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July 26th, 2009:

Smoke rings: the mainland’s cigarette counterfeiters

Te-Ping Chen, SCMP

The mainland’s counterfeit cigarette industry is thriving thanks to ravenous demand, local corruption and few effective deterrents. In Fujian province, the trade’s heartland, producers go to great lengths to protect their business

On first approach, Yunxiao seems like any other mainland backwater caught in an uneasy industrial transition. Faded advertisements line the streets downtown, where motorcyclists wearing bamboo-frond hats vie for paying passengers in a riot of honking horns. A cheerful red banner in the city centre exhorts citizens to develop the local economy – a somewhat superfluous sentiment considering that, since the 1990s, the county has raised a legion of millionaires.

But you won’t find any evidence of them downtown. Illicit cigarette factories dot the thickly forested, mountainous countryside: carved deeply into caves and high up in the hills, and even buried metres under ground. By one tally, some 200 operations are hidden in Yunxiao, a county in the south of Fujian province that is slightly larger than Hong Kong.

Over the past decade, production has soared, making the mainland the world leader in fake cigarettes. The country churns out an unprecedented 400 billion counterfeit cigarettes a year. Yunxiao – once famed for its bright yellow loquat fruit – is the trade’s heartland; the source of half those 400 billion, officials say. Some factories here boast up to 500 workers and more than US$100 million in annual sales.

From New York delicatessens to London corner shops, China’s rip-offs are sold in cities around the world. While a pack of fake Marlboros costs 20 US cents to make in the mainland, in the United States, it can fetch up to 20 times that amount. Facilitated by global crime rings, the counterfeit trade has exploded, propping up addiction and robbing governments of billions in tax revenue. According to US Customs, 99 per cent of the counterfeit cigarettes seized in the country originate from China, as do up to 80 per cent of those in the European Union. Meanwhile, official efforts to stop the trade in Yunxiao are met by riots, machete-wielding manufacturers and retaliatory killings.

Cigarette counterfeiting delivers profits to rival those of the narcotics trade, officials say. And while a drug trafficker might land a life sentence if caught in the US or Europe, someone dealing in counterfeit cigarettes will receive a comparative slap on the wrist – a minor jail term or, possibly, a fine.

The Chinese diaspora plays a major role in smuggling and distribution, with groups particularly active in New York, in the US; Vancouver, Canada; Rotterdam, the Netherlands; Le Havre, France; Valencia, Spain; and Hamburg, Germany. In 2005, two FBI sting operations, code-named Royal Charm and Smoking Dragon, netted a group of 62 ethnic Chinese that had smuggled one billion fake cigarettes, all of them from Fujian, into the Los Angeles-Long Beach and Newark ports, using false descriptions such as “wicker furniture” and “toys”. The counterfeits, largely Marlboros and Newports, were in turn sold on the streets of LA, Chicago and New York.

“In the last few years, pretty much every market has been targeted,” says Andrew Robinson, who directs the brand integrity division for tobacco company Philip Morris International (PMI).

In 2001, Chinese manufacturers were producing eight varieties of counterfeit Marlboros. As of last year, PMI reports, mainland counterfeiters were making versions of Marlboro tailored for some 60 countries – down to specific details such as tax stamps and regional health warnings.

“Ten years ago, [there were] almost no counterfeit cigarettes [in the EU],” says Austin Rowan, who heads cigarette fraud investigations for the EU’s Anti-Fraud Office, known as Olaf. Last September, though, the tide of fake cigarettes flooding Europe – most of them Marlboros from China – prompted Olaf to post an officer in Beijing for the first time.

In Britain, where, in some areas, up to one-third of all the cigarettes sold are counterfeit, the illicit trade costs the government nearly US$5 billion a year in lost revenue.

Knock-off cigarettes may be kind to your pocket but there is evidence they are more detrimental to your health than their legitimate counterparts. Laboratory tests show that some Chinese counterfeits – especially the inferior products, which tend to be those that are exported – emit higher levels of dangerous chemicals than brand-name cigarettes and contain impurities that include insect eggs and human faeces. Furthermore, health authorities fear the counterfeit tide diminishes incentives to quit. (US Centres for Disease Control and Prevention studies show that every 10 per cent increase in the price of cigarettes causes a 4 per cent drop in consumption.)

While Western markets are the most lucrative for counterfeits, they’re also the riskiest. Inside China, local ties and protectionism afford a degree of control; a friendly 70,000 yuan tribute, one customs official confides, is the going rate to ease a container out of Xiamen port. Even without a bribe, the chances of getting contraband through a mainland port are high; inspection rates are a low 1 per cent to 2 per cent. Beyond the mainland’s borders, though, containers are vulnerable to detection by enforcement officers, many of them newly vigilant in the fight against fakes.

