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Iraq: Despite Embargo, Baghdad Gets Winstons; Who's to Blame?

RJR Unit, Japan Tobacco Face Scrutiny Over Distribution; Saddam's Son Takes a Cut

by Steve Stecklow and Alix M. FreedmanThe Wall St. Journal
October 30th, 2002

Immediately after the Persian Gulf War ended in 1991, billions of Winstons and other American-brand cigarettes began turning up inside Iraq. Even now,the flow continues.

Under U.S. trade sanctions, companies that make cigarettes in the U.S. can't knowingly sell them in the Iraqi market -- either directly or through intermediaries -- unless they obtain a license from the U.S. government. The company that produced many of those cigarettes for most of the past decade, RJR Nabisco Corp.'s international tobacco unit, which was incorporated in the U.S., never got a license. Neither did Japan Tobacco Inc., which acquired the former RJR unit in 1999 and whose U.S. unit continued to manufacture cigarettes in the U.S. until recently.

Now questions are mounting about whether RJR Nabisco's R.J. Reynolds Tobacco International unit and Japan Tobacco, which is majority-owned by the Japanese government, knew that their distributors were shipping cigarettes to Iraq.

One Middle East distributor claims he built a thriving market in Iraq with the blessing of the former RJR unit. And European regulators claim that employees connected to the tobacco companies visited Turkey as recently as August 2001 to monitor the shipment of cigarettes from there into Iraq.

Lawyers for both companies deny any violation of U.S. law or of United Nations economic sanctions against Iraq.

The European Union is considering filing a civil lawsuit in federal court in Brooklyn, N.Y., that would accuse the former RJR unit and related companies, among other things, of sanctions-busting by shipping huge quantities of American cigarettes to Iraq via Cyprus and Turkey from 1990 through this year. Separately, federal prosecutors in the U.S. Attorney's office in Manhattan recently opened an investigation into possible cigarette smuggling into Iraq by American companies in violation of federal laws, according to a person familiar with the matter.

One reason that trade of cigarettes into Iraq raises special concerns: Some exporters say that the sales to Iraq of cigarettes indirectly enrich the Saddam Hussein regime. Since 1995, Mr. Hussein's eldest son, Uday, has collected on average $10 million a year in "taxes" from legal and illegal sales of imported cigarettes, according to Abbas Al-Janabi, who served as Uday Hussein's private secretary from 1984 to 1998.

Lawyers for the former RJR international tobacco unit and Japan Tobacco's international unit vigorously deny any suggestion that either company violated U.S. law or U.N. sanctions. "It is simply wrong to say that any U.S. company must have violated U.S. and U.N. sanctions because their products appear in Iraq," says Stanley Marcuss, a lawyer for Japan Tobacco who formerly represented the RJR unit.

"There are many, many ways, all of which are perfectly legal, for U.S.-origin goods to be distributed in Iraq," he says. The companies also deny enriching the Iraqi regime.

A spokesman for R.J. Reynolds Tobacco Holdings Inc., the No. 2 tobacco company in the U.S., underscores that his company was never involved in international cigarette sales. His company is the former domestic unit of RJR Nabisco, and was spun off as an independent company in 1999.

Apart from any questions of corporate responsibility, the Iraqi odyssey of the Winstons and other brands sheds light on how global commerce adapts in a region where the normal lines of distribution are distorted by international politics and trade restrictions. The traffic in these American-brand cigarettes relies on a circuitous tobacco route spanning many countries, a complex network of distributors and traders, and has yielded an unlikely cast of beneficiaries.

In addition to Uday Hussein, they include Saddam's murdered former son-in-law, Hussein Kamel, as well as the Kurds of Northern Iraq -- who continue to do business with Baghdad even though thousands of their compatriots were gassed by Saddam during the 1980s.

Over the years, cigarettes from other multinational tobacco companies also have been available inside Iraq. But until the activities of the RJR unit and Japan Tobacco started coming to light, little has been known about this secretive trade.

The influx of American brands into Saddam Hussein's Iraq began shortly before the outbreak of the Persian Gulf War, when the Baghdad government lifted restrictions on the private importing of cigarettes.

Before that, Mr. Hussein's regime held a monopoly on the cigarette business, and imports of Western brands were limited. Back then, in the late 1980s, there were no sanctions prohibiting the sale of cigarettes to Iraq, and the former RJR unit was looking to build its business in the Middle East. Abdel Hamid Damirji, a cigarette exporter then based in Baghdad, says he seized the opportunity.

