Patriot games

Roused into action by the terrorist attacks on September 11, Congress rushed to tighten US laws governing money laundering and smuggling and to require transparency among financial institutions in order to strike at the means by which terrorists generate funds through illicit financial enterprises. In the original House version of the Patriot Act, introduced on October 3 and then known as the Financial Anti-Terrorism Act, Section 107(b) expanded the definition of money laundering to include "fraud or any scheme to defraud against a foreign government or foreign government entity, if such conduct would constitute a violation of this title if it were committed in interstate commerce in the United States." The Justice Department had asked for that section to strengthen its hand in pursuing legal prosecutions for money laundering — but the section would also have established the jurisdiction of US courts over precisely the sort of activity of which the tobacco companies now stand accused.

At the time, the tobacco companies were facing legal assaults on several fronts. The government of Canada was preparing to appeal a lower-court decision that threw out its case accusing RJ Reynolds of evading $1 billion in taxes by smuggling cigarettes into Canada. And the Colombian and European RICO cases were on the docket at federal district court in New York. The provision would have provided clear legal standing to the plaintiffs in those lawsuits. But on October 11, with the country still reeling from the attacks one month before, GOP representative Michael Oxley of Ohio, chair of the House Financial Services Committee, undermined the Justice Department’s original request and removed the provision before the committee hearing. He undertook that maneuver at the behest of the White House, according to a congressional source close to the negotiations.

"The tobacco companies didn’t care that in striking that provision they might have opened the American people to greater risk of a terrorist attack and funding terrorist groups that might attack our own people," comments Congressman Henry Waxman, a leading antagonist of the tobacco industry in Congress. "They wanted to make sure that that provision would not have been interpreted to give standing to these foreign countries." Philip Morris does not dispute the latter point, but in a letter insisted the changes were supported by "the business community at large," which has long been concerned with such matters of foreign liability, and vigorously denied that the change would hamper "the government’s ability to bring suits to combat terrorism."

According to one Waxman staffer, in Congress the tobacco companies took a "belt and suspenders" approach to the Patriot Act in an effort to insulate their international operations from legal challenges in US courts. The "belt" — Section 107(b) — was what Oxley removed from the act. The "suspenders" came late at night on October 16, when Chairman Oxley inserted a provision into the bill after it had been debated and approved by the full committee. His addendum specifically blocked any expansion of jurisdiction for US courts to hear civil claims for damages from foreign nations seeking compensation for violations by US corporations of foreign tax laws. The measure had the support of the White House and the top Republican leadership, including House majority leader Tom DeLay, according to a report by the Center for Public Integrity’s International Consortium of Investigative Journalists. On the morning of the October 17 — an infamous day, as the anthrax scare jumped from the Senate to the House, where members prepared to evacuate — the Financial Anti-Terrorist Act passed overwhelmingly in the House, including the new provision that would get the companies off the hook.

But staff aides to Waxman and Massachusetts Democrat Martin Meehan caught wind of the change. They alerted the Campaign for Tobacco-Free Kids, which concluded in a memo that the only relevance of the provision was to "the ... currently pending lawsuits ... brought by Canada, the European Union, and several Latin American countries ... against major US cigarette companies.... And the only future lawsuits likely to be affected would be similar lawsuits directed at the US cigarette companies’ involvement with international cigarette smuggling."

When the bill reached the Senate, there was outrage at what Senator Patrick Leahy described as the attempted "carve-out of tobacco companies from RICO liability for foreign excise taxes." Senator Paul Sarbanes, chair of the Banking Committee, removed the offending passage from the bill. On the day it passed the Senate, Massachusetts senator John Kerry, a long-time advocate of tighter money-laundering laws, introduced a statement into the Congressional Record clarifying that the law could be used to pursue the sort of legal challenges now faced by the tobacco companies: "It is the intent of the legislature that our allies will have unimpeded access to our courts and the use of our laws if they are the victims of smuggling, fraud, money laundering, or terrorism." On October 26, the Patriot Act was signed by President Bush without Oxley’s language.

While the "suspenders" in the tobacco industry’s offensive were gone, however, the "belt" remained — a narrowed definition of money laundering that denied future and current plaintiffs against the tobacco industry an important legal instrument. "What was left out," says an infuriated Waxman aide, "was far more important than what was not put in." As Richard Daynard, director of the Tobacco Litigation Center at Northeastern University, says, "The bill as originally drafted would have made the tobacco companies a lot more vulnerable to the [money-laundering] charges."

As in Colombia, those who argued on behalf of the tobacco industry were also major recipients of the industry’s largesse: a report by the Campaign for Tobacco-Free Kids reveals that Republicans received 82 percent of the more than $18 million that the tobacco industry has poured into political campaigns since 1997. Oxley himself has received $34,300 from the tobacco industry since 1999, both for his political campaigns and his PAC, Leadership 2000, and he held a party at the 2000 Republican convention that was paid for partly by Philip Morris.

