DeathEconomy

EU v RJR Nabisco cigarette smuggling-laundering

html version of: UNITED STATES DISTRICT COURT NEW YORK EUROPEAN COMMUNITY – Money-Laundering Narcotics Trafficking Links Between Europe The United States Russia and Colombia – 02cv5771cmp.pdf

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK—————————————-
THE EUROPEAN COMMUNITY,
acting on its own behalf and on behalf of the
MEMBER STATES it has power to represent, and the
Kingdom of Belgium, Republic of Finland,
French Republic, Hellenic Republic,
Federal Republic of Germany, Italian Republic,
Grand Duchy of Luxembourg,
Kingdom of the Netherlands,
Portuguese Republic, and
Kingdom of Spain, individually,
Plaintiffs,
– against – COMPLAINT
RJR NABISCO, INC.,
R.J. REYNOLDS TOBACCO COMPANY,
R.J. REYNOLDS TOBACCO INTERNATIONAL, INC.,
RJR ACQUISITION CORP., f/k/a
NABISCO GROUP HOLDINGS CORP.,
RJR NABISCO HOLDINGS CORP.,
R.J. REYNOLDS TOBACCO HOLDINGS, INC.,
DEFENDANTS.

—————————————-

Plaintiffs, THE EUROPEAN COMMUNITY, acting on its own behalf and on behalf of the MEMBER STATES it has power to represent, and the Kingdom of Belgium, Republic of Finland, French Republic, Hellenic Republic, Federal Republic of Germany, Italian Republic, Grand Duchy of Luxembourg, Kingdom of the Netherlands, Portuguese Republic, and Kingdom of Spain, individually, (hereinafter referred to as the “MEMBER STATES” and together with THE EUROPEAN COMMUNITY, as “PLAINTIFFS”), by and through their undersigned attorneys, for their complaint herein allege:
TABLE OF CONTENTS
I. INTRODUCTION……1
II. PARTIES ………………3
III. JURISDICTION …..10
IV. VENUE ……………..11
V. THE LINK BETWEEN RJR’S CIGARETTE SALES, MONEY LAUNDERING, AND
ORGANIZED CRIME ……..11
Money-Laundering Links Between Europe, The United States, Russia, and Colombia …11
Background on the Convergence of Narcotics Trafficking and Money Laundering ……..12
Background on Black Market Money Exchanges …..14
Background on Money Laundering: The Cut-Out Strategy …….17
VI. THE RACE FOR MARKET SHARE ……..18
VII. RJR’S DIRECT INVOLVEMENT IN MONEY LAUNDERING……………….23
RJR’s Relationships with Money Launderers ………..23
RJR’s Direction and Control of the Money-Laundering Scheme ………………26
The Gerardo Cuomo Money-Laundering Organization…………..28
The Alfred Bossert Money-Laundering Organization……………..31
Money Laundering for Italian Organized Crime……33
Money Laundering through the Bank of New York…36
Walt Money-Laundering Conspiracy …..41
Money Laundering through Cut Outs in Ireland and Belgium….42
Cigarette Sales to Launder Narcotics Proceeds…….44
ii
Cocaine Trafficking and Money Laundering in Spain …………….45
Money Laundering Through Central America and the Caribbean…………….47
Money Laundering through Panama …..49
Money Laundering through the United Kingdom …..50
Distinctions between Sales to Legitimate Customers and Sales to Criminal Customers..51
Money-Laundering Mechanisms / Laundering of Cash ………….54
Money Laundering through Brady Bonds …………….55
Money Laundering through Secret Swiss Accounts ………………..57
Movement of Operations to Cyprus …….58
Illegal Sales into Iraq ……….59
RJR and the PKK …………….70
Corruption of Public Officials in the Balkans ……….72
Travel and Entertainment by RJR Employees ……….74
RJR’s Efforts to Deceive the Plaintiffs…75
RJR’s Responsibility for its Agents, Employees, and Coconspirators ………..78
RJR’s Use of Wires and Mails ……………79
VIII. IMPACT OF THE MONEY-LAUNDERING SCHEME ON THE US AND THE EC ….81
IX. CONTINUING DAMAGE TO THE PLAINTIFFS AND COMPELLING NEED FOR
INJUNCTIVE AND EQUITABLE RELIEF ………..85
COUNT I: MEMBER STATES (RICO, 18 U.S.C. § 1962(a)………….102
COUNT II: MEMBER STATES (RICO, 18 U.S.C. § 1962(b) ………..116
COUNT III: MEMBER STATES (RICO, 18 U.S.C. § 1962(c) ……….117
COUNT IV: MEMBER STATES (RICO, 18 U.S.C. § 1962(d)……….119
iii
COUNT V: MEMBER STATES (RICO, 18 U.S.C. §§ 1964(a), 1964(c), 28 U.S.C. § 1651(a)
….121
COUNT VI: EC AND MEMBER STATES (COMMON LAW FRAUD) …………123
COUNT VII: EC AND MEMBER STATES (PUBLIC NUISANCE) ………………126
COUNT VIII: EC AND MEMBER STATES (UNJUST ENRICHMENT) ……….130
COUNT IX: MEMBER STATES (UNJUST ENRICHMENT) ……….132
COUNT X: EC AND MEMBER STATES (NEGLIGENCE)………….133
COUNT XI: EC AND MEMBER STATES (NEGLIGENT MISREPRESENTATION) ……..137
COUNT XII: MEMBER STATES (COMMON LAW CONVERSION) …………..139
COUNT XIII: MEMBER STATES (MONEY HAD AND RECEIVED)…………..141
DEMAND FOR JUDGMENT ……142

I. INTRODUCTION

1. For more than a decade, the DEFENDANTS (hereinafter also referred to as the “RJR DEFENDANTS” or “RJR”) have directed, managed, and controlled money-laundering operations that extended within and/or directly damaged the Plaintiffs. The RJR DEFENDANTS have engaged in and facilitated organized crime by laundering the proceeds of narcotics trafficking and other crimes. As financial institutions worldwide have largely shunned the banking business of organized crime, narcotics traffickers and others, eager to conceal their crimes and use the fruits of their crimes, have turned away from traditional banks and relied upon companies, in particular the DEFENDANTS herein, to launder the proceeds of unlawful activity.

2. The DEFENDANTS knowingly sell their products to organized crime, arrange for secret payments from organized crime, and launder such proceeds in the United States or offshore venues known for bank secrecy. DEFENDANTS have laundered the illegal proceeds of members of Italian, Russian, and Colombian organized crime through financial institutions in New York City, including The Bank of New York, Citibank N.A., and Chase Manhattan Bank.

DEFENDANTS have even chosen to do business in Iraq, in violation of U.S. sanctions, in transactions that financed both the Iraqi regime and terrorist groups.

3. The RJR DEFENDANTS have, at the highest corporate level, determined that it will be a part of their operating business plan to sell cigarettes to and through criminal organizations and to accept criminal proceeds in payment for cigarettes by secret and surreptitious means, which under United States law constitutes money laundering. The officers and directors of the RJR DEFENDANTS facilitated this overarching money-laundering scheme

by restructuring the corporate structure of the RJR DEFENDANTS, for example, by establishing subsidiaries in locations known for bank secrecy such as Switzerland to direct and implement their money-laundering schemes and to avoid detection by U.S. and European law enforcement.

This overarching scheme to establish a corporate structure and business plan to sell cigarettes to criminals and to launder criminal proceeds was implemented through many subsidiary schemes across THE EUROPEAN COMMUNITY. Examples of these subsidiary schemes are described in this Complaint and include: (a.) Laundering criminal proceeds received from the Alfred Bossert money-laundering organization; (b.) Money Laundering for Italian organized crime; (c.) Money laundering for Russian organized crime through The Bank of New York; (d.) The Walt money-laundering conspiracy; (e.) Money laundering through cut outs in Ireland and Belgium; (f.) Laundering of the proceeds of narcotics sales throughout THE EUROPEAN COMMUNITY by way of cigarette sales to criminals in Spain; (g.) Laundering criminal proceeds in the United Kingdom; (h.) Laundering criminal proceeds through cigarette sales via Cyprus; and (i.) Illegal cigarette sales into Iraq.

Numerous additional subsidiary schemes exist that harm THE EUROPEAN COMMUNITY and each of the MEMBER STATES named herein.

4. This civil action is based upon violations of the Racketeer Influenced and Corrupt Organizations Act, which was specifically intended by Congress to eradicate organized

crime on all fronts (including in foreign and interstate commerce) and to deprive violators of their ill-gotten gains. It is also based upon violations of standards of common law, including fraud, negligence, unjust enrichment, public nuisance, and conspiracy to commit such torts.

Plaintiffs seek damages; equitable relief such as disgorgement of profits; and injunctive relief (a) to enjoin DEFENDANTS from engaging in money laundering and facilitating organized crime, and (b) to compel DEFENDANTS to adopt necessary programs and procedures to prevent such conduct in the future. Absent such relief, there will be an increased risk to national security, continued harm to Plaintiffs, and damage to the vital interests of the United States and Plaintiffs.

II. PARTIES

5. THE EUROPEAN COMMUNITY is a governmental body created as a result of collaboration among the majority of the nations of Western Europe, more specifically, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, and the United Kingdom. Pursuant to the Treaty establishing THE EUROPEAN COMMUNITY, as last amended by the Treaty of Amsterdam (1999), Article 2, THE EUROPEAN COMMUNITY is vested with the responsibility “to promote throughout the Community a harmonious, balanced and sustainable development of economic activities, . . . a high level of protection and improvement of the quality of the environment, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among the Member States.” THE EUROPEAN COMMUNITY has certain legal rights and responsibilities. Pursuant to Article 281 of the Treaty establishing THE EUROPEAN COMMUNITY, THE EUROPEAN COMMUNITY is a legal person. Pursuant to

Article 282 of the Treaty establishing THE EUROPEAN COMMUNITY, THE EUROPEAN COMMUNITY possesses the most extensive legal capacity accorded to legal persons under the laws of the Member States, and it may, in particular, acquire or dispose of property and may be a party to legal proceedings. In such instances, THE EUROPEAN COMMUNITY is represented by the European Commission. Pursuant to Article 280 of the Treaty establishing THE EUROPEAN COMMUNITY, THE EUROPEAN COMMUNITY has the duty to counter fraud and any other illegal activities affecting the financial interests of THE EUROPEAN COMMUNITY through measures which shall act as a deterrent and be such as to afford effective protection in the Member States. THE EUROPEAN COMMUNITY has a duty to protect against harm to the financial institutions and infrastructure within THE EUROPEAN COMMUNITY. THE EUROPEAN COMMUNITY possesses additional duties and authorities that have been conferred upon it by the MEMBER STATES or that it shares with the MEMBER STATES, by virtue of treaty and/or law, including but not limited to the following: (a) The duty and authority to regulate foreign commerce; (b) The duty and authority to regulate and set rules to combat money laundering; (c) The duty and authority to prescribe regulations for the seizure of bank accounts and assets and to take other related actions to combat money laundering and other financial crimes committed against the financial interests of THE EUROPEAN COMMUNITY and the MEMBER STATES; (d) The duty and authority to ensure and regulate the free movement of goods within THE EUROPEAN COMMUNITY; (e) The duty and authority to regulate safety and security at sea; (f) The duty and authority to regulate and take action to protect against breaches of THE EUROPEAN COMMUNITY Customs Territory or THE EUROPEAN COMMUNITY Customs Border; (g) The duty and authority to regulate ports, customs territories, free trade zones, and customs bonded warehouses; (h) The duty and

authority to regulate transportation into THE EUROPEAN COMMUNITY or within its borders; and (i) The duty to promote throughout the Community a harmonious, balanced, and sustainable development of economic activities and to protect and promote the economic well being of its citizens. THE EUROPEAN COMMUNITY has the general duty and the authority to act to abate any harm to itself or to the general public of THE EUROPEAN COMMUNITY within its areas of competence as set forth above. Among the legal rights of THE EUROPEAN COMMUNITY is the right to hold a legal or beneficial interest in property. THE EUROPEAN COMMUNITY is represented in the United States by a Delegation in Washington, D.C. The Delegation has full diplomatic privileges and immunities, and the Head of the Delegation is accorded full ambassadorial status.

6. Each of the named MEMBER STATES, Kingdom of Belgium, Republic of Finland, French Republic, Hellenic Republic, Federal Republic of Germany, Italian Republic, Grand Duchy of Luxembourg, Kingdom of the Netherlands, Portuguese Republic, and Kingdom of Spain, is a sovereign State. As such, each State possesses the legal capacity to acquire, own, or dispose of property and may be a party to legal proceedings. Each MEMBER STATE is a “person” as defined under the applicable United States law. Each MEMBER STATE has the right to hold a legal or beneficial interest in property.

