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From Cave to Carton: China's Illicit Smokes

12-20 13:09 Caijing Magazine

Ten years after China launched a crackdown against counterfeit cigarette rings, the fully integrated business is flourishing.


By staff reporter Ouyang Hongliang
From Caijing Online


Zeng Changsheng looks like an ordinary farmer except for a long, centipede-shaped scar behind what little remains of his left ear.


Zeng was battered in retaliation for battling illegal cigarette makers in the Chaozhou-Shantou area of Guangdong and Fujian provincec. He survived the attack three years ago but lost half an ear, as well as two colleagues, who were killed.


Before the attack, Zeng spent seven years as a professional anti-counterfeiting agent, helping break up more than 40 production facilities. But his sacrifice – and the Chinese government’s decade-long war against counterfeit cigarettes -- hasn’t made much of a dent in the nationwide racket.


Illegal cigarette production is still rampant in China, particularly in Guangdong and Fujian provinces, said Zhang Hui, deputy director of the State Tobacco Monopoly Administration (STMA), who spoke at a National Conference on the Counterfeit Cigarette Crackdown.


The Chaozhou-Shantou area and the city of Guangzhou, also in Guangdong, are important production bases for counterfeit cigarettes. The county of Yunxiao in Fujian is another focal point for factories, some in secret caves. Guangzhou ranks as the country’s largest transshipment hub for illicit tobacco.


But the web stretches across the country, from Yunnan Province farms to Shanghai, Xiamen and Hong Kong. Growers, manufacturers, distributors, shippers and corrupt officials are intimately linked in a system that competes against China’s only legal cigarette company, state-run China National Tobacco Corp.


A thread of the nationwide network was exposed in late October when authorities seized a 45-foot container stuffed with thousands of cartons of counterfeit cigarettes worth more than 10 million yuan. The cargo originated in Yunxiao and nearby Quanzhou, and had been shipped through Guangzhou to Chongqing.


A Caijing investigation into the illegal cigarette trade took reporters to these and other areas to expose its dark secrets.


Number 3 Factory


One prominent stop was the Wuxianqiao area of Guangzhou, which Caijing learned is home to the illicit Number 3 Cigarette Factory – apparently the nation’s most important manufacturing and distribution center for counterfeit cigarettes. It’s been said that knockoffs of Chinese as well as global cigarette brands are produced here.


“Forty-seven cartons of baitiao?” said a shirtless man on the phone when a Caijing reporter walked past in a Wuxianqiao alley.


“No problem! Shipping arranged at five,” the man said before quickly disappearing in a maze of narrow lanes.


“Baitiao”, or bland bar, is local jargon for counterfeit cigarettes. It’s also one brick in a significant language barrier that walls counterfeiters from authorities in Wuxianqiao, a dense neighborhood of alleys and hovels inhabited by about 100,000 people. Most locals are originally from Yunxiao or Zhao’an, also in Fujian, and speak the Hakka language, rather than Cantonese or Mandarin, among themselves.


Parked at four main gateways to the maze, Caijing saw groups of silver-gray vans with black-tinted windows. Sources said vans regularly queue just outside Wuxianqiao’s alleys to accept cartons of finished cigarettes for shipment. Occasionally, a parked SUV signals the presence of a smuggling boss.


Every night, starting at about 8 o’clock, men carrying cigarette cartons file from shadowy buildings. They rush to the waiting vans with cartons labeled “auto parts,” “Wuyi tea,” “printers” or “stainless steel tableware.”


Reporters watched as, about every five minutes, a loaded van drove off. Each driver was accompanied by at least one man working as a guard -- usually a friend of relative of the boss. Sometimes a boss in an SUV would personally escort a van, especially if the load was unusually large.


Sources said camouflaged cartons are shipped from the illegal production zone to cities across China via bus stations in Guangdong and Tianhe, or through freight depots and major logistics centers. Some are shipped via air express.


Shipping orders are placed by cigarette makers who usually produce to fill specific orders, firing up assembly lines only after orders arrive. Their operations are highly professional, mimicking bona fide tobacco manufacturing from production to packaging. Indeed, counterfeit cigarettes are extremely hard to distinguish from the real thing.


A source hinted that most of the tobacco is grown in Yunnan Province, while processing and first-step manufacturing is centered in Yunxiao and Zhao’an. Dealers in Guangzhou buy semi-finished “baitiao” from Yunxiao, turn it into finished products in Wuxianqiao’s workshops, and then ship cartons across the country.