The globalization of smuggling

With an annual turnover of some $400 billion, tobacco is one of the world’s largest industries. Across the globe, there are stories similar to that of the Way’uu and Philip Morris: "mules" who have helped put four tobacco companies in control of 70 percent of the world market. Smuggling insulates the companies from national controls to limit cigarette consumption — which the World Health Organization warns will cause another 10 million deaths by 2030. Wherever smuggling occurs, the pattern, says Luk Joossens, a consultant to the International Union Against Cancer and a member of the Belgian delegation to the WHO, is the same: "If you have high tariffs or a state [tobacco] monopoly, they smuggle to get into the market, weaken the state monopolies, and lead the market into the hands of the multinationals."

Smuggling has also become a big-time criminal activity. The European Union’s Anti-Fraud Office, which has investigated cigarette smuggling in conjunction with the national police forces of Spain, Italy, the Netherlands, and elsewhere, claims that organized crime is increasingly a major player in what has become a multi-billion-dollar business. In Montenegro last December, the Parliament held a series of explosive hearings on allegations raised by a Croatian newsweekly, Nacional, that Montenegro president Milo Djukanovic has ties to cigarette smugglers linked to the Italian Mafia. In August the Iranian health ministry released statistics indicating that up to two-thirds of all cigarettes in the country had been smuggled. As part of its legal complaint, the European Union introduced evidence in February indicating that the profits from smuggling have gone to finance terrorist groups in Iraq and elsewhere. Here in the United States, four Arab immigrants confessed in early March to sending the profits from cigarette smuggling back to Hezbollah contacts in Lebanon; another 14 people will be going on trial in Charlotte, North Carolina, this spring on the same charges, which now, according to the FBI, include "aiding and abetting a terrorist organization."

The World Health Organization has come to see smuggling as a major public-health issue, asserting that it incapacitates one of government’s best weapons for lowering tobacco consumption: high taxes. The WHO puts forth a simple calculation: more smuggling equals cheaper cigarettes equals more smokers, which means more smoking-related illnesses and deaths. According to the World Bank, if the price of cigarettes were to increase just 10 percent — which could be mandated through taxation — an estimated 40 million people would quit smoking worldwide.

At a meeting in Geneva on March 18 to 23, representatives from WHO’s 191 member states began finalizing plans for a Framework Convention on Tobacco Control, which would become the first international public-health treaty. Proposals include measures to combat smuggling by requiring that tobacco companies mark each cigarette pack with a clear electronic code identifying its origins and destination; licensing all parties involved in cigarette distribution; and eliminating duty-free sales, which are a primary means of skimming off tax-free cigarettes into national markets.

The tobacco industry has been fighting those provisions, as well as others proposed by the WHO. Representative Waxman charges that the Bush administration’s delegation has been trying to weaken the organization’s effort to limit tobacco consumption and contraband. In a letter to President Bush last November, Waxman accused his negotiators of embracing 10 out of 11 changes to the convention proposed by Philip Morris, which had expressed opposition to the strongest of the anti-smuggling measures as well as controls on cigarette advertising, and even a proposal insuring that health-warning labels appear in the language of the country of destination. A follow-up meeting on the issues raised in Geneva will be held in New York in July under the aegis of the Bureau of Alcohol, Tobacco, and Firearms.

The tobacco companies refused repeatedly to be interviewed for this article. A spokesman for BAT, David Betteridge in London, said that the company would not comment on anything relating to smuggling, due to an ongoing investigation by the British Department of Trade and Industry. In December the company stated publicly that it would "apply even more stringent criteria" to its international-distribution system to counter smuggling, and shortly thereafter BAT issued a statement that it was revising its projected earnings downward for the coming year. Philip Morris’s director for public communication, John Sorrells, e-mailed me a statement on March 22, which reads, in part, "Philip Morris does not condone, facilitate, or support the smuggling of cigarettes and cooperates with governments in their efforts to prevent an illegal trade in the products we manufacture. We have taken significant steps, both internally and in cooperation with foreign governments, to prevent the smuggling of our products." The company also indicated that it now agrees with several measures proposed by the World Health Organization and foreign governments "to prevent cigarette smuggling," including "licensing of distribution chains" and "marking of duty-free products" intended to make it easier to track contraband cigarettes.

Clearly, the companies are uneasy about the lawsuits still winding their way through the US court system. At a court hearing on the case last January, Philip Morris’s attorney, Irvin Nathan of Arnold & Porter, expressed the company’s dismay. "We are a public corporation," Nathan stated to the court. "It is unfair to us to have to be engaged in discussions about terrorism and money laundering. To have to put that in our disclosure documents is misleading to our shareholders."

As for the Way’uu, Alvaro Iguaran says: "The biggest social debt Philip Morris has is with us, the Way’uu. We showed Colombia and Venezuela that Marlboros existed ... they used us because we opened their markets. And after their markets were opened, they didn’t need us anymore. They owe us a lot of money."

Mark Schapiro is an investigative journalist in New York, specializing in foreign affairs. His work has appeared in Harper’s Magazine, the Atlantic Monthly, and the New York Times Magazine. This piece was originally published by the Nation.