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British American Tobacco, North Korea, & the Bomb: Setting a New Low for How Evil a Tobacco Company Can Be

Last Tuesday, British American Tobacco, the world’s second-largest tobacco company, along with its Singaporean subsidiary, pled guilty to bank fraud and conspiracy charges and agreed to pay a combined $635 million in criminal and civil fines, penalties, and forfeitures to the Treasury and Justice Departments. The charges arise from an secret joint venture, going all the way back to 2001, in which BAT sold the North Korean government tobacco, other materials, machinery, and technical help to manufacture cigarettes, despite having said in 2007 that it had pulled out of this joint venture. For years after U.S. sanctions laws criminalized North Korea’s payments to BAT, BAT conspired with the North Koreans to get paid in dollars laundered by sanctioned North Korean banks.

[T]he defendants engaged in a scheme to purchase leaf tobacco for North Korean state-owned cigarette manufacturers and used front companies and false documentation to cause U.S. financial institutions to process at least 310 transactions worth approximately $74 million that they otherwise would have frozen, blocked, investigated or declined, had they known the transactions were connected to trade with North Korea. The transactions resulted in an estimated up to nearly $700 million in revenue for the North Korean manufacturers, one of which was owned by the North Korean military. [DOJ]

“For years, BAT partnered with North Korea to establish and operate a cigarette manufacturing business and relied on financial facilitators linked to North Korea’s weapons of mass destruction proliferation network in the process of enriching itself.” [DOJ]

BAT will pay a combined $629 million in criminal fines, penalties, and forfeitures–$122,537,016 for Count 1 (Bank Fraud), $317,813,722 for Count 2 (conspiracy to violate counterproliferation and North Korea sanctions), and $189,541,115 in criminal forfeitures of proceeds of BAT’s crimes, for an exact total of $629,891,853. BAT also entered into a Settlement Agreement with the Treasury Department’s Office of Foreign Assets Control, or OFAC, to pay $508,612,492 in civil penalties, of which all but $5,348,685 is offset by penalties paid to the Justice Department.1 BAT admitted in its Deferred Prosecution Agreement (DPA) with the Justice Department that it knew it was being paid in dollars through two North Korean banks that the Treasury Department blocked for WMD proliferation financing in 2009 and 2013. OFAC calls this the largest penalty ever for a non-bank respondent, and also, the largest civil penalty ever for violating North Korea sanctions.

This $635 million direct cost does not include the bills from Cravath, Swain, and Moore, one the oldest and most expensive white-shoe corporate law firms in New York. The docket shows that two of the firm’s partners and one associate entered appearances for BAT. They must have billed a great deal of time while negotiating BAT’s agreements with the Treasury and Justice Departments. BAT also agreed to three years of federal probation, improvements to its compliance programs, and cooperation in other investigations.

BAT must wish today that it had gotten better advice in 2001. If it had no moral reservations about who it was dealing with, it should have had pragmatic ones.

The judge who accepted BAT’s plea was Chief District Judge Beryl Howell, a by-the-book, law-and-order judge who gave prosecutors a series of favorable rulings in unrelated enforcement cases involving North Korea, and who awarded the family of Otto Warmbier $501 million for torturing their son into an irrecoverable coma.

I’ve uploaded the main documents from PACER (the federal courts’ online docket) and will refer to them throughout this post.

This post also cites numerous DOJ and Treasury press releases (1, 2, 3, 4, 5, 6, 7).

A Long Investigation & A Short Docket

Penalties and terms like these are for the worst of the worst corporate actors–those that engage in egregious, willful violations over long periods of time, involving large amounts of money. OFAC claims it imposed the maximum civil penalty the law allowed. DOJ says the 310 illegal payments it charged “resulted in an estimated up to nearly $700 million in revenue for the North Korean manufacturers, one of which was owned by the North Korean military,” but OFAC estimates that overall, North Korea’s counterfeit cigarette trade “netted over $1 billion a year.”

