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Corruption Watch: December 3, 2002

3 December 2002, Volume 2, Number 41
By Roman Kupchinsky
Both criminals and terrorists have long used cigarette smuggling to launder money and finance terrorist activities. An illustration of the worldwide cigarette smuggling business was brought to public attention in a suit filed in a U.S. court in Brooklyn by the European Union against the American tobacco company RJ Reynolds on 31 October. According to "The Los Angeles Times" of 5 November, the EU's lawsuit links Reynolds with money-laundering networks serving Latin America, Italy, Spain, Russia, the Balkans, Britain, and Iraq, where it is allegedly overseen by President Saddam Hussein's son, Uday.

"The Los Angeles Times" writes that the lawsuit also alleges that cigarettes were at the center of the infamous Bank of New York money-laundering case of 2000, in which two top bank executives have pleaded guilty to helping launder billions of dollars for organized crime figures in Russia.

In copious detail, the suit describes stratagems RJR allegedly employed to distance itself from criminal partners, including eradicating identification numbers from illicit shipments, using secret bank accounts and third-party checks and establishing intermediary companies that they used to do business through.

RJ Reynolds spokesmen have denied the charges and claim that the suit is identical to the one brought by the EU against the company in 2000, which was dismissed by a federal judge in February 2002 on grounds that its claim of European tax evasion by RJR lay outside the jurisdiction of U.S. courts.

"The Los Angeles Times" quotes David Vladeck, a law professor at Georgetown University and director of the Public Citizen Litigation Group as stating that: "These are the most serious and far-reaching allegations ever made against any domestic U.S. corporation. According to this complaint, RJR is at the nerve center of an enormous international operation that has far-reaching and detrimental impacts throughout the U.S., Western Europe and South America."

In September 2002, the Coalition for International Justice released a study entitled "Sources of revenue for Saddam & Sons -- A Primer on the Financial Underpinnings of the Regime in Baghdad." The study found that Uday Hussein, has long controlled the importation of cigarettes into Iraq. An Iraqi defector claims to have negotiated with foreign suppliers on Uday's behalf, and insists that "hundreds of million of dollars" were at stake in the deal he was working on just prior to his defection in February 1998. The report notes that Cypriot registered companies appeared to be the main organizers of this trade.

According to the EU, Iraq became a prime market for cigarettes smuggled via Cyprus. In November 2001 the EU launched another suit against RJ Reynolds and Phillip Morris, charging such "violations of the Racketeer Influence and Corrupt Organizations (RICO) Act of 1970" as "money laundering, wire fraud and mail fraud." The study states that: "The EU is also arguing that among the beneficiaries of the cigarette trade are terrorist organizations and sponsors of such. There is a clear and direct link between cigarette smuggling in this case and the Kurdistan Worker's Party (PKK) and the Iraqi regime," claims a supporting document submitted in the suit.

As for the scale of cigarette and alcohol trade with Iraq, the British Foreign Office released some figures in October 2000. According to the office, "In the last 6 months, and these figures incidentally have been provided through the United Nations Security Council, Saddam Hussein has imported over 300 million cigarettes, 38,000 bottles of whisky per month, 230,000 cans or 115,000 liters of beer per month, over 120,000 cans or 40,000 liters of vodka per month and almost 19,000 bottles of wine a month."

As the story of the EU suit against RJ Reynolds gained publicity, "The Washington Post" on 14 November wrote that Iraqi President Saddam Hussein and his son, Uday, "reaped millions of illicit dollars from the sale of cigarettes in Iraq by RJR, as did the Kurdistan Workers' Party (PKK) -- a group that has carried out bombings and kidnappings in Europe in its bid for an independent Kurdish homeland and that was designated a terrorist entity by the United States in 1998. The group controls parts of northern Iraq and extracts a fee for each container of cigarettes it allows to pass from Turkey into Iraq, the lawsuit alleges."

