TERRY GROSS, host:
This is FRESH AIR. I'm Terry Gross. What's the most widely smuggled legal substance? Tobacco. The tobacco-smuggling business helps fund organized crime and terrorist groups, and according to a new study, the business stretches from counterfeiters in China and renegade factories in Russia to Indian reservations in New York and warlords in Pakistan and North Africa.
Here in the U.S., many states are finding their budget crises have been made even worse as a result of lost tax revenues from smuggled cigarettes. Some states are trying to crack down.
A series of articles on tobacco, terrorism and illicit trade has been published as part of the Tobacco Underground Project. The project is an investigation by the International Consortium of Investigative Journalists, which is a project of the Center for Public Integrity.
My guest, David E. Kaplan, is the director of the consortium and the editorial director of its work. David Kaplan, welcome to FRESH AIR. Let's just start with the scope of this. Like how big in terms of money and number of countries is the tobacco-smuggling business?
Mr. DAVID KAPLAN (Center for Public Integrity): Oh, it's massive. You're talking about huge black markets, literally all over the planet. At heart, this is really an organized-crime story. It's about how these alternate economies have risen in various regions, various countries, and they're feeding crime and corruption.
I mean, tobacco is, because it's a legal substance, the penalties aren't as large as they are on narcotics, but the profit margins are just as big. So tobacco has become the world's most widely smuggled legal substance that we've ever seen.
GROSS: Has the tobacco industry itself been involved in the illicit cigarette trade?
Mr. KAPLAN: Oh God, deeply. It really came from them. In the 1990s, there were a series of investigations culminating in one that my group, the ICIJ, did, showing how big tobacco had systematically engaged organized crime groups around the world to push smuggled, contraband tobacco, and the reasons were to create market share and to save money.
Much of the price of a pack of cigarettes is in taxes. So if you can take cigarettes from a low-tax place, like, say, the Carolinas, and sell it in a high-tax place like, say, New York, you pocket the difference. That's where these huge profit margins come from.
GROSS: We'll get more into the tobacco industry a little bit later, but let's look at, like, who else - just an overview - who else is profiting from this black market cigarette industry? Big tobacco has profited from it. You mentioned the Taliban. Who else?
Mr. KAPLAN: Well, when you create these big off-the-books economies, pretty much people across the border are profiting. There are huge renegade tobacco companies that have risen up in Eastern Europe and Russia and Ukraine. In South America, Paraguay has become this tobacco behemoth. It's pouring a billion dollars of contraband goods into Argentina and Brazil.
In our own country, we see large tobacco companies flooding U.S. Indian reservations with untaxed tobacco, and that's okay on its face. The Indians are by law allowed to buy untaxed tobacco. What they're not allowed to do is then turn around and sell it on the black market to bodegas and street corner vendors in New York City and in Canada, and that's going on, again, another billion-dollar black market.
The problem with these black markets is they create a kind of structural corruption. There's so much money flowing through these off-the-books transactions, pretty soon you've got Hell's Angels involved, and the Mafia and all kinds of spurious characters overseas.
GROSS: And let's talk about who's losing money, because there's a lot of tax money not being paid on these illegal cigarettes.
Mr. KAPLAN: Yeah, it's a great question. I mean why really should we care? I mean, okay, it's cigarettes. It's basically a legal product, even though it's being smuggled. You really care for three reasons.
One is that it's feeding organized crime and corruption. Two is there's a huge amount of lost tax revenue, revenue that states, that governments have to make up elsewhere. New York City and New York state are losing as much as a billion dollars a year, and these are governments in crisis that cannot fund basic services.
Finally, you care because of the health implications. Studies have shown that high taxes really do discourage smoking. People tend to smoke less when cigarettes are taxed high, and when you flood the market with these black market cigarettes, you undercut that policy, and people start smoking more. And who's smoking more? It's people who are in poor income brackets. It's women. We're seeing explosive growth in developing countries, and all this is related in many ways to the smuggling boom that's going on.
GROSS: And smokers are being hurt by this illegal trade in cigarettes because some of the cigarettes that are being sold illegally are also illegally made. They're not brand-name cigarettes, although some of them are knockoffs of brand-name cigarettes, and they're sometimes higher in nicotine than real, legit cigarettes are.
