Tobacco companies linked to criminal organizations in lucrative cigarette smuggling

WASHINGTON, MARCH 3, 2001 When Tommy Chui failed to show up at the grand opening of his wife's new boutique in downtown Singapore, alarm bells rang 1,600 miles away in the offices of Hong Kong's Independent Commission Against Corruption. It was March 29, 1995, and the news that Chui was missing devastated the commission's assistant director, Tony Godfrey. He immediately sent two investigators to Singapore. Three days later, on April 1, his worst fears were realized. Dockworkers found Chui's bloated body floating in Singapore Harbor. A former director of British American Tobacco's biggest distributor of contraband cigarettes to China and Taiwan, the 38-year-old Chui had been abducted, ritually tortured, gagged, suffocated, and thrown into the harbor just weeks before he was to testify against his ex-associates. Chui was the star prosecution witness in an international tobacco smuggling investigation launched in 1993 by Hong Kong's Independent Commission Against Corruption. He was about to blow the lid off a $1.2 billion smuggling operation to China and Taiwan and implicate three former British American Tobacco executives in a HK$100 million bribery scandal. In addition, his testimony was key to the prosecution of his two former business associates, several corrupt customs officers, and various members of Asia's most notorious criminal gang, the Triad.

The case of Chui and the massive BAT-fed smuggling network into China reveals the dark underbelly of a billion-dollar business fed by international corporations and operated by organized crime. While it is among the more sensational examples of corporate tobacco's implication in international smuggling and its links to organized crime, it is far from an isolated instance.

Tobacco manufacturers have often blamed the international smuggling of their products on organized crime. But a year-long investigation by the International Consortium of Investigative Journalists shows that tobacco company officials at BAT, Philip Morris, and R.J. Reynolds have worked closely with companies and individuals directly connected to organized crime in Hong Kong, Canada, Colombia, Italy, and the United States. In fact, one Italian government report obtained by the Center states that Philip Morris and R.J. Reynolds licensed agents in Switzerland were high-level criminals who ran a vast smuggling operation into Italy in the 1980s that was directly linked to the Sicilian Mafia. Corporate documents, court records, and internal government reports — some going back to the 1970s — also show that BAT, Philip Morris, and R.J. Reynolds have orchestrated smuggling networks variously in Canada, Colombia, China, Southeast Asia, Europe, the Middle East, Africa, and the United States as a major part of their marketing strategy to increase profits. The corporate documents refer to this black market business as "duty not paid," "parallel" markets, "general trade," or "transit." But these same documents often clearly delineate between this aspect of the business and legal trade. For example, one BAT official, in a 1989 letter to associates in Taiwan, said, "With regard to the definition of transit, it is essentially the illegal import of brands from Hong Kong, Singapore, Japan, etc., upon which no duty has been paid."

The companies have sought to undercut rising government taxes, which studies show are the main reason most smokers quit, as well as to gain market share on their competitors or on government-controlled tobacco monopolies by offering competitively priced popular international brands on the black market. The result has been tax evasion on a global scale that has greatly depleted government treasuries, especially in Third World countries. Cigarette smuggling has also fostered international crime and money laundering and alarmed growing numbers of law enforcement officials worldwide. Attracted by huge profits, quick turnovers, a captive market, and relatively light penalties if caught, organized crime now controls large sectors of the smuggling.

"Organized criminals, who have traditionally been involved in smuggling illicit narcotics, are suddenly realizing that tobacco is a good thing to get into, as you make just as much money, and it's perhaps not quite as anti-social," Douglas Tweddle, the outgoing director for compliance and facilitation at the World Customs Organization in Brussels, told the Center. "The public generally aren't against you if you're selling smuggled cigarettes; in fact, they rather appreciate you. And if you get caught, in virtually all countries, the penalties for smuggling tobacco are a great deal less than smuggling heroin or cocaine." In the United States, cigarette imports have risen so dramatically that investigators are looking into whether the country is being used as a way station in the global smuggling trade. "Profits from cigarette smuggling rival those of narcotic trafficking," then-U.S. Customs Commissioner Raymond Kelly told Congress last year. "The United States plays an important role as a source and transshipment country."