7. Within the areas of their competency and jurisdiction, THE EUROPEAN COMMUNITY and each of the named MEMBER STATES are the legal entities with the duty and responsibility for enforcing the money and banking laws within their respective jurisdictions.

If any entities, including the RJR DEFENDANTS, launder criminal proceeds or commit other illegal acts that violate the money and/or banking laws of the PLAINTIFFS, it is these PLAINTIFFS with the duty and competency to enjoin and obtain redress for such conduct.

8. RJR NABISCO, INC. was a Delaware corporation and, according to public records, maintained its principal place of business at 1301 Avenue of the Americas, New York, New York 10019-6013. During relevant times, RJR NABISCO, INC. was the parent corporation of R.J. REYNOLDS TOBACCO COMPANY and has participated in the sale and manufacture of cigarettes and other tobacco products both individually and through its agent and instrumentality, DEFENDANT R.J. REYNOLDS TOBACCO COMPANY, and related entities and ventures. At all relevant times, RJR NABISCO, INC. assumed an active role in the tobacco business and treated the tobacco business as a department or division of RJR NABISCO, INC.

At times pertinent to this complaint, RJR NABISCO, INC., individually and through its agents, subsidiaries, divisions, or affiliated companies, or ventures, materially participated in the operation and management of RJR’s money-laundering enterprise, and materially participated, conspired, assisted, encouraged, and otherwise aided and abetted one or more of the other DEFENDANTS in the unlawful and fraudulent conduct alleged herein, all of which has affected foreign and interstate commerce. Upon information and belief, based on RJR’s public filings, RJR NABISCO, INC., was renamed R.J. REYNOLDS TOBACCO HOLDINGS, INC., a Delaware corporation, and is now a direct, wholly-owned subsidiary of RJR ACQUISITION CORP., f/k/a NABISCO GROUP HOLDINGS CORP. During relevant times herein, RJR NABISCO, INC., has conducted continuous and systematic business in the State of New York, maintains a substantial financial presence in the State of New York, utilizes offices of its own and of its affiliated corporations in New York, and is otherwise subject to the jurisdiction of the courts in the State of New York.

9. R.J. REYNOLDS TOBACCO COMPANY is a New Jersey corporation whose principal place of business is located at 401 North Main Street, Winston-Salem, North Carolina

27102. At times pertinent to this complaint, R.J. REYNOLDS TOBACCO COMPANY, individually and through its agents, subsidiaries, divisions, or affiliated companies or ventures, materially participated in the operation and management of RJR’s money-laundering enterprise, and materially participated, conspired, assisted, encouraged, and otherwise aided and abetted one or more of the other DEFENDANTS in the unlawful and fraudulent conduct alleged herein, all of which has affected foreign and interstate commerce. During relevant times herein, R.J.

REYNOLDS TOBACCO COMPANY conducted continuous and systematic business in the State of New York, maintains a substantial financial presence in the State of New York, utilizes offices of its own and of its affiliated corporations in New York, and is otherwise subject to the jurisdiction of the courts in the State of New York.

10. R.J. REYNOLDS TOBACCO INTERNATIONAL, INC. is a Delaware corporation. At times pertinent to this complaint, R.J. REYNOLDS TOBACCO INTERNATIONAL, INC., individually and through its agents, subsidiaries, divisions, or affiliated companies or ventures, materially participated in the operation and management of RJR’s money-laundering enterprise, and materially participated, conspired, assisted, encouraged, and otherwise aided and abetted one or more of the other DEFENDANTS in the unlawful and fraudulent conduct alleged herein, all of which has affected foreign and interstate commerce.

During all relevant times, R.J. REYNOLDS TOBACCO INTERNATIONAL, INC. conducted continuous and systematic business in the State of New York, maintained a substantial financial presence in the State of New York, utilized offices of its own and of its affiliated corporations in New York, and is otherwise subject to the jurisdiction of the courts in the State of New York.

11. RJR NABISCO HOLDINGS CORP. is a Delaware corporation whose principal place of business is 1301 Avenue of the Americas, New York, New York 10019-6013.

During all relevant times, RJR NABISCO HOLDINGS CORP. was the parent corporation of RJR NABISCO, INC. On June 14, 1999, RJR NABISCO HOLDINGS CORP. changed its name to NABISCO GROUP HOLDINGS CORP. In 2001, NABISCO GROUP HOLDINGS CORP.

changed its name to RJR ACQUISITION CORP. RJR ACQUISITION CORP., f/k/a NABISCO GROUP HOLDINGS CORP. is a Delaware corporation whose principal place of business is 7 Campus Drive, Parsippany, New Jersey 07054-0311.

12. On June 14, 1999, RJR NABISCO HOLDINGS CORP. distributed all of the common stock of its subsidiary, R.J. REYNOLDS TOBACCO HOLDINGS, INC., to the shareholders of RJR NABISCO HOLDINGS CORP.

13. During all relevant times, the holding corporations, identified above in paragraphs 11 and 12, participated, directly and indirectly, in the sale and manufacture of cigarettes and other tobacco products through their agent and instrumentality DEFENDANT, R.J. REYNOLDS TOBACCO COMPANY, and related entities and ventures. These holding corporations assumed an active role in the tobacco business, and at relevant times have treated the tobacco business as a department or division. At times pertinent to this complaint, these holding corporations, individually and through their agents, subsidiaries, divisions, or affiliated companies or ventures, materially participated in the operation and management of RJR’s money-laundering enterprise, and materially participated, conspired, assisted, encouraged, and otherwise aided and abetted one or more of the other DEFENDANTS in the unlawful and fraudulent conduct alleged herein, all of which has affected foreign and interstate commerce.

During relevant times herein, the holding corporations, identified above in paragraphs 12 and 13, conducted continuous and systematic business in the State of New York, maintained a substantial

financial presence of their own and their affiliated corporations in New York, and are otherwise subject to the jurisdiction of the courts in the State of New York.

14. The RJR DEFENDANTS are and were, during all relevant times, involved in directing, managing, and controlling money-laundering operations that extended within and/or directly damaged the PLAINTIFFS. At all times pertinent to this complaint, the RJR DEFENDANTS, individually and through their employees, agents, joint venturers, coconspirators, subsidiaries, divisions, or affiliated companies, actively directed, managed, and controlled the RJR money-laundering enterprise, and actively participated, conspired, assisted, encouraged, and otherwise aided and abetted one or more of their coconspirators in the unlawful and fraudulent conduct alleged herein, all of which has affected and continues to affect foreign and interstate commerce in the United States.

15. The foregoing RJR corporations, as well as their affiliated entities, ventures, and successors, are and were, during all relevant times, affiliated, consolidated, combined, and unitary entities for purposes of tobacco operations and related activities. Tobacco operations were departments within the RJR corporate family. The RJR DEFENDANTS maintain control of tobacco operations worldwide through a web of affiliated entities and joint ventures. This corporate structure was an essential aspect of RJR’s successful efforts to launder the proceeds of criminal activity to the detriment of the PLAINTIFFS.

16. The RJR DEFENDANTS are and were, during all relevant times, responsible for the acts and omissions of their employees, for acts undertaken within the general area of their authority and for the benefit of the RJR DEFENDANTS. As alleged herein, the RJR DEFENDANTS were central figures in the overall conspiracy that actively embarked on and extensively participated in the fraudulent scheme. By means of corporate policies that put RJR

DEFENDANTS’ resources and strategy at the heart of the conspiracy, the RJR DEFENDANTS were aggressor entities that acted to harm the economic interests of the Plaintiffs.

17. The RJR DEFENDANTS, during relevant times, have adopted a “worldwide” policy that purports to exercise control of the activities of their employees, as well as those of their direct and indirect subsidiaries. Under this policy, which is said to be monitored and enforced by RJR’s Audit Committee, RJR DEFENDANTS have undertaken responsibility for the acts of the employees of the RJR DEFENDANTS, wherever taken, including acts related to money-laundering activities within Europe and elsewhere which materially injured THE EUROPEAN COMMUNITY and its MEMBER STATES.

III. JURISDICTION

18. As to the Plaintiffs, the MEMBER STATES, jurisdiction is proper in this Court pursuant to 28 U.S.C. §§ 1331, 1337 because this matter involves allegations of illegal behavior arising under the laws of the United States, including violations of RICO. Furthermore, jurisdiction in this Court is proper pursuant to RICO, 18 U.S.C. §§ 1964(a),(c) and 28 U.S.C. § 1651(a). The DEFENDANTS are “persons” within the meaning of 18 U.S.C. § 1961(3). As to all Plaintiffs, jurisdiction is proper in this Court pursuant to 28 U.S.C. § 1332 because the matter in controversy exceeds the sum or value of $75,000 and involves parties of diverse citizenship.

The Plaintiffs are “persons” within the meaning of 18 U.S.C. § 1961(3). Finally, this Court may exercise jurisdiction over Plaintiffs’ non-federal claims pursuant to 28 U.S.C. § 1367, as this Court possesses both federal question and diversity jurisdiction.

IV. VENUE

19. Venue is proper in this Court pursuant to 18 U.S.C. § 1965(a) because DEFENDANTS reside, are found, have an agent, or transact affairs in this District. Venue is also proper in this Court pursuant to 18 U.S.C. § 1965(b) because, to the extent any DEFENDANT may reside outside of this district, the ends of justice require such DEFENDANT or DEFENDANTS to be brought before the Court. Venue properly lies in this Court pursuant to 28 U.S.C. § 1391(b)(2) or, alternatively, pursuant to 28 U.S.C. § 1391(a)(2). Further, certain of the conspiratorial acts alleged herein took place within this judicial district.

V. THE LINK BETWEEN RJR’S CIGARETTE SALES, MONEY LAUNDERING, AND ORGANIZED CRIME

Money-Laundering Links Between Europe, The United States, Russia, and Colombia

20. Cigarette sales, money laundering, and organized crime are linked and interact on a global basis. According to Jimmy Gurule, Undersecretary for Treasury Enforcement: “Money laundering takes place on a global scale and the Black Market Peso Exchange System, though based in the Western Hemisphere, affects business around the world. US law enforcement has detected BMPE-related transactions occurring throughout the United States, Europe, and Asia.” 21. The primary source of cocaine within THE EUROPEAN COMMUNITY is Colombia. Large volumes of cocaine are transported from Colombia into THE EUROPEAN

COMMUNITY and then sold illegally within THE EUROPEAN COMMUNITY and the MEMBER STATES. The proceeds of these illegal sales must be laundered in order to be useable by narcotics traffickers. Throughout the 1990s and continuing to the present day, a primary means by which these cocaine proceeds are laundered is through the purchase and sale of cigarettes, including those manufactured by the RJR DEFENDANTS. Cocaine sales in THE EUROPEAN COMMUNITY are facilitated through money-laundering operations in Colombia, Panama, Switzerland, and elsewhere which utilize RJR cigarettes as the money-laundering vehicle.

22. In a similar way, the primary source of heroin within THE EUROPEAN COMMUNITY is the Middle East and, in particular, Afghanistan, with the majority of said heroin being sold by Russian organized crime, Middle Eastern criminal organizations, and terrorist groups based in the Middle East. Heroin sales in THE EUROPEAN COMMUNITY and the MEMBER STATES are facilitated and expedited by the purchase and sale of the DEFENDANTS’ cigarettes in money-laundering operations that begin in THE EUROPEAN COMMUNITY and the MEMBER STATES, Eastern Europe, and/or Russia, but which ultimately result in the proceeds of those money-laundering activities being deposited into the coffers of the RJR DEFENDANTS in the United States.

Background on the Convergence of Narcotics Trafficking and Money Laundering

23. This complaint is about Trade and Commerce or, more correctly, illegal Trade and illegal Commerce, and how money laundering facilitates the financing and movement of goods internationally. Merchants engaging in global trade often turn to the more stable global

currencies for payments of goods and services purchased abroad. In many markets, the United States dollar is the currency of choice and, in some cases, the United States dollar is the only accepted form of payment. Merchants seeking dollars usually obtain them in a variety of ways, including the following three methods. Traditional merchants go to a local financial institution that can underwrite credit. Private financing is usually available for those with collateral. A third and least desirable source of dollar financing can be found in the “black markets” of the world. Black Markets are the underground or parallel financial economies that exist in every country. Criminals and their organizations control these underground economies, which generally operate through “money brokers.” These “money brokers” often fulfill a variety of roles not the least of which is an important intermediate step in the laundering process, one that we will refer to throughout this complaint as the “cut out.” (See paragraphs 32-35 below.)

