North Korean counterfeit cigarette trade faces squeeze
ANDREW SALMON, Contributing writer
SEOUL -- Stepped up U.N. sanctions against North Korea could put a crimp on an important source of foreign exchange for the secretive communist state: illicit cigarettes.
Port officials in Manila and Malta have at least twice in the past two and a half years seized shipments of North Korean cigarettes that camouflaged millions of high-quality counterfeit Marlboros with packaging and markings like those prepared for legal sale in Iraq.
Under a United Nations resolution adopted March 2 in response to North Korea's latest nuclear and rocket tests, member states are required to inspect all cargo headed to and from the country to check for contraband goods.
Sulafar Safir, commercial attache at the Iraqi embassy in Seoul, speculated that the seized shipments may have carried Iraqi markings to facilitate sale in neighboring states such as Syria and Turkey.
The Malta shipment was addressed to a Libyan business identified as Al Shama Al Modea, whose name also surfaced in a 2014 Malta case involving counterfeit Winston cigarettes. Paperwork for the Manila shipment listed two Philippine addressees, Gervic Trading and Transocean Export Sales.
The Philippines is one of Asia's top markets for counterfeit cigarettes, accounting for an estimated 709 million of 1 billion counterfeit cigarettes consumed across 16 regional markets in 2014, according to a study released in January by the International Tax and Investment Center and Oxford Economics. The study was underwritten by Marlboro owner Philip Morris International; Japan Tobacco owns rights to the Winston brand outside the U.S.
A tobacco investigator familiar with both seizures said however that the Manila shipment was to be sent on to the United Arab Emirates port of Jebel Ali for transshipment by a Syrian businessman to his homeland.
While the political affiliations of the businessman are unclear, insurgent and terrorist groups in Syria, Algeria, Afghanistan and other Middle Eastern countries have turned to cigarette smuggling to generate revenue.
The Center for Analysis of Terrorism in Paris in a report last year counted 15 terror groups who had turned to counterfeit and smuggled cigarettes for financing, including the Kurdistan Workers' Party, or PKK, in Turkey. Volumes crossing over the border with Syria have doubled since that country's civil war began in 2011, the report said. "Cigarettes smuggled into Turkey have been used to fund terrorism," said Louise I. Shelley, who directs the Terrorism, Transnational Crime and Corruption Center at George Mason University.
Khaled Abou al-Abbass, known as Mokhtar Belmokhtar and a leader of al-Qaida's affiliate in northwest Africa, is also known to have relied on cigarette trafficking for funds. Said Michael Ellis, assistant director at Interpol's counterfeiting and illicit goods trafficking unit: "The links between al-Qaida and cigarette smuggling led to [Belmokhtar's] nickname of 'Mr. Marlboro.'"
North Korea emerged as a major producer of counterfeit cigarettes after China joined the World Trade Organization in late 2001 and began cracking down on such activity within its borders, according to a 2014 report by Sheena Chestnut Greitens, a political science professor at the University of Missouri. Production simply shifted over the Korean frontier. Just between 2002 and 2005, counterfeit Marlboros from North Korea were identified 1,300 times within the U.S., according to a State Department report issued in December.
Although North Korea last year banned the sale of foreign cigarettes at home, counterfeiting of foreign brands continues, according to interviews Greitens conducted with defectors.
"Cigarettes are an especially lucrative item to counterfeit compared to other consumer goods," she said. "They are also comparatively less risky from an enforcement standpoint than a product like narcotics."
"How [does North Korea] get hard currency to pay for necessary imports?" asked Daniel A. Pinkston, a lecturer on international relations at Troy University in Seoul. "With the sanctions regime and the inefficiencies and structural problems in the economy, those problems are not going away any time soon, so pressures to resort to illicit activities remain."
Hard data on this is naturally difficult to come by. "We don't know the volumes," said the investigator involved in the recent seizures. "I think they go up and down but we believe [the production] to be ongoing and increasing. We know from primary sources that what restricts their volumes is lack of machinery and lack of spare parts. They have a backlog of counterfeit orders, it is just a matter of getting the machinery to produce them."
The South's Korea Trade-Investment Promotion Agency has reported that the North imported $180,000 worth of Swiss tobacco manufacturing machinery in the first half of 2014, though the North also produces its own brands for local consumption. North Korean leader Kim Jong Un is a keen smoker, often photographed with a lit cigarette in hand. Legitimate cigarettes are one of the few manufactured items the country exports, mostly to or via China. Along the border, North Korean cigarettes are sometimes used in lieu of currency in small-scale transactions.
The seizures in Manila and Malta followed tip offs to port authorities from the U.K. Customs and Excise agency and Interpol. The seized cargoes were inspected by U.S. Homeland Security agents. In both cases, shipping containers with cartons of legitimate North Korean cigarettes concealed packs of pirated Marlboros. The Manila shipment, seized in October 2013, included 8.79 million counterfeit Marlboros in 439,000 packs; the shipment in Malta in June 2014 held 8.16 million sticks in 413,000 packs. A source put the street value of the two shipments at $4.2-$8.4 million. The counterfeits were hidden behind stacks of legitimate North Korean cigarettes.
According to shipping documents, the sender for both shipments was Sun Moon Star Trading based in Dalian, a port in northeast China close to North Korea. But there is no sign of such a company at the address listed on the forms and people working in the building said they had never heard of Sun Moon Star. Nor are there any signs of Gervic Trading or Transocean Export at their given Manila addresses.
The tobacco investigator said his informant told him the cigarettes came to Dalian from the North Korean port of Nampo. After leaving Dalian, the Manila shipment passed through Kaohsiung, Taiwan, according to shipping records; the Malta container transited through Busan, South Korea.
Philip Morris International is cagey about how it is handling these cases. "We don't comment on action taken or intended with respect to specific cases," a spokesman said.
The question now is whether U.N. member states will rigorously implement the inspections which would root out more shipments of counterfeits.
"I think they will make life more difficult for these kinds of operations, and at the moment is it high energy and high implementation, but the places most likely to implement cargo checks consistently, over the long-term, are places that are least likely to be buyers," said Christopher Green, who researches the North Korean economy at Leiden University in the Netherlands. "I can imagine that a majority of places in Africa and the Middle East will lose the institutional will or interest in conducting these checks over the long term."
Said Troy's Pinkston: "It is certainly going to influence or affect North Korean smuggling, but it is all about enforcement and compliance. Rigorous inspections are costly and a lot of places do not have these capacities, so who is going to pay for this?"
Nikkei staff writers Daisuke Harashima in Dalian, China and Cliff Venzon in Manila contributed to this report.