Under the U.S. Victims of State-Sponsored Terrorism Act, the money will be deposited into a fund to compensate judgment creditors for acts of terrorism and torture by state sponsors. If the fines, penalties, and forfeitures in this case were instead deposited into escrow and used to fund U.N. humanitarian aid programs–currently about $54 million a year, though Kim Jong-un expelled all aid workers from North Korea three years ago–$635 million would fund the current annual cost of WFP operations in North Korea for almost 12 years.

BAT clearly wanted this case to be over as quickly as possible. The Judge’s Sealing Order tells us that BAT and the Justice Department agreed on most (if not all) of the terms before DOJ filed its Information on April 7th, which came just two weeks before the announcement of the plea agreement, DPA, and settlement.  BAT didn’t file any motions. Its main interest seems to have been delaying the public disclosure of the charges until after the announcement of the plea deal. It waived its constitutional right to indictment by a grand jury. As former FBI intelligence analyst Nick Carlsen told The Wall Street Journal, “These are huge cases, which took years to build.” This case was obviously strong enough to persuade BAT to enter a quick plea to some very serious crimes.

Also Indicted: North Korean Cybercriminals

“Separately,” the Justice Department says in the very same press release, it also indicted a China-based North Korean banker and two Chinese facilitators for “a multi-year scheme to facilitate the sale of tobacco to North Korea,” leaving it to us to imply a connection to BAT. The North Korean banker, Sim Hyon-sop, is variously described by DOJ and Treasury as working for the Foreign Trade Bank or its subsidiary, Korea Kwangson Banking Corporation (KKBC), both of them blocked by the U.S. Treasury Department and the U.N. Security Council.

Sim was indicted twice (one, two) last week, for laundering the proceeds of cryptocurrency thefts and the wages of North Korean IT workers, some them employed by U.S. companies, and with some of the money laundered through U.S. exchanges. Sim did this by using over-the-counter cryptocurrency traders whose function is to make trades for people who don’t want regulators to know who they are or how they got their money. That is to say, their job is to violate the Know-Your-Customer rules that apply to banks, and the special Patriot Act regulations that cut North Korea off from the financial system. One of the Chinese traders was charged with operating an unlicensed money transmitting business. Sim and the two named OTC traders were also blocked from the financial system.

The IT workers whose wages Sim laundered were employed by North Korea’s Reconnaissance General Bureau, which runs teams of hackers who were responsible for cyberattacks on Sony Pictures, the Bangladesh Bank, and numerous other targets around the world. Their main function is to raise money for missile and other WMD programs.

A quarter-century of lies and crimes

BAT’s dealings with North Korea go all the way back to 2001, when it secretly built a cigarette factory in North Korea. The factory was reported in the press in 2005 and became a political issue when The Guardian reported that Conservative Member of Parliament Kenneth Clarke, BAT’s “non-executive deputy chairman,” knew about the factory and kept it secret from the public and BAT shareholders. By then, BAT already had a long history of criminal convictions for smuggling and tax evasion. The North Korea story emerged shortly after human rights campaigners forced BAT to pull out of Burma, and shortly before Clarke made an unsuccessful bid to lead the Conservative Party. At the time, Clarke promised to “oversee human rights reports on all countries where we operate,” but BAT also made clear that its human rights ethics were decidedly situational:

“It is not for us to interfere with the way governments run countries.” She said BAT could “lead by example” and assist the country’s development by meeting internationally accepted standards of businesses practice and corporate social responsibility.

….

Even one of BAT’s own public relations officers, in Japan, was astonished when questioned about the joint venture company. “Business with North Korea?” he asked. “Where there are no human rights?” The depth of concern about the suffering of people in North Korea is expressed in a series of reports by the United Nations and human rights watchdogs. [The Guardian]

BAT’s first scrape with the law came in 2005, when BAT was using an account in Banco Delta Asia to receive funds from North Korea. The account was frozen when BDA was blocked out of the financial system for laundering the proceeds of North Korean counterfeiting and other sundry crimes. In October 2006, North Korea tested its first nuclear weapon, and the U.N. Security Council approved its first sanctions against North Korea. In 2007, BAT told the public and its shareholders that it had pulled out of North Korea and sold its stake to a Singaporean company called SUTL. In 2017, SUTL denied to NK News that it had any business links to North Korea. Now, prosecutors confirm that BAT (and possibly, SUTL) lied.