24. The criminal activity that provides the dollars for these black market moneylaundering operations is often drug trafficking and related violent crimes. South America is the world leader in the production of cocaine, and the United States and the European Union are the world’s largest cocaine markets. Likewise, Colombia and countries in the Middle East produce heroin. Cocaine and heroin are smuggled to the United States and Europe, and are sold for United States dollars as well as in local European currencies (and now the Euro). Russian drug smugglers obtain heroin from the Middle East and cocaine from South America, and sell both drugs in large quantities in the United States and in Europe. Retail street sales of cocaine and heroin have risen dramatically over the past two decades throughout the United States and Europe. Consequently, drug traffickers routinely accumulate vast amounts of illegally obtained cash in the form of United States dollars in the United States and Euros in Europe. The U.S.

Customs Service estimates that illegal drug sales in the United States alone generate an estimated fifty-seven billion dollars in annual revenues, most of it in cash.

25. A drug trafficker must be able to access his profits, to pay expenses for the ongoing operation, and to share in the profits; and he must be able to do this in a manner that seemingly legitimizes the origins of his wealth, so as to ward off oversight and investigation that could result in his arrest and imprisonment and the seizure of his monies. The process of achieving these goals is the money-laundering cycle.

26. The purpose of the money-laundering cycle is to establish total anonymity for the participants, by passing the cash drug proceeds through the financial markets in a way that conceals or disguises the illegal nature, source, ownership, and/or control of the money.

Background on Black Market Money Exchanges

27. Within Europe, the United States, South America, and elsewhere, a community of illegal currency exchange brokers, known to law-enforcement officials as “money brokers,” operates outside the established banking system and facilitates the exchange of narcotics sale proceeds for local cash or negotiable instruments. Many of these money brokers have developed methods to bypass the banking systems and thereby avoid the scrutiny of regulatory authorities. These money exchanges have different names depending on where they are located, but they all operate in a similar fashion.

28. A typical “money-broker” system works this way: In a sale of Colombian cocaine in THE EUROPEAN COMMUNITY, the drug cartel exports narcotics to the MEMBER STATES where they are sold for Euros. In Colombia, the cartel contacts the money broker and

negotiates a contract, in which the money broker agrees to exchange pesos he controls in Colombia for Euros that the cartel controls in Europe. The money broker pays the cartel the agreed-upon sum in pesos. The cartel contacts its cell (group) in the European Union and instructs the cell to deliver the agreed-upon amount of Euros to the money broker’s European agent. The money broker must now launder the Euros he has accumulated in the European Union. He may also need to convert the Euros into U.S. dollars because his customers may need U.S. dollars to pay companies such as RJR for their products.

29. The money broker uses his European contacts to place the monies he purchased from the cartel into the European banking system or into a business willing to accept these proceeds (a process described in more detail below). The money broker now has a pool of narcotics-derived funds in Europe to sell to importers and others. In many instances, the narcotics trafficker who sold the drugs in THE EUROPEAN COMMUNITY is also the importer who purchased the cigarettes. Importers buy these monies from the money brokers at a substantial discount off the “official” exchange rates and use these monies to pay for shipments of items (such as cigarettes), which the importers have ordered from United States companies and/or their authorized European representatives, or “cut outs.” The money broker uses his European contacts to send the monies to whomever the importer has specified. Often these customers utilize such monies to purchase the DEFENDANTS’ cigarettes in bulk and, in many instances, the money brokers have been directed to pay the RJR DEFENDANTS directly for the cigarettes purchased. The money broker makes such payments using a variety of methods, including his accounts in European financial institutions. The purchased goods are shipped to their destinations. The importer takes possession of his goods. The money broker uses the funds derived from the importer to continue the laundering cycle.

30. In that fashion, the drug trafficker has converted his drug proceeds (which he could not previously use because they were in Euros) to local currency that he can use in his homeland as profit and to fund his operations; the European importer has obtained the necessary funds from the black market money broker to purchase products that he might not otherwise have been able to finance (due to lack of credit, collateral, or U.S. dollars, and/or a desire for secrecy); the company selling cigarettes to the importer has received payment on delivered product in its currency of choice regardless of the source of the funds; and the money broker has made a profit charging both the cartel and the importer for his services. This cycle continues until the criminals involved are arrested and a new cycle begins. Money laundering is a series of such events, all connected and never stopping until at least one link in the chain of events is broken.

31. Many narcotics traffickers who sell drugs in THE EUROPEAN COMMUNITY now also purchase and import cigarettes. In particular, as the trade in cigarettes becomes more profitable and carries lesser criminal penalties compared to narcotics trafficking, the “business end” of selling the cigarettes has become at least as attractive and important to the criminal as the narcotics trafficking. Finally, it makes no difference whatsoever to the moneylaundering system whether the goods are imported and distributed legally or illegally.

Regardless of whether he sells his cigarettes legally or illegally, the narcotics trafficker has achieved his goal in that he has been able to disguise the nature, location, true source, ownership, and/or control of his narcotics proceeds. At the same time, the cigarette manufacturer (in this case RJR) has achieved its goal because it has successfully sold its product in a highly profitable way.

Background on Money Laundering: The “Cut-Out” Strategy

32. There are numerous important steps in any money laundering cycle. “Dirty” money of necessity moves in a way that is specifically designed to conceal or disguise its nature, source, ownership, and/or control. Successful “layering” of “dirty” transactions will often involve intermediaries, like money brokers, as a matter of necessity and convenience. These “money brokers” play an important role in the laundering conspiracy. They serve to isolate relevant coconspirators from the overt criminal acts, and because of that they are often referred to by law-enforcement agencies as “cut outs.” The “cut out” is purposefully inserted into the transaction to create a layer of activity between the overt criminal actors and those receiving the laundered proceeds or profits of the criminal scheme. The “cut out’s” role is to shield the true participants in the conspiracy from discovery.

33. In this money-laundering conspiracy, the RJR DEFENDANTS’ role will often be masked by the activities of the “cut outs.” Consequently, the “cut-out” strategy will be referred to often throughout this complaint. The “cut-out” strategy is also relevant to the sales and marketing end of the international cigarette export cycle. When a cigarette manufacturer intentionally sells its products into criminal distribution channels via carefully selected wholesalers, so that it can deny responsibility for “where the customer sells the product,” the manufacturer is using that wholesaler as a “cut out” to insulate itself from the overt acts involved in the sale of cigarettes as a means of supporting the money-laundering cycle.

34. The cut-out strategy works for the benefit of the manufacturers looking to increase market share and for those merchants looking to conceal their involvement in legal or illegal business activity. Overall, this process develops into the creation of an unfair business

strategy for the manufacturer that increases its market share by creating a competitive disadvantage. By operating outside the legal framework for fair business operations, the manufacturer creates an unfair advantage for itself as against its competitors in virtually all aspects of business activity, including profit margins, financing terms, price structures, shipping, storage, advertising, regulation (e.g., in the case of cigarettes, health warnings), reporting obligations, and other aspects of business strategy. The resulting “competitive disadvantage” is particularly onerous to domestic companies that must comply with an array of regulations ranging from the sourcing of raw materials to laws governing treatment of their employees.

Consequently, domestic manufacturers in THE EUROPEAN COMMUNITY (both state owned and privately owned) are particularly harmed by the cut-out strategy.

35. As will become clear from the RJR DEFENDANTS’ use of Weitnauer Trading Company Ltd. (hereinafter referred to as “Weitnauer”), Michael Haenggi, Copaco, Alfred Bossert, and many others, the “cut out” was an integral part of the RJR DEFENDANTS’ direction of and participation in this international money-laundering conspiracy.

VI. THE RACE FOR MARKET SHARE

36. RJR has been aware of organized crime’s involvement in the distribution of its products since at least the 1970’s. On January 4, 1978, the Tobacco Institute’s Committee of Counsel met at the offices of Philip Morris in New York City. The Committee of Counsel was the high tribunal that set the tobacco industry’s legal, political, and public relations strategy for more than three decades. The January 4, 1978, meeting was called to discuss, among other things, published reports concerning organized crime’s involvement in the tobacco trade and the

tobacco industry’s complicity therein. The published reports detailed the role of organized crime in the tobacco trade (including the Colombo crime family in New York), and the illegal trade at the Canadian border and elsewhere. RJR’s general counsel, Max Crohn, attended and participated in the meeting. All of the large cigarette manufacturers were present at the meeting and represented by counsel, such as Philip Morris (Arnold & Porter, Abe Krash), and Brown & Williamson (Paul Weiss Rifkind Wharton & Garrison, Martin London). The Committee of Counsel took no action to address, investigate, or end the role of organized crime in the tobacco business. Instead, the Committee agreed to formulate a joint plan of action to protect the industry from scrutiny of the U.S. Congress. Notice and the agenda for the meeting, and the minutes of the meeting, were transmitted by the use of the U.S. mails.

37. Throughout the 1990s and continuing to the present day, the RJR DEFENDANTS have undertaken extensive efforts to increase their market share and to expand the sales of their products throughout the world.

38. To accomplish this end, the RJR DEFENDANTS have actively engaged in the sale of their products to criminals and/or criminal organizations, which can purchase goods with their criminal proceeds only if the payments for those goods are made covertly so as to avoid detection by law enforcement. The RJR DEFENDANTS engaged in such conduct through illegal acts, including money laundering, wire fraud, mail fraud, and other violations of United States law. The RJR DEFENDANTS have controlled, directed, encouraged, supported, and facilitated the activities of the criminals who purchase their products. The RJR DEFENDANTS have collaborated with criminals, directly and indirectly, and have sold cigarettes to persons and entities that they know or had reason to know were laundering criminal proceeds through the purchase of cigarettes.

39. By engaging in this illegal conduct the RJR DEFENDANTS have achieved multiple benefits for themselves, including but not limited to the following: (a.) The RJR DEFENDANTS have increased their cigarette sales because they have new and additional customers, namely, the money-launderers and the criminal organizations they service.

(b.) The RJR DEFENDANTS have increased their profit margins because they require the criminals to pay a premium for their cigarettes and/or subject the criminals to sales and credit terms that are more favorable to the RJR DEFENDANTS than those granted to legitimate customers.

(c.) The RJR DEFENDANTS have increased their market share by adding to their customer base to the detriment of their competitors.

(d.) The RJR DEFENDANTS have enhanced the market value of their tobacco operations, while decreasing the market value of their competitors’ operations.

40. The RJR DEFENDANTS, jointly and as individual corporations, control, direct, encourage, support, promote, and facilitate the criminal activities that harm THE EUROPEAN COMMUNITY in a variety of ways, including but not limited to the following: (a.) The RJR DEFENDANTS developed mechanisms and procedures, including the use of cut outs, to allow their criminal customers to pay them for cigarettes in ways that could not be detected by U.S. and European law enforcement. In most instances, the RJR DEFENDANTS mandate that their criminal clients utilize these procedures to ensure that the RJR DEFENDANTS’ role in these money-laundering activities will remain undetected.

(b.) The RJR DEFENDANTS accept payments from persons or entities they know, or have reason to know, are criminals and money launderers, and/or from distributors that they know, or have reason to know, are selling cigarettes to criminals and money launderers.

(c.) The RJR DEFENDANTS make arrangements by which the cigarettes they sell can be paid for in such a way that the payments are virtually untraceable.

(d.) The RJR DEFENDANTS make arrangements for payments for their cigarettes to be made into foreign accounts, including accounts held by Swiss corporations and/or Swiss bank accounts, in an attempt to improperly utilize Swiss banking and privacy laws as a shield to protect the criminals from government investigations concerning their activities.

(e.) The RJR DEFENDANTS agree to receive payment for cigarettes by way of third-party checks and other forms of payment executed by persons who have no relationship to the transaction other than that they have provided the funds. Such persons are a common part of money-laundering schemes. Payments for cigarettes by such third-party persons are a clear indication of money-laundering activity.

(f.) The RJR DEFENDANTS established protocols for “layered transactions” that allowed for payment for cigarettes to be made through multiple intermediaries (cut outs) to conceal the ultimate source and nature of the illicit funds.

(g.) The RJR DEFENDANTS invoiced distributors and intermediaries (cut outs) for cigarettes that were sold to criminal customers to conceal the fact that these sales were being made to criminals. In fact, however, the intermediaries and distributors were never expected to pay for the invoiced cigarettes and, at most, would act as pass-through accounts by which the criminals paid the RJR DEFENDANTS for cigarettes.