According to "Post" story, the EU lawsuit claims that RJ Reynolds knowingly set up the selling scheme in Cyprus and through it sold cigarettes to Iraq while preparing false paperwork showing that the cigarettes were going to Russia.

How are cigarettes smuggled? According to the British-based Action on Smoking and Health (ASH) from February 2000, "Cigarettes legitimately move through the 'in-transit' regime without bearing tax until they reach the final end market -- at which point tax is payable. Most smuggling involves the cigarettes moving out of the untaxed distribution chain and entering the final end-market illegally -- often through a third country. This can happen by legal export followed by illegal re-import or cigarettes in transit may be diverted from the legal to the illegal distribution chain. Smuggling is not generally driven by differences in tobacco taxes between countries, but by the avoidance of taxation by diversion from the wholesale distribution chain -- where duty has not been paid."

Is RJ Reynolds the only company accused of such activity? According to a study done in Malaysia, a target country for Islamic fundamentalists involved with terrorism, contraband cigarette smuggling is a major industry. Dunhill and Co. cigarettes constitute 16 percent of all smuggled cigarettes in Malaysia. The study found that in 2000 the sale of contraband cigarettes had become more open and the price had increased. And while the Malaysian government claims that terrorism is not a problem in that country, someone is behind the large-scale smuggling which is taking place. A similar case can be made for the Philippines, where a World Bank study found that in 1995 some 19 percent of sales of cigarettes in the Philippines came from contraband cigarettes, the World Bank reported. This information raises many questions when superimposed on the fact that on 24 August 2002 the Filipino Anti-Money Laundering Council announced it had frozen more than $18.7 million in suspicious accounts in the Philippines, much of it connected at least to organized crime, if not to terrorist organizations.

Another major company suspected of abetting in smuggling is British American Tobacco (BAT), according to a report by ASH in London (February 2000): "While there is little evidence of BAT smuggling tobacco itself, there is compelling evidence to suggest that BAT is a significant part of a conspiracy which causes smuggling to happen. At least one BAT executive has been convicted for smuggling-related offences in Hong Kong and other legal actions are possible. While conspiracy action in the UK is unlikely for technical reasons, conspiracy-equivalent actions in the jurisdictions where the smuggling has taken place are plausible. U.S.-based racketeering actions (RICO) have been launched against the tobacco industry for its involvement in Canadian smuggling and RICO actions against BAT and Philip Morris are reportedly under consideration by the Colombian Governors. ("

Worldwide cigarette smuggling has not only lowered revenues from taxes for local and national governments, it has facilitated money laundering for drug dealers who are known to buy cigarettes with their ill-gotten drug money and then resell these cigarettes on the black market, thus earning an additional profit. The potential for terrorist fundraising by engaging in this trade is unlimited, as a recent U.S. example from North Carolina showed. There a group of men bought cigarettes in North Carolina and resold them in Detroit (without paying state taxes) and used part of the profits to send to the terrorist organization Hizballah (see "RFE/RL's Crime and Corruption Watch," 21 November 2002). The Kurdish Workers' Party smuggling rings have also used the profits from illegal cigarette sales to finance their terrorist activities. Given the magnitude of this business in such countries as Malaysia, Indonesia, and the Philippines, it must be kept on the radar screen of law enforcement organizations as other measures to cut off terrorist funding take effect.

Is Osama bin Laden alive and taping messages to be read on Al-Jazeera television? According to a 19 November report in "The New York Times" and other media, the CIA has concluded that the tape is genuine and the voice is bin Laden's. The daily wrote: "An American intelligence official said today that an 'extensive analysis' of the audiotape conducted over several days had convinced intelligence experts that the tape 'almost certainly' contained the voice of Mr. bin Laden."

However, according to a report by RFE/RL on 29 November, a respected Swiss research institute said the latest audiotape statement attributed to bin Laden is not authentic.