In May, British authorities seized more than 20 million counterfeit Regals (valued at US$8.6 million) imported from China into Southampton. Also that month, Spanish authorities nabbed 20 million fake Marlboros – described as mattresses on the shipping manifest – imported from the Shenzhen ports of Chiwan and Shekou – and French customs intercepted 15 million made-in-China fake Marlboros outside Paris, some bearing Vietnamese as well as Arabic and French health warnings.

Such seizures are just the tip of the iceberg, says Rowan. Smugglers frequently ship cigarettes through an array of destinations such as Dubai and Singapore to mask a container’s origin, with some spending up to three months at sea before delivery. And the profits are so high that “with nine containers seized in 10″, Rowan says, “[smugglers] still would not be losing money”.

For counterfeiters, the rewards are prodigious. According to manufacturers, state-of-the-art cigarette machines (available online from sites such as (SEHK: 1688, announcements, news) ) can fetch US$1.5 million to US$3 million. “But everyone knows the investment can be recouped in just a few months of manufacturing,” says a Yunxiao cigarette broker.

With so much profit at stake, this underground industry has cultivated a violent set of players. Past factory raids have yielded semi-automatic rifles and met with armed resistance, and every year, several state and private investigators are killed trying to penetrate the trade. In some Yunxiao raids, which can involve thousands of officers, police have had to blast through concrete bunkers to find the machines.

In the 90s, mainland counterfeiters relied heavily on Macau, Taiwan and Hong Kong for technical expertise, as well as high-quality packaging. These days, the counterfeiters source the majority of their supplies in the mainland: tobacco from Yunnan province, packaging from Dongguan and Shantou in Guangdong province and cast-off machines bought online from underground manufacturers or recently shuttered state facilities. (Over the past decade, the mainland’s legal cigarette industry has been consolidated, with the number of factories shrinking from 185 to 31 since 2001.)

Counterfeiters have not only acquired the technology to mimic holograms used to distinguish real packs but also the rounded-corner packaging the tobacco industry has introduced in recent years. As manufacturing technology has improved, so too has the speed with which counterfeiters respond to shifting markets. In December, when Irish authorities seized a shipment of 20 million counterfeit cigarettes, they found the made-in-China packs bore exact replicas of Ireland’s latest tax stamps, which had been in circulation for only a few months.

Counterfeiters are becoming ever more brazen; many openly court clients through online stores, touting quality guarantees and their equipment’s international calibre. One Yunxiao operation, established in 1993, assures customers of its experience in exporting to Asia and Africa and says it maintains its own tobacco leaf fields in Laos. The company – which churns out some 80 million cigarettes a week – promises a six-day manufacturing turnaround, door-to-door delivery for certain overseas clients and impeccable customer service.

For tentative buyers, the owners guarantee that for the US in particular, it’s a “profit business”. Reads the website: “We strive to build and maintain a total honesty management culture, and will appreciate the chance to do business with you.”

A successful business relies on more than just technology, of course – it requires support from investors and brokers. Men, for example, such as Tony Tung. Originally a fishmonger, for the past 15 years, Tung – square-jawed, middle-aged and with a thick coif of black hair – has ranked among the mainland’s most notorious cigarette dealers. In the early 90s, though, he found gold in the genuine product: Marlboros and 555s smuggled into the mainland from abroad.

For years, Beijing has worked strenuously to keep foreign cigarette companies at bay, capping imports and levying tariffs as high as 430 per cent. That, though, didn’t deter companies such as British American Tobacco from smuggling their products into the mainland – or enterprising men such as Tung, who made millions smuggling in cigarettes produced legally in the Philippines.

When the government cracked down on smuggling in the 90s, Tung built factories in Fujian, as well as in the Philippines (closed by authorities in 2005) and the free-trade zone of Rajin, in North Korea. In recent years, his enterprise has reportedly shipped up to 50 containers a month – or 500 million cigarettes – to markets throughout the US, Europe and Asia. Tung continues to elude authorities, shuttling between Singapore and nearby countries, according to a tobacco industry source. Recently, his syndicate has started using fishing boats to smuggle its product around Asia.

Tung and his fellow counterfeiters employ an impressive bag of tricks to avoid scrutiny. One manufacturer (arrested in 2001) constructed a factory that masqueraded as a People’s Liberation Army compound, complete with 20 labourers dressed in cast-off military uniforms, who would conduct faux army drills and sing the national anthem in the yard every morning. Other machines have been lodged on ships and even under a lake.

“Finding these guys is like a James Bond movie,” says Keith Tsang, of the China Association of Industry Security Professionals. “You’d never believe it was for real.”

In Yunxiao, “most factories are underground”, confides a cigarette broker in hushed tones. “They’re under buildings, unimaginably well-hidden, with secret doors from the basements.”

