Monday, March 3, 2008

Thank you

Noel and I are back in the Tobacco Reporter office now, and this will be my last official post.

I would like to thank you for joining us on this exciting journey. Your virtual presence added a whole new dimension to editorial travel

We received many comments, suggestions and words of wisdom—both through the feedback function on the blog and by e-mail.

Some suggested that I might have achieved more had I come to South America discreetly. By announcing my intentions publicly, they argued, I put everyone on guard, including any illegal traders among our readership.

That’s a good point, and I will reconsider my approach in the future. At the same time, the public nature of my journey resulted in valuable feedback from people who I would have never thought to contact on my own.

For example, after Pablo insisted I put my camera away, one helpful reader sent me a photograph of that same factory that he had taken several years ago.

Blogging has been fun but also a pain in the you-know-where. After traveling and interviewing all day, the last thing you want to do is configure an uncooperative wireless router in your hotel room.

But the benefits outweigh the drawbacks and I intend to blog again during future editorial trips. Please take two seconds to respond to the poll in the right hand corner at the top of this page.

And if you have additional suggestions or ideas--either for this story or another one--I would love to hear from you.

Thanks again for your support.

PS: Who won the bet at PM USA?

Friday, February 29, 2008


As the plane taxis toward the runway for the flight back to Miami, I reflect on our mission.

While I learned a lot about the illicit trade from legitimate manufacturers, I didn’t manage to talk my way into a Paraguayan cigarette factory supplying the black market.

That means I cannot report on the types of cigarette making and packing machines these manufacturers use, or where they obtain their tobacco, spares and other materials—let alone share the serial numbers of the installed equipment, as a reader from Philip Morris USA requested.

Next time, I should schedule more time and fix fewer “official” appointments in advance, creating the flexibility to pursue leads as they arise. An interpreter too would come in handy.

Unfortunately, open-ended trips are harder to justify financially. Before signing off on our travel budgets, Tobacco Reporter’s accounting department wants to have a rough idea of who we plan to see where, when and why.

Needless to say, it would be difficult to submit such details when chasing representatives of an industry that prefers to operate out of the limelight.

But while I failed to achieve my main objective, readers will be satisfied to know that at least some blood flowed during this trip.

The men’s room’s door at Ciudad del Este airport sticks. Slamming it shut, I am a split second too late withdrawing my fingers from the gap between the wall and the door. I curse and shake my hand ferociously to dispel the pain. As I do so, blood flings through the bathroom stall in all directions.

By the time I’ve wrapped my hand in toilet paper, there are bloodstains on the floor, the toilet seat and even on walls. The door is now stuck at a crooked angle, opened in the opposite direction of which it was designed to, and I can barely squeeze out.

Assessing the damage, it looks like a little person has been assassinated in the airport bathroom.

If I were a more creative writer, this would be the perfect opening scene for my first tobacco crime novel.

Thursday, February 28, 2008

Meanwhile, back at the gate

Pablo tells me to remain in the car as he walks up to the gate. He talks with the guard, occasionally pointing in my direction.

I am not sure how to behave. Should I wave, pretending to be a regular visitor, or should I ignore the two, as if I am preoccupied with the latest money-laundering scheme?

Surely, a powerful crime boss doesn’t have to acknowledge his minions. At the same time, to get in, I need this guard to like me.

Suddenly, I wish I had paid better attention during that Chicago cops-and-robbers movie on the flight from Miami to Rio. Raised in a sheltered, upper-middle-class environment, I certainly could use some pointers on how to conduct myself among mafia types.

I decide to play indifferent, closely studying the still-empty pages of my notebook. But it’s difficult to take my eyes off the guard, whose ammunition belt is so generously stocked that I fear he might lose his balance.

The guard’s skeptical expression isn’t promising. He seems to see right through the cover story. And when he starts shaking his head, my hopes evaporate—we are not going to get in.

Pablo calls his colleague again and gives me the phone. “Only the director can authorize a visit,” apologizes his partner. But the big boss won’t return to town until next week, when I am expected back at Tobacco Reporter ’s office in the United States.

While part of me is disappointed, I also feel relief. Seldom has a scheduling conflict been so convenient.

What's behind that wall?

Wednesday, February 27, 2008

Buenos Aires

As I write these words, Noel and I are enjoying the evening sun on a terrace in Buenos Aires, hundreds of miles from the tri-border area. Described as the Paris of South America—but with palm trees—Buenos Aires is a far cry from the bedlam of Ciudad del Este.