At that time, "there was accordingly no real market for RJR products in Iraq and certainly no marketing of them," Mr. Damirji says in a sworn affidavit he provided in a civil case filed in Cyprus in 1997. The lawsuit, which is still pending, was filed by Mr. Damirji against R.J. Reynolds Tobacco International and its Cyprus-based Middle East distributor. It alleges that the two companies cut him out of an exclusive arrangement to supply its cigarettes in Iraq.

The former RJR unit and the Cypriot distributor denied the allegations in court filings. The former RJR unit said it didn't even know its cigarettes were going into Iraq.

The U.N.'s sweeping economic sanctions, which were designed to punish the Iraqi regime for its invasion of Kuwait, exempt certain items deemed to be essential civilian needs. Cigarettes are among the exemptions. However, both the U.N. and the U.S. government still impose restrictions on the sale of cigarettes for the purpose of controlling the flow of commerce into a pariah regime. All cigarette exporters must request formal U.N. authorization to ship cigarettes to Iraq. Enforcement of these rules is uneven.

"Huge amounts went in without anyone asking for permission," says Paul Conlon, a former deputy secretary of the U.N. Iraq sanctions committee.

In addition, the U.S. Treasury Department's Office of Foreign Assets Control, which enforces the U.S. embargo, stipulates that U.S.-based companies obtain a license if they are knowingly selling cigarettes to Iraq.

Companies can't deliberately evade this requirement simply by selling through foreign distributors or subsidiaries -- unless these intermediaries decided on their own to sell into Iraq, without anyone at the U.S. company being aware of it. A senior U.S. Treasury official said the department has no evidence that RJR violated sanctions.

In his affidavit in the Cyprus case, Mr. Damirji says that with the full knowledge of R.J. Reynolds Tobacco International, he set up a distribution network for the company's products in Baghdad in 1990. Business went well, Mr. Damirji says, and in August of that year, when Iraq invaded Kuwait, Mr. Damirji relocated his operations to Jordan. From there, he says in the affidavit, he continued to supply the Iraqi market "with stocks of RJR products obtained from RJR direct and sources to which RJR directed" him. Mr. Damirji declined to comment for this story.

According to Mr. Damirji, a number of RJR executives, including some at the company's headquarters in Winston-Salem, N.C., were aware of his activities and met with him in the U.S. and abroad. "What there's no question about is this: R.J. Reynolds in the U.S. was well aware of Damirji's operations. So if they wish to say, `We have no idea what was going on,' that horse will not run," says Anthony D. Kerman, Mr. Damirji's lawyer in London.

Mr. Marcuss, the tobacco lawyer, declines to comment about Mr. Damirji's activities. However, he says generally that RJR's international unit and Japan Tobacco simply sold to a distributor who determined where to resell the company's goods. Mr. Marcuss says: "The nature of the cigarette business is such that distributors typically act independently. They are independent businessmen."

In his view, only the last distributor in the chain selling into Iraq would need to get official permission.

Mr. Damirji, who grew up in Iraq as a member of a prominent family, says in his affidavit that his shipments to Iraq quickly grew after he moved to Jordan. He says that in June 1991 alone, he ordered 50,000 "master cases" of products from RJR's international unit for Iraq -- half-a-billion cigarettes. Because his supplier in Cyprus couldn't fulfill such a large order, he says, the RJR unit directly transported 17,000 cases to him, filling seven airplanes. In a court filing, RJR's international unit doesn't dispute shipping such a huge quantity of cigarettes to Mr. Damirji in Jordan, but the company claims not to know what happened thereafter.

In October 1992, Mr. Damirji's affidavit says, the border between Iraq and Jordan closed to cigarette traffic, and he had to move his inventory and operations to Mersin, Turkey, a port city on the Mediterranean. Mr. Damirji says that a consultant to R.J. Reynolds International named Issa Audeh, who was also a former executive of the unit, orally offered to make Mr. Damirji the "sole and exclusive supplier and distributor of RJR products in Iraq" if Mr. Damirji would establish secure warehousing facilities in Mersin.

Mr. Damirji says he built two warehouses in Mersin, at a total cost of $976,000, and began purchasing RJR cigarettes through a company that Mr. Audeh set up in Cyprus in early 1993 called IBCS Trading and Distribution Co. Until then, Mr. Damirji says, Mr. Audeh had arranged for him to purchase RJR products through another Cypriot distributor. In court filings, RJR's international unit denies knowing anything about Mr. Damirji's exclusive agreement. In his court filings, Mr. Audeh's company denies that there was any exclusive agreement.