Even the village temple – topped with a lilting red roof and twisting, frescoed spires – conceals a factory below, she says.

The turf masks the tobacco scent while sentries are positioned to monitor passers-by. Workers staff production lines in teams of six or seven, feeding tobacco into large, heavy machines anchored in concrete foundations. Above ground, manufacturers use other ploys to hide the tell-tale aroma: double-paned glass and cotton quilts tacked to the walls, with pig pens sited nearby. Investigators say the easiest way to find a factory is by searching for signs of industrial power usage.

Operations are distributed over an area: tobacco cutting and drying at one site, cigarette rolling at another and packing yet elsewhere. The packing – usually managed outside port cities, just prior to shipment – is the only process that hasn’t yet been mechanised. In major distribution centres such as Guangzhou, 480 kilometres from Yunxiao, labourers fill and seal the branded packs by hand.

It’s hard to overstate the ubiquity of tobacco in the mainland, a country home to one of the world’s most entrenched smoking cultures. The introductory exchange of cigarettes is as ritualised as a handshake while expensive packs moonlight as everything from wedding gifts to bribes – even offerings on ancestors’ tombs.

As an official from the tobacco company Rothmans once put it, “Thinking about Chinese smoking statistics is like trying to think about the limits of space.”

Every year, the mainland’s smokers consume one-third of the world’s tobacco: an overwhelming 2.2 trillion cigarettes. Cigarette-related mortality levels, too, are staggering, with one-third of all mainland men currently under the age 30 predicted to die as a result of smoking.

Like everything else related to tobacco in the mainland, the number of counterfeits flooding the domestic market is similarly off the charts.

“Each of us has come up with our own strategy to deal with [counterfeits] by now,” says one Beijing smoker, who refuses to buy from outlets where he doesn’t know the owner. The problem is so bad that train conductors hawk cheap keychain lights that purportedly reveal fake packs.

All legal manufacture and distribution of cigarettes in the mainland is state owned and in a nation of 400 million smokers, that’s big business. (Local governments are keen to defend it, too: up until May, officials in Hubei province were required to smoke a collective 230,000 packs of regional brands a year.) With cigarette sales accounting for nearly 8 per cent of the mainland’s budget in 2007, the state has a strong motive to keep its supply counterfeit free.

The State Tobacco Monopoly Administration (STMA) has spared no resources in trying. By 1995, long before multinational tobacco companies had seriously mobilised, the STMA had dedicated at least 80 million yuan to combating counterfeiters. The agency today fields 50,000 agents to fight the fakes, according to industry sources, although only 150 officers have been sent directly to Yunxiao, claims a police officer in the area. The STMA is not willing to explain its tactics.

Last year, officials say, the STMA raided 3,312 production sites throughout the mainland, apprehending 7,128 people in the process and seizing 8.3 billion counterfeit cigarettes. The STMA also regularly holds public “destruction ceremonies”, hoisting cigarette machines up into the air by crane before dashing them onto concrete below.

“China devotes a huge amount to enforcement,” agrees Martin Dimitrov, a professor at Dartmouth College in the US who has studied the issue. “The puzzle is that there seems to be little effect.”

It’s not that Yunxiao’s manufacturers don’t feel the pressure. Last December, the Ministry of Public Security announced the bust of one of the largest international schemes in years, a network consisting of 27 people who reportedly smuggled at least 600 million fake cigarettes around the globe. While the cigarettes – mostly counterfeit Marlboros and 555s – were shipped as far as South Africa, Greece, Indonesia and Britain, they had all been manufactured in the rugged mountains of southwest Fujian. Furthermore, one manufacturer reports local counterfeiters are losing up to two million yuan a day in seized materials, and phone calls to a handful of different counterfeiters suggest a number of them are laying low, hesitant to expose themselves to new buyers.

But when it comes to Yunxiao’s factories, an old Chinese idiom seems particularly fitting: the mountains are high and the emperor is far away. Yunxiao villagers quote their own motto: “Any official can absolutely be bought within half a month.” In some cases, a gift of just 10,000 yuan can buy a counterfeiter a licence to operate and some official breathing room. Last year, 28 officials were reportedly detained in connection with cigarette counterfeiting on charges such as protecting people involved in the trade and directly participating in it themselves.

On the other hand, the counterfeit industry is a boon for local employment, which some officials are loath to suppress. Last year, even though the State Administration for Industry and Commerce undertook 13 per cent more intellectual property raids than in 2007, the number of cases transferred for criminal prosecution dropped by 40 per cent. In January, the Guangdong prosecutor’s office instructed prosecutors to “cautiously choose whether cases should be brought” and with less serious criminal cases, “postpone enforcement where appropriate”. In December, the deputy minister of Shandong’s public security bureau (who was recently arrested for corruption) pressed police to avoid “aggravating” businesses’ production problems, for fear it would “increase the likelihood of mass protests”.