The investigation by the Center's International Consortium of Investigative Journalists is based on a review of thousands of pages of corporate and government documents and dozens of interviews with law enforcement officials, smugglers, and other sources worldwide. It indicates that tobacco smuggling is increasingly dominated — often with the knowledge and consent of the tobacco companies — by a handful of criminal organizations that in some cases have links to organized crime. The Italian Mafia in Western Europe, East European gangs, Triads in Asia, drug cartels in Colombia, and motorcycle gangs and the American mafia in North America all have become entrenched in the game. Licensed distributors for the manufacturers feed these organized crime syndicates billions of cigarettes worldwide, often with corporate knowledge. "A primary driving force behind the proliferation of cigarette smuggling in both Colombia and Europe is the need of narcotics traffickers, Colombian, Russian, and others, to launder enormous amounts of money that can no longer be laundered through banks," said one recent court filing in a cigarette smuggling case.

The black market trade

It's estimated that about one in every three cigarettes exported worldwide is sold on the black market. This enormous business is operated through a web of offshore companies and banking institutions that often employ the same routes and distributors. Russian and Italian mafia use Cyprus and Montenegro. The drug cartels and U.S. mafia use Aruba and Panama. The same names turn up in smuggling networks into Colombia, Canada, and Europe. In Southeast Asia, the same distributors who smuggle out of Hong Kong to China also control distribution out of the Philippines and Singapore. The Center investigation shows that the manufacturers funnel massive amounts of their brand name cigarettes into these smuggling networks, often employing circuitous routes in an apparent attempt to shield themselves from accusations of wrongdoing. Distributors and manufacturers work hand-in-hand to feed this market.

But, in some cases, the manufacturers have worked directly with organized crime figures. In Colombia, tobacco companies are alleged to have helped launder drug money and to have worked closely with distributors who are involved in drug trafficking. A Colombian lawsuit against Philip Morris and BAT accuses them of involvement in drug-money laundering through what is known as the "black market peso exchange," a circuitous system by which drug dollars are laundered for clean pesos through the purchase and importation of such goods as cigarettes and alcohol. In a federal civil racketeering lawsuit launched in 2000, Colombia's governors accused tobacco company executives of illegally entering the country to organize smuggling networks and retrieve cash payments, which were then smuggled out for deposit in offshore banks. Company employees are also alleged in the lawsuit to have bribed border guards. And their agents have been implicated in illegal cash campaign contributions to Colombia's former president Ernesto Samper.

In Italy, court cases and police and government reports reveal an intricate web of Mafia families that through bribery, intimidation, and murder control the smuggling of billions of Philip Morris and R.J. Reynolds cigarettes into Europe through Cyprus, Albania, and Montenegro. In Spain, at least one major distributor for RJR is allegedly a black market distributor linked to illegal drug trafficking. In Canada, RJR sales executives dealt directly with smugglers linked to the American and Canadian mafia. In some cases, tobacco industry executives actively played various gangs off against each other and solicited and received millions of dollars in kickbacks or bribes in return for selling to preferred criminal syndicates, according to court records and sources.

The Center investigation also shows that when senior or mid-level executives have been charged criminally with aiding and abetting smuggling, tobacco companies often don't cooperate with investigators. In a Louisiana case, for example, lawyers for one tobacco company used their connections in the administration of former President Bill Clinton to force the removal of a prosecutor pursuing a Brown & Williamson sales executive for smuggling into Canada. The major tobacco companies all vigorously deny any involvement in the smuggling of their products. In a statement to the Center, BAT also said it knew of no evidence "to substantiate allegations that some of our employees or distributors have worked with criminal organisations and/or organised crime." Companies such as BAT have stated that they can't be expected to keep track of their 90,000 employees, even though in many cases those named in smuggling are senior managers. The companies also argue that they sell a legal product to wholesalers over whom they exercise no control. Kenneth Clarke, BAT's deputy chairman and the former Conservative chancellor of the exchequer, told the British House of Commons health select committee on February 16, 2000, that "there is no evidence I have ever seen that BAT is a participant in this smuggling. We seek to minimize it and avoid it."

