Made to be smuggled

Introduction

Europe is being flooded by smuggled Russian-made cigarettes worth at least $1 billion a year, an international investigation has discovered.

A network of factories and routes has been put together across Europe since 2004, following large-scale smuggling routes previously supplied by major multinational tobacco companies. The new underground smoking trade involves only one brand, Jin Ling, which is turning up in more cities and countries across Europe every month.

Jin Ling, virtually unknown to the authorities three years ago, has grown so rapidly that law enforcement officials say it now rivals Marlboro as the top smuggled brand being seized in the European Union.

The organization behind this fast expanding black market, the Baltic Tobacco Factory (BTF) of Kaliningrad, Russia, has links to two of the world’s largest tobacco companies. Its factory network in Russia and Ukraine was previously owned and run by subsidiaries of Japan Tobacco International (JTI) Group, the world’s number three producer.

The investigation has identified a network of Russian and East European companies, including 5 factories believed to play roles in manufacturing the contraband cigarettes being smuggled to the West. The Russian-run factory network now claims to be able to produce more than 24 billion cigarettes annually. This would be equivalent to 7 percent of legal EU cigarette imports.

Originally imported from China, Jin Ling features a king-size packet design that closely resembles the legal Camel brand in color, typestyle, and layout. Instead of a camel, the packs are illustrated with a mountain goat.

Jin Ling cigarettes have no legal market in any European country, according to customs officials. The brand is never advertised and cannot be bought in shops. It is only sold illegally — smuggled by gangs who hope to pocket immense profits by selling unlicensed, untaxed cigarettes on black markets across Europe.

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

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

Operation Baltic

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Delivering ‘The Kids’

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

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

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

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

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

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

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

‘We Cannot Meet Demand’

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

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

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

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

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

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

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

Ties to Big Tobacco

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

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

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

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

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

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

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

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

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

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

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

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

The Jin Ling Archipelago

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

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

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

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

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

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

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

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

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

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

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