Mr. KAPLAN: Yeah. If you can believe it, as bad as cigarettes are for you, some of these bootleg smokes are much, much worse. There's all kinds of crud in them, I mean heavy metals like cadmium, and there's arsenic. Studies have found high rates of pesticides, rat poison, even human feces.
You have two different categories of these off-the-book cigarettes. One are basically legitimate brands that are untaxed. They don't get the stamps that you're supposed to have, and they just get shipped every which way. This is what big tobacco has flooded U.S. Indian reservations with.
Another kind are these obscure brands, and you can find them sold everywhere on the Internet, that come out of places like Paraguay and Russia and China, which, you know, they may be produced legitimately in their home countries, but they're completely unregulated. They're untaxed, and in many cases they're counterfeit versions of the packs that we've grown accustomed to seeing, and some of the counterfeiting is really good. I mean, even the industry has trouble figuring out which are the legitimate brands and which aren't. They can even copy, like, the holographic images that are on Marlboro packs to thwart counterfeiters.
There's one village, Zhangzhou, in southern China, in Fujian Province, that is the world center of counterfeiting. The whole town is dependent on counterfeiting cigarettes, and some of the factories are literally underground. It's just amazing, and they're shipping them in unbelievable numbers overseas, I mean by the container, by tens of millions of packs at a time, and what we've reported on a couple of cases, one involving a billion counterfeit cigarettes from China that came through the U.S.
I mean, they really are huge, and you can find them on street corners today, in neighborhood shops, Indian reservations. It's really become quite a phenomenon.
GROSS: If you're just joining us, my guest is Dave Kaplan. He's the editor of the Tobacco Underground Project, which is an investigative research project on tobacco, terrorism and the illicit trade in cigarettes. He is the editorial director of the Center for Public Integrity and the director of the center's International Consortium of Investigative Journalists.
What is big tobacco doing about these counterfeit cigarettes, these knockoffs, coming from China that are sometimes being sold in the U.S.?
Mr. KAPLAN: They're pretty alarmed. You know, big tobacco has come a long way since the '90s, when they were really behind most of the smuggling. Now it's taken on a life of its own. The big tobacco companies have deployed agents around the world. They've got their own intelligence networks.
They're trying to get local governments to crack down, but it's pretty well out of control at this point, and we think that - gee, I forget the numbers - something like 12 percent of all sales are now contraband in the worldwide tobacco market. It's almost 700 billion cigarettes, and again, it's hard to tell when you're buying a legitimate brand.
GROSS: Now, you have said that in the '90s the tobacco industry itself was deeply involved in cigarette smuggling. Give us an example of how, back in the '90s, parts of the tobacco industry got cigarettes to underground groups and to the black market, and how did they make a profit doing that?
Mr. KAPLAN: We recently ran a piece based on court records that have been coming out in Italy and Switzerland called "The Montenegro Connection." Now Montenegro, if you saw one of the recent James Bond films, it was filmed there. It's a very picturesque small Balkan country on the Adriatic, and for some 10 years it's been ruled by Prime Minister Milo Djukanovic.
Mr. Djukanovic, according to these court records, is at the center of a criminal conspiracy involving about a billion dollars of contraband cigarettes that he was moving to help support Montenegro during the Balkan Wars and then to fund the state. It was a quasi-state enterprise to move off-the-books tobacco.
He was buying those from the big tobacco companies, who had to know. I mean, Montenegro, which only has a few million people, couldn't possibly absorb these huge amounts of tobacco. What was going on, according to court records, is he and his alleged compatriots were selling them to two different Italian Mafia syndicates, who were then distributing these untaxed cigarettes all through Europe, and they laundered, allegedly, about a billion dollars in Switzerland.
The case is being looked again now because Montenegro wants to join the European Union, and their biggest concerns about little Montenegro are, well, crime and corruption.
GROSS: I still don't completely get it how, like, a country like Montenegro can buy cigarettes at such a discount that there could be so many middlemen in between and still people making profits every step along the way.
