Black Market Billions: How Organized Retail Crime Funds Global Terrorists (Gal Zentner's Library) (26 page)

Sony Gulf’s involvement with smuggling televisions wasn’t the first or last time Sony would be accused of supporting terrorism efforts. After years of surveillance, in October 2010 Khaled T. Safadi pled guilty to exporting Sony PlayStation 2 consoles to the Galeria Page mall in Paraguay, which is on the U.S. blacklist of businesses that fund terrorist organizations. Safadi and his two co-conspirators, Ulises Talavera and Emilio Gonzalez-Neira, allegedly sold thousands of Sony PlayStation 2s and digital cameras during 2007 and 2008.
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Sony gaming consoles and cameras also were being smuggled into Venezuela by Hassan Hodroj, a Hezbollah official, and his son-in-law Dib Hani Harb. They were eventually arrested in November 2009 in Philadelphia for smuggling 1,200 machine guns to the Hezbollah through Syria.
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Both men are from Beirut but were living an upper-middle-class life in the U.S. (According to court documents, the government seized more than $500,000 in U.S. currency, property in Dearborn, Michigan, and Staten Island, New York, and a BMW X5 and a Land Rover Range Rover Sport.) The men were also conspiring with Moussa Ali Hamdan, Hamze El-Najjar, Moustafa Habib Kassem, and Latif Kamel Hamzime. The four men allegedly ran a smuggling ring where they would purchase hundreds of thousands of dollars worth of Sony PlayStation 2 systems, laptops, cell phones, and automobiles from a cooperating witness.
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Then they would send the merchandise to Margarita Island, Venezuela. Although the total value of the gaming systems was $38,997, Hamdan declared the worth on the Shippers Export Declaration of Commerce (SED) as $17,600.
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In Venezuela, the merchandise was sold at the actual retail value. The proceeds were sent overseas to the Hezbollah by transferring funds from a TD Bank account to a Bank Audi account in Beirut, Lebanon.

“The allegations contained in this complaint demonstrate how terrorist organizations rely on a variety of underlying criminal activities to fund and arm themselves,” says David Kris, Assistant Attorney General for National Security.
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What’s more, these terrorist groups rely on consumers’ desire to purchase products at the lowest possible price to keep the cash flow coming. Because bargains never go out of style, smugglers always know they have a market, and terrorist groups always have an income.

The Business of Cigarette Smuggling

Finding discounted cigarettes, as I quickly discovered, is about as easy as finding a Starbucks in a major metropolis. With a pack of cigarettes costing almost as much as my double-shot-no-foam-low-fat-in-a-small-cup latte, I channeled my addiction to coffee into finding cheaper sticks of nicotine (since I am not addicted). My search took me to Long Island, New York, to a smoke shop run by the Shinnecock Native Americans in South Hampton. This shop, which is on a Native American reservation, doesn’t have to adhere to the same state tax laws imposed on cigarettes. It can sell cartons of cigarettes for $30 to $40, depending on the brand. A carton of cigarettes sold in New York state costs $120 to $140. “We have to pay 75% tax on the cigarettes. That’s why they are so expensive,” says an employee at The Smoke Shop in the West Village. “Even if you are purchasing the cigarettes online at a discount, you are definitely buying it from a Native American reservation.”

Or was I?

As states increased taxes on cigarettes in the late 1990s and early 2000s to as much as 75% a pack, people with fierce nicotine addictions—especially in New York, Massachusetts, New Jersey, Washington, Rhode Island, and Michigan—scoured the Internet and discount smoke shops to save money. Distributors and ORC rings quickly
figured out that reselling smuggled packs and cartons of cigarettes bought in lower-taxed states—such as North Carolina, Kentucky, Virginia, South Carolina, Wyoming, and Georgia—could yield them high margins when sold across state borders and online. Law enforcement officials in New York state estimate that well-organized cigarette smuggling networks generate $200,000 to $300,000 per week. A large percentage of the money is believed to be sent back to the Middle East. The money directly or indirectly finances groups such as Hezbollah, Hamas, and al Qaeda.
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One example was an ORC ring run out of Charlotte, North Carolina. Mohamad Hammoud smuggled cigarettes from North Carolina where the tax was 50 cents per carton and sold them in Michigan, where the tax was $7.50 per carton. Hammoud and his co-conspirators took the proceeds (he made more than $8 million, according to court documents) and sent close to $100,000 back to Lebanon to fund a Hezbollah cell. The smuggled cigarettes were not only bought by retail stores via a distributor intermediary and members of the ORC ring, but they also were available for purchase online at a fraction of the cost of regularly taxed cigarettes. As a result, smokers flocked to these outlets to purchase the discounted cigarettes, not knowing that the profits were being used to fund a terrorist organization overseas. Hammoud was arrested in 2000 and convicted in 2002.

