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Tobacco Firms Trace Fakes  To North Korea



By GORDON FAIRCLOUGH


Staff Reporter of THE WALL STREET JOURNAL



January 27, 2006; Page B1




In Philip Morris USA's ongoing war against counterfeiters, it was a fairly simple operation: Buy a pack of Marlboros from a corner bodega on Manhattan's Upper East Side to follow up on a tip about contraband cigarettes.

But it took until 2005, the year after the pack was purchased, company officials say, before they could trace the artfully counterfeited smokes to one of the world's most isolated countries, North Korea.

The communist nation has become a leading source of counterfeit cigarettes -- with the capacity to churn out more than two billion packs a year, tobacco companies say. Philip Morris, a unit of New York-based Altria Group Inc., says over the past several years it has discovered North Korean-made knockoffs of its Marlboro brand in more than 1,300 places, from New York to Oklahoma City, Seattle and Los Angeles.

Big cigarette companies, facing billions of dollars in lost revenue, have hired former intelligence and law-enforcement officials, recruited informants inside Asian crime syndicates and even sent agents into North Korea in an effort to stem what they say is a flood of illicit exports.

Andre Reiman, a senior vice president of Philip Morris International whose oversees antismuggling programs, said his company is "very concerned to find organized counterfeiting of our products in the Democratic People's Republic of Korea."

The scale of the distribution network -- believed to include fleets of ships owned by global organized-crime groups -- has the U.S. government taking a more active role after years of industry pleas to crack down on counterfeit cigarettes.

U.S. authorities seized more than a billion fake smokes, many allegedly from North Korea, in California last year as part of an undercover operation targeting Asian smugglers. Millions more packs of bogus Marlboros, Mild Sevens and other cigarettes made in North Korea have been confiscated in Taiwan, the Philippines, Vietnam and Belize.

In a little-publicized 2004 case, three Asian men pleaded guilty to conspiring to smuggle counterfeit goods and currency, in connection with a scheme to send fake cigarettes, forged $100 bills and knockoff Cialis, an erectile-dysfunction drug made by Lilly ICOS LLC, into the U.S. The cigarettes, a U.S. official says, were made in North Korea.

The case started when an undercover investigator working for Philip Morris posed as a buyer looking for counterfeit cigarettes, according to papers filed by the government in federal court in Washington last year. The men took the investigator to a cigarette-making plant on the east coast of North Korea. They also offered to sell the investigator forged U.S. currency, prompting Philip Morris to alert the U.S. Secret Service. In all, the men accepted payments of more than $400,000 for counterfeit cigarettes and currency, prosecutors say.

Supplying counterfeit cigarettes has cemented North Korea's ties to crime organizations, giving the country access to a vast smuggling network that could allow it to move almost anything -- from forged U.S. banknotes to weapons -- in or out of the country, U.S. officials say.

"Much more dangerous things than cigarettes can flow along these same routes," warns a senior Bush administration official. "The North Koreans could import technology and export strategic goods and weapons. It's a big deal."

North Korea has long been accused of counterfeiting U.S. currency. In a press conference yesterday, President Bush said the U.S. was moving aggressively to halt Pyongyang's forgers. "When somebody's counterfeiting our money, we want to stop them from doing that," Mr. Bush said.

Washington's efforts, however, have drawn criticism from other capitals, which worry that U.S. moves will keep North Korea from rejoining multilateral talks aimed at ending its nuclear-weapons programs.

North Korea denies it engages in counterfeiting or other illicit acts. Its official news agency said last month that "such illegal activities are unimaginable in the DPRK."

In a report prepared by a consortium of tobacco companies that includes Altria, Japan Tobacco Inc. and

British American Tobacco

PLC, and presented to U.S. authorities last year, investigators said that the North Korean regime could be earning $80 million to $160 million in annual payoffs from smugglers alone.

Those estimates are equal to roughly 8% to 16% of the total value of annual exports of legitimate goods from North Korea, whose economy collapsed after the fall of the Soviet Union. Profits from suspected state-run counterfeiting operations would likely push that number even higher, say tobacco-company executives.

"Counterfeit cigarettes are probably becoming one of their biggest sources of illicit income," says Raphael Perl, an expert on North Korean finances at the Congressional Research Service.


Two developments have helped North Korea establish itself in the fake-smokes business. First, major cigarette manufacturers, sued by the European Union and others for allegedly supplying smugglers with cigarettes in an effort to circumvent taxes, have moved to keep their products out of criminals' hands.

Second, China has moved aggressively to clamp down on cigarette counterfeiting. Rather than engage in a high-stakes game of cat-and-mouse with the Chinese authorities, makers of high-end counterfeits have instead sought refuge in North Korea.

"North Korea is the perfect place," says one tobacco executive. "There's very little scrutiny from outside, and there's no risk of law-enforcement action because it's all sanctioned by the state."

One of the main hubs of counterfeiting activity, the tobacco companies say, is Rajin, a run-down port city on North Korea's east coast. More than a decade ago, Pyongyang decided to turn the area into a free-trade zone as part of a United Nations-backed effort to spur economic development in the impoverished communist country and its neighbors.

Many of the cigarette factories in Rajin, which use tobacco from China and Vietnam, are owned or financed by Taiwanese and Chinese criminal groups, which smuggle the cigarettes they produce into countries around Asia as well as into the U.S. and Europe, say tobacco executives.

North Korean state-owned enterprises, mostly located in or near Pyongyang, the country's capital, also make knockoff cigarettes, the tobacco companies say. The companies say one of these factories is controlled by the internal security service; another is owned by a group with close links to the Communist Party leadership.

Some of the smuggling organizations that move the North Korean cigarettes use their own fleets of freighters, tankers and fishing vessels, tobacco-company executives say. Cargos are often shifted to other vessels at sea, in international waters, to mask their origin. In other cases, cigarettes move via a series of small ports.

The look of the counterfeits and their packages is also very good, say tobacco executives. Packs of Marlboro seized in Miami even included forged pamphlets urging smokers to visit a Web site to find information about the health dangers of cigarettes and the admonition "Don't Litter" on the side of the box.

Executives say packaging is the key to determining which cigarettes are fakes and where they come from. They compare suspect cigarettes to examples from prior raids that have been conclusively tied to a particular source. For example, counterfeiters often don't change the tracking numbers on counterfeit packages. Sometimes, printing flaws give them away.

---- Jay Solomon in Washington contributed to this article.

Write to Gordon Fairclough at gordon.fairclough@wsj.com1