In reality, BAT continued to do business in North Korea through the third-party company and BATMS maintained control over all relevant aspects of the North Korean business. Between 2007 and 2017, BAT and BATMS ran the payments for the tobacco sold to North Korean entities through the third-party company, resulting in approximately $418 million of U.S. dollar cash and correspondent banking transactions from North Korea to the third-party company in Singapore – money that was then passed on to BATMS and BAT. [DOJ]

A Long Road of Bad Choices

Instead of leaving North Korea in 2007 as it said, BAT conspired with Pyongyang keep selling it tobacco, supplies, machinery, and technical assistance, and to launder the profits through the U.S. financial system as sanctions continued to escalate. BAT’s directors in London reviewed and approved the subterfuge to hide the joint venture and its money trail behind a web of front companies.

In 2001, BAT’s Singapore subsidiary, British-American Tobacco Marketing (Singapore) PTE Ltd. (“BATM”) and a North Korean company (the “North Korea Company”) established a joint venture company (the “Joint Venture”) located in North Korea for the purpose of manufacturing and distributing BAT cigarettes. BATM held a 60 percent stake in the Joint Venture and supplied it with machines, equipment, tobacco, and other material to produce cigarettes (“Kit Sets”). It also provided the Joint Venture with professional services.

In 2007, BAT’s Standing Committee—which included BAT’s top executives in London—approved a scheme whereby BAT’s subsidiary would sell its stake in the Joint Venture to a Singapore-based trading group (the “Singapore Company”) for one euro due to concerns over its public association with North Korea and difficulty remitting profits out of the country. The terms of the divestment, completed in August 2007, purposefully obscured BAT’s continued effective ownership and control over the Joint Venture. Indeed, the Singapore Company understood that it would act “as a vehicle for BAT to bring out [the Joint Venture’s] money and distribute [dividends] back to BAT.” BAT continued to exercise control over the Joint Venture through restrictions in the sales agreement, including a provision that allowed BAT, through a subsidiary, to reacquire its stake in the Joint Venture at its discretion for one euro. As part of the scheme, BATM also continued to sell and receive payment for Kit Sets and other goods and services to the Joint Venture through the Singapore Company. [Treasury]

According to the Settlement Agreement, the specific BAT executives who approved this subterfuge included its CEO, its Chief Operating Officer, and its Finance Director. Internal BAT memos referenced in the DPA and the Treasury Settlement Agreement leave no doubt that BAT knew that this was illegal. BAT employees also coordinated their strategies to conceal their links to North Korea from banks that did their due diligence and questioned wire transfers.2

By now, you may be wondering if this means that none of the BAT officers who committed all these crimes will go to prison, and that BAT shareholders will absorb all the consequences of their crimes while the culpable executives get to keep their compensation and bonuses for failing their fiduciary duties. No, it does not mean that. Paragraph 11.b of the DPA states that it “does not provide any protection against prosecution of any present or former officer, director, employee, shareholder, agent, consultant, contractor, or subcontractor.”

Each of the seven U.N. Security Council resolutions, three statutes, and dozens of designations that followed presented BAT with new legal and ethical choices. Each time, BAT chose crime and profit over truth and ethics. BAT chose to keep laundering payments from KKBC after 2009, when the Treasury Department designated it for WMD proliferation financing. A very naughty lawyer for a BAT subsidiary and a very naughty lawyer working for the joint venture that BAT “sold” its factory to discussed KKBC’s role as an intermediary for payments over email (¶ 61). BAT made a similar decision after Treasury designated the Foreign Trade Bank of North Korea, or FTB, for WMD proliferation financing in 2013.