Mr. KAPLAN: Well, they can buy the cigarettes for as little as, say, two, three dollars a pack. I mean, that's what cigarettes cost without the tax. I mean, you can buy them for under $1 in some countries. But then if you sell them in a high-priced country, like, say, Norway or the U.K., they're going to cost eight, nine dollars a pack. I think they're about seven bucks in New York.
You don't have to sell them at exactly that rate, but gee, if you're paying two bucks wholesale and then you turn around and sell it for five bucks, which is still a much better deal than the retail price, you're more than doubling your profit. So these cigarettes are sold untaxed and on the black market, and that's where these big markups come from.
GROSS: And Montenegro is getting their cigarettes from legit cigarette manufacturers, the big brand-name companies.
Mr. KAPLAN: Exactly, yeah.
GROSS: So the big brand-name companies were making their profits on it too.
Mr. KAPLAN: Well, they were happy to move product, and they were creating market share. More people are smoking. That means a bigger future market. They use that for market penetration in mainland China. They use Triad criminal organizations to move product that way. You know, more people smoking is better for business.
GROSS: You said that the big tobacco companies had a big part in tobacco smuggling in the sense that they were selling huge amounts of cigarettes to places like Montenegro, probably knowing that they'd be used in the underground business? Yes? They probably knew that?
Mr. KAPLAN: Oh, there's no doubt. I think court records reflect this, as do our own investigations. If you look at what's happening in the U.S. right now, I mean we've got a map on our site which shows how many cigarettes American Indians on New York reservations would have to smoke to account for all the cigarettes that big tobacco has been selling to them.
You know, on some reservations it's like a cigarette every, you know, 30 seconds. It's impossible to account for the numbers of cigarettes that have flooded these various places - like the reservations, like Montenegro in the '90s, and like Paraguay is doing to Brazil and Argentina today.
So we've just looked all these different markets, and billions and billions of cigarettes are just disappearing. They're disappearing into these black markets that are creating just a real health nightmare.
GROSS: Now, why have Indian reservations in Canada and the United States been involved in the underground cigarette trade?
Mr. KAPLAN: It's lucrative, and you know, many reservations have had a challenging time creating good livelihoods for their people, and this has been a proven way to make some real money on the reservation. And we calculated it. It's about a billion-dollar black market.
So a billion dollars is suddenly off the books. That has implications. It has implications for law enforcement, for health policy, for lost tax revenue. It's serious stuff.
GROSS: New York's Governor David Paterson last December signed legislation designed to stop the illegal - the underground cigarette trade coming out of Native American reservations in New York. Can you tell us about that legislation?
Mr. KAPLAN: Well, New York's gone at this again and again, and it's been a problem from the get-go, and the reason is that the Indians, particularly Mohawk reservations, are quite adamant that they have a right to sell these cigarettes untaxed, and the state and the city of New York dispute this, and they believe they are losing hundreds and hundreds of millions of dollars in needed tax revenue. But the last time they tried to crack down, I think there were Indian blockades and threats of violence, and the state is not interested in provoking a crisis with their Native American population.
So there's been an uneasy truce, and the result is that the cigarette black market has grown and grown, and this last legislation passed by New York state was an attempt to crack down on this, but we don't see any real intent on putting real teeth into enforcement, and the reason is they don't want to provoke a confrontation with the Indians.
GROSS: You said in the '90s that the big tobacco companies played a major part in the underground cigarette business. Why, then - that implies that they no longer play a big part. What changed? Was it lawsuits against them?
Mr. KAPLAN: Yeah, exactly. There were big lawsuits in the United States and Canada and the EU. There's one in Colombia that is, it's reaching a conclusion right now, where the tobacco industry has had to pay billions of dollars for - not just for pushing an unhealthy product and covering up evidence about its effects but actively encouraging smuggling, and they've had to make deals and they've had to make pledges that they would clean up their act.
In many cases they have, and I think they decided it was no longer in their best interest to be so deeply involved in smuggling. Now, that's not entirely the case. We got a piece we just published on Ukraine in Eastern Europe, where there's like 30 billion cigarettes that are overproduced by big tobacco companies in Ukraine. Well, where do they think those are going? They're all being sold on the black market in the EU, where they get huge amounts, and we interviewed representatives of the big tobacco industry in Ukraine. They were surprisingly frank about what's going on. Basically the attitude is, look, we produce it; it's not our job to police it. But the evidence is pretty clear that they end up in the black market.
