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Saturday, April 29, 2017

After dalliance with ISIS, Bulgartabac losses continue

Bulgarian tobacco giant Bulgartabac lost $9 million in 2016, as the company is still reeling from charges it was doing business with ISIS.

The company announced its 2016 results on Wed. March 1.

Last spring, the company, which is responsible for producing some of the country and region’s most popular cigarette brands, halted exports to the Middle East amidst suspicion it was selling cigarettes to ISIS.

The company has also drawn the ire of Turkish authorities and European anti-corruption officials, who claim its cigarettes account for a huge share of Turkey’s black market tobacco sales.

Smuggling of cigarettes into Turkey surged in 2010 after the country raised tobacco taxes.

A report in The National described how smugglers would bring Bulgartabac products—including the popular Victory, Prestige and MM brands—into Turkey through northern Iraq, Syria, and Iran. A Turkish government report on smuggling claimed more than half of the country’s $1 billion illegal cigarette market were Bulgartabac products. The report also detailed how hidden shipments of Bulgartabac’s cigarettes were smuggled through regions of Iraq controlled by the Marxist group, the Kurdistan Workers’ Party (PKK), shepherded by terrorist leaders.

Corrupt from the beginning


Operating in one of Europe’s most corrupt countries, Bulgartabac Holding has long played by its own rules. Established as a state-controlled monopoly over the tobacco industry in 1951, the Bulgarian Communist Party (BCP) wielded full control over the corporation until the party’s collapse transformed Bulgartabac into a holding company with 22 predominantly state-owned subsidiaries.

Benefiting from government support and growing demand for tobacco, Bulgartabac became one of Eastern Europe’s largest cigarette holding companies. Political leaders resisted multiple attempts to privatize it, keeping the company under tight government control and, as such, minimizing its growth.

In 2011, former Prime Minister Boyko Borisov finally gave in, selling 80 percent of the company to an Austria-based investment firm, BT Invest, for $145 million. The firm, which was founded five months before the sale and has been called “a classic mailbox”, remains the majority owner of Bulgartabac.

“There are hidden owners, among them politicians who did not declare the ownership,” reported the investigative journal Bivol, in 2015. “There is dirty money in this deal—a lot of money, very dirty and even illegal.”

According to published reports, the privatization scheme was led by controversial lawmaker and media mogul Delyan Peevski and resulted in some of the country’s most powerful politicians, including Borisov, acquiring large shares in the holding through offshore companies registered in Liechtenstein and the British Virgin Islands.

A series of reports by Bivol indicates that Peevski remains a major shareholder in the company through registered proxies including his mother, Irena Krasteva, and close associates.

The wrong kind of customer


Four years after the controversial privatization process was finalized, Bulgartabac’s name reappeared in the headlines for all the wrong reasons.

This time it was Turkish authorities, specifically the Customs Ministry and the Financial Crime Investigation Board (MASAK), that accused Bulgartabac of wrongdoing. In their combined report, the Turkish agencies reportedly claimed that Bulgartabac’s Prestige was the most common brand among the millions of cigarettes being smuggled into the country every year. The investigation also traced the smuggling route through northern Iraq to Turkey’s southern border, identifying a man named Salam Qader Faraj as the distributor of the Bulgartabac-produced cigarettes in northern Iraq.

Further reports explained that the Bulgartabac packages depart Bulgaria, travel through the Suez Canal and Red Sea and around the Gulf of Aden before reaching the Jebel Ali port in Dubai where smugglers avoid taxes by sending the products to duty-free shops. In Dubai, the cigarettes are usually repackaged to disguise their contents and given new paperwork for the trip to Iraq.

Bivol advanced the investigation into Bulgartabac’s smuggling schemes by releasing a letter they claim to be the signed agreement by Bulgartabac’s executives for the distribution of Bulgartabac’s most popular cigarette brands throughout the Middle East—including in Iraq, Iran, and Syria—by Faraj’s Caledon Invest.

Faraj was the Middle East representative of the U.S.-registered Caledon Invest which, according to a 2007 letter provided by Bivol, was under investigation by the Bulgarian Prosecutor’s Office for tax crimes and the illegal distribution of Bulgartabac cigarettes. In 2011, the Regional Government of Iraqi Kurdistan added to suspicions surrounding the suspected smugglers by revoking the import licenses of Caledon Invest and Salam Qader Faraj after Faraj reportedly submitted a forged contract between Caledon and Bulgartabac to the Kurdish authorities.

According to a Hurriyet report on the Turkish authorities’ investigation of smuggled cigarettes, Faraj’s intermediary firm also “played a role” in the transfer of money through PKK’s European intermediaries to the northern Iraq-based terrorist group. The PKK, which relies on cigarette smuggling for a large share of its income, maintains established trafficking networks along Iraq’s northern borders. Bulgartabac’s cigarettes, which traveled through northern Iraq with the help of a man believed to have transferred money to the PKK, were almost certainly smuggled in coordination with the PKK.

But the PKK was not the only player in northern Iraq during the height of Bulgartabac’s smuggling operations.

In the years since the emergence of civil war in Syria, ISIS has come to control large portions of northern Iraq and Syria, including the major Iraqi city of Mosul and much of the borderlands between the two countries. At the group’s height in 2014, ISIS quickly captured cities in northeastern Iraq, leaving only a portion of territory untouched at the crossroads of Kurdish and Iraqi Government control near Iraq’s eastern border with Iran.

Smugglers operating in northern Iraq and Syria during this time would have been forced to coordinate with ISIS or risk an all-too-likely attack. With millions of Bulgartabac cigarettes traversing the dangerous terrain each year en route to Turkey, it seems unlikely that the smugglers would have risked a brutal ISIS attack or shelling on each mission.

Despite these charges, there is no sign that Bulgartabac dropped their loyal smugglers in Caledon and Faraj. Instead, the company merely insisted that they had not changed Middle East distributors for over ten years and blamed the media for fabricating the smuggling stories.

But Bulgartabac did not get off scot-free. Following the release of reports about the Turkish investigation, Turkey banned Ahmed Dogan and Delyan Peevski, the founder and a Member of Parliament of the Movement for Rights and Freedoms party, respectively.

Peevski’s Tobacco Investment company sold its five percent share in Bulgartabac citing “artificially created reputation problems” and a month later Bulgartabac halted its sales to the Middle East, resulting in 400 jobs being cut, the loss of access to the market responsible for 85 percent of the company’s exports, and the gradual removal or relocation of Bulgartabac’s subsidiary factories. While doubts remain over Peevski’s sale of his shares, Bulgartabac’s lesson is clear: cooperating with terrorists carries tough consequences.