The report, by the Lausanne-based Dalle Molle Institute for Perceptual Artificial Intelligence (IDIAP), contradicts the findings of the U.S. Central Intelligence Agency and National Security Agency. IDIAP says it is 95 percent certain the tape does not feature the voice of the terrorist leader. The U.S. agencies say they are almost certain it does.

France-2 TV commissioned the review of the tape. The IDIAP director, Herve Bourlard, said the institute compared the voice on the tape with 20 earlier recordings attributed to bin Laden before making the decision.

Whether it is authentic or not, President George W. Bush said on 13 November at the White House that he is not dismissing the importance of the tape. "Whoever put this tape out has put the world on notice yet again that we're at war and that we need to take these messages very seriously, and we will."

The audiotape was acquired on 12 November by Al-Jazeera, the satellite television news network based in the Gulf nation of Qatar. According to the AP of 14 November, a journalist from Al-Jazeera said he received the recording in Pakistan from an agent of the Al-Qaeda leader. Ahmad Muaffaq Zaidan of Al-Jazeera TV said the bin Laden emissary contacted him by phone and asked to meet in Islamabad, Pakistan. Zaidan would not say where they met.

In the recording, bin Laden is heard saying: "As you assassinate, so will you be [assassinated], and as you bomb so will you likewise be" in reference to the United States and its allies. The Arabic-language station has previously broadcast messages from bin Laden, but this is the first that has included the speaker referring to recent events, indicating that bin Laden -- if the speaker is bin Laden -- is still alive.

In the message, the speaker cites the recent bombing in Bali, the hostage siege in Moscow, the killing of a U.S. soldier in Kuwait, the assassination of an American diplomat in Jordan, and the bomb attack against a French oil tanker off the coast of Yemen.

International affairs analysts interviewed by RFE/RL say they are reluctant to speculate about the message, but they add that some aspects of the recording lead them to some conclusions.

Retired General Edward Atkeson, a former senior intelligence officer for the U.S. Army, says he believes that the format of the tape -- audio not video -- is significant.

He says that bin Laden, if he is the speaker, may be in bad shape or in hiding and does not want this to be known.

In the meantime, the United States FBI and European law enforcement agencies issued a strong warning about the possibility of terrorist attacks in Europe. According to the 14 November issue of "Time" magazine: "In Berlin, Germany's normally reticent intelligence chief, August Hanning, made the case in a frank interview on prime-time television: 'The fear is very concrete that we must reckon with a further attack...of perhaps great dimension.'" Hans-Josef Beth, who heads the international counterterrorism unit of the Foreign Intelligence Agency, was even more specific, fingering Abu Musab Zarqawi, a one-legged terrorist with known Al-Qaeda connections, as the likely mastermind of chemical attacks on European targets. Zarqawi has ordered trained operatives into Europe, Beth told a meeting of the German-Atlantic Society in Berlin: "He has experience with poisonous chemicals and biological weapons...and has become highly active. Something big is in the air." "Time" also quotes a French judge who told the magazine: "We're absolutely scrambling here," said a harried top French terrorist judge. "Every light in every service in France is full red."

But Nathan Brown -- a professor of international affairs at George Washington University in Washington, D.C. -- sees the tape as less of a threat to U.S. allies and more of a message of encouragement to his own followers and sympathizers.

Brown told RFE/RL that he believes the wording on the tape suggests that its target audience is not Westerners, but Muslims. For example, he says, the speaker refers to the sacking of Baghdad by Hulagu in 1258, when Iraq's ancient capital was burned to the ground. This, he said, is well known in the Muslim world, but not among Westerners.