Multiple internal memoranda and emails indicated that BAT managers in Asia Pacific offices understood as early as 2005 that U.S. restrictions could prohibit banks from processing payments that involved North Korea. BAT and its subsidiaries did not, however, cease their conduct after KKBC and FTB were respectively designated, despite knowing both were involved in the remittance of funds from North Korea. BAT and its subsidiaries also sought to conceal their apparently violative conduct from banks, for example by letting a wire transfer expire rather than respond to a question from a bank that would have revealed the payment’s connection to North Korea. [Treasury]

In 2014, BAT again reconsidered whether to comply with U.S. sanctions laws (¶ 67). Instead, it decided to move its trade into Singapore dollars, but couldn’t move the entire chain of payments out of the dollar system. For years, North Korea funneled payments to BAT through Dandong Hongxiang, which was indicted in another federal court in New Jersey in 2016 for laundering North Korea’s money. It’s as if BAT had, like Orascom or the Cuckoo Rice Cooker Company, become trapped by its capital investments, its uncollected debts, and the fear of how exposure would affect its stock price.

According to the Treasury Department Settlement Agreement, the final straw was Executive Order 13722, a March 2016 executive order that implemented the North Korea Sanctions and Policy Enhancement Act of 2016. (Here, my own contribution to this case begins and ends.) At last, the legal risks were too high for BAT, which allowed its subsidiaries to withdraw from their joint venture with Pyongyang in April, and terminated it in May 2017.

Remember this the next time an “expert” tells you that sanctions never work.

By 2017, the feds were closing in on North Korea’s cigarette rackets. Starting in 2016, ports that followed the cargo inspection mandate of UNSCR 2270 began to seize more shipments of counterfeit North Korean cigarettes. In 2020, I wrote that Essentra FZE, a UAE subsidiary of a British tobacco company, had entered into a DPA with prosecutors after it was charged with forming a joint venture with an Indian tobacco company, selling “tobacco-related products” to North Korea, and conspiring to use front companies to launder dollar payments for those products through U.S. correspondent banks. In its DPA, FZE agreed to cooperate with investigators. This may have been Pyongyang’s effort to replace BAT as a supplier.

In 2021, the Treasury Department agreed to a $1 million settlement with an Indonesian company called PMJ that sold cigarette paper to Korea Daesong General Trading Corporation, a designated front for Bureau 39, through a China-based intermediary. PMJ also agreed to cooperate with investigators.

In March of this year, the Indian tobacco company Godfrey Phillips, which may or may not be the same “Indian tobacco company” mentioned in the Essentra FZE deferred prosecution agreement, signed a $332,500 settlement with the Treasury Department for laundering dollars through the financial system as payment for exporting a shipping crate of tobacco to North Korea. Godfrey Phillips also provided information to the Treasury Department as a term of the settlement.

When BAT could no longer hide the truth, it was economical with it

I checked BAT’s SEC shareholder disclosure reports going all the way back to 2007. None of them mentions any investments in or dealings with North Korea or the “DPRK.” BAT disclosed that it was under investigation for unspecified sanctions violations in 2020, mentioned the investigation in its 2021 SEC filings, and reported to its shareholders at the end of 2022 that the DOJ-OFAC investigation into “alleged historical breaches of sanctions” would cost it 450 million pounds, which only works out to $562 million. This hardly rings of a heartfelt acceptance of responsibility for the potential harm BAT’s actions did to international peace and human rights. BAT also says that the penalties were one of several factors that had largely offset its profits from increased business operations that year. That suggests that the omissions in its disclosures to its shareholders were material. The shareholders had a right to know.

But BAT never disclosed that the violations involved North Korea, and that itself is a material fact, because BAT’s joint venture with North Korea carries additional implications for human rights, nonproliferation, the possible counterfeiting of competitors’ intellectual property, and the consequent boycott, divestment, and liability risks (we’ll get to those shortly). Unfortunately, there is no specific requirement to disclose investments in North Korea in an issuer’s annual reports; I tried and failed to get one enacted in 2013. There is, however, a requirement to disclose “such further material information … as may be necessary to make the required statements, in the light of the circumstances under which they are made not misleading.”

That’s why I filed a Whistleblower report with the SEC today.

