Serious business

| May 1, 2014

The illicit cigarette trade isn’t just about lost profits and unpaid taxes; it provides seed money for other crimes, including terrorism and human trafficking.

By Timothy S. Donahue

Tobacco companies are sometimes criticized for overstating the seriousness of the impact the illicit cigarette trade has on society. Anti-smoking groups contend that stories of smuggled smokes funding crimes such as terrorism and human trafficking are exaggerated and the problem is more about lost profits than lost lives. A look at the facts, however, suggests the link between the illegal tobacco trade and serious crime is all too real.

Examples of such connections are disturbingly easy to come by. The notorious terrorist Maokhtar Belmokhtar, for instance, is frequently referred to as “Mr. Marlboro” for financing his jihadist activities through cigarette smuggling across the Sahel. Income from the illicit tobacco trade allowed him to finance spectacular operations such as the 2013 gas field hostage drama in In Amenas, Algeria, during which 40 people died.

Louise Shelley, director of the Terrorism, Transnational Crime and Corruption Center and a professor with the School of Public Policy at George Mason University, in Fairfax County, Virginia, USA, says cigarettes are just one part of Belmokhtar’s criminal panoply, which also includes kidnapping, extortion, arms dealing and drug smuggling.

Because of its role in funding terrorist organizations, the illicit cigarette trade can be blamed for the deaths of military personnel from numerous countries, says Doug daCosta, president of Elite Security Services International and a former agent with the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF). While there are a number of steps between cigarette smuggling and terror, daCosta insists the link is clear.

“There is no argument about the fact that money made from illicit trade that is funneled to these terrorists groups can either barter or buy guns, ammunition and explosives that are used by al-Qaida, Hezbollah, Hamas and numerous other terrorist groups,” he says.

Criminal networks in the 21st century are vast, operating across both geographic and functional borders, says Brendan Lemoult, anti-illicit trade vice president at Japan Tobacco International (JTI). “We know that criminals and terrorists traffic illegal tobacco just like they traffic humans, drugs and weapons. It’s the same gangs using the same smuggling routes,” he says. “This is not a victimless crime.”

The Irish Republican Army (IRA) was one of the first groups to use cigarettes to fund its activities, according to Interpol. Police estimate that the IRA, in its various incarnations, made $100 million in just five years (1999–2004) from trafficking illicit cigarettes. In September 2013, a rocket fired by al-Qaida at a massive container ship blew the lid off a multimillion-euro illegal cigarette operation run by a millionaire businessman with links to former IRA leader Thomas “Slab” Murphy.

But criminals need not always cross national borders to profit. On May 15, 2013, law enforcement officials in New York City took down a Palestinian cigarette smuggling ring that bought $55 million worth of cigarettes in Virginia and sold them at a hefty profit in New York City. Virginia’s cigarette tax is $0.30, compared with $4.35 in New York City.

Day after day, truckloads of illicit cigarettes continue to be purchased from southeastern U.S. states, which levy comparatively low tobacco taxes, and then shipped to and sold in the Northeast, where taxes are higher. “We refer to the Interstate 95 corridor as ‘the new tobacco road,’” says David Howard, senior director of communications for R.J. Reynolds. “It’s estimated that more than 60 percent of the cigarettes sold in New York are illicit, which is significant because New York collects more than a billion dollars a year in tobacco taxes sold through legitimate markets.” In a recent study conducted by the city of New York,  more than 40 percent of the 1,700-plus stores surveyed sold illicit cigarettes.

One of those arrested in the New York City operation, appropriately dubbed “Tobacco Road,” was Youssef Odeh, a vocal supporter of Omar Abdel-Rahman, the blind sheik now serving a life sentence for his role in a foiled 1993 plot to blow up New York City’s World Trade Center. The ring was run by brothers Basel and Samir Ramadan of Ocean City, Maryland, USA, who are believed to have ties to Hamas and Hezbollah.