But contrary to what their appearances suggest, Ciudad del Este could very well be the wealthier city of the two. One person I spoke to suggested that more money passes through Ciudad del Este every year than through New York City, making it the world’s undisputed money-laundering capital.

I told him about the completely white, unmarked Boeing 747 we saw at Ciudad del Este’s airport—the only other plane on the tarmac besides our own. “I suppose you’d need a damn 747 to get all that money out,” he joked.

Thank you for flying Whitewash airlines

We order two of those famous Argentinean steaks but, to avoid clichés, I drink beer rather than wine.

The recent success of Argentinean wines on the world market has allegedly more to do with marketing than advances in production.

“It’s still the same wine,” says a local with knowledge of such issues.

Tobacco executives think their industry should follow the example of Argentina’s wine makers. “We produce a consistent and high-quality product, but we need to create a brand,” says a Salta-based leaf merchant.

Like their colleagues in Brazil, Argentinean tobacco companies face competition from smuggled and falsified cigarettes, again mostly originating in Paraguay. But the issue is less pressing here than it is in Brazil.

A recent price war among the major manufacturers has narrowed the price gap between duty-paid and duty-not-paid cigarettes and reduced the potential profits for smugglers.

Brand piracy remains a concern, though. Albino Carlos Del Frari, president of the Cooperativa de Tabacaleros de Jujuy, was recently surprised to find a hinge-lid version of his company’s leading cigarette brand. The cooperative packages its cigarettes in soft cups.

It’s time to head to the airport. I’ll tell the rest of the story about my trip to the Paraguayan cigarette manufacturer tomorrow.

Video: Tobacco in Argentina: creating a brand

Monday, February 25, 2008

To the factory

Pablo motions for me to have a seat behind the counter of the money exchange booth and starts making calls on his cell phone.

The director of the factory turns out to be in Asuncion, Paraguay’s capital, and my new friend seems to be trying to track down somebody who can authorize my visit in his place.

When he’s done calling, Pablo appears disappointed. But after more heated exchanges with his fellow money changers, he gets up and starts toward the exit. “Let’s go,” he says.

My mind is racing a hundred miles a minute as I follow him into a dingy parking garage.

With no English speakers around, I can probably sustain a sufficient level of confusion to avoid more pointed questioning. But what if I am introduced to a higher-level, multilingual factory official and have to explain the nature of my “negocios”?

And even if a company representative agrees to an interview, what would I ask him—which Brazilian custom officials are easiest to buy off? Are printed tear tapes really the deterrent their manufacturers make them out to be?

Pablo presses the remote entry button on his keys and the lights blink on a high-end Mercedes that seems strangely out of place in its surroundings.

I hesitate for a moment, questioning the wisdom of getting into the car with a stranger who could very well be connected to one of Latin America’s nastiest crime syndicates.

Tobacco Reporter’s parent company offers a modest life insurance, but no policies covering ransom payments, such as those held by senior officials in the mineral extraction industries.

If I got kidnapped, management would probably be better off hiring a new editor than paying the ransom anyway. It would certainly be cheaper.

Are you coming, or what?

As we climb into the car, I decide to approach the interview—if I ever get one—as if I were talking with a legitimate manufacturer: What is your market share? What’s your annual turnover? And, importantly, who are your suppliers?

After all, it is theoretically possible that the manufacturer we are about to visit is a model corporate citizen, playing by the rules, paying all taxes and investing in social responsibility.

On the other hand, if he is not, the answers to these standard questions should be revealing too.

Pointing to his watch and holding up two fingers, Pablo seems to indicate the factory is about 20 minutes away. He’s eager to make small talk but conversation doesn’t come easy. “Hillary or Obama?” he asks. My attempt to explain that noncitizens are not entitled to vote in the United States goes nowhere, so I ask him about Paraguay’s presidente.

“Idiota” is the reply.

We leave the city limits and the roads turn quiet but bumpy. Pablo is on his cell phone again. “My partner,” he says, handing the phone to me. The voice on the other end has a good command of English but there is so much static that it’s still difficult to make out what’s being said.

I gather that Pablo and his partner are some sort of contractors who do the occasional job for the cigarette factory. They have not been able to reach any of their contacts in the factory, but Pablo will drive there anyway and try his luck at the gate.

As we pull up to the factory, I snap a picture of what looks like a prison watch tower. But Pablo motions to put the camera away. “Police,” he says, sliding his index finger along his throat.

Sunday, February 24, 2008


Today’s the day. I wash and shave like a holy warrior preparing for battle. But just in case divine protection is withheld, I also put on my running shoes. Under normal circumstances, I jog a respectable-but-not-spectacular 7.5-minute mile. With a gang of irate cigarette smugglers in pursuit, I reckon I could probably shave two whole minutes from that average.