The Polish Finance Ministry estimates that some $3 billion earned from illegal operations -- drug dealing, theft, prostitution, gambling, and human trafficking -- is laundered through Poland's financial institutions annually. The ministry speculated that the total, however, could vary from between $ 1.5-8 billion, the UPI reported on 11 November. The Polish public prosecutor, Jerzy Iwanicki, told the UPI that his office is currently involved in 70 investigations of money laundering, but that a lack of police resources and record search delays have suspended many of them. Concurrently, many bankers have been reluctant to file transaction disclosure forms and other mandatory reports. And while Polish laws are now compliant with European standards, enforcement is another matter. A lack of cooperation between financial institutions and government investigators hinders enforcement, as do laws that prohibit prosecutors from discussing investigations or questions from financial institutions.

Russian Interior Minister Boris Gryzlov visited the Central Asian states of Kyrgyzstan and Tajikistan on 12-13 November. Gryzlov's purpose is in part to help organize a united front against the region's biggest problem -- drug trafficking.

Gryzlov is only the latest official to travel to Central Asia to call for a greater effort in fighting this problem, which stems from Central Asia but whose effect is felt worldwide.

In his meeting with Kyrgyz Interior Minister Bakirdin Subanbekov on 13 November, Gryzlov suggested that a "belt of security" be established along the southern rim of the Commonwealth of Independent States (CIS), to prevent illegal narcotics from entering from Afghanistan.

Gryzlov admitted it would be expensive to create such a security network to fight narcotics-trafficking and proposed that governments in the West, whose populations are affected by drugs from Afghanistan, should foot some of the bill for helping secure CIS borders against drug-traffickers.

For now, Gryzlov said it was necessary for Russia to act with some of the countries in Central Asia to stem the flow of drugs from Afghanistan. Gryzlov pointed to a collaborative antinarcotics operation in June that netted some two tons of illegal narcotics as an example of what could be done without outside help. Russia, Kazakhstan, Kyrgyzstan, and Tajikistan all participated in the operation.

Gryzlov also signed an agreement with Kyrgyzstan on the issue. (Bruce Pannier, RFE/RL, 14 November 2002)


By Taras Kuzio

Belarus has become a major source of domestically produced arms and a conduit for arms produced by other CIS states to Iraq. The country is led by Europe's last dictator, Alyaksandr Lukashenka, who disbanded and replaced the democratically elected parliament and was re-election in what the OSCE termed fraudulent elections in September 2001.

Lukashenka is, together with Armenia, Russia's major ally in the CIS. His virulent anti-Westernism was useful to President Boris Yeltsin in his failed attempt to halt the enlargement of NATO in the second half of the 1990s. Yeltsin's successor, Vladimir Putin, has accepted NATO enlargement as a fait d'accompli and established a strategic, "antiterrorist" partnership with the U.S. Putin has therefore less need for Lukashenka, who has become increasingly marginalized.

Belarus is a black hole in the CIS. Lukashenka's command economic policies have proved unable to generate any sustained economic recovery of the kind now experienced by neighboring Ukraine and Russia. Belarus also has the largest inflation rate in the CIS.

Domestic arms exports and acting as a conduit for illegal arms transfers from other CIS states whose corrupt ruling elites wish to distance themselves from such practices has become a major money-making operation for Lukashenka's cash strapped Belarus. The free-trade regime operating between Belarus and Russia assists in this operation, as does the fact that Belarus inherited a large military industrial complex from the former USSR. Some Belarusian tank repair plants only stay afloat by refurbishing Soviet-era tanks sent to former Soviet client states. Like other front line, first-echelon Soviet republics, such as Ukraine, Belarus inherited large stockpiles of weapons which are surplus to its needs. Belarus has 1,700 T-72 tanks (NATO member Poland, with four times the population, has only 900).

Between 1996-2000 Belarus ranked 10th in major arms exports in the world, according to SIPRI, which is only just above Ukraine, at 7th, with a five times larger population. Most of these exports are not undertaken transparently and the proceeds end up within the presidential administration as slush funds for elections or to fund his growing apparatus of internal security forces used to keep his regime in power.