GROSS: My guest is Dave Kaplan, editorial director of the International Consortium of Investigative Journalists. We'll talk more about their Tobacco Underground Project after a break. This is FRESH AIR.
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GROSS: If you're just joining us, my guest is Dave Kaplan, and we're talking about the Tobacco Underground Project, which is an ongoing series of investigative articles on tobacco, terrorism and the illicit trade in cigarettes. This is a project that started in 2000 by the International Consortium of Investigative Journalists, which is a project of the Center for Public Integrity, and Dave Kaplan is the editor of the Tobacco Underground Project and editorial director of the Center for Public Integrity.
One of the interesting stories that the Tobacco Underground Project has investigated is Jin Ling cigarettes, which is the first cigarette manufactured and designed explicitly for smuggling. Tell us what Jin Ling cigarettes are and where they're made.
Mr. KAPLAN: Gee, I love this story, not just methodologically. I've been an investigative reporter for 30 years, and it was this transnational underground empire that we penetrated and put the story together for the first time. But the scale was extraordinary.
Three years ago this outfit didn't even exist. There's a company called the Baltic Tobacco Factory, and it shows you how quickly things can change in a globalized world. From virtually nothing, this outfit started pouring about a billion dollars of cigarettes into the European Union.
They're called Jin Ling, which is actually a Chinese name. It's the old name for Nanjing, ancient Chinese city, and somehow it ends up, the brand in Russia, these factories start producing it, and it costs a fraction of what the big brands, the name brands, in Europe cost because of high taxes.
So they started pouring Jin Ling cigarettes all over the EU, and as we looked, we went from country to country - suddenly from nothing, Jin Lings had become the second-most-seized cigarette next to Marlboros in the EU.
GROSS: So are these officially illegal cigarettes, or are they just kind of cheap ones designed for smuggling. Are the cigarettes themselves illegal?
Mr. KAPLAN: No, no, and that's the dilemma with so much of this. You know, I mean, cigarettes are a legal product. It's - under law it's okay for people to, you know, of age, to smoke cigarettes. The problem is when they're either counterfeit or they're untaxed and unregulated. These were untaxed and unregulated. So they would take these cheap Jin Ling cigarettes and smuggle them across various borders in Europe and then sell them on the black market, sell them untaxed. And suddenly Jin Ling cigarettes are flooding these places, and nobody had heard of Jin Ling, and you know, we may see similar operations here in the U.S., start seeing strange brands coming in.
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Mr. KAPLAN: You can find them on the Internet. Go ahead and Google Jin Ling, J-I-N L-I-N-G. You'll get a lot of hits.
GROSS: What do the packages look like?
Mr. KAPLAN: They look like Camels. There's a picture on our site. It's - but instead of a Camel, there's a goat.
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Mr. KAPLAN: And we did the project. You know, ICIJ, our international consortium, works with partners around the world, and one of our partners on this was Novaya Gazeta, the gutsy weekly in Moscow, and the name of their story is "Who Will Answer for Our Goats?"
GROSS: David E. Kaplan will be back in the second half of the show. He is the editorial director of the International Consortium of Investigative Journalists, which is part of the Center for Public Integrity. You can find a link to their Tobacco Underground Project reports on our Web site, freshair.npr.org. I'm Terry Gross, and this is FRESH AIR.
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GROSS: This is FRESH AIR. I'm Terry Gross.
Let's get back to our conversation about international cigarette smuggling and how it's funding organized crime and terrorists groups. My guest, David E. Kaplan, is the director of the International Consortium of Investigative Journalists, which has produced a new series of reports as part of its Tobacco Underground Project. The consortium is part of The Center for Public Integrity.
One of the groups that is profiting from the underground sales of cigarettes is the Taliban. So let's talk a little bit about how the Taliban are profiting from cigarettes. Where do they get their cut?
