Under terms of a 2007 contract between JTI and the European Commission, employees who want to report suspicious activity must be granted anonymity if they want it, even from the company. They also have the right to directly talk to investigators, outside the presence of JTI attorneys and executives. JTI’s decision to name and monitor all employees could intimidate employees.
The letter to workers came days after an Organized Crime and Corruption Reporting Project (OCCRP) investigation showed that the company’s own documents indicate that distributors in Russia, the Middle East and the Balkans may have been illegally shipping tens of millions of cigarettes to smugglers. New records made public last week by OCCRP also show that company executives discussed ways of shielding a distributor suspected of smuggling from possible banishment by OLAF, the European Commission anti-fraud agency which is charged with stopping tobacco smuggling.
Two sources told OCCRP that OLAF has begun contacting current and former employees of JTI, and the Belgium newspaper Le Soir reported sources inside OLAF saying that an investigation is expected. OLAF issued a brief statement to OCCRP but would not comment further.
"OLAF is aware of the report and is carefully evaluating its allegations. OLAF will not comment on the allegations contained in the report at this time," Pavel Borkovec, the agency’s communications chief wrote in an email.
The 2007 anti-smuggling agreement calls for JTI to spend $400 million over 15 years to root out smuggling and counterfeiting of cigarettes. The company set up an internal investigative unit comprised of former senior law enforcement officials from the CIA, British police and other law enforcement agencies worldwide.
But those investigators say they were fired in 2010 after they reported what they said were repeated instances of smuggling by distributors, and claiming that senior JTI executives protected the smugglers by leaking information of ongoing investigations.
One day after OCCRP published its investigation, a spokesman for Japan Tobacco told the Reuters news agency that problems the story outlined had been rectified.
“(These matters) have all been properly addressed and handled within JTI in line with our overall stance toward anti-illicit trade, and my understanding is that it has been all solved or addressed already as far as JTI is concerned," spokesman Hideyuki Yamamoto told Reuters.
JTI did not respond to questions from OCCRP. But in a written response to two French-language newspapers that ran the story, the company said the entire piece was false, although it did not rebut any specific piece of information, all of which came from the company’s own investigative files.
JTI told Le Matin Dimanche newspaper that the employees were fired after repeated violations of unspecified laws. It also told the paper it would consider legal action against former employees named in the story, "no matter who they work for now."
That was an apparent reference to former JTI Vice President Dave Reynolds, who was fired one business day after alerting JTI’s chief legal counsel to what he called widespread problems.
Reynolds served as an operative at the Central Intelligence Agency for 14 years before joining JTI in 2004. At the tobacco maker he rose through the company, eventually being put in charge of global anti-smuggling and anti-counterfeiting in 2009. In that position, he wrote, he and handpicked associates uncovered what he called a climate of corporate corruption that enabled smuggling worldwide.
After being fired, Reynolds was hired by the FBI, where he serves as a senior analyst on organized crime at its headquarters in Washington, D.C. Several other investigators who backed Reynolds’ allegations were also fired.
Reynolds was replaced by Espin, who was an executive at the Gallaher Tobacco Company when it was implicated in smuggling by a distributor in 2005 civil lawsuit filed in the United Kingdom. Gallaher won the case but was admonished by a judge.
In the letter to La Matin Dimanche, JTI portrays the fired employees as rogues who acted unilaterally and routinely broke the law. It never names the employees but said they had essentially threatened to spread false stories if JTI did not pay them.
"If anything, the vendetta which is the basis for this article simply proves that JTI has the courage to apply its principles by firing employees who do not live up to them," wrote Senior Vice President Paul Bourassa.
But a review of JTI documents by OCCRP obtained shows that company executives monitored and approved of a series of operations in the Middle East that included bribes to corrupt border guards to get information about the movement of cigarette shipments and hijacking trucks believed to contain counterfeit tobacco. Those operations continued after Reynolds and his top assistants were fired.
And the records show JTI executives knew about problems at its Middle East distributor for years and took action to help shield it from potential sanctions, including a ban by the European Union regulatory body.
A top targets for Reynolds and his team was IBCS Trading, a subsidiary of the Audeh-Group in Amman, Jordan. Owner Issa Audeh has been named as a smuggler in a 2002 lawsuit filed by the European Commission and the Canadian government.
In 2001, JTI and IBCS formed a joint venture to manufacture and distribute cigarettes throughout the Middle East, according to the IBCS website.
Reynolds and his team identified what it called a persistent pattern of smuggling by IBCS and its distributors. In 2009, Vice President Jean-Luc Perreard wrote Reynolds promising that JTI would start getting tough and would “most likely” terminate two IBCS distributors the next time they got in trouble.
But in a series of emails obtained by OCCRP that did not include Reynolds, Perreard and others took a softer stance. The emails refer to JTI’s "strong relationship" with IBCS, and said a proposed letter admonishing IBCS should be worded in "such a way that it can be disclosed to OLAF."
OLAF is the European regulatory agency charged with policing tobacco companies and working with them to stop smuggling. Perreard, in a July 15, 2009, e-mail to several JTI executives, indicated that writing a stern letter to IBCS should be enough to appease OLAF regulators.