To get from Foz do Iguaçu to Ciudad del Este, you must cross the Bridge of Friendship.

Despite the early hour, there is a steady stream of Brazilian shoppers heading toward Paraguay. Taxis, minibuses and motorcycles choke the middle lanes, while pedestrians hug the sidewalks, which are flanked by high fences to prevent shoppers from falling off—and, according to some, to stop smugglers from lowering merchandise to accomplices below.

At several places there are large holes in the fence, but it’s unclear whether they are a result of neglect or whether they have been created to help illegal traders circumvent customs above.

The smell of exhaust alternates with that of food and the occasional whiff of urine. In the middle of the bridge lies a pile of what looks like human excrement, as if marking the halfway point between Brazil and Paraguay.

The other side
As soon as I pass passport control and enter Paraguay, it’s utter bedlam. People stuff flyers into my hand advertising competitively priced electronics, shopkeepers pull my arm and wave at implausibly cheap brand-name sneakers while others push boxes of luxury perfumes and aftershaves into my face.

A passing woman pinches my buttocks, but as I spin around to check whether she was worth being pinched by, a speeding motorcycle taxi coming from the other direction almost kills me.

I look around for cigarettes but am quickly surrounded by a group of street kids shouting at me in Spanish. I don’t understand a word but assume this is the point at which I will lose my camera, so I start looking for an escape route.

But then I realize these kids aren’t interested in my valuables—they merely want their picture taken. Relieved, I take a short video as they pretend to throw one of their own into a foul-smelling container.

They thank me with the thumbs-up sign and then gesture to keep a close watch on my wallet and camera. “Maaany bad people here,” they manage in English, pointing at the passersby.

Now what?

It’s time to find a cigarette smuggler. But how? Standing in the center of Latin America’s contraband capital I suddenly realize I don’t have plan.

Perhaps I should change money first. That would also be a good opportunity to ask directions to one of Ciudad del Este’s cigarette factories. Earlier this week, a helpful reader sent me a list with names and addresses of Paraguayan tobacco companies. There are more than 10 in Ciudad del Este alone, but it’s been difficult to find a detailed street plan of the city.

Ciudad del Este is uncharted territory even to Google maps, which has no trouble displaying the stains on my driveway but doesn’t offer even a rudimentary layout of the city I find myself in today. The search engine produces a pretty good image with street names of Foz de Iguaçu, but on the other side of the bridge, it simply turns white.

(Google has mapped it now. Also see my post of July 4, 2009)

View Larger Map

Fifty Brazilian real buy me a wad of Paraguayan bills with many zeros on them. The largest denomination, 50,000 guaranies, equals about 10 U.S. dollars.

I show the clerk the address of one of the cigarette factories on my list. “How far?” I ask, mimicking a walking motion with my fingers.

A lively discussion erupts behind the counter, and then somebody is summoned from a back office. A young man in his early 20s introduces himself—I’ll use a fake name, Pablo, to protect him—and from the back-and-forth between his colleagues, I deduct that he either works for the cigarette factory or does some sort of business with them.

Pablo motions he will take me to the factory but wants to know what I want to do there.

I have to be careful now. On the one hand, I am dying to question a Paraguayan tobacco executive about his country’s suspiciously high cigarette exports. On the other, revealing my true intentions would probably kill on the spot my chances of doing so.

Suddenly the language barrier works in my advantage. “Empresa Tabacalera,” I say, pointing to myself. “Negocios.” That last word means “business,” I think, because I saw it in a Spanish-language newspaper at the top of a page with what looked like share prices and a photo of U.S. Federal Reserve President Bernanke. Or was it a Portuguese paper?

It doesn’t matter. Without context, the words mean nothing—and that’s exactly what I intended. They have aroused enough curiosity among my new friends for them to want to help me, but I haven't revealed the real purpose of my visit.

I’ll share the rest of this story tomorrow—it’s pretty good. But I am tired now. It's past midnight (again) and I have an early morning appointment (again).

Video: Entering Paraguay

Saturday, February 23, 2008


As we get closer to Foz do Iguaçu, the Brazilian border town facing Ciudad del Este in Paraguay, I am starting to have doubts.

When we first proposed investigating Latin America’s black market, I knew smugglers and counterfeiters would not necessarily welcome a pesky journalist sticking his nose in their lucrative business. But I also knew it would be unlikely that we’d ever actually find one, making it easier to feign bravery.