In 2003, two women from the Seneca Nation of Indians Cattaraugus Reservation in New York were sentenced for participating in a smuggling ring. They would provide tax-free cigarettes from the Seneca reservation smoke shop to a Hezbollah-linked network in Dearborn, Michigan. Elias Mohamad Akhdar, a native of Lebanon, was the head of the smuggling ring and had direct ties to the Hezbollah.
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But terrorist funding through the purchase of contraband cigarettes wasn’t just happening in the U.S.

In complaints filed by the European Community (EC) in 2001 and 2002, the EC accused RJR companies, including RJR Nabisco, Inc; R.J. Reynolds Tobacco Company; R.J. Reynolds Tobacco International,
Inc; RJG Acquisition Corp. (formerly known as Nabisco Holdings Corp.); RJR Nabisco Holdings Corp.; and R.J. Reynolds Tobacco Holdings, Inc., of exploiting established smuggling routes by shipping large volumes of cigarettes to shell corporations for more than ten years. According to court documents filed by the EC, RJR Corp. used fraudulent documents to facilitate organized crime by laundering funds from narcotics trafficking and the sale of its products, specifically in countries that have U.S. trade sanctions imposed on them, such as Iraq. Ultimately, the charges against RJR were dismissed.

The EC Versus R.J. Reynolds Tobacco

With the establishment of the Bank Secrecy Act of 1970, banks were required to avoid doing business with organized crime rings or known criminals or facilitating any of their transactions. Knowing this, members of organized crime rings in Italy, Russia, and Colombia had the RJR companies launder money through their own accounts in financial institutions such as The Bank of New York, Citibank N.A., and Chase Manhattan Bank, according to the court papers filed.
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In the 1990s The Bank of New York was known to have accounts through which Russian organized crime members would launder millions of dollars worth of funds. Accounts were set up in the name of both legitimate and fake businesses. As customers, these organized crime rings seemingly paid RJR with the laundered funds in the accounts and sold smuggled cigarettes at a discounted price within their communities and online, with RJR fully aware that it was being paid for its cigarettes with illegal funds.
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According to the case, to sidestep U.S. money laundering laws, top RJR executives established subsidiary companies in countries known for bank secrecy (such as Switzerland) to avoid being detected by U.S. and European law enforcement. Subsidiaries with schemes included the following organizations: The Alfred Bossert money laundering
organization, the Walt money laundering conspiracy, and money laundering through The Bank of New York for a Russian organized crime ring. In addition, illegal cigarette sales in Iraq funded the terrorist organization PKK (Kurdistan Workers’ Party). The EC alleged that corporate management knowingly colluded with organized crime by helping launder the proceeds of narcotics trafficking and other crimes into the purchase of cigarettes. By providing false packaging and documentation to facilitate the smuggling, RJR Corp. allowed the PKK and the Iraqi regime to profit from the illicit cigarette sales.
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Colombia is the primary source of cocaine in the EC according to a legal brief. Money obtained from the illegal sale of cocaine in countries including Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, and the United Kingdom
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must be laundered for narcotics traffickers to use it. The complaint states that RJR Corp. helped facilitate this Black Market Peso Exchange through the purchase and sale of its cigarettes. This was also the case for heroin sales. The money laundering cycle gave participants total anonymity by passing the drug proceeds through the financial markets. This allowed them to disguise the illegal nature, source, ownership, and control of the money.
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The Role of Money Brokers and Money Launderers

A money broker is a crucial go-between for the drug cartels and their overseas market. In the case of the European Community versus RJR Corp., after the proceeds were made from the sale of imported cocaine, the cartel contacted the money broker and negotiated a contract to exchange pesos he controlled in Colombia for euros. After the money broker paid the agreed-upon sum in pesos, the cartel contacted
its cell and instructed them to deliver the agreed-upon amount of euros to the money broker’s agent. The broker then laundered the euros and converted them into dollars so that his customers could use the dollars to import and purchase RJR Corp. cigarettes in bulk.