And that is not all. BAT admitted to defrauding its American and foreign bankers, and so it may be facing the loss of those banking relationships, a higher cost to maintain them, or more compliance hassles, suspicious activity reporting, and wire transfer delays. BAT and its subsidiaries could face criminal and civil penalties in other jurisdictions where they broke laws, including the UK and Singapore. The plea agreement does not mention tax evasion, the Internal Revenue Service is not a party to any of the settlement agreements, and the IRS is not bound by the terms of the DPA (¶ 27). Maybe BAT reported its income from North Korea as derived from other sources, but it’s not unheard of for criminals to fail to report their criminal income on their tax returns.

BAT may have civil liability exposure from its competitors

Then there is the question of what North Korea did with the tobacco it bought from BAT, and what BAT knew about this. As a senior Treasury official said, the object of BAT’s conspiracy was “to establish and operate a cigarette manufacturing business,” by providing the North Koreans with “cut tobacco, filters, cigarette paper, and other materials,” machinery, and “professional services, including through managers and technical advisors.” These were not fire-and-forget sales. For years, BAT attended meetings with its North Korean joint venture partners, where everyone agreed not to create minutes.

Over the decades, Pyongyang’s cigarette business and profits grew. It’s not clear whether or how much that business expanded beyond the material and technical support BAT first provided in 2001. We know that in 2014, North Korea imported cigarette manufacturing equipment from Switzerland—the same country that sold it the specialized intaglio printing presses and optically variable magenta-to-black ink it used to print perfect counterfeit $100 bills. By 2017, when BAT finally pulled out of North Korea, there were 20 Chinese-North Korean joint ventures involved in counterfeit cigarette production. That was also the year that U.N. sanctions banned new and existing joint ventures with North Korea (UNSCR 2371, ¶ 12).

Regular readers of this blog already know that North Korea probably did not make those cigarettes for domestic consumption, although I can’t exclude this unlikely possibility entirely. Given North Korea’s opaque ways of dealing with foreign investors, BAT may never have known for certain. At best, it was willfully blind to the probability that North Korea was reselling at least some counterfeit cigarettes it made with BAT’s help on the black market. It was well known by 2005 that Pyongyang was in the business of making and selling counterfeit cigarettes for immense profits to pay for its nuclear weapons and missile programs. 

I don’t know whether BAT directly or indirectly helped North Korea counterfeit its competitors’ brands. Whether there is evidence to prove this is for BAT’s competitors and the courts to decide. Those competitors will be interested in any evidence that BAT could have abetted Pyongyang’s counterfeiting of their brands. Tobacco companies have employed some sophisticated investigators to trace North Korea’s counterfeit cigarette trade. The profits these competitors lost must have been immense. The question is whether they were large enough to justify the expense of litigation, and whether the Statement of Offense attached to the Deferred Prosecution Agreement is enough to meet Rule 11 pleading standards and open the door to discovery.

Which Chinese and Singaporean banks laundered North Korea’s payments to BAT?

Prosecutors tend to offer varying degrees of leniency to targets who cooperate against bigger targets, but BAT is a very big target. Yet Paragraph 3 of the DPA refers to BAT’s “provision of valuable information that has expanded and advanced the criminal investigation.” Investigation of who? OFAC’s press release includes a chart with some strong hints. That press release refers to BAT defrauding “unwitting U.S. banks,” but implies nothing so exculpatory about the Chinese and Singaporean banks.

I’ve said for years that we will only exert maximum pressure on North Korea when Chinese banks begin to pay nine-digit civil penalties for violating North Korea sanctions. The directors of the Chinese and Singaporean banks should worry that BAT “provid[ed] detailed document productions” to Treasury and agreed to cooperate with DOJ’s investigations. BAT agreed not only to turn over any records the feds request, but also to give statements to law enforcement officers, and to testify before federal grand juries and courts. In paragraph 72, there are hints that at least two banks involved in the money transfers were aware of their customers’ North Korea nexus.