(h.) The RJR DEFENDANTS generate false or misleading invoices, bills of lading, shipping documents, and other documents that expedite the process by which the cigarettes are secretly delivered to criminals.

(i.) The RJR DEFENDANTS approve their criminal customers on an expedited basis and do not require them to go through the formalities required of legitimate customers.

(j.) The RJR DEFENDANTS engage in a pattern of activity by which they ship cigarettes designated for one port knowing that, in fact, the cigarettes will be diverted to another port to be sold illegally and/or in violation of United States laws and embargoes.

(k.) The RJR DEFENDANTS have formed, financed, and directed the activities of industry groups to disseminate false and misleading information to Plaintiffs and the public to conceal their illegal activities.

(l.) The RJR DEFENDANTS controlled, directed, encouraged, supported, and facilitated cigarette sales to criminals by giving instructions to distributors, shippers, shipping companies, retailers, and/or various other intermediaries so as to effectuate the sale of large amounts of cigarettes by criminal organizations.

41. But for the involvement and active assistance of the RJR DEFENDANTS, money launderers and criminals could not have laundered the proceeds of their criminal activities and continued such activities at such levels to the detriment of THE EUROPEAN COMMUNITY and the MEMBER STATES.

42. The members of this vertical group, consisting of the DEFENDANTS, the distributors, the shippers, the criminal customers, currency brokers, and the RJR DEFENDANTS’ agents and subsidiaries who receive payment for the cigarettes, work together

for the common purpose of depriving Plaintiffs of money and property and engaging in a course of conduct to gain massive profits from the sale of cigarettes as a part of a global moneylaundering enterprise while harming Plaintiffs’ economic interests. The activities of this core group constitute a conspiracy in law and in fact.

VII. RJR’S DIRECT INVOLVEMENT IN MONEY LAUNDERING

43. The RJR DEFENDANTS have been actively involved in money laundering for many years, and have carried out their scheme through acts within this District and throughout this State. Examples of the methods and means by which the RJR DEFENDANTS have been complicit in the money-laundering scheme, directly and through the acts of their coconspirators, are set forth below.

RJR’s Relationships with Money Launderers 44. The RJR DEFENDANTS solicited contacts with companies and individuals in Europe, Central America, and the Caribbean that the DEFENDANTS knew, or had reason to know, were money launderers. Large parts of RJR’s illegal activities were conducted through a branch of RJR called North American Duty Free (NADF). Richard LaRocca was vice presidentgeneral manager for North America Duty Free. He had been recruited by the RJR DEFENDANTS because of his special knowledge of the Spanish cigarette market. Richard LaRocca knew and worked directly with Michael Haenggi who was a major customer of RJR and a central figure in a massive cigarette sales/money-laundering scheme. In 1997, Michael

Haenggi freely admitted to the New York Times that he sold RJR cigarettes in bulk to known criminals. In spite of this public announcement, the RJR DEFENDANTS made a corporate decision to continue selling huge volumes of cigarettes to Michael Haenggi even though they were on notice that payments from Haenggi would include the proceeds of criminal activity.

45. In light of the dramatic increase of narcotics sales in THE EUROPEAN COMMUNITY over the last two decades, narcotics traffickers and money launderers in THE EUROPEAN COMMUNITY increasingly needed to launder enormous volumes of cash and/or convert their cash from one form of currency to another. The RJR DEFENDANTS wished to increase their market share in certain target markets in THE EUROPEAN COMMUNITY by obtaining additional customers for their product on whom they could rely to sell the cigarettes in the markets targeted by the DEFENDANTS. In general, it was immaterial to the RJR DEFENDANTS whether the cigarettes were sold legally or illegally, so long as the cigarettes were sold in the target markets. Accordingly, the RJR DEFENDANTS reached an agreement with their coconspirators, the narcotics traffickers and money launderers, that the DEFENDANTS would provide these criminals with the capability to launder the proceeds of their criminal activities, including narcotics trafficking, by purchasing the DEFENDANTS’ tobacco products. The RJR DEFENDANTS arranged for secret delivery of the cigarettes and secret means by which the coconspirators could pay for the cigarettes, an essential component of the money-laundering scheme. In return, the narcotics traffickers and money-launderers agreed to sell the products in the markets targeted by the RJR DEFENDANTS and sold the cigarettes under the instructions of the RJR DEFENDANTS. In this way, the proceeds of enormous amounts of Colombian cocaine money and Russian heroin money derived from narcotics sales in

the United States and THE EUROPEAN COMMUNITY, as well as the proceeds of other crimes, were laundered through the purchase and sale of the RJR DEFENDANTS’ products.

46. The RJR DEFENDANTS had a well-established relationship with distributors in Switzerland, Panama, the Caribbean, Eastern Europe, and elsewhere who were well situated to develop and exploit relationships with criminal individuals and organizations. The RJR DEFENDANTS directly and indirectly encouraged their distributors to solicit and/or expand their relationships with customers who were purchasing the cigarettes largely for the purpose of laundering criminal proceeds.

47. The RJR DEFENDANTS entered into agreements and understandings with money launderers and narcotics traffickers in Europe, Russia, and South America to meet the business needs of RJR and their coconspirators. These money launderers include but were not limited to Gerardo Cuomo, Patrick Laurent, Gilbert Llorens, Corrado Bianchi, Werner Denz, Martin Denz, Luis Garcia, members of the Mansur family, and Patrick Monnier.

Communications with or on behalf of these individuals were accomplished through a regular use of the U.S. wires and mails.

48. Two Swiss companies known as Algrado A.G. (hereinafter referred to as “Algrado”) and Weitnauer were primary distributors of RJR products and an essential link in the money-laundering chain. During the time that the RJR DEFENDANTS and their coconspirators, including Algrado and Weitnauer, were selling cigarettes through the aforesaid scheme, they developed a sophisticated mechanism by which the proceeds of these sales could be laundered to disguise their criminal origins. For example, throughout the 1990s and until some time in 1998, a significant conduit for the laundering of criminal proceeds in THE EUROPEAN COMMUNITY and the MEMBER STATES was a series of accounts opened in Liechtenstein

and Switzerland by Mingo Finance Limited, a British Virgin Island company. Payments of criminal proceeds to Algrado for RJR products were made through several Mingo Finance accounts, including but not limited to account #: 0577983-AB/US at the Bank of Liechtenstein, One Herrengasse 12, located in Vaduz, Liechtenstein. The RJR DEFENDANTS knew or, but for their willful blindness would have known, that the payments through Mingo Finance constituted the proceeds of criminal activity.

RJR’s Direction and Control of the Money-Laundering Scheme

49. The RJR DEFENDANTS controlled every aspect of the financial transactions involving the purchase of their cigarettes. The RJR DEFENDANTS set either favorable or unfavorable financing terms for their customers as a means to reward, punish, and/or control the customers. The RJR DEFENDANTS also controlled the exact methods and means by which RJR was paid for the cigarettes. In this way, RJR structured its payment schemes to maximize its own security from detection by United States and European law enforcement.

50. In addition to establishing the rules by which the RJR DEFENDANTS would be paid by cash, Brady Bonds, secret payments to Swiss accounts, or other means as described more fully below, the RJR DEFENDANTS also dictated that their criminal customers route payments to RJR through intermediary distributors, shippers, and other cut outs. This procedure, known in money-laundering jargon as “layering,” is conducted for the sole purpose of concealing the payments’ true source from THE EUROPEAN COMMUNITY and United States law enforcement. In the case of money-laundering transactions related to THE EUROPEAN COMMUNITY and the MEMBER STATES, such intermediaries included Weitnauer, Algrado,

Copaco, and various exchange houses in Switzerland, including Intercambi S.A. In the case of sales of cigarettes into Iraq, the primary intermediary was IBCS and other companies owned by Issa Audeh.

51. At key distribution points such as Antwerp, Belgium, the RJR DEFENDANTS utilized certain storage and shipping companies to handle their products. These storage and shipping companies maintained lists of “direct customers of RJR” which included special handling instructions for shipments designated for RJR customers that RJR knew were involved in criminal activities. These direct customers included but were not limited to Porespa, Copaco, Arbol, Brascotres, Icosa, Sacon, and others. These special handling instructions included, for example, that all invoices for shipments to certain companies must be sent to Renato Meyer, an employee of the RJR DEFENDANTS in Switzerland who was a central actor in RJR’s money-laundering scheme. Instructions concerning other customers included that the cartons (master cases) should be “neutralized and decoded.” To neutralize and decode a master case meant to remove the marks and numbers on the case that otherwise could be used by THE EUROPEAN COMMUNITY authorities to track and regulate the product. As to other companies, special instructions included that invoices must not travel with the product but must be sent to a particular fax number. These special instructions, directed by the RJR DEFENDANTS, were intended to conceal the true purchaser of the cigarettes and/or RJR’s relationship with these special customers. These “direct customer” lists clearly demonstrated that the RJR DEFENDANTS knew that they were selling to criminal customers and thereby demonstrated that the RJR DEFENDANTS knew that they were receiving criminal proceeds in payment for their products.

52. RJR’s criminal customers were obtained, serviced, and supervised by other RJR employees in Switzerland in addition to Renato Meyer, including Diego Luchessa and Oscar Ivanissevich. Distributors and warehousemen in Belgium had regular communications with these individuals regarding many of RJR’s criminal customers, including Porespa, Copaco, Arbol, Brascotres, and others. For example, these criminal companies routinely used certain ships for the shipment of RJR products. These ships included the Tara I, the Ali B, Bleu Diamond II, and Wendy I. Details of the shipments of cigarettes aboard these vessels were requested by and delivered to RJR employees in Switzerland, including Diego Luchessa, so that RJR could keep track of the cigarettes all the way to their ultimate destination. In this way, the RJR DEFENDANTS knew who their ultimate customers were and knew that they were receiving criminal proceeds in payment for their products.

The Gerardo Cuomo Money-Laundering Organization

53. The RJR DEFENDANTS knowingly sold large volumes of cigarettes to Gerardo Cuomo, an Italian citizen residing in Switzerland who is currently under indictment by the Italian government for charges of money laundering and other criminal activities. The RJR DEFENDANTS, their coconspirators, and Gerardo Cuomo created a complex web of companies located in various bank secrecy havens to disguise the true nature and origin of the criminal proceeds that the Cuomo money-laundering organizations were receiving from Italian mafia-type criminal organizations which included the proceeds of arms trafficking, drug trafficking, and other illegal activity. Monies received from Cuomo’s criminal activities, as well as from the criminal activities of other mafia organizations, would be ferried illegally out of Italy in large

cash amounts and received by the money-laundering broker organizations located in Switzerland, including but not limited to the Alfred Bossert organization and the Gegis money-laundering broker organization. Gerardo Cuomo accomplished his purchase of RJR cigarettes through the use of the U.S. wires and/or mails.

54. The principal company of the Gerardo Cuomo money-laundering organization was Maxim S.A., located at Via Motta #34, 6900 Lugano, Switzerland. This company would distribute RJR cigarettes to itself and to Italian criminal cigarette distribution, drug-trafficking, and arms-trafficking organizations. These organizations delivered payment for the cigarettes to money brokers in Switzerland who would in turn credit the payments to Maxim S.A.

55. From the accounts held by the Bossert money-laundering broker organization and the Gegis money-laundering organization, payments would be wired to the different companies that were providing huge volumes of RJR cigarettes to the Gerardo Cuomo organization. The criminal proceeds would then be exchanged for RJR cigarettes as part of the money-laundering process. Providers of the RJR products included: (a.) Kyro Avia Limited located at 202 Christoforous Court, 3734 Limassol, Cyprus. Payments to Kyro Avia were made to account 233-10561419.1 at Union Bank of Switzerland, 4001 Basel, Switzerland. Payments of criminal proceeds were made to Kyro Avia on behalf of the Gerardo Cuomo organization by the money-laundering broker organizations throughout the 1990s.

(b.) Van Caem Belgium Bvba, located at Van Cuyclestaat #7, Bus 13, 2000 Antwerp, Belgium. Payments of criminal proceeds to Van Caem were made throughout the 1990s and were made to account 633.033.219 at KBC Bank Nederland N.V., located in Amsterdam, Holland, Swift KRED NL 2X through KBC Bank N.Y., SWIFT KRED U.S. 33.

(c.) Rosacta Co. Ltd., located at 62 Arch. Makarios Avenue, 3728 Limassol, Cyprus. Payments of criminal proceeds to Rosacta were made to account 241-07- 158027-02 at Helenic Bank Ltd., located at Gladstonos Avenue in Anaxagoras Street, 3041 Limassol, Cyprus, Swift #: HEBACY2NLIM. Payments to Rosacta were made throughout the 1990s.

