s original URL Yesmoke.com was shut down, but its operators simply packed up shop and today continue to do business from Italy.

“Websites used to be very clear about where their stated location was, but more and more, you can’t figure out where they’re from,” Ribisl said. According to his research, while about 50 percent of online cigarette sites are based in the U.S., in recent years, more and more sites have been appearing abroad as part of a complicated international supply chain. “A website might say it’s based in Irving, New York, and that the cigarettes come from overseas, like the British Virgin Islands. But then we’ll look at the actual shipping label when it arrives, and it might say ‘customs duty, Ireland.’”

U.S. authorities are hardly alone in feeling flummoxed by the trade. Canada, for example, has experienced a jump in Internet and mail-order sales, with related seizures rising by 151 percent to 1,610 from 2006-2007.

But given how one site can pop up as quickly as another is shuttered, suppressing the trade has become something of a global game of “whack-a-mole.” “We see a lot of sites operating outside the country: Moldova, Israel, Russia, Ukraine,” Kaplan said. Despite states’ best efforts, she said, “We haven’t noticed a real reduction in sales.”

To that end, advocates such as Representative Anthony Weiner, Democrat of New York, and the National Association of Attorneys General are actively pushing the optimistically titled Prevent All Cigarette Trafficking (PACT) Act, which would — among other provisions — make failure to report sales under the Jenkins Act a felony, ban mailings of tobacco through the U.S. Postal Service, and codify existing agreements with credit card companies and common carriers. The bill passed the House of Representatives this September, and is expected to receive a favorable reception in the 111th Congress in 2009.

Although the spate of state actions hasn’t stemmed the tide of online sales, they may be showing an impact. Jeff Kimbel, for example, a 45-year-old smoker from Long Beach, California, was accustomed to getting his untaxed Seneca-brand cigarettes in discreet brown boxes arriving from Buydiscountcigarettes.com. After the site was sued this year, though, his shipments were disrupted, and he was double-billed for his purchases. Similar consumer complaints of being fleeced online abound.

“At one point the site was based in New Mexico, and then I heard they were moving to Kentucky,” Kimbel said. “Now the cigarettes come out of Irving, New York.” (Kimbel — who paid by direct debit — said he never realized that he was violating state tax laws.)

With the accelerating state and federal scrutiny of Internet sales, some online cigarette purchasers figure that even with higher costs, they’re better off buying in person. As one smoker recently posted online: “No online cigarettes for me. Find local store, pay cash, no trail.”