Mr. KAPLAN: Well, we zeroed in on the Pakistan Taliban in particular because there's a very large and lucrative tobacco industry in Pakistan's Northwest Frontier, which has been in the news so much with, you know, people - intelligence experts think that's where bin Laden may be hiding. The Taliban has tried to take over swaths of Pakistan territory and well, how are they funding themselves?
Part of it is through heroin shipments. They tax the shipments as they come from Afghanistan into Pakistan. If you're coming through this territory, the Taliban have arms, they control key passages, and if you're going to bring it through, you have to pay them the tax. They're doing the same thing with cigarettes and Pakistan intelligence officials told us that second only to heroin the Pakistan Taliban are profiting from the cigarette industry.
And there've been studies that look at why some conflicts last longer than others and there's a category called contraband finance. Well, whether it's narcotics like heroin and opium or blood diamonds or illegal timber harvesting, or illicit tobacco - tobacco smuggling, when they fuel civil wars and insurgencies and other conflicts, they tend to last as much as five, six times longer than conflicts that aren't fueled by these criminal sources of income, so it's another reason the trade is troublesome.
GROSS: So are the Taliban basically like demanding protection money from tobacco - from cigarette manufacturers and cigarette smugglers in Pakistan?
Mr. KAPLAN: Yeah - that's exactly what's going on. It's a protection racket where they get fees not to interfere and to allow safe passage. And, in fact, we found the same thing is going on with al-Qaida's franchise in North Africa. They're allowing safe passage through these ancient smuggling routes that go from West Africa through the Sahara into the North and it's, again, it's safe passage money, and very lucrative.
GROSS: It's taken you a team of international journalists through the Tobacco Underground Project, which is part of the International Consortium of Investigative Journalists. So it's this international team that tracked down what's going on, that investigated what's going on. Will it take similarly an international global crackdown on this illegal trade to actually do anything about it? Is it too difficult for individual countries to really accomplish anything that would stop the global trade?
Mr. KAPLAN: This is actually a solvable problem. It took some initiative on our part to put the big story together. But the problem in these, when you allow these kind of black markets to fester and to expand, they create their, how should I say it? They take on a life of their own and they become - the criminal economies become institutionalized. It's the same principle where they start fueling conflicts overseas, these sources of contraband. And it becomes very hard to rip out that sort of plumbing.
GROSS: You've been working on a lot of different projects and a lot of them have to do with terror networks in one way or another, even in the tobacco thing, there are terror networks that profit off of the tobacco trade. So you're getting to see this, you know, almost aerial view of what's going on because you're researching so many different cross-border projects, many of them related to terrorism. So I'm wondering if you're seeing patterns that you think a lot of other people aren't seeing.
Mr. KAPLAN: Well, I don't know if I...
GROSS: You know, or interconnectedness?
Mr. KAPLAN: Yeah. I don't know if I'm seeing them and other people aren't but it's, you know, I started as a crime reporter and it's all -they're all crime stories to me. I mean, even - I was covering al-Qaida before 9/11 for U.S. News and World Report. I went to East Africa after the embassies were bombed and these were criminal conspiracies, they're criminal organizations. That's what terrorist cells are. They have different motives.
You know, organized crime functions because of profit. These people love to make lots of money very quickly. You know, terrorists tend to function because of political or religious reasons. So the motives are different but the MO's are very similar.
They're using safe houses. They're smuggling products. They're moving contraband goods. They're smuggling arms, they use violence to enforce their way. And I guess I see this as all one continuum. Even though the motives are different, it's - I'm almost at the point here where you have to clean up the whole world.
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Mr. KAPLAN: You can't just take on organized crime or take on terrorism or take on cigarette smuggling. I mean, you have to clean up dirty money. You have to develop and educate societies. You have to create transparency and accountability and civil society in these various cultures. I mean, that's what's really going to do it.
GROSS: Well good luck to you and thank you so much for talking with us about the Tobacco Project.
Mr. KAPLAN: A real pleasure. Thanks so much.
GROSS: David E. Kaplan is the director of the International Consortium of Investigative Journalists, which is part of The Center for Public Integrity. You can find a link to their Tobacco Underground Project on our Web site, freshair.npr.org.
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