(d.) Namari Holdings Ltd., located at 22 Grenville Street, in St. Helier, Jersey, Channel Islands, JE4PX. Payments of criminal proceeds to Namari were made to Harris Bank International Corp., located at 430 Park Avenue, New York, New York 10022, Swift # HATRUS33, for credit to the Royal Bank of Scotland International PLC, located at Royal Bank House, Baxt Street, St. Helier, Jersey, JE48XF, account 16028601 for credit to sub-account Namari Holdings Ltd., sub-account 34878/610/1045889 – Account name: “Nama Hold-USD1”.

(e.) Corlett Trading Limited also located at 202 Christoforous Court, 3734 Limassol, Cyprus. Payments of criminal proceeds to Corlett were made to account 310 465 US dollars in the name of Corlett Trading Limited at Anker Bank Genf Postfach 4923, 8022 Zurich, Switzerland, clearing number 8279. Payments were made to Corlett Trading for product exchanged for criminal proceeds throughout the 1990s.

(f.) Old Navy Trading, 56 Macarious Avenue, Christoforous Court, Office 202, 3734 Limassol, Cyprus. Payments of criminal proceeds were made to Old Navy Trading for products received and exchanged for criminal proceeds to account 10-561’419.1 US dollars at Union Bank of Switzerland, located in Basel, Switzerland. Payments were made to Old Navy Trading throughout the 1990s.

(g.) Icosa A.G., located at Post Office Box 409, 4132 in Muttenz, Switzerland. Numerous payments of criminal proceeds were made to Icosa A.G. throughout the 1990s to account 700.192.00 held at Banque Vanorient Geneva, in Geneva, Switzerland.

(h.) Rowill International located at Mikseban, 238 Links, 2930 Brasschaat, Belgium. Numerous payments of criminal proceeds were made to Rowill International on behalf of the Cuomo money-laundering organization by the Swiss money-laundering broker organizations to account 63.30.56.103 at KBC Bank, located in Rotterdam, Netherlands, Swift KRED-NL-2X and additional payments were made to a second Rowill account 411-2015001-22 at the KBC Bank located in Antwerp, Belgium, Swift KRED-DE-22.

56. All of the aforesaid companies ultimately delivered these criminal proceeds to the RJR DEFENDANTS. The aforesaid scheme was developed and facilitated by the RJR DEFENDANTS.

The Alfred Bossert Money-Laundering Organization

57. One of the primary Swiss money-laundering organizations involved in the wholesale laundering of the proceeds of narcotics trafficking, arms trafficking, and other criminal activities in THE EUROPEAN COMMUNITY was the organization created by Alfred Bossert, located in and around Lugano, Switzerland. Mr. Bossert’s primary company, “Intercambi S.A.,” received and continues to receive large cash payments stemming from the criminal activity of various criminal organizations operating in THE EUROPEAN COMMUNITY, including the proceeds of narcotics trafficking. These payments would be received by the Bossert organization in Switzerland, the sums would be counted, and the person

or entity to which the funds belonged would be credited with the appropriate amount. The Bossert organization would then, either directly or through a variety of money-laundering “subcontractors” such as Enrico Rosini and/or Gecap S.A., change the various currencies (i.e., Italian lira, Spanish pesetas, and others) into U.S. dollars, and would hold those dollars in several accounts created and/or controlled by the Bossert organization or its “subcontractors”.

58. On a monthly basis, the Bossert organization would send a “statement” to the various owners of the funds, such as the organization created by Corrado Bianchi, a major RJR customer, indicating the dates and sums received on their behalf from mafia-type criminal organizations. Furthermore, the Bossert organization would receive instructions from its various clients, including Corrado Bianchi, to make payment out of their informal “account” to a variety of destinations, including directly to RJR and other providers of cigarettes. In this way, huge volumes of cash were illegally transported out of THE EUROPEAN COMMUNITY and the MEMBER STATES by mafia-type criminal organizations, converted into United States dollars, and funneled to the RJR DEFENDANTS via their coconspirators.

59. The Bossert organization holds the funds for its money-laundering clients and issues payment through accounts it controls according to the instructions received by the clients.

These accounts included account 251884/01/US dollars, located at Corner Banca S.A. located at Via Canova 16, 6901 Lugano, Switzerland; account #: Q5-790-418/US dollars, located at the Swiss Bank Corporation (SBC) located in Lugano, Switzerland; account #:1.1.17300.01.333.0002, located in Banca del Sempione, in Lugano, Switzerland; or accounts held by companies controlled by Intercambi, S.A.; or by the Bossert organization such as the account held by Okapi Panama S.A., including account 242.151/02 in the name of Okapi Panama, S.A. at the ABN/AMRO Bank in Lugano, Switzerland.

60. RJR cigarettes were paid for in bulk through the aforesaid scheme. The RJR DEFENDANTS were fully aware that their primary customers for the sale of cigarettes into Italy were various families of the Italian mafia and that the RJR DEFENDANTS were receiving criminal proceeds, including narcotics proceeds, in payment for their cigarettes, and that a primary purpose of these purchases was to conceal the nature, source, ownership, and control of the criminal proceeds. No reasonable company, upon receiving these payments from the Bossert money-laundering organization, could possibly have concluded that these funds were derived from legitimate sources. The payment for cigarettes, not by the true purchaser but rather through cut-outs such as Alfred Bossert, is a clear and classic sign of money laundering.

Money Laundering for Italian Organized Crime

61. Throughout the 1990s and at least through 2000, the RJR DEFENDANTS and their coconspirators maintained four major customers for sales of their products to Italian organized crime groups via Montenegro. These four customers, known within the trade as the “fabulous four,” were the following: (a.) Gilbert Llorens; (b.) Luis Garcia Manolo, a/k/a Il Spaniolo; (c.) Patrick Laurent; and (d.) Patrick Monnier. This group of the “fabulous four” each enjoyed a “license” granted by the exclusive license holder in Montenegro, Montenegrin Tabak Transit (MTT). Montenegrin Tabak Transit received an exclusive license from the Montenegrin government for the transit of tobacco products through Montenegro.

62. The RJR DEFENDANTS and their coconspirators maintained an additional, second tier of coconspirators who were actually representatives of Italian mafia organizations,

and included Gerardo Cuomo, Guglielmo Chiavi, Augusto Arcellaschi, Gregory Tsortzakis, Ciro Mazzarella, Francesco Prudentino, and others.

63. Representatives of the first tier group of the “fabulous four” also participated in this second tier of RJR coconspirators, providing the product directly to Montenegro, and then taking the product out of Montenegro and providing it to Italian mafia-type criminal organizations.

64. The RJR DEFENDANTS also sold products to these groups through routes other than Montenegro using criminal organizations that included but were not limited to, Gerardo Cuomo, Martin Denz, and Luciano Caré.

65. Throughout the 1990s, the Italian mafia-type criminal organizations illegally transported large volumes of cash, including narcotics proceeds and the proceeds of other crimes, to Switzerland for deposit with money-laundering broker organizations located in Switzerland, including but not limited to the Alfred Bossert organization. After the funds were received, the various currencies would be exchanged for U.S. dollars and held in “informal” accounts at the disposal of the particular cigarette distributor that was dealing with the criminal organization in question. Upon receipt of notification from the money-laundering broker, the provider would order the release of the appropriate quantity of cigarettes to the representatives of the purchasing criminal organization.

66. The RJR DEFENDANTS made special arrangements with these criminal groups to ensure that they could make secret payments to the RJR DEFENDANTS so that the RJR DEFENDANTS could sell their products to these groups and these groups could avoid detection by law-enforcement authorities of THE EUROPEAN COMMUNITY and the MEMBER STATES. As a result, a complex scheme of money launderers, money couriers,

corporate structures, and banking relationships was established to launder the aforesaid proceeds.

Billions of dollars in criminal proceeds were laundered in this manner. The RJR DEFENDANTS were both the architects and the beneficiaries of the payment plan by which these massive amounts of funds were laundered. But for the RJR DEFENDANTS’ complicity in the money-laundering scheme, the money laundering could not have been accomplished.

67. The RJR DEFENDANTS and their coconspirators made use of an organized group of money couriers whose function was to receive criminal proceeds in Italy and other parts of THE EUROPEAN COMMUNITY and to illegally ferry those proceeds out of Italy and THE EUROPEAN COMMUNITY to Switzerland, where the couriers would hand the cash proceeds over to the Swiss money-laundering broker organizations. Examples of the courier organizations include those associated with Nedo Caneva, Adriano Corti, Donino Verdamo, Aldo Tacchini, Pietro Cerroni, Lorenzo Fieni, Americo Mirandi, and Angelo Carboni. These courier organizations provided a vital and necessary link between the Italian mafia-type criminal organizations and the Swiss money-laundering broker organizations, and provided an essential link in the laundering of the criminal proceeds distributed to the RJR DEFENDANTS.

68. Throughout the 1990s, employees of the RJR DEFENDANTS traveled to the warehouses and facilities of these criminals groups to inspect product, ensure freshness, replace damaged goods, and provide other services for these criminal organizations just as they would any other customer. In this way, the RJR DEFENDANTS knew who their customers were and knew, or but for their willful blindness would have known, that their customers were organized criminal organizations. The United States wires and mails were used on a regular basis for communication between the RJR DEFENDANTS and these individuals and/or their employees.

Money Laundering through the Bank of New York

69. The RJR DEFENDANTS have participated in and have received the proceeds of a massive money-laundering scheme through the Bank of New York. Throughout the late 1990s, the Bank of New York was the hub of a money-laundering scheme created by Russian organized crime, including Russian narcotics traffickers. In this scheme, a group of bank entities, some legitimate and some fabricated, opened correspondent accounts with the Bank of New York. Through these correspondent banks and the Bank of New York, Russian organized criminals were able to launder hundreds of millions of dollars of criminal proceeds in the Eastern District of New York. The RJR DEFENDANTS were prime beneficiaries of this moneylaundering enterprise. THE RJR DEFENDANTS received millions of dollars per month in payments through the Bank of New York that constituted the proceeds of Russian organized criminal activity, including narcotics trafficking. The RJR DEFENDANTS knew or should have known that the money that they were receiving through this route constituted the proceeds of criminal activity and was being illegally laundered. In spite of this fact, the RJR DEFENDANTS continued for years to sell cigarettes to these customers and receive these criminal proceeds in New York. The transfer of these illicit funds to and through the Bank of New York was accomplished through a continuing use of the U.S. wires and mails. The vast majority of the aforesaid transactions were accomplished through the use of the SWIFT system, which is based in Belgium and which is an important part of U.S., EUROPEAN COMMUNITY, and international banking systems.

70. Sinex Bank. One example of the ways in which the Bank of New York was utilized to launder criminal proceeds by way of payments to the RJR DEFENDANTS involved a

bank known as Sinex Bank. Sinex Bank was incorporated under the laws of the country of Nauru in 1996 and was created almost exclusively for the purpose of laundering the proceeds of Russian organized crime. Sinex bank did business in the United States by way of an office maintained in this district in Kew Gardens, Queens, New York, by Aleksey Volkov, one of its directors. The owners and general managers of the bank were indicted and are currently incarcerated as a result of their activities laundering Russian criminal proceeds through the Bank of New York.

71. Sinex’s criminal customers initiated bank transfers that were sent to Depozitarno Kliringovy Bank (DKB). Transfers to DKB Bank were cleared through DKB’s accounts at the Bank of New York in Queens. These payments were then sent to accounts at Credit Suisse First Boston in Geneva, Switzerland, for the benefit of the RJR DEFENDANTS.

Such payments occurred over a several-year period. Examples of such payments in one limited time period include the following: Date Payee Amount May 27, 1997 RJ Reynolds Tobacco International S.A. $1,000,050.

May 28, 1997 RJ Reynolds Tobacco International S.A. 491,745.

May 29, 1997 RJ Reynolds Tobacco International 200,000.

May 30, 1997 RJ Reynolds Tobacco International 260,000.

June 2, 1997 RJ Reynolds International S.A. 379,235.

June 3, 1997 RJ Reynolds Tobacco International 245,850.

June 25, 1997 RJ Reynolds Tobacco International 125,000.

July 23, 1997 RJ Reynolds Tobacco International 290,000.

July 24, 1997 RJ Reynolds Tobacco International 459,745.

July 25, 1997 RJ Reynolds Tobacco International 679,910.