However, writing in the February 3, 2000, issue of The Guardian, in response to a Center expos released a few days earlier, Clarke complained that high cigarette taxes caused smuggling and added: "where governments are not prepared to address the underlying causes of the problem . . . we act, completely within the law, on the basis that our brands will be available alongside those of our competitors in the smuggled as well as the legitimate market." Top BAT executives, at a meeting last summer, considered the company's marketing strategy in light of expanding investigations, media reports, and civil lawsuits. An industry source told the Center that BAT executives discussed halting all "transit" business but worried that shareholders would be furious at the resulting drop in profits, which one government source estimated to be as high as 500 million pounds (US $720 million) annually. BAT decided to continue the "transit" business, the industry source said, but no longer to refer to it as transit, DNP, or GT. The new company term is "WDF" for "Wholesale Duty Free." The executives also discussed taking steps to counter any civil and penal actions that could threaten the company's survival, the source said.

Massive smuggling has sparked a growing number of lawsuits. In a 12-month period ending last year, Canada, the governors of Colombia, Ecuador, and the European Union all filed separate racketeering suits in the United States against the tobacco giants. Seven nations — Germany, Spain, France, Italy, Belgium, the Netherlands, and Finland — have since joined the EU suit. Among the charges, the EU accuses the tobacco companies of aiding and abetting smuggling, involvement in organized crime, defrauding state treasuries of billions of dollars, laundering drug money, and committing wire fraud and mail fraud.

In addition, criminal investigations have multiplied. In the United States, several grand juries are examining the allegations of tobacco company involvement in cigarette smuggling, including one in Raleigh, N.C., and another in New York. A multi-agency investigation, coordinated out of Atlanta, is also looking into possible corporate involvement in cigarette smuggling and its related crimes, such as money laundering, according to federal government sources. Canada, Italy, and Britain have also launched criminal investigations. Still, with the exception of one case in Syracuse, New York, where a unit of RJR called Northern Brands International pleaded guilty in 1998 to smuggling-related charges, the tobacco industry has not faced criminal prosecution.

The growing list of civil cases, however, could prove devastating. Faced with possible treble damages under the U.S. Racketeering Influenced and Corrupt Organizations (RICO) Act, the tobacco companies are vigorously fighting the lawsuits. Already, allegations have surfaced in the Colombian lawsuit that Philip Morris is corrupting the legal process through threats and the destruction of documents. BAT is alleged to have engaged in influence-peddling by putting political and government officials in Colombia on paid consultant contracts. An affidavit sworn in September 2000 by Jos Manuel Arias Carrizosa, the executive director of the Colombia Federation of Departments [or states] says that Philip Morris Vice President J. Armando Sobalvarro tried to persuade Arias, in an October 27, 1999, meeting, that a lawsuit against Philip Morris was "not in the Departments' best interests." Sobalvarro noted that Philip Morris was lobbying Washington for a large aid package for Colombia and concluded the visit by threatening Arias that if the lawsuit against Philip Morris proceeded, "there would be blood." For investigators like Hong Kong's Godfrey, there is "absolutely no doubt" that BAT knew its cigarettes were being smuggled into China and Taiwan. "[BAT is] a very sophisticated company," he said in an interview. "There's no reason why they shouldn't know." Godfrey also said he believes that bribery became institutionalized at BAT-Hong Kong. Blood, threats, bribery, and corruption are no strangers to cigarette smuggling. And tobacco companies seem to know that as well as anyone.

 

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