Not only were the importers getting the laundered dollars at a substantially discounted rate, but the money broker was sometimes instructed to pay RJR Corp. directly by depositing the laundered drug money into accounts held at European banks. Accused money launderers included Gerardo Cuomo, Patrick Laurent, Gilbert Llorens, Corrado Bianchi, Werner Denz, Martin Denz, Luis Garcia, members of the Mansur family, and Patrick Monnier.
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They worked in Europe, Asia, and Russia and acted as go-betweens for RJR and its co-conspirators. RJR would then dictate exactly how much to charge for the products, which secret Swiss bank accounts the money would be deposited into, and who would make the payments.

Another set of players in the money laundering scheme were the “cutouts.” They helped bypass the direct sale by going to an illegal source interested in purchasing cigarettes. In this case, RJR Corp. allegedly selected the cutout—a group of wholesalers that, according to the court document, could “deny responsibility when the customer sells the product.” That way, the manufacturer (in this case, RJR Corp.) could insulate itself from overt acts involved in the sale of the cigarettes. Because it wanted to increase its market share in the EC, RJR Corp. did whatever it took to get its product distributed—even if that meant doing business with criminals. One RJR employee based in Switzerland went so far as to instruct customers buying RJR product in bulk that the cartons should be “neutralized and decoded” by removing marks and numbers on the packaging that would allow them to be tracked and regulated within Europe.

The laundry list of illegal activity in which RJR Corp. was accused of engaging is extensive. In addition to being charged with using cutouts, RJR Corp. was charged with accepting payments from persons
or entities it knew (or had reason to know) were criminals and money launderers. RJR Corp. arranged for its cigarettes to be paid for in such a way that the payments were virtually untraceable. It also established protocols for “layered transactions” that allowed for cigarettes to be paid for through multiple intermediaries (cutouts) to conceal the source and nature of the illicit funds.
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Despite strict trade restrictions on Iraq, RJR Corp. allegedly continued its quest for worldwide market share by selling cigarettes in the northern territories of Iraq in towns such as Dohuk and Zokho. This region was controlled by terrorist groups including the PKK,
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which launched numerous attacks on the EC, according to court documents. The terrorist group would charge RJR Corp. a fee for every container of cigarettes allowed to pass through the territory. These fees provided a money lifeline for these terrorist groups, funding weapons purchases, ammunition, and bomb-making materials, as well as terrorist acts such as kidnapping and executions. What’s more, Saddam Hussein put aside the longtime conflict between the Kurdish groups in Iraq and allowed them to import RJR cigarettes. Hussein’s son Uday, who oversaw the illegal importing operation, personally profited from it. Illegal shipments of RJR cigarettes from January to April 2002 included cases of Winston (59,500), Magna (65,000), Winchester (10,909), Aspen (7,022), Doral (1,500), Barton (4,500), and Easton (1,560).
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The History of Cigarette Smuggling

Cigarette smuggling is not a new form of laundering money; it’s been around for centuries. According to a World Bank study, what makes smuggling cigarettes convenient is the high global demand for cigarettes. Most smuggled cigarettes are well-known brands that go for $200,000 per container of 10 million cigarettes without paying taxes. Smugglers then resell the same cigarettes in the European
or U.S. markets, taking into account excise duties, value-added tax (VAT), and import taxes, bumping up the value of the cigarettes to more than $1 million. The margin on the sale of the cigarettes is so high (and it’s even higher if the cigarettes are stolen) that smugglers can fund not only their travel but also their illicit activities.
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Another version of smuggling is called “round-tripping.” Locally made product is exported to neighboring countries where it’s exempt from duties and taxes. Then the containers in which the product was shipped make their way back into the country of origin containing tobacco products. These “ghost exports” are not subject to regular tobacco duties and taxes, thus costing the country billions of dollars a year.
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