Examples of the illicit cigarette trade contributing to terrorism and organized crime appear in the news almost daily. The U.S. Congressional Research Service’s Report on Terrorism and Transnational Crime mentions that “cigarette smuggling schemes as a means for financing terrorists have been discovered in a range of countries and regions, including the United States, Europe, Turkey, the Middle East and North Africa, and Iraq.”

Murphy is said to have amassed a £40 million ($66.7 million) fortune through smuggling cigarettes and other goods. During a 2006 raid on his home, police officers  confiscated 30,000 cigarettes and $1.1 million in sterling bank notes. In March 2013, Murphy was tipped off four hours before he was again targeted in a major cross-border police raid. As of this writing, Murphy, in an Al Capone-like fashion, is being prosecuted on nine charges of failing to furnish tax returns from 1996 to 2004.

Money from illicit cigarette sales is often funneled to terrorist networks through a bartering system that operates outside of, or parallel to, traditional banking channels, according to daCosta. A hawala is an informal value transfer system based on the principle “honor among thieves,” which includes numerous cash brokers. Although they are primarily located in the Middle East, North Africa, the Horn of Africa and the Indian subcontinent, the reach of the hawala is global.

“It’s how money was given to some of the pilots for training for September 11,” says daCosta. “How it works is a guy in, let’s say, the Middle East, tells his associate, ‘I need you to send money over to this guy in California.’ Then contact is made to their guy in San Diego, they send him a message, and he pays the debt. Maybe later the guy in San Diego needs to pay a debt in the Middle East, and that cancels the first debt or increases what the other side owes. Once a year they may get together to level everyone’s balance sheet. It’s worldwide and nearly untraceable.”

The first case of documented links between a terrorist organization and cigarette smuggling in the U.S. was uncovered nearly 20 years ago. In 1996, ATF agents and other law enforcement agencies discovered that a group of men were purchasing large pallets of cigarettes from local distributors and paying for everything in cash. Their business model involved moving those cigarettes across state lines, where they would be sold for a substantial profit. According to court documents, “the conspiracy involved a quantity of cigarettes valued at roughly $7.5 million.”

In 1999, the Federal Bureau of Investigation notified the ATF that a Hezbollah cell was raising funds and procuring equipment in Charlotte, North Carolina, USA. Mohamad Hammoud led the fundraising efforts for the cell, and he was also a prime suspect in the cigarette smuggling ring identified by the ATF in 1996. Hammoud transferred his ill-gotten gains generated by the cigarette trafficking scheme, as well as money raised from other sources, back to Lebanon through a hawala and into the coffers of Hezbollah, which the U.S. government considers a terrorist organization.

Winning an unwinnable war

The main problem in combating the scourge of smuggling is the high profits, which rival those of narcotics, and the relative cheapness of conducting a terrorist operation. A shipping container holding 10 million cigarettes could cost as little as $100,000 to produce in Asia, says daCosta, but could bring in as much as $3 million to $4 million in the U.S. Contrast that against the estimated $400,000 to $500,000 it cost al-Qaida for the September 11 attacks, according to the final report of the National Commission on Terrorist Attacks Upon the United States.

Dismayed by the link between the illicit cigarette trade and serious crime (and, yes, also by their lost sales), tobacco companies are playing an active role in stopping smuggling. It is not uncommon for companies to hire private investigators to help law enforcement catch the crooks. Imperial Tobacco Group has gained years of experience in compiling intelligence, analyzing data and briefing law enforcement agencies on the findings of Imperial’s security team.

“We have been central to the breakup of several sophisticated criminal gangs, including those who operate on an international scale, during the past several years,” says Steve Smith, Imperial’s head of group security and risk management. “The largest by volume was in Hamburg in May 2013. We passed intelligence to OLAF [the European anti-fraud office] on a suspect shipping container; OLAF in turn notified German customs, and 53 million cigarettes were subsequently seized.”

Philip Morris International (PMI) has been working with private investigators in Singapore to identify smugglers’ distribution networks. After months of surveillance, the investigators managed to identify the supply chain routes used by smugglers and shared the results with Singapore customs. “As a result, two seizures were carried out by the customs authorities, with the latest, in December 2013, involving illegal cigarettes worth over sgd1.6 million ($1.26 million),” says Iro Antoniadou, manager, external communications, PMI.