The Yunxiao Connection


STMA data shows the Guangdong government seized 201 pieces of counterfeit cigarette production equipment in 2007, representing 28 percent of the amount seized nationwide. Nearly 70 of the pieces were found in Guangzhou, a 17 percent increase from the amount captured in the city the year before.


Guangzhou authorities have conducted four special sweeps of the illicit packaging and shipping businesses in Wuxianqiao and other sites since 2007, but with limited results. The cigarettes keep on coming. It seems nothing gets in the way at the first stop on the contraband road – Yunxiao.


Officials say half of the country’s counterfeit cigarettes originate in Yunxiao. The city was found to have been the origin of counterfeit cigarettes smuggled by a ring through Henan Province in 2007. The ring handled more than 75 million yuan worth of products through a nationwide network covering 20 cities and provinces. This year, a record crackdown in Zhejiang Province involved as much as 400 million yuan worth of cigarettes, also from Yunxiao.


Cigarette making has a long history in Yunxiao, where handmade smokes have been popular since the Qing Dynasty. Almost every household had a cigarette-making machine, and as many as seven cigarette factories employed more than 900 people as early as 1949. The state-owned Yunxiao Cigarette Factory was established in 1952 but closed in 1998, idling experienced workers, some of whom entered the counterfeiting business. Many illegal operations employ technicians who retired from legitimate tobacco factories in Yunnan, Hunan, Guizhou and Sichuan provinces.


The business is extremely secretive and clannish. Manufacturing sites are hidden in caves, barns or even underground. A former anti-smuggling agent told Caijing mobile phones are banned at the sites, and all entrances are tightly controlled.


Inside, workers toil all year, taking time off only for the Chinese annual Spring Festival, without knowing where they are. Food and other necessities are delivered by special couriers. When workers are allowed to go home, they leave the factories inside closed containers on trucks that twist and turn through the city to confuse their human cargo, before depositing the workers at bus or train depots.


Luo Suxiu, director of Yunxiao’s Office of Rectification and Standardization of Market Economic Order, said making and smuggling illicit cigarettes can generate profits similar to those enjoyed by drug traffickers, but with less risk.


Luo cited as an example that a fake carton of Hongtashan, a well-known brand, costs only 500 yuan to produce. But a carton can sell for 1,500 yuan. And high-end fakes can fetch 3,000 yuan a carton. Thus, the cost of a piece of production equipment can be recovered in a month.


Some dealers do business overseas; Chinese-made counterfeits have been found in the Americas and Europe. Luo said Chinese sales can net counterfeiters a 200 percent profit, while foreign sales can yield 500 percent.


Yunxiao is particularly famous for high-quality contraband. Speaking with Caijing, a local manufacturer said a special formula is used to imitate genuine brands. The manufacturer produces more than 40 brands, including copycat packets of Marlboro and 555. Some arrested counterfeiters told police they conducted market research – collecting feedback from smokers of their contraband -- to fine-tune their cigarettes to imitate real brands as closely as possible.


Secret Shipping


How do cigarettes get from Yunxiao and Chaozhou-Shantou to Guangzhou and beyond? Caijing followed a delivery van from Wuxianqiao to a cargo terminal at a bus station. Two cartons marked “stainless steel tableware” were unloaded for delivery to Conghua. Consignment procedures were handled without any content checks. Dozens of similar cartons were seen on their way to cities across Guangdong Province.


Four vans arrived during Caijing’s 15-minute stay at the cargo center. A taxi driver who said he used to deliver counterfeit cigarettes claimed that, by 5 a.m., hundreds of cartons would be stacked and ready for shipping across the province.


At Caijing’s request, two cartons were put through a security scanner. The screen clearly showed rows of cigarettes inside.


Contraband also travels by air. After interviewing staffers at 10 air cargo centers along the Guangzhou airport road, eight told Caijing they were able to consign counterfeit cigarettes.


A worker at a logistics company said bluntly his firm specifically handles counterfeit cigarettes, CDs and DVDs, while another bragged about delivering to any city reachable by domestic flights except Xi’an and Urumqi.


At one cargo company, mountains of plastic bags marked “shoes” and “tea” were piled in a hallway. They were filled with counterfeit cigarettes. Two vans arrived during Caijing’s visit with another load of cartons, packed with phony Zhonghua and Double Happiness cigarettes.


