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.

China's counterfeit smokesInterviews 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.

YunxiaoLast 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.

From Chinese ports like Xiamen, 40-foot containers of cigarettes depart for high-tax markets like those in the United States and European Union. Photo: Te-Ping ChenAfter 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.

Yunxiao’s cigarette counterfeiters are well-armed and well-protected; in some raids, police have had to blast through concrete bunkers to find the machines.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.

Tony TungBut 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.

To dodge official scrutiny, counterfeiters tunnel deep within the mountains to hide their workshops, which helps camouflage the tobacco scent.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 were reportedly 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.

Much of China’s counterfeit cigarette industry is literally underground, with many factories accessible only by trapdoor and ladder.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.

Cigarette stalls like these are ubiquitous within China, where one third of the world’s smokers consume 2.2 trillion cigarettes a year. Photo: Te-Ping ChenSurveillance 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.”