In addition, Lukashenka has no interest in ensuring good diplomatic relations with NATO, the U.S. or the OSCE. Belarusian relations with the West are poor and because Lukashenka expresses no interest in Euro-Atlantic integration, unlike Ukraine, Lukashenka is uninterested in maintaining good relations with the EU, Council of Europe, or NATO. The EU was evicted from Minsk some years ago but eventually returned. The OSCE has been accused of being a nest of "spies" and also has been made persona non grata.

It is therefore very difficult for the West to exert pressure on Lukashenka. Threats of diplomatic isolation or sanctions against Belarus hold little weight because Lukashenka is content with his isolation. The only manner in which pressure can be brought to bear is through Russia, although the West is unwilling to push too hard in order not to jeopardize its partnership with Russia.

Lukashenka has cultivated a long-term relationship with Iraq. In early October a Belarusian and CIS 150-man delegation headed by Nikolau Evan visited Iraq. The visit followed a July Iraqi delegation which visited Belarus. Evan described the visit as an example of deep-rooted relations between Iraq and Belarus and denounced U.S. plans to attack Iraq. An example of Belarus acting as a pro-Iraqi conduit in the CIS could be seen by the inclusion in the Belarusian delegation of Russian and Ukrainian parliamentarians and political party leaders. Following the visit on 22 October, Lukashenka instructed presidential administration head Mikalay Ivanchanka to expand ties with Iraq.

Even before the recent scandal surrounding the sale by Ukraine of "Kolchuga" radars to Iraq, Belarus had become a major supplier of advanced military equipment to the countries in the Middle East and elsewhere. Belarusian weapons have ended up in Tajikistan, some of which were resold to warring clans in Afghanistan. Other destinations included Angola, Algeria, and even Sudan, where T-55 tanks and Mi-24 Hind helicopters were exported. In the first half of 2001 over $500 million in weapons were exported to Arab, Palestinian, and Albanian extremist groups, according to U.S. and Israeli intelligence sources.

The most disturbing supplies have gone to Iraq. Former Belarusian Defense Minister Pavel Kozlauski admitted that Belarus has no moral principles when exporting arms. This places it in the same league as Ukraine. What is different is that Ukraine's leadership undertakes this for corrupt reasons whereas Lukashenka has an ideological commitment to rogue, anti-Western states such as Iraq (as well as Iran, Libya, Syria, and North Korea). Lukashenka congratulated Iraqi leader Saddam Hussein on the 100 percent support he received in his 15 October referendum.

Reports about Belarusian arms exports to Iraq first surfaced in February, only a month before similar reports were released about Ukraine. A U.S. congressional visit to Belarus attempted to obtain assurances that arms transfers would be transparent, "to ensure that weapons sold are not delivered or diverted to terrorist groups." In February, the U.S. claimed it had hard evidence of Belarus breaching arms sanctions to Iraq, including supplying S-300 missiles, and threatened sanctions. Twenty Iraqi air defense officers are undergoing a two-year training course on the S-300 missile at the Belarusian Military Academy at a monthly cost of $2,500 per officer. Belarus has assisted Iraq in rebuilding and modernizing its air defense capability by supplying it with SA-3 anti-aircraft missile components and technicians.

Arms exports from Belarus and other CIS states follow a pattern common to arms exports from other countries in the post-communist world whereby arms legally sold end up in countries barred by the UN from receiving them. intended for the designated end user. This has been the case with Yugoslav arms "exported" to Nigeria but ending up in Liberia, which subject to UN sanctions.

Transparency is highly unlikely in Belarus or other CIS states such as Ukraine and Russia because of a Soviet legacy of secrecy that still permeates their governments. Transparency would also increase public accountability and reduce possibilities for corruption. The budget law in Belarus never includes a revenue item pertaining to arms sales. An Israeli expert on arms proliferation concluded that Belarus is one of the most secretive in its arms exports "and probably one of the most irresponsible countries." Other CIS states are little different.

Dr. Taras Kuzio is a resident fellow at the Centre for Russian and East European Studies, University of Toronto.