The Information contains more clues. It says that most of the payments from the North Korean government to BAT never entered or exited North Korea itself; they were paid from export revenues (presumably from coal, other minerals, and seafood) held in Chinese bank accounts under the control of the Foreign Trade Bank or KKBC. Paragraph 65 says that as late as 2016, BAT and North Korean Tobacco Company representatives met in Vietnam to discuss the future of their relationship and agreed that they would keep using the same Chinese bank, whose name is redacted in the Information, for money transfers. Now, the feds have witnesses who know that bank’s name, and who are legally obligated to testify against it.

I hope the lawyers for those banks will soon be opening grand jury subpoenas.

So, is BAT the world’s most evil tobacco company?

Aside from the grave legal risks that BAT accepted, its ethical decisions were even worse. BAT continued its dealings with Pyongyang as the body of evidence of Pyongyang’s human rights abuses became undeniable–even after a U.N. Commission of Inquiry produced exhaustive evidence of murder, rape, enslavement, kleptocracy, mass starvation, and the operation of concentration camps that the Commission’s Chair compared to those in Nazi Germany. The Commission wrote directly to Kim Jong-un and said that it was recommending his referral to the International Criminal Court.

The cigarette racket was also tied to other dangerous criminal activity. Four years after BAT lied and said that it had ended its partnership with North Korea, a federal investigation of the Chinese gangs that smuggled Kim Jong-il’s counterfeit cigarettes into the United States told us that those same gangs were also trying to smuggle in drugs and man-portable surface-to-air missiles. As we’ve seen, North Korea used the same banks and agents it used to pay BAT to launder the wages of probable hackers and the stolen cryptocurrency that it used to pay for WMD programs. We have just lowered the ethical bar for tobacco companies.

Stanton’s Law of North Korea Engagement, an inversion of the Sunshine theory, holds that Pyongyang will never take up the ways of its engagers, but that an engager will eventually take up Pyongyang’s ways. It has been proven so in more cases than I care to recite here. If my guess is right, BAT has only begun to pay for its crimes. But BAT’s shareholders, including unknowing small investors whose pensions invested in BAT stock, should not have to pay the price for the crimes of its directors. The unwitting shareholders of other corporations should be spared this costly lesson, through a legal requirement that every public corporation or issuer must disclose its investments in North Korea. It could go without saying–though it must not go without saying–that no one will ever compensate the North Korean workers who were likely enslaved to make those cigarettes, or the South Korean and Japanese citizens who, thanks to BAT, must live in fear of the nuclear bombs that Kim Jong-il and Kim Jong-un built instead of feeding their malnourished people.

*   *   *

1. The Treasury Settlement Agreement says that of its $508,612,492 civil penalty, BAT’s obligation to pay OFAC is only for that portion of $503,263,807 (the part of the penalty attributable to nonproliferation sanctions, because the North Korea sanctions came at the very end of the joint venture) is deemed satisfied up to the amount of penalties paid to the Justice Department. This key language doesn’t mention forfeitures, which total more than $189 million, and the total penalties DOJ assessed are actually $440,350,738. There is a strict reading of the Treasury Settlement Agreement in which BAT actually owes OFAC an additional $62,913,069, which would mean that BAT must pay DOJ and OFAC a total of $692,804,922 in fines, penalties, and forfeitures, although this doesn’t appear to be the reading the parties intended.

2.  In one of those weird contractual terms that lawyers put into the boilerplate of documents and that no one actually believes–or apparently, reads–the Treasury Settlement Agreement says that the agreement “shall not in any way be construed as an admission by Respondent that Respondent has engaged in the Apparent Violations.” Meanwhile, the Justice Department’s DPA says that BAT cannot make any public statement denying its responsibility for the criminal conduct described in the Statement of Offense, and that DOJ can even void the DPA if BAT does. Needless to say, the conduct described in the Statement of Offense is the same conduct described in the OFAC Settlement.

1 Response

  1. Fabulous work. I am amazed how far the nefarious network went up the BAT ladder. I was aware how important the cigarette industry was to DPRK military, but not the details described in this piece. Now we know why DPRK insisted on unfreezing the DBA account during the 6-party Talks. Thank you.