A cargo center in Guangzhou and another in Urumqi were cited as transport hubs for a cigarette trafficking ring investigated by STMA and the Ministry of Public Security that led to a conviction in October in Zhongwei Intermediate People’s Court in Ningxia. Investigators found that, starting in 2005, the group shipped fake Haixin cigarettes worth more than 20 million yuan.


For shipping abroad, smuggling rings use the port of Hong Kong. Cargo is sent to Europe, the United States, the Middle East and Africa. Cigarettes may be disguised as tea to confuse security scanners at customs offices. Some are shipped in containers.


Some overseas smugglers ship from the cities of Xiamen and Shanghai. City officials in Xiamen, for example, found in June 2007 a container truck at a warehouse containing 984 cartons of counterfeit cigarettes worth more than 8.4 million yuan. That led investigators to a trafficking ring that transported illegal cigarettes from Yunxiao to Xiamen and then to Shanghai before shipping overseas. As the probe began, officials found that nine containers had already arrived at ports in the United States, Britain and Spain, and two were en route to Britain.


A smuggling group nabbed in June 2006 in Xiamen transited counterfeit Marlboros made in Yunxiao through Shanghai to countries such as Greece.


Another destination is Taiwan. In 2002, Fujian authorities cracked down on a ring that smuggled four vans filled with counterfeit cigarettes to Taiwan within three months. One gang leader was a police officer with the Public Security Bureau in Yunxiao.


Seizures have been rising of late. China Customs reported 849 cases of cigarette smuggling in 2007, up from 717 the year before. Customs officials in the city of Shenzhen, which is near Guangzhou and Hong Kong, cracked 11 cases involving overseas-bound cigarettes in the first four months of 2007 -- more than for all 2006.


To step up the fight against counterfeit production and smuggling, STMA and the General Administration of Customs signed a memorandum for combating cigarette smuggling in 2006. They also established a provincial reporting network. Meanwhile, anti-smuggling departments across China reinforced their cooperation with authorities in other countries.


Too Clever?


But so far, authorities trying to halt the flow of illegal smokes have proven no match for wily counterfeiters.


The crackdown has been under way for a decade in Yunxiao. More than 100 machines have been destroyed annually in recent years. And investigators have gotten extensive help from informants who, among other things, have drawn detailed maps of underground complexes, Lou said. Nevertheless, investigators have struggled to find the entrances.


When international anti-counterfeiting experts visited Yunxiao last year, Luo said, they were stunned by one ring’s clever technique. Local officials brought the experts to an underground manufacturing site and asked them to find its secret entrance. They failed. Later, they were shown the cave door -- two meters beneath a tree.


When the crackdown began in 1998, raids coordinated by seven government agencies temporarily shut down the illegal business in Yunxiao. But the operators simply moved to the Chaozhou-Shantou area. When that area was targeted in 2002, the counterfeiters moved to Guangzhou. Others returned to Yunxiao.


The cat-and-mouse game continues. The battle remains tough, and prospects for victory are dim, said Zhang Hui, STMA deputy director. The business’ roots are strong and adaptable.


And in some places with flourishing counterfeiters, local officials choose to look the other way. It’s not unusual to hear some say “cigarette counterfeiting stimulates the economy.”


Authorities in Yunxiao, Chaozhou-Shantou and Guangzhou continue offering to reward informants, who now outnumber counterfeiters. But Luo said some members of the law enforcement community are involved in the counterfeiting chain.


Last year, Caijing learned, 28 officials were detained for cigarette counterfeiting on charges such as dereliction of duty, cover-ups or actually participating in the counterfeit trade.


Some corrupt officials apparently tip off criminals before raids occur. A media source in Guangzhou described how a 2006 “secret” raid organized by STMA in Wuxianqiao was thwarted by counterfeiters who managed to safely remove all their equipment just before police arrived.


Zeng, the disfigured farmer, said he once reported a counterfeiting site and got a reward. But nothing else happened; the manufacturers stayed in business.


Zeng is occasionally reminded of the pervasiveness of the illegal industry he once tried to stop. While visiting a former law enforcement contact, for example, he was handed 20 packs of fake Zhonghua cigarettes. “It’s counterfeit,” the contact said. “But I bet you’ll like it.”


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