EU accuses R.J. Reynolds of selling black-market cigarettes

T By Henry Weinstein and Myron Levin

the European Union accused tobacco giant R.J. Reynolds in a lawsuit Wednesday of selling black-market cigarettes to drug lords and mobsters, helping them launder profits from their illegal activities.

The 149-page complaint describes in detail Reynolds’ allegedly corrupt business dealings in Europe and Latin America, including with members of the Italian Mafia and Russian organized crime, Colombian drug cartels and high government officials in the Balkans.

The suit filed in U.S. district court in Brooklyn paints a world in which contraband cigarettes have become the currency of choice in Europe for money laundering, and where one of the world’s major tobacco companies aided and abetted the criminals.

RJR officials “at the highest corporate level” made it “part of their operating business plan to sell cigarettes to and through criminal organizations and to accept criminal proceeds in payments for cigarettes by secret and surreptitious means,” the suit alleges.

The complaint was filed late Wednesday, and RJR spokesman Seth Moskowitz said the company could not fully respond before reviewing it. “However, at first glance it appears that this complaint is related” to a case “which has been dismissed,” Moskowitz said.

Indeed, the suit continues the EU’s legal assault on Reynolds and other tobacco companies that it claims have cheated member states of billions of taxes over the years, through collusion with smugglers.

The EU’s earlier complaint against RJR and Philip Morris was dismissed in February by a federal judge in Brooklyn on grounds it was barred by the “revenue rule,” a centuries old common law doctrine that generally prohibits foreign governments from collecting tax defaults through U.S. courts. The EU has appealed the dismissal.

In dismissing the case, U.S. district Judge Nicholas G. Garaufis said he would consider a suit based on money laundering violations, rather than tax recovery. In response, the EU filed this suit and is expected to file a similar suit against Philip Morris and Japan Tobacco in the coming months.

The suit filed Wednesday lists bank accounts in Switzerland, Italy, Cyprus, Lichtenstein, the Isle of Jersey and the Netherlands and identifies wire transfers used as part of money laundering schemes.

The suit also asserts that RJR entities frequently changed banks where the company was going to receive payments from illicit sales in order to escape detection by U.S. law enforcement. “This process was known within RJR as `musical banks,’ ” according to the suit.

In contrast to the earlier suit, the new complaint does not seek recovery of lost tax revenue or customs duties because the judge found such claims were barred. Instead, it seeks alleged losses resulting from money laundering, including law enforcement expenditures and other costs. The complaint does not ask for a specific amount of damages, but it says the EU’s losses are in the hundreds of millions.

The lawsuit presents a purported marriage of convenience between tobacco officials seeking to expand their markets in Europe, and criminal gangs needing to launder profits from narcotics and weapons trafficking and extortion, and accomplishing this through the purchase and sale of RJR brands.

“Throughout the European community, cigarettes and narcotics are routinely part of the same criminal transactions, and the incidence of such violence associated with such trade is rising rapidly around the world,” the suit alleges.

“Throughout the 1990’s and continuing to the present day, a primary means by which…cocaine proceeds are laundered is through the purchase and sale of cigarettes, including those manufactured by the RJR defendants. Cocaine sales in the European community are facilitated through money-laundering operations in Colombia, Panama, Switzerland, and elsewhere which utilize RJR cigarettes as the money-laundering vehicle,” the suit asserts.

Similarly, the suit contends RJR cigarettes are used as a money laundering vehicle for heroin sales in the European community.

The allegations are unusually stark and detailed, in contrast to many civil lawsuits that lay out charges in a general form with few specifics.

The suit was filed by three U.S. law firms, but they drew upon information gathered by law enforcement authorities in Italy and other countries.

The suit asserts that RJR’s motivation for dealing with criminal organizations was to increase its market share. RJR has benefited from these illicit relations by increasing sales and profit margins “because they require the criminals to pay a premium for their cigarettes and/or subject the criminals to sales and credit terms that are more favorable to (RJR) than those granted to legitimate customers.”

Among the other allegations in the lawsuit, RJR moved its cigarettes through the Balkans in the 1990s by means of illicit payments to corrupt government officials, including the current president of Montenegro, Milo Djukanovic, and the deceased former head of the Montenegro’s Foreign Investment Agency, Milutin Lalic.

The payments came from a company founded by Italian organized crime figures that had the official sanction of the investment agency, and operated under the protection of Djukanovic. The company, Montenegrin Tabak Transit, was granted exclusive rights to move cigarettes through the Port of Montenegro, and over time made millions of dollars in payments to members of the Yugoslav federal government and Montenegrin regional governments, including Djukanovic and Lilic, the lawsuit states.

It said RJR officials and distributors were well aware that such “licensing fees” were being paid to facilitate the movement of their brands. They “traveled to Montenegro on a regular basis to inspect their cigarettes and service their customers and, as such, were well aware of these practices,” the lawsuit states.

According to European press reports, Italian authorities have opened a criminal investigation into alleged involvement by Djukanovic with Mafia-run smuggling operations. Djukanovic has denied any involvement with the contraband trade.

The suit also alleges that throughout the 1990s and continuing today, RJR has violated U.S. trade sanctions against Iraq by shipping billons of cigarettes into that country through intermediaries. According to the lawsuit, those profiting from the trade include Uday Hussein, the son of Iraqi leader Saddam Hussein, and the PKK, a Kurdish independence group based in northern Iraq that the U.S. has classified as a terrorist organization.

For most of this time the cigarettes followed a circuitous route from an RJR plant in Puerto Rico to European ports, and on through Cyprus to Turkey, where they were trucked across the border into Iraq.

Although Japan Tobacco acquired RJR’s international business in 1999 for $8 billion in 1999, the lawsuit says RJR remained involved in this trade at least through May 2001 under a “transitional services agreement” with JT.

The allegations of illegal trade with Iraq are also the subject of a criminal investigation by U.S. authorities. As The Times reported in May, the probe is being conducted by the U.S. Customs Service and the U.S. Attorney for the Southern District of New York.

Although not set forth in the EU’s original lawsuit filed in November, 2000, allegations about Iraq surfaced in the case last winter. In an unsuccessful effort to persuade Judge Garaufis not to dismiss the case, the EU sought to show that terrorist organizations were benefiting from the allegedly illegal trade.

EU lawyers learned of the Iraq connection through a breach-of-contract suit filed in Cyprus by a cigarette trader who claimed that an RJR agent reneged on a promise to make him RJR’s “sole and exclusive supplier” to the Iraqi market.

According to the suit filed Wednesday, during a two year period from 1999-2001, RJR and its accomplices sold almost 840 container loads of U.S. made cigarettes into Iraq, “amounting to almost 8 billion cigarettes.”

The suit maintains that RJR and its confederates also created false paperwork to misstate the ultimate destination of the cigarettes. As further evidence the company knew where the cigarettes were going, employees of RJR subsidiaries “visited Turkey on a regular basis to oversee the delivery of RJR-brand cigarettes into Iraq and to ensure that the shipments in fact were being delivered from Turkey into Iraq,” the EU claimed.

The suit contends that at all times RJR officials “were well aware that they were laundering the proceeds of criminal activities” and that they went to great lengths to conduct these activities in a surreptitious manner.

R.J. Reynolds was also sued by the Canadian government over tax losses and law enforcement costs stemming from a wave of cigarette smuggling from the early to mid 1990’s. That case was dismissed last year under the “revenue rule.” Canada has filed an appeal with the U.S. Supreme Court, seeking to reinstate the claim