R.J. Reynolds Tobacco International, S.A., the recipient of the above-listed funds, was the subsidiary and/or agent and/or alter ego of the RJR DEFENDANTS. Criminal proceeds received by R.J. Reynolds Tobacco International, S.A. were received for the benefit of the RJR DEFENDANTS. R.J. Reynolds Tobacco International S.A. was based in Switzerland by the RJR DEFENDANTS as a part of the money-laundering scheme by which criminal organizations could make payments to the RJR DEFENDANTS and avoid detection from U.S. and European law-enforcement agencies by utilizing Swiss secrecy laws.

72. In each of the above-described transactions, the “ordering bank” was Sinex Bank. The RJR DEFENDANTS, as payees for these orders, knew or should have known that they were receiving millions of dollars in payments ordered by an obscure bank located on a tiny Pacific island. The RJR DEFENDANTS thus knew or should have known that they were receiving laundered criminal proceeds. No legitimate purchaser of cigarettes would be ordering payment for product through Sinex Bank. Equally revealing, on the payment detail forms that would have been delivered to or available to the RJR DEFENDANTS, Sinex Bank identified itself as the Ordering Customer. By identifying itself as the “Ordering Customer,” Sinex Bank was concealing the true identity of the entities that were paying for the RJR cigarettes. Such concealment is a classic indication of money laundering and would have been certain to alert the RJR DEFENDANTS that the proceeds in question were most likely laundered criminal proceeds.

73. Between 1996 and 1999, Sinex Bank laundered up to Seven Billion Dollars in criminal proceeds. Much of the data surrounding these transactions has not yet been available to the Plaintiffs. Accordingly, it would be impractical to list individually all of the similar transactions by which Russian organized crime proceeds were laundered through payments to the

RJR DEFENDANTS. All the aforesaid transactions occurred through extensive use of the U.S.

wires and mails. Employees of the Bank of New York and officers of Sinex Bank have pled guilty to U.S. money-laundering charges in connection with the above-described scheme. THE EUROPEAN COMMUNITY’S banking system, transportation system, and free market were exploited, and various crimes were committed in THE EUROPEAN COMMUNITY, including fraud, forgery, and others, as many of the cigarettes that were purchased through this scheme were transported through THE EUROPEAN COMMUNITY to Russia.

74. Benex and BECS. One part of the conspiracy involving the Bank of New York includes the following facts. In late 1995, Peter Berlin and his wife, Lucy Edwards, who was then a vice president in the Bank of New York, Eastern European Division, in Manhattan, entered into an agreement with certain coconspirators, including Russian individuals, to establish bank accounts at the Bank of New York. Several accounts were established for the Russian coconspirators at the Bank of New York, including accounts in the names of “Benex” and “BECS.” These accounts were managed from offices in Forest Hills, Queens, and that office was run by individuals who were working for a Russian bank, DKB. DKB would transfer funds into the Benex and BECS accounts in bulk amounts on a daily or almost daily basis and then DKB would issue daily instructions from its offices in Moscow directing employees in the Queens office to transfer funds out of the accounts to various third-party transferees and beneficiaries located around the world.

75. Benex and BECS operated as front companies for the Russian coconspirators and the Russian banks they controlled. A large number of Russian individuals and businesses used this illegal banking operation to transfer and receive money in violation of Russian currency control limitations and to promote schemes to defraud the Russian government. Edward Berlin

and Lucy Edwards were charged by the United States government with conspiracy to, among other things, “launder money through international funds transfers intended to promote criminal activity, including a wire fraud service scheme to defraud the Russian government.” In pleading guilty, Berlin and Edwards admitted under oath that they personally assisted individuals to transfer money through the Benex and BECS accounts knowing that the reason, intent, and purpose of using these entities was to defraud the Russian government.

76. The money-laundering scheme described above was designed to launder the proceeds of crimes committed by Russian organized crime groups, including at least one group that utilizes the purchase and sale of cigarettes as a primary mechanism for its money-laundering activities—the Soltntsevskaya Group. The FBI has indicated that “the Benex and BECS accounts have been used to transmit funds for illegal purposes or to individuals or groups known or suspected to be involved in Russian organized crime or other criminal activities,” including kidnapping, financial crimes, narcotics trafficking, arms trafficking, and other crimes. Wire transfers involved in this scheme were made through United States financial institutions and were sent to countries throughout the world, including Luxembourg and Belgium. Cigarettes sold by the RJR DEFENDANTS were a part of this money-laundering conspiracy, and all or part of the funds laundered through the aforesaid conspiracy were laundered within the Eastern District of New York. In a substantial percentage of the transactions described above, THE EUROPEAN COMMUNITY and the MEMBER STATES were victims of the criminal schemes.

THE EUROPEAN COMMUNITY facilities and institutions were exploited as a part of this narcotics trafficking and money-laundering scheme. Many of the aforesaid transactions were conducted by Russian organized crime groups based in THE EUROPEAN COMMUNITY.

These schemes involved illegal acts in Belgium, Austria, Greece, the United Kingdom, and other

MEMBER STATES as part of an extensive narcotics trafficking/money-laundering scheme.

Narcotics involved in this scheme were sold in THE EUROPEAN COMMUNITY and in the United States.

The Walt Money-Laundering Conspiracy

77. WALT S.R.L. (hereinafter Walt) was an Italian company with offices in several European countries. Walt was owned and run by Luciano Caré, whose organization is currently under criminal investigation by European authorities for money laundering and other criminal activities in several MEMBER STATES and THE EUROPEAN COMMUNITY. The cigarettes for criminal proceeds money-laundering conspiracy carried out through Walt has harmed THE EUROPEAN COMMUNITY and several MEMBER STATES, including Italy, Spain, Belgium, France, and Portugal. It has also harmed several non-European Community jurisdictions, including the United States, Senegal, and Angola.

78. Throughout the 1990’s and, upon information and belief, continuing through at least 2001, the Walt scheme traded cigarettes manufactured by RJR in the United States with and through several criminal organizations within THE EUROPEAN COMMUNITY. The illegal proceeds received by Walt from these criminal organizations were then transported through several MEMBER STATES, including but not limited to Belgium, France, Spain, and Italy, via clandestine and covert means. Once transported to Italy, the criminal proceeds were delivered to banking institutions and deposited into accounts, including but not limited to account numbers 00300/24/08279513, and 00300/16/09330095 in the San Paolo Bank, located in Genoa, Italy. From this account and others, funds representing criminal proceeds were wired to

the Bank of New York, for further credit to R.J. REYNOLDS TOBACCO INTERNATIONAL in Geneva. Examples of these transactions occurred on April 12, 1997 ($53,000), and September 30, 1997 ($90,010). Such transactions continued throughout the 1990s and, upon information and belief, through 2001.

79. An additional example of a transfer of criminal proceeds from Walt to the RJR DEFENDANTS occurred on November 12, 1997, when Walt transferred $82,800 from its account number 06572674071 at the Monte Paschi Bank, located in Paris, France, to R.J.

REYNOLDS TOBACCO INTERNATIONAL located in Switzerland. Payment was received in the R.J. REYNOLDS account #719100-82-1 in Credit Swiss Bank, in Geneva, Switzerland. The RJR DEFENDANTS knew that Walt was not the true purchaser of the cigarettes, but instead was serving as a cut out for criminal groups. The RJR DEFENDANTS knew or should have known that Walt had no license to import or sell cigarettes in Italy and therefore could not be a legitimate purchaser of the RJR products in question.

Money Laundering through Cut Outs in Ireland and Belgium

80. The RJR DEFENDANTS sold cigarettes and laundered criminal proceeds through a series of cut outs located in Ireland and Belgium. An example of such a moneylaundering scheme is set forth below.

81. The RJR DEFENDANTS maintained as direct customers two companies called Willbrook Trading Ltd. and Glenpower Ltd. These were Irish companies based at the same address in Dublin, Ireland. They both maintained Swiss bank accounts at the same Swiss

bank. Even though these companies ostensibly purchased RJR cigarettes through third-party distributors, they were direct customers of RJR and were serviced directly by RJR employees.

82. Willbrook Trading Ltd. and Glenpower Ltd. sold RJR-brand cigarettes to numerous companies owned and operated by criminals and/or criminal organizations, including Maverick Trading Limited and Delphinus Services Ltd. Both companies were owned and operated by individuals who have been charged with conspiracy, forgery, and other crimes within THE EUROPEAN COMMUNITY. Maverick Trading Limited and Delphinus Services Ltd., while incorporated in Guernsey, Channel Islands, were actually operated from Antwerp, Belgium.

83. In the years 1996 through 1998, the organization that included Willbrook Trading Ltd. and Glenpower Ltd. purchased almost forty million dollars worth of RJR cigarettes and sold them to Maverick Trading Ltd., Delphinus Services Ltd., and/or other related companies. All or virtually all of the forty million dollars utilized to purchase the aforesaid cigarettes constituted criminal proceeds. The RJR DEFENDANTS knowingly laundered the aforesaid criminal proceeds by way of their sales of their cigarettes to Willbrook Trading Ltd.

and/or Glenpower Ltd. The aforesaid sales and transfers of proceeds were accomplished through multiple uses of the U.S. wires and mails.

84. Companies related to Maverick Trading Ltd. and Delphinus Services Ltd.

include Unicorn, Encoterra, Sunflower, Ando-Invest, and A.I.T.A., all located in Belgium, and a company known as Incomondo, located in Aruba. At a minimum, Maverick Trading Limited, Unicorn, Encoterra, Sunflower, and Incomondo laundered criminal proceeds through the use of bank accounts located in Belgium and by way of money transfers between Belgian bank accounts utilizing the SWIFT system. The majority of the funds utilized in the aforesaid

transactions ultimately inured to the benefit of and/or were transferred to the RJR DEFENDANTS.

Cigarette Sales to Launder Narcotics Proceeds

85. The sale of cigarettes has become one of the primary vehicles by which drug traffickers launder their illicit profits. RJR has become a prime recipient of this business.

Money brokers routinely purchase large volumes of RJR cigarettes with money that represents the proceeds of illicit drug sales. Representatives of RJR know or should know the source of these funds and their illicit nature, yet RJR continues to receive these funds and to sell cigarettes to these persons and entities.

86. Sales of RJR cigarettes have enabled drug lords to launder their illicit profits.

Representatives of the RJR DEFENDANTS are on actual notice that the source of funds used to purchase their cigarettes is drug trafficking, yet RJR continues to receive these funds and to sell cigarettes to these persons and their affiliates. By reason of this conduct, the RJR DEFENDANTS aid, abet, and act in concert with drug lords to launder their ill-gotten gains.

87. The DEFENDANTS have long been on notice that their cigarette sales are linked to money laundering. In or about 1994, the National Coalition Against Crime and Tobacco Contraband, which was funded by RJR and other tobacco companies, retained Lindquist Avey Macdonald Baskerville Inc. (“Lindquist”) to investigate and analyze illegal activity involving cigarettes in the United States, among other things. In its August 15, 1994, report, Lindquist observed that: “There are indications that some Colombian cocaine barons still handle cigarettes, but for a different purpose. It is believed that, in some cases, they patriate

cocaine profits earned in the United States through cigarette purchases. These cigarettes are imported into Colombia and sold there, providing cocaine traffickers with a seemingly legal alibi for the source of their wealth.” 88. That the RJR DEFENDANTS should have known that their distributors were laundering drug proceeds is undeniable. In or about the early 1990s, bank accounts in Miami, Florida, owned by various RJR cigarette distributors, were frozen by United States lawenforcement officials because funds credited to those accounts represented laundered drug money. The freezing of these accounts was well known to the RJR DEFENDANTS. By virtue of this event, the RJR DEFENDANTS were aware or should have been aware that their distributors had been involved in handling laundered narcotics proceeds. In spite of the fact that the conduct of these individuals was known to RJR, the RJR DEFENDANTS continued to develop these relationships actively so as to sell large volumes of cigarettes to these money launderers.

Cocaine Trafficking and Money Laundering in Spain

89. Cocaine trafficking occurs in Spain on a massive scale as a result of joint ventures between Colombian producers and Galician traffickers. In 1999, seventeen tons of Colombian cocaine were seized in Spain. These seizures represented a small percentage of the total amount of Colombian cocaine delivered into THE EUROPEAN COMMUNITY via Spain.

Prior to and during the 1990s, Galician organized crime groups specialized in trading in cigarettes manufactured by the RJR DEFENDANT S and laundering their money in Switzerland.