A police officer based just outside Yunxiao, who asked to remain anonymous, says that his superiors have lowered the priority of targeting people in the trade and that an arrest is an anomaly. Most workers caught “just pay some fines” and, even if they are arrested, their bosses will pay a bribe to get them out. Catching the production bosses, he says, is “impossible”. They’re too insulated and adept at hiding: some hold as many as 100 fake identity cards, from several provinces.

Even if caught, the maximum sentence a cigarette counterfeiter can expect is just seven years. Three years is the minimum and more common sentence, says Tsang. To put someone in jail for even that long, authorities have to seize more than 250,000 yuan worth of contracts or goods, a threshold counterfeiters try to duck by separating storage and production efforts.

“It’s impossible to root out this business,” says the police officer. “Even though there are crackdowns, I don’t see any long-term plan to eradicate the industry.”

While the STMA pays any police division up to 15 per cent of the retail price of any goods seized, the incentive, he explains, is ineffectual. “When cars [containing fake cigarettes] are stopped, the drivers run away but the police don’t care because they’ll get a reward anyway.”

Few in Yunxiao will talk openly about the area’s main industry. One resident, a 30-year-old woman and sometime cigarette broker, explains why the trade flourishes so well in her community. The counterfeiting industry, she says, is more than just a business, it’s a brotherhood. Only those whose entire family tree can be traced to the area are permitted to work in production. Regional markets are divided by family and once established, respected – spurring others, in turn, to develop their own markets. Unity is fierce, she says: that’s why the county is so well protected.

Surveillance is heavy in Yunxiao’s narrow side streets and in its hotels, and outsiders are frequently tailed. Although authorities offer rewards of tens of thousands of yuan for information, few residents dare to take them, she says. “Even if you get the money, you won’t have any life left to enjoy it afterwards.”

But when it comes to production, she adds, Yunxiao people are nothing less than business-minded “professionals”.

She tells the story of one Shanghai chemistry professor who manufacturers collectively enlisted five years ago to help them better mimic the popular mainland cigarette brand Hongtashan. Counterfeiters paid him 100,000 yuan and have rewarded him with royalties ever since.

Similarly, in years past, she says, counterfeiters have invited retired workers from the state-owned Shanghai Cigarette Factory – home to some of the nation’s top brands – to tour Yunxiao and help fine-tune the recipes. Yunxiao has become synonymous with quality fakes to such an extent, illegal manufacturers from other regions of the mainland claim their cigarettes originate in the area.

As they battle with Beijing, Yunxiao’s manufacturers show no signs of backing down. Some have stepped up investment in factories outside the area, including in the counties of Pinghe and Zhangpu. Others are shifting production outside the mainland altogether, as far away as Vietnam and Myanmar.

Yunxiao might someday change but such a transition would take many years, says the broker. Or a more concerted effort from Beijing. Additional reporting by Patricia Chan and Alain Lallemand

Butting in

Smoking is not as ingrained in the fabric of life here as it is on the mainland – according to 2007-08 data from the Tobacco Control Office, smokers make up only 11.8 per cent of Hong Kong’s population – but the smuggling of cigarettes over the border, both counterfeit and genuine, remains a problem. In one March bust alone, customs officials seized HK$7.5 million worth of cigarettes and arrested 54 people. The total amount seized that month was 9.1 million sticks, worth HK$17.8 million.

According to Fung Hoi-yan, acting divisional commander of the New Territories Anti-Illicit Cigarette Investigation Division, roughly 30 per cent of cigarettes seized are counterfeit.

The cigarettes are distributed by gangs working in places such as Mong Kok and Wan Chai who hand out flyers with contact details. Tactics employed to avoid arrest include selling only to regular customers, making buyers say a password, delivering to buyers’ homes or arranging pickups in MTR stations.

With February’s 50 per cent rise in tobacco duty, the average cost of a pack of 20 cigarettes rose from HK$29 to HK$39. Smuggled genuine cigarettes sell for about HK$15 to HK$17 while counterfeits can be as cheap as HK$6.

The maximum penalty for trading in illicit cigarettes is a HK$1 million fine and two years’ imprisonment.

Fung says authorities have made significant progress since March in catching traders who conduct their business on mobile phones.

“I think the most important problem [concerns] the examination of the people passing through our checkpoints,” Fung says. “There are many, many passengers and there are many, many vehicles coming into Hong Kong every day and if we had to examine all of them we would suffocate the trade flow between Hong Kong and China.

“We have to be selective,” Fung adds. “We have to work based on our intelligence.” Chelsea Shover