At this point, Mr. Damirji says, his business got even better. Between March 1993 and December 1996, he says, he purchased RJR cigarettes valued at more than $213 million. They were shipped to Iraq via a dangerous route across the Turkish border into northern Iraq. "During the period, Aspen was established as the premier brand in Iraq" through his sales efforts, Mr. Damirji says, referring to a RJR brand.

Mr. Damirji says RJR executives in Europe and the U.S. were fully aware of his activities. He says Edward Touma, then a R.J. Reynolds Tobacco International vice president, visited him twice in Mersin and also met him in Baghdad, Amsterdam, Geneva and Cannes. Mr. Damirji says he met with seven other RJR executives at various times.

In 1994, he says, RJR paid for him to attend a meeting of Middle East distributors in New York and at RJR's headquarters in Winston-Salem. The court file contains a copy of a 1995 RJR International magazine, called "RJR News," with photographs taken at that meeting that include Mr. Damirji, and with an accompanying article written by Mr. Touma. Mr. Touma now works for Japan Tobacco in Geneva; the company declined to make him available to comment.

C. Stephen Heard Jr., a New York attorney for R.J. Reynolds Tobacco International and Japan Tobacco, says that Mr. Audeh, the former RJR international executive, invited Mr. Damirji to the meeting but adds that "technically you could say he was RJR's guest."

In 1997, Mr. Damirji sued RJR's international unit and Mr. Audeh's distributorship, IBCS, claiming that they were selling to Mr. Damirji's competitors. Mr. Audeh's response to this claim provides an intriguing glimpse into how in some corners, at least, the fierce hatred between the Iraqis and the Kurds appears to have been set aside so both can reap the spoils of the tobacco trade.

Specifically, Mr. Audeh, in a series of interviews, claimed that he couldn't continue selling cigarettes to Mr. Damirji because of demands imposed on Mr. Audeh by the Kurdish Democratic Party, or KDP, which controls the northern part of Iraq that borders Turkey. This is a crucial artery through which foreign cigarettes flow into Kurdish-controlled Northern Iraq. From there, local traders re-export the cigarettes to Iran and even to parts of Iraq controlled by Saddam Hussein.

In early 1997, the KDP set up a company called Kani, which was given a monopoly on all cigarette exports to the Kurdish-controlled area. The company collects a tax imposed by the KDP of $20 to $25 for every master case, or 10,000 cigarettes. Mr. Audeh says Kani directed him to sell to a company that competes with Mr. Damirji's. A KDP spokesman says Kani officials couldn't be reached for comment.

Asked why Kurdish traders would do business with a regime that in the 1980s had killed thousands of Kurds with chemical weapons, the spokesman said: "Business is business. Unfortunately, when people are interested in making money I think they are less interested in what the regime or what the government of Baghdad has done to them."

RJR-brand cigarette sales into Iraq dramatically increased from 1997 to 2001, with many of the cigarettes manufactured in Puerto Rico, according to people familiar with the EU's investigation. The paperwork accompanying some of those shipments states: "United States law prohibits distribution of these commodities to North Korea, Vietnam, Iraq or Cuba unless otherwise authorized by the United States."

In recent months, Japan Tobacco for the first time sought and received U.N. permission to sell cigarettes in Iraq. These sales aren't subject to U.S. law, because the company closed its only plant on U.S. soil, which was located in Puerto Rico; Japan Tobacco's cigarettes bound for Iraq are now made in Europe.

These cigarettes still flow to Kurdish-controlled Northern Iraq. However, at this point their final destination is murky. It now appears that many of them are smuggled to Iran, which some traders consider a more lucrative market than Baghdad. Every day, young Kurds bearing large canvas backpacks stuffed with cartons of cigarettes make daily climbs along the mountainous routes into Iran. "It is constant, nonstop," says one Kurdish businessman who witnessed waves of backpackers smuggling Winstons last month, adding that they're paid about $10 per trip.

According to U.N. records, Japan Tobacco got approval to sell 401,000 master cases of Winston, Magna and Winchester -- more than five billion cigarettes -- to Kani, the Kurdish tobacco monopoly, via Mr. Audeh and a Turkish distributor. The KDP spokesman called the amount requested by Japan Tobacco "huge" and far more than the 3.7 million Kurds possibly could smoke. "You'd have to find babies in their cradles smoking," he says.

Asked for his view of where the cigarettes might be ending up, Guy Cote, Japan Tobacco's spokesman in Geneva, says: "I don't have a clue."



Gordon Fairclough and Jerry Markon contributed to this article.





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