Penalties are another problem. “Since penalties and sentences for tobacco smuggling are frequently much lighter than those for smuggling drugs, criminals see it as a soft and easy option,” says a British American Tobacco representative. “They hedge their bets, and there is a lot less risk of being put out of business for extended periods when you sell illegal cigarettes.”

Howard and Smith believe that laws should be enacted to increase fines for illicit trade activity and impose penalties that treat such crimes as felonies where they are not already regarded as such. “Organized crime and terrorism has been involved in the illicit tobacco trade for many years, as it’s a very profitable practice for them, and, for those caught, the penalties are too often very light,” says Smith.

“Weak border controls in some regions also contribute to the problem. We believe that in order for anti-illicit trade measures to be practical and effective, responsibility for each of the key elements should be assigned clearly to the individual parties involved: a) tobacco companies, b) government authorities and international organizations, c) tobacco companies and/or government authorities and international organizations working together.”

Tobacco companies are often working together with law enforcement to combat the problem. One example of an industrywide effort is the Digital Coding & Tracking Association (DCTA), whose members include BAT, Imperial, JTI and PMI. DCTA members produce more than 75 percent of the world’s tobacco products (excluding China) and move billions of finished goods through international supply chains every year, undertaking millions of cross-border transactions in the process.

Codentify, the main product offered by the DCTA, offers quick and easy access through a mobile phone or computer terminal to all information concerning a case, carton and, recently, some packs of cigarettes. The coding on the packages verifies the legitimacy of shipments and meets future international regulatory methods, including the World Health Organization’s protocol to eliminate the illicit trade in tobacco.

The implementation of Codentify as JTI’s track-and-trace solution has been a valuable tool for its anti-illegal tobacco team, according to LeMoult. “Codentify has provided us with concrete information on illegal tobacco routes that we have passed on to law enforcement, at times stopping illegal supply chains in their tracks,” he says.

Agreeing with a recent report from the European Commission, LeMoult also noted that JTI’s implementation of Codentify, combined with its other anti-illegal tobacco and due diligence measures, explains why the company has been so successful in reducing the criminal diversion of genuine JTI products into the illegal market, even during a time when the commission warns that “overall, the illicit trade is increasing in the EU.”

Smith adds that tracking and breaking down the types of gangs that smuggle smokes is resource intensive, and Imperial is investing heavily in technology (e.g., Codentify). “Whilst not a silver bullet to illicit trade, technology is a key tool in securing the legal supply chain,” he says. “Consolidating intelligence builds a more complete picture of known criminal operations.”

Lemoult notes that if corporations work together alongside law enforcement to combat the illegal cigarette trade, together they can blaze a path forward. “Through concerted action by governments, the public and the industry, by taking a stand together, we can deliver considerable benefits for national economies, as well as local businesses and communities,” he says. And while cracking down on illicit trade will, by itself, not stop terrorism, it will at least make perpetrators’ lives more difficult by forcing them to find alternative sources of funding.



Bigger than Imperial

Due to its nature, illicit trade is notoriously difficult to measure. Philip Morris International (PMI) estimates that global non-tax-paid volume was around 570 billion units in 2012. “This represents between $40 billion–$45 billion in unpaid taxes and approximately $4 billion to $5 billion in lost margins for legitimate manufacturers,” says Iro Antoniadou, manager, external communications, PMI.

Steve Smith, head of group security and risk management with Imperial Tobacco, believes those numbers may be even higher, with revenue losses for the industry possibly reaching as high as double PMI’s estimates—about $10 billion annually. “This makes ‘Illicit Tobacco PLC’ bigger, in volume terms, than Imperial Tobacco,” he says.

British American Tobacco says organized crime holds 11.1 percent of the EU cigarette market and is selling 65.5 billion cigarettes a year, pulling in a profit of up to €5 billion ($6.87 billion).






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