RJR’s Winston brand is by far the most popular foreign-made cigarette in Spain and a large

percentage of the money laundering conducted in Spain through cigarette sales was thus accomplished using RJR products. Accordingly, the marriage between the Galician crime groups and Colombian crime groups has proven mutually beneficial. The Galicians obtained a valuable new product for distribution in the form of cocaine. The Colombians obtained partners who had established trafficking networks in THE EUROPEAN COMMUNITY, expertise in money laundering in Switzerland, and expertise in the purchase and sale of American cigarettes, RJR-brand cigarettes in particular.

90. The activities of Colombian organized crime in Spain are particularly violent.

In 1999 alone, eight Colombian nationals were murdered in Spain as a result of turf wars and realignment within the criminal community. Spaniards actually became the heads of Colombian cocaine networks in Europe, especially as far as money-laundering operations were concerned.

91. Partnerships between the Colombian cocaine producers and Galician traffickers often occurred as follows: The Colombians conveyed cocaine to Central America, where the Galicians picked it up and transported it to the coast of Northern Spain. In return for this service, the Galicians received 30% to 50% of each shipment, which they then sold in THE EUROPEAN COMMUNITY, in particular Spain, Belgium, and The Netherlands. The remaining fifty to seventy percent of the cocaine was marketed in Europe by the Colombians themselves once the narcotics were within the borders of THE EUROPEAN COMMUNITY.

Two such smuggling networks were identified and dismantled in 1999 by Spanish authorities.

One such network was known as “Los Mataderos” (The Slaughter House).

92. Throughout the 1990s, the RJR DEFENDANTS had dealings with individuals in Spain that they knew or should have known were a part of these criminal organizations. One such individual, a major customer of the RJR DEFENDANTS, was Laureano Oubina. Laureano

Oubina was a member of the Galician drug trafficking network described above. As far back as June 18, 1990, Laureano Oubina was identified by and arrested by Spanish law-enforcement authorities as a result of his involvement in narcotics trafficking and money laundering. At that time, Laureano Oubina was considered by Spanish law enforcement to be the Spanish connection for the Colombian “Medellin Cartel.” He was linked to notorious Colombian cocaine traffickers, including Pablo Escobar Gaviria and Fabio Ochoa Vazquez. Both before and after June 1990, Laureano Oubina was also a major customer of the RJR DEFENDANTS. He was a customer of Michael Haenggi who was a major distributor for the RJR DEFENDANTS and who, as described above, has publicly admitted that he was involved in the sale of cigarettes to criminals.

93. During all or part of the time that Laureano Oubina was purchasing and selling RJR cigarettes, he was using those cigarette purchases to launder narcotics proceeds.

Laureano Oubina’s involvement in narcotics trafficking was known to the RJR DEFENDANTS or should have been known to them. Laureano Oubina had several publicized bouts with lawenforcement agencies in Spain throughout the 1990s regarding his alleged narcotics trafficking.

In the most recent incident in October 1999, he escaped just as law-enforcement authorities were preparing to arrest him on a hashish trafficking charge.

Money Laundering through Central America and the Caribbean

94. Richard Larocca, Vice President-General Manager for North America Duty Free/Latin America; Tom Brock, Vice President, Special Markets Americas; John Dyson, Latin America Sales Manager, RJR Tobacco International Miami; Sergio Rotati, Vice President, RJR Tobacco International for Special Markets Latin America; Bill Ventura, RJR Director Latin America; Orlando Morales, RJR Tobacco International Miami Chief Financial Officer, and other

agents or employees of the DEFENDANTS established direct relationships with individuals in Europe, Central America, and the Caribbean who they knew, or should have known, were actively involved in laundering the proceeds of illicit narcotics sales. Executives and employees of the RJR DEFENDANTS traveled to Europe, the Caribbean, and to Central America on multiple occasions for the purpose of meeting and negotiating business agreements with individuals who the RJR DEFENDANTS knew, or should have known, were involved in the laundering of narcotics proceeds. This travel was routinely arranged through the use of the U.S.

wires and mails.

95. An example of the RJR DEFENDANTS’ agreements with money launderers can be seen in RJR’s relationship with El Torreon, S.A. In October 1992, John Dyson (Latin America Sales Manager for RJR Tobacco International located in Miami) traveled to Aruba to establish direct contacts between RJR distributors and Colombian narcotics money laundering organizations. The meeting was arranged through the use of the U.S. wires and/or mails. During the meeting, RJR set up the following scheme to receive Colombian narcotics money in exchange for cigarettes sold by RJR: (a.) RJR’s Aruba distributor would sell products to El Torreon, S.A., which would then sell the product into the distribution channels selected by RJR.

(b.) El Torreon would pay for the product with narcotics proceeds collected in Medellin and flown from Medellin to be handed over to the Aruban distributor.

(c.) El Torreon’s front man in Medellin was to be in charge of the collection of the narcotics proceeds in cash in Medellin and was to effectuate the transfer of the proceeds in person.

(d.) At the direction of Mr. Dyson, the El Torreon money-laundering arrangement was established to go into effect on January 1, 1993.

(e.) The Aruban RJR distributor explained to Mr. Dyson at the October 1992 meeting that the narcotics proceeds to be delivered to him would require special handling, and create special risks, and that the additional costs associated with the El Torreon money scheme would be charged to RJR. Mr. Dyson agreed to this.

(f.) Beginning in January 1993 and continuing for an undetermined time thereafter, the RJR DEFENDANTS laundered drug proceeds through this scheme.

(g.) The aforesaid criminal proceeds were delivered to the RJR DEFENDANTS in the United States through the use of the U.S. wires and/or mails.

96. El Torreon S.A. was owned, operated, and directed by a Spanish multinational corporation.

97. The development of these relationships with known money launderers, such as El Torreon S.A., was known or should have been known by all the RJR DEFENDANTS and in particular RJR NABISCO, INC., R.J. REYNOLDS TOBACCO COMPANY, and R.J.

REYNOLDS TOBACCO INTERNATIONAL, INC.

Money Laundering through Panama

98. The RJR DEFENDANTS knowingly and intentionally shipped large volumes of cigarettes to individuals and corporations in certain free trade zones such as the Colon Free Trade Zone in Panama for the purpose of expediting the money-laundering scheme. One such company was a company known as Compania Panamana de Comercio (Copaco). Copaco was a

major distributor for the RJR DEFENDANTS. Sales through Copaco were made to companies that were known money launderers. Copaco was wholly or partially owned and controlled by Michael Haenggi, who sold most of his RJR cigarettes to criminal customers in THE EUROPEAN COMMUNITY. Even as to cigarettes whose ultimate destination was nowhere near Panama, RJR shipped these cigarettes through cut outs in Panama so that the money launderers could use the secrecy laws of the Republic of Panama as a shield by which to prevent law-enforcement agencies and governments from identifying the true purchasers of the cigarettes. This trade allowed for the movement of laundered money out of Europe without detection. The RJR DEFENDANTS endeavored to conceal the sale of their products into money-laundering channels by transferring the cigarettes to several cut outs in several destinations prior to the ultimate delivery to the final customer, and by providing secret and circuitous means by which the cigarettes were paid for.

Money Laundering through the United Kingdom

99. From at least October 1995 through April 1997, the RJR DEFENDANTS knowingly supplied large volumes of cigarettes to a money-laundering group in the United Kingdom that was selling cigarettes into Spain as a part of a money-laundering enterprise. One of the companies involved in the operation was Entire Warehousing. Additionally, there were at least six other related companies that were engaged in a massive money-laundering scheme.

Through the period from 1995 through 1997, the aforesaid companies sold thousands of cases of cigarettes manufactured by the RJR DEFENDANTS into Spain. The RJR DEFENDANTS sold cigarettes to “distributors” in Panama and elsewhere with the full knowledge that the true

purchaser of the cigarettes was this money-laundering group. The cigarettes were sold to intermediary “distributors” in Panama and elsewhere to conceal from law-enforcement authorities the fact that the RJR DEFENDANTS were selling cigarettes to this criminal group.

The cigarettes in question were paid for with the proceeds of criminal activity. The RJR DEFENDANTS were the recipients of these criminal proceeds and were a key part of the money-laundering process. A substantial portion of the cigarettes that were sold to this moneylaundering conspiracy were provided by Cimarron Holdings, S.A., a company that appears on RJR’s special customer lists described more fully in paragraph 51. Payments for cigarettes as a part of this conspiracy were paid for by Intercambi S.A., the primary company in the Alfred Bossert money-laundering organization.

100. Through the aforesaid transactions, cigarettes were sold by the RJR DEFENDANTS and criminal proceeds were laundered on or about the following dates: November 23, 1995; November 27, 1995; November 28, 1995; November 30, 1995; December 1, 1995; December 4, 1995; December 5, 1995; December 6, 1995; January 5, 1996; January 11, 1996; January 19, 1996; January 26, 1996; February 2, 1996; February 12, 1996; February 22, 1996; March 20, 1996; April 30, 1996; and May 16, 1996.

Distinctions between Sales to Legitimate Customers and Sales to Criminal Customers

101. Throughout the 1990s, the RJR DEFENDANTS utilized different business practices depending on whether their customer was a legitimate business customer or a criminal business customer. Criminal customers were handled differently because they represented a greater risk. Specifically, the RJR DEFENDANTS faced a risk that the products intended for

criminal customers might be confiscated or the customers arrested. Additionally, the RJR DEFENDANTS took steps to secrete from law enforcement authorities their relationship with these criminal customers so as to prevent law-enforcement authorities from becoming aware that the RJR DEFENDANTS were laundering criminal proceeds.

102. Cigarette sales to a legitimate customer can be identified by the following characteristics: (a.) Customers placed orders directly to RJR through the use of purchase orders. Purchase orders could be communicated by telephone or fax.

(b.) The purchase orders were processed and serviced by warehouses contracted by RJR.

(c.) The wholesaler of the cigarettes was responsible for complying with all applicable laws and the payment of applicable taxes.

(d.) Legitimate customers were usually provided with credit terms.

Because credit was being extended, the approval process for a new customer could take a substantial amount of time.

(e.) Legitimate customers routinely make payments directly to RJR via wire transfers.

(f.) Cigarettes purchased by legitimate customers were typically produced and shipped from a single source.

103. In contrast, when the RJR DEFENDANTS sold cigarettes to criminal customers, the procedure often was as follows: (a.) The customers could not place orders directly to RJR; orders had to be placed with some intermediary company (a cut out).

(b.) Orders for production of the cigarettes were placed by an intermediary company, not the wholesaler.

(c.) If the cigarettes passed through a Free Trade Zone, the customer, not RJR, coordinated the shipment and transportation instructions with the Free Trade Zone.

(d.) The customer was deemed “responsible” for compliance with applicable law regarding the sale of the cigarettes.

(e.) Sales were often for cash only; no credit or credit terms highly favorable to RJR were offered.

(f.) The RJR DEFENDANTS approved such sales almost immediately without any attempt to “know the customer.” In fact, the RJR DEFENDANTS make it a point to not develop a knowledge of the customer so they would not have to admit that they were aware of the customer’s criminal activities. Formal applications and waiting periods for approval that were the standard in the industry were circumvented.

(g.) The RJR DEFENDANTS accepted payment by checks payable to intermediary companies, third-party checks, bank checks, third-party wire transfers, and other forms of payment that were not typical in the cigarette trade. Payments often had to be made through “cut outs” to hide or disguise the true nature of the transaction and the participants.

(h.) On some occasions, payments were made directly to the account of an RJR subsidiary in Puerto Rico. However, in such instances, those payments were directed to be sent to a numbered account and did not name RJR in the payment details.

(i.) The RJR DEFENDANTS continually switched the banks where payments were to be made to RJR in order to escape detection by U.S. law enforcement. This process was known within RJR as “musical banks.”

(j.) The RJR DEFENDANTS engaged in “dual sourcing,” a practice in which cigarettes were sourced from multiple locations or transferred through circuitous and indirect shipping routes to conceal the true customer.

Money-Laundering Mechanisms Laundering of Cash

104. The way in which the RJR DEFENDANTS laundered narcotics proceeds and the proceeds of other forms of criminal activity evolved over the years. In the early- to mid- 1990s, the money-laundering operations were often simple and overt, involving meetings between RJR employees and known money launderers in which the RJR employees would actually receive large volumes of cash in payment for cigarettes, or would be present when these transactions took place.

105. For example, for many years it was virtually a monthly routine that employees of the RJR DEFENDANTS would travel to Colombia by way of Venezuela. These employees, traveling with authorized RJR distributors, would enter Colombia illegally, paying bribes to guards at the Colombian border so that they could enter the country without their passports being stamped. They would then travel by car to various locations such as Maicao where they would meet face to face with money launderers and narcotics traffickers. There the RJR employees would receive payments for cigarettes in the form of bulk cash that may be denominated in United States dollars or Venezuelan bolivars. They would also receive easily transferable instruments such as third-party checks, cashiers checks, and other such instruments.