"The fact of the matter is that if we do not do it – in case of repetitive seizures – OLAF will place both customers + IBCS on the blocked customer list – and this for 5 years," Perreard wrote. "As soon as the letter is sent – please provide me with a copy so that I could – if needs be – use it to demonstrate OLAF that we are proactive in addressing such matters."
Despite the letter, smuggling continued unabated, according to company documents. JTI sent the letter to Audeh on July 17, 2009. But over the next year, Reynolds and his team continued to intercept cigarettes it said IBCS was smuggling, including shipments in February and April 2010. The team also obtained information from Middle East shippers who claimed that IBCS pressured them to sell to companies already suspected of smuggling.
Finally, on April 10, 2010 – the same day Reynolds outlined his allegations in a letter to Japan Tobacco’s legal team – investigators seized a shipment of 10 million Winston cigarettes, JTI’s most popular brand that originated with Audeh, according to an internal timeline company investigators compiled.
The records also show that JTI executives directed undercover operations in Iraq, Syria and elsewhere in the Middle East from their Geneva and Cyprus offices. The operations, initially designed to identify and target alleged counterfeit tobacco factories, eventually spread to include bribes and interception of trucks, according to documents.
In some cases JTI investigators would falsely claim the shipments of counterfeit tobacco were actually related to "terrorism" so that Iraqi police would stop the trucks, according to JTI records filed between July 2009 and July 2010.
In its letters to employees and to the French language newspapers, JTI claims that the fired employees engaged in illegal activities, including impersonating law enforcement officers. But the records show that all of the undercover operations were documented in weekly and monthly reports forwarded to JTI executives. The false claims of terrorism and other activities were monitored and approved by officials, including JTI Middle East director of brand integrity Willem Van Aldrichem, these records show.
Van Aldrichem emailed live tips with the colors and license plate numbers of trucks he wanted stopped or followed. JTI investigators in Iraq placed tracking devices on trucks suspected of shipping counterfeit product – and sometimes on those shipping competitors’ brands -- according to company records and interviews with former JTI operatives.
With those tracking devices, JTI executives could sit at their computers anywhere in the world and monitor the shipments, a Feb. 26, 2010 internal intelligence report boasted.
"We start to place tracking devices and give JTI heads up … If JTI wants to see truck moves, then go to the web and view live tracking," suggested one report, one of several monthly reports JTI operatives in the Middle East filed.
A May 10, 2010, monthly report showed the shadowy world of Iraqi smuggling, and JTI’s attempts to infiltrate it.
Undercover operatives posing as cigarette smugglers met with an Iraqi Army Major identified as Major Saleh. Saleh bragged that he had at his disposal a division of soldiers who could hijack cigarettes and protect them from competitors and others. He also passed passport information on all visitors – and potential partners –to the intelligence services of Syria and Iran.
"This major had no bones in stating his ability to do anything," according to the report. When Major Saleh noticed a handgun sticking out of the undercover agent’s pocket, he moved the group over to his new BMW, popped open the trunk and displayed 20 Sig Sauer automatic weapons.
"I asked where he got them, and he stated they hijacked a truck. Major Saleh stated they can do anything they want," the JTI intelligence report states.
Michael Padilla, who headed undercover operations in the Middle East and Asia for JTI, said when he worked for the company, investigators often bribed officials for information on cigarette shipments, or formed alliances with willing officials. He insisted JTI knew about and approved all operations, which were detailed in investigator’s reports filed with JTI.
"You have to understand that there is no law there at all," said Padilla, who was close to Reynolds and was also forced out last year. "You can’t go to a judge or ask the police to help you. You can do whatever you want there, so it’s up to each company to take whatever action it can."
Records show that borders of Turkey, Iraq and Iran have become a focal point for smuggled and counterfeit cigarettes originating in Russia, China, Vietnam, North Korea and Dubai.
A Feb. 26, 2010, company investigative report showed that operatives began tracking truckloads of shipments through the Turkish town of Mersin and into Iraq through the Habur border crossing of Iraq. Operatives tracked the shipments for at least days.
The records outline a series of bribes to border guards in Iraq, Iran, Oman, Syria and Turkey, and meetings with high-level Iraqi and Kurdistan officials wanting a piece of the action. A June 2010 intelligence report asked for the "green light" to use Iraqi police and military units to help them stop truckloads of counterfeit or other targeted cigarette shipments.
"Under the threat of terrorism it can be done as we already work with Iraqi military and police on other matters," the report said.
The report also said JTI operatives had successfully begun bribing an Iraqi border official in Basra for information on all cigarette shipments. A July, 2010 entry mentions investigators were working with Iraqi police in Baghdad "on buying information as it relates to cigarette movements. … Dangerous, well, being in Baghdad is dangerous. It is what it is, a way to gain information."
According to company records, JTI contractors met with a crooked Kurdish Army Colonel on April 20, 2010. The records show that Col. Ismail Taha is director of security for the Ministry of Interior in Ebril province.
Posing as a smuggler who wanted to open a counterfeit factory in the region, Padilla bragged about powerful connections and got an offer from his host.
"Colonel Ismail (Taha) said they would welcome a cigarette factory and that he would become my partner to insure that no one would stop or view the products," a JTI investigator wrote, according to internal company documents "He said we would be given MOI badges and could also carry weapons in Kurdistan under his protection."
The memos also show that Col. Taha was closing factories of counterfeits and smugglers who didn’t pay protection.
