U.S. authorities are probing allegations that cigarette makers R.J. Reynolds and Japan Tobacco Inc. have violated trade sanctions against Iraq by channeling billions of dollars worth of cigarettes into the country through intermediaries, sources have told The Times.
The allegations of illegal shipments to Iraq first surfaced publicly in a civil lawsuit by the European Union, which accused Reynolds, Japan Tobacco and Philip Morris Cos. of evading hundreds of millions of dollars in taxes by promoting a vast cigarette-smuggling scheme.
Federal investigators separately have launched a criminal investigation, tracking shiploads of cigarettes suspected of being diverted through Cyprus and other authorized ports into Iraq despite the trade embargo.
Dean Boyd, spokesman for the U.S. Customs Service, said he could "neither confirm nor deny any such investigation." But people familiar with the probe said it involves at least six customs investigators based in the U.S. and abroad.
These sources said the Customs Service is working with federal prosecutors in the office of the U.S. attorney for the Southern District of New York. A spokesman for that office also declined to comment.
Reynolds spokesman Seth Moskowitz said company officials hadn't heard of the probe. If contacted by authorities, "we'll ... provide whatever information is required," Moskowitz said.
"To my knowledge, nobody from this company has been involved in any smuggling activity," he added.
Guy Cote, spokesman for JT International, the Japan Tobacco subsidiary that acquired the international cigarette business of Reynolds in 1999, also said his firm was unaware of the investigation. Cote said that, as far as company officials know, their cigarettes have not been shipped to Iraq.
In court papers and exhibits filed in U.S. District Court in Brooklyn, the EU has claimed that Reynolds' Winston cigarettes and other brands have flowed into Iraq continuously--and illegally--since August 1990, when U.S. trade with Iraq was outlawed after its invasion of Kuwait.
The trade sanctions, ordered by former President George Bush under the International Emergency Economic Powers Act, bar not only direct shipments but also moving goods through middlemen or third countries. Penalties for criminal violations range up to 12 years in prison and a $1-million fine. Civil penalties of as much as $275,000 per violation also may be imposed.
According to some estimates, as much as one-third of exported cigarettes are smuggled across national boundaries to evade duties and taxes. Cigarette makers say they send products through legitimate channels and aren't responsible for diversions that may occur later in the distribution chain. In the Iraq case, knowledge or intent to violate trade sanctions would be required to prove a criminal charge.
The EU's smuggling lawsuit was dismissed in February by U.S. District Judge Nicholas G. Garaufis, though his ruling did not absolve the tobacco companies or address the Iraq allegations.
Rather, Garaufis ruled that the suit could not proceed because other countries are barred from using U.S. courts to collect unpaid taxes. The EU has filed an appeal.
The Iraq allegations involve cigarettes produced at a former Reynolds cigarette factory in Puerto Rico that was transferred to Japan Tobacco in 1999 as part of the sale of Reynolds' international business.
According to the EU's claims, cigarettes from the plant were shipped to European ports, then rerouted to a Reynolds' distributor in Cyprus, and ultimately routed to Turkey and trucked into Iraq. JT International announced this year that it plans to close the Puerto Rico plant.
In support of its claims, the EU filed an affidavit by Tugrul Ozsengul, identified as a Turkish security consultant, who said he had witnessed the shipments into Iraq on a visit to the border area in December 2001.
"I went to the Habur border gate of Turkey with Iraq and I witnessed that Winston cigarettes and Philip Morris brand cigarettes were being shipped across the border into Iraq," Ozsengul said. "I questioned people working and living in the area about these shipments and learned that almost every day lorries, mainly of the above-mentioned brands, have been shipped to Iraq, and this situation has persisted for several years."
The EU further claimed that a terrorist group, the Kurdistan Workers' Party, may be involved in the cigarette trade, citing a document it filed under seal to protect an informant.
The EU also said that Uday Hussein, son of Iraqi leader Saddam Hussein, probably has profited from the venture, citing claims by a high-ranking Iraqi defector that Uday Hussein controls the country's cigarette trade.
In 1998, a Reynolds subsidiary, Northern Brands Inc., pleaded guilty to U.S. charges in a cigarette smuggling case and paid a $15 million fine.
A Northern Brands sales executive also went to prison in the case, which involved contraband cigarettes sent from upstate New York across the border into Canada to evade Canadian tobacco taxes.
In filings with the Securities and Exchange Commission, Reynolds has disclosed that it is under investigation by the Royal Canadian Mounted Police in connection with the Northern Brands case.
In 1999 and 2000, Reynolds also received document subpoenas from a federal grand jury in North Carolina that is looking into possible shipments of contraband cigarettes to Europe.
Sources said that investigation is continuing and is separate from the probe by prosecutors in New York of alleged shipments to Iraq.