But nearly everyone we’ve met so far has cautioned us against merely entering Ciudad del Este.

Depending on who you listen to, the city is controlled by the Chinese mafia, Russian organized crime or Islamic radicals ready to detonate themselves at the first sight of a Westerner.

Bizarrely, the cautionary tales seldom include Paraguayans, although one person suggested that the illicit trade is Paraguay’s revenge for a war the country fought against its neighbors in the late 19th century—one that it lost, resulting in a significant loss of territory.

Not knowing whether carrying grudges is a national trait, I put greater stake in the economic explanation: Facing widespread poverty and few opportunities in the formal economy, the profits to be made from smuggling and counterfeiting are simply irresistible to many.

That said, it is still unclear to me whether Paraguay’s overproducing factories themselves are doing anything illegal under Paraguayan law. They could simply be selling to third domestic parties who proclaim to be buying for the domestic market but then turn around and sell the product elsewhere.

And while Brazilian law enforcement has stepped up border controls in recent years, some believe it is afraid to truly crack down because many Brazilians too benefit from the illegal trade.

Some smugglers apparently pay poor people to travel back and forth between Paraguay and Brazil all day, each time bringing their maximum allowance of cigarettes.

As we near Iguaçu we pass several police stations whose parking lots are packed with cars. “Stolen and intercepted en route to Paraguay,” explains our host.

It's really mine, officer

Half of the vehicles on Paraguay’s roads are said to have been stolen in Brazil. Even a former president reportedly owned such a vehicle.

I still plan to enter Ciudad del Este tomorrow. But I will leave my valuables in our (Brazilian) hotel safe and travel by foot.


You’d think we’d know better after more than a decade of international business travel, but we’ve underestimated the size of Brazil and overestimated the number of appointments a person of flesh and blood can squeeze into a single workday.

By the time we arrive at our hotel in Londrina, it’s 3:30 a.m. Our first appointment will be at 9 a.m., after which we must drive to Foz do Iguaçu.

On the office map, this had looked like a three-hour drive. Our host says it’s closer to eight. It’s easy to forget that Brazil is larger than the continental United States.

It will probably be past midnight again when we arrive at our next destination, the tri-border area.

Friday, February 22, 2008

Staggering numbers

This morning, I received an unsigned e-mail from a person who says he has studied Paraguayan cigarette production.

The writer estimates 2008 cigarette consumption at 2.43 billion cigarettes. There are 50 licensed factories, and based on export activity, the e-mailer suspects that 32 factories are producing on a regular basis.

Paraguay’s total production is around 35 billion cigarettes, according to the author—but the 2007 legal exports registered in the customs system were only 2.7 billion!

He estimates the total volume of Paraguay-made cigarettes smuggled into Brazil at 18 billion cigarettes in 2007.

The incentive is clear: The average price of a master case of cigarettes (50 cartons) at the Brazilian border is $55—11 times cheaper than that of legal products in Brazil.

Thursday, February 21, 2008

Can Brazil sustain its integrated system?

While cigarette smuggling primarily affects cigarette manufacturers, Brazilian leaf dealers are facing an entirely different set of challenges.

The U.S. dollar—the currency in which they are paid for their exports—has lost some 20 percent of its value against the Brazilian real in recent years, while the cost of production has gone up.

The exchange rate makes it difficult for exporters to pass on these expenses to their customers.

Leaf merchants say there's little room to reduce their cost of operation. Consolidation and rationalization initiatives in recent years have made them as lean as they can possibly be.

Some dealers also expressed concern about the future of Brazil's integrated tobacco production system, in which the buyers supply farmers with inputs and agronomic assistance and recover these expenses when the tobacco is delivered.

"Pinhookers" are damaging the system by buying tobacco from farmers who have been sponsored by other companies.

If trust in the system isn't restored, they say, Brazilian volumes could start to decline and buyers will lose control over the cleanliness of their tobacco.

Some suggest the dealer's plight could trigger vertical integration, with one of the major manufacturers—or even the increasingly assertive Chinese tobacco industry—purchasing a leaf merchant to secure its supply.

Videos: Brazil's selling season is under way

Wednesday, February 20, 2008

Chicken feathers

Last night, we had dinner with a representative of a major leaf merchant who was too diplomatic to question our sanity but impressed on us to be very careful as we probe the black market.

Apparently, manufacturing cigarettes is so lucrative that some Paraguayan tobacco executives drive armored cars to protect themselves against kidnapping—not the bulletproof types that protect against small arms fire, but vehicles designed to withstand mine blasts.

Regarding leaf exports, the tobacco trader told us that the Brazilian government years ago tried to cut the supply of Brazilian leaf to Paraguay by implementing a 150 percent tax on tobacco exports.

The Paraguayan government, however, successfully challenged that measure as a violation of the Mercusor free-trade agreement, and the export tax was removed.

But that doesn’t mean the smuggled cigarettes are made from high-quality Brazilian leaf. Rather, they are said to contain “funny ingredients” such as chicken feathers or even sand.

Reality check

I knew Santa Cruz had a sizable population of German heritage, but there’s something bizarre about speaking German with a tanned taxi driver while zipping past palm trees in balmy 32-degrees-Celsius (90 degrees F) weather in a very un-European landscape.

Santa Cruz is said to have the world’s second-largest Octoberfest after Munich.

Too bad it’s only February.

Tuesday, February 19, 2008

Santa Cruz do Sul

While Paraguay obviously has the manufacturing capacity, it is not a major leaf-producing country.

Where does it obtain its tobacco, and are leaf producers in a position to help curtail the illegal cigarette trade?

To find out, we’ll travel to Santa Cruz do Sul, the largest tobacco-producing area in the region.

Monday, February 18, 2008

The fourth-largest market

If you are looking for a bargain, Rio’s Centro Uruguaiana is the place to be. Normally expensive brand-name sneakers, faux designer purses and wristwatches sell at rock-bottom prices—as do cigarettes.

Telling fake from real isn’t easy, however—even for the trained eye. That afternoon we present several cigarette packs purchased at Centro Uruguaiana to Dante Letti, president of market leader Souza Cruz.

After examining the packages from different angles, he concludes they are “probably” genuine.

The packs carry the mandatory health warnings depicting shriveled lungs and sickly babies and are fitted with official-looking tax stamps.

The only way to be sure, says Letti, is by sending them off to a laboratory for analysis. But by the time a cigarette pack is opened, the damage has of course already been done.

The challenge facing legitimate cigarette manufacturers in Brazil is enormous. Illicit product accounts for a whopping 28.6 percent of the domestic cigarette market.

And while that is down from 34 percent in the mid-1990s—due to a combination of improved law enforcement, new tracing technologies and other industry initiatives—this still means that roughly one in three cigarettes sold in Brazil is unlawful.

In terms of sales, Brazil’s illegal cigarette market ranks fourth in Latin America, outstripping the total market in several countries.

Counterfeits account for a comparatively small part of the black market. Smuggling and tax evasion are even bigger concerns.

As is often the case, differentials in tax rates are to blame. Brazil taxes cigarettes at about 70 percent of their retail price, compared with 20-25 percent in Paraguay. It doesn’t take an advanced degree in mathematics to picture the potential profits to be made from manufacturing in Paraguay and sneaking your product across the border for sale in Brazil.

And many appear to have made that calculation. According to some estimates, Paraguay has 40 cigarette factories—on a population of less than 4 million.

If they were serving the domestic market only, Paraguayans would be consuming an ungodly number of cigarettes, and their country would probably replace Asia as the World Health Organization’s top priority.

Sunday, February 17, 2008


The insignia thief must have turned himself in, because we're allowed off the plane.

But while the flight attendant has her decorations back, we're without luggage. It's still in Miami, where we had a tight connection.

Fortunately, there are two more Miami-Rio flights that day. The airline promises to deliver that afternoon.

There's something oddly liberating about being bagless. I make a mental note to quietly throw my luggage on another conveyor belt upon return in Raleigh.

If I file a report with the airline's lost and found office, someone else will bring it home free of charge.

Stinky and empty-handed, we head to our hotel.


We haven't even landed in Latin America yet, and we're already being threatened with detention—not for investigating the counterfeit cigarette trade, but for theft.

As the plane descends, a terse flight attendant announces that a pin and some other American Airlines insignia have disappeared from a cabin crew member's uniform.

If the decorations aren't returned promptly, she thunders, the passengers will not be allowed to disembark in Rio de Janeiro.

This being a U.S. airline, pins are considered a security threat.

Rio approach

Monday, February 11, 2008

We're idiots

"That's the stupidest thing I've ever heard."

The leaf merchant was not impressed with our suggestion to track down a cigarette counterfeiter in Paraguay and interview him for an upcoming article in Tobacco Reporter about the illicit tobacco trade.

"You'll never find one. And even if you do, they will kill you."

Good. That confirms our idea has legs.

We will travel to Ciudad del Este in Paraguay to find an illegal trader and visit some legitimate manufacturers en route to get their perspectives.