The employees of the DEFENDANTS would then travel back to Venezuela, bribing border

guards at the Venezuelan border to ensure that they could move the cash illegally across the border into Venezuela. Once the employees of the DEFENDANTS reached a major Venezuelan city such as Maracaibo they would, by direct or indirect means, wire transfer the funds to bank accounts of the RJR DEFENDANTS in the United States, thereby completing the moneylaundering cycle.

106. At all times throughout this process, the RJR DEFENDANTS and their employees were well aware that they were laundering the proceeds of criminal activities. The great lengths that were taken to conduct these activities in a surreptitious manner demonstrate the knowledge of the RJR DEFENDANTS that these activities were illegal. The process by which these illegal payments were made, received, transported, and laundered was established by highlevel executives of the RJR DEFENDANTS. This money-laundering operation could not have occurred without the knowledge and complicity of officers and managers of the RJR DEFENDANTS. The above-described travel was arranged through the use of the U.S. wires and mails and the laundered narcotics proceeds were transferred to the bank accounts of the RJR DEFENDANTS through the U.S. wires and mails.

Money Laundering through Brady Bonds

107. At another time in the 1990s, to avoid the transportation of bulk cash and to conceal further the illegal nature of their transactions, the RJR DEFENDANTS laundered the proceeds of criminal activities through the use of Brady Bonds. Brady Bonds, named after former United States Secretary of the Treasury Nicholas Brady, were created in association with the IMF and the World Bank as part of an effort to restructure outstanding sovereign loans into

liquid debt instruments. Brady Bonds were coupon-bearing bonds for which the principal and interest were collateralized by United States Treasury zero-coupon bonds and other high-grade instruments. Creditor banks exchanged sovereign loans for Brady Bonds incorporating principal and interest guarantees as a means by which debtor governments could have their debts reduced.

Issued as registered and/or bearer bonds, Brady Bonds were utilized to restructure the debt in a number of countries, including Venezuela. Brady Bonds are transferable and can be bought and sold through various exchanges.

108. As an example of how Brady Bonds were used to launder narcotics proceeds, employees and/or distributors of the RJR DEFENDANTS traveled to locations such as Maicao, Colombia, to receive payment for cigarettes by cash, check, or money order. Often these payments were made in Venezuelan bolivars, not the preferred currency for the RJR DEFENDANTS. To convert these bolivars into United States dollars, the RJR DEFENDANTS and/or their distributors would transport the cash, checks, or money orders to a major city in Venezuela. At that point, they would use the funds in question to purchase Brady Bonds. Once the Brady Bonds were purchased, they would be transferred to an exchange in New York City where they would then be sold for dollars. In this way, the DEFENDANTS could launder the proceeds of criminal activities, convert the proceeds into United States dollars, and deliver them to their bank accounts in New York without detection from law enforcement. The purchase, movement, and sale of the Brady Bonds were expedited through the United States wires and/or mails.

Money Laundering through Secret Swiss Accounts

109. In the mid- to late-1990s, the RJR DEFENDANTS received public notice that many of their distributors were laundering narcotics proceeds. Several of their major customers were indicted for money laundering by the U.S. government or by the governments of other countries. Other distributors had their bank accounts in Miami, Florida, seized because they contained the proceeds of narcotics trafficking. In spite of this notice that the RJR DEFENDANTS were selling their cigarettes to criminals and were laundering the proceeds of narcotics trafficking, the RJR DEFENDANTS did not cease conducting their business with these distributors and customers. Rather, they moved their international operations to Switzerland for the sole reason of conducting continuing illegal activities, including the laundering of criminal proceeds by taking advantage of Swiss secrecy laws to conceal their activities. The RJR DEFENDANTS established policies by which many of their criminal customers could pay for the cigarettes they purchased only by way of such secret bank accounts and Swiss companies.

This secret and surreptitious method of payment was eagerly embraced by the RJR DEFENDANTS’ criminal customers. The primary reason they purchased cigarettes from the RJR DEFENDANTS was to launder the proceeds of their criminal activities. Secret payments were necessary to ensure that U.S. and European law-enforcement agencies did not detect their activities.

110. The decision to move certain operations to Switzerland and to provide for payment by their customers into Swiss accounts was made at an executive level by RJR NABISCO, INC., R.J. REYNOLDS TOBACCO COMPANY, R.J. REYNOLDS TOBACCO INTERNATIONAL, INC., RJR ACQUISITION CORP., f/k/a NABISCO GROUP HOLDINGS

CORP., RJR NABISCO HOLDINGS CORP., and R.J. REYNOLDS TOBACCO HOLDINGS, INC.. The RJR DEFENDANTS moved the records concerning almost all their illegal activities to Geneva, Switzerland, so as to escape the surveillance of the governments that are victimized by RJR’s illegal activities, including THE EUROPEAN COMMUNITY and governments of the MEMBER STATES.

Movement of Operations to Cyprus

111. One of the RJR DEFENDANTS’ primary agents for the storage and handling of cigarettes in THE EUROPEAN COMMUNITY was a company known as Belgian Pakhoed N.V. On May 26, 1997, Belgian Pakhoed N.V. sent a letter to the RJR DEFENDANTS notifying the RJR DEFENDANTS that a substantial number of the RJR DEFENDANTS’ customers were “involved in major EC-fraud.” Belgian Pakhoed N.V. identified these customers and told the RJR DEFENDANTS that Belgian Pakhoed N.V. would no longer load cigarettes on to ships operated by these customers.

112. By way of this communication, the RJR DEFENDANTS were put on notice that certain of their customers were criminals and that there was a high probability that these customers were paying RJR with criminal proceeds. The response of the RJR DEFENDANTS was not to cut off its supply of cigarettes to these customers, but rather to redirect their supply of cigarettes to these customers through the country of Cyprus, which is not a member of THE EUROPEAN COMMUNITY. The RJR DEFENDANTS continued to supply cigarettes to these customers for years after RJR had been notified that these customers were criminals, and RJR continued to receive and launder the proceeds of their crimes. Many of the aforesaid customers

were involved in money laundering and/or other criminal activities that were highly detrimental to THE EUROPEAN COMMUNITY.

Illegal Sales into Ira

q113. Throughout the 1990s, the RJR DEFENDANTS committed an array of crimes, including money laundering, by selling United States-made cigarettes into Iraq in violation of United States law. The means by which this money-laundering operation was conducted include the following: The RJR DEFENDANTS maintained a long-term relationship with an individual known as Issa Audeh. Issa Audeh had previously been an employee of R.J.

REYNOLDS TOBACCO INTERNATIONAL, INC. In the 1980s, Audeh served as Regional Director, Middle East/Near East Region for RJR. Around the late 1980s or early 1990s, Issa Audeh set up a group of companies located in Cyprus, including Audeh Trading and Consultancy Service and IBCS Trading and Distribution Company Limited (“IBCS”). IBCS was established in complicity with, and at the direction of, the RJR DEFENDANTS. The sole or primary purpose for IBCS was to sell and distribute RJR cigarettes throughout the Middle East, including Iraq. Throughout the 1990s, Issa Audeh and his companies became one of the largest international customers of the RJR DEFENDANTS. Throughout the 1990s, IBCS, as well as other companies managed or directed by Issa Audeh, acted pursuant to an agreement with RJR, under which RJR directed and controlled the actions of IBCS and other companies owned by Issa Audeh.

114. In late 1989 or early 1990, the RJR DEFENDANTS and Issa Audeh entered into an agreement with an individual known as Abdel Hamid Damirji for the purpose of distributing RJR products in Iraq. Through his Liechtenstein corporation, Tradinter Middle East

Development Establishment, Abdel Damirji worked with the RJR DEFENDANTS and Issa Audeh to establish RJR products and the RJR product name in Iraq.

115. In the fall of 1990 after the Iraqi invasion of Kuwait, Abdel Damirji transferred his cigarette sales operations to Jordan with the approval of the RJR DEFENDANTS for the purpose of supplying the Iraqi market with RJR cigarettes from Amman. The RJR DEFENDANTS, through their officer or employee, Edward Touma, as part of RJR’s “Special Markets-Middle East-Near East” division, in written and/or telephonic communications with Abdel Damirji, arranged a procedure by which Abdel Damirji would purchase RJR cigarettes from RJR through Issa Audeh in Cyprus. At times when Abdel Damirji needed more RJR cigarettes than could be supplied through Issa Audeh’s companies, Abdel Damirji obtained his RJR cigarettes directly from RJR. For example, in June 1991, the RJR DEFENDANTS sold and delivered directly to Abdel Damirji seven full air-cargo shipments consisting of approximately 17,000 master cases of RJR cigarettes. (There are 10,000 cigarettes in a master case.) Between March 1991 and September 1992, Abdel Damirji purchased at least six hundred thousand master cases of cigarettes, either directly from RJR or from Issa Audeh.

116. On approximately September 1, 1992, the RJR DEFENDANTS modified their procedures with Abdel Damirji so that Mr. Damirji would be obtaining his cigarettes through IBCS. In October 1992, in meetings between Mr. Damirji and Issa Audeh held in Limassol, Cyprus, their agreements were further modified. At that time, Abdel Damirji agreed to acquire, build, and secure warehousing for storage and distribution of RJR products in Mersin, Turkey. In return, RJR and IBCS agreed that Abdel Damirji would have the exclusive rights to distribute RJR products in Iraq. Pursuant to this agreement, Abel Damirji spent almost one

million dollars building and equipping warehouses in Turkey for the purpose of selling RJR products into Iraq.

117. Between 1993 and 1995, the aforesaid agreement remained in place and Abdel Damirji acted as the exclusive distributor of RJR products in Iraq. During this period, hundreds of millions of dollars of RJR cigarettes were purchased by Abdel Damirji from the RJR DEFENDANTS and were sold and distributed in Iraq. During this time period, as part of the distribution arrangement, upon becoming aware of customers who wished to purchase RJR products in Iraq, IBCS and THE RJR DEFENDANTS would direct those customers to Damirji’s company, Tradinter Middle East Development Establishment 118. In approximately October 1995, IBCS and/or the RJR DEFENDANTS promoted the establishment of a different group (hereinafter referred to as the Zenjelawi Group) that also would sell RJR cigarettes into Iraq. In September 1996, IBCS and the RJR DEFENDANTS began to supply a company known as Akshimpex Trading Limited (“Akshimpex”) with RJR cigarettes for the Iraqi market. Akshimpex is owned by an individual who is, upon information and belief, an Iraqi citizen. Between October 24, 1996, and December 31, 1996, Abdel Damirji ordered and the RJR DEFENDANTS delivered forty-four containers of Winston cigarettes and fifty-seven containers of Aspen-brand cigarettes that were ultimately delivered and sold in Iraq. (A forty-foot container typically holds approximately ten million cigarettes.) According to an agreement between Abdel Damirji and Issa Audeh on behalf of RJR, these sales were made to “achieve the sales goal for 1996 . . . and the continuous promotion and sale of Winston and Aspen brand cigarettes to the Iraqi market.” On or about January 1997, the RJR DEFENDANTS sold fifteen containers of Aspen-brand cigarettes to Akshimpex for sale into Iraq.

119. In approximately January 1997, the RJR DEFENDANTS ceased selling cigarettes to Abdel Damirji and his company Tradinter Middle East Development Establishment.

However, the RJR DEFENDANTS continued to sell their cigarettes to Akshimpex for sale into Iraq and in fact dramatically increased such sales. Since January 1997, Akshimpex has acted as the agent for the RJR DEFENDANTS for the delivery of their products into Iraq. From January 1997 through 2001, RJR employees visited Akshimpex on a regular basis to check on consignments of cigarettes to confirm that they were in fact going into Iraq.

120. Throughout the aforesaid time period, IBCS Trading and Distribution Company Limited was acting as the agent, alter ego, and/or coconspirator of the RJR DEFENDANTS. All acts attributable to IBCS are equally attributable to the RJR DEFENDANTS. Additionally, all the RJR DEFENDANTS were put on notice of the aforesaid facts because on or about October 15, 1997, Tradinter Middle East Development Establishment sued R.J. REYNOLDS TOBACCO INTERNATIONAL S.A., a subsidiary of the RJR DEFENDANTS. The lawsuit specifically identified R.J. REYNOLDS TOBACCO INTERNATIONAL S.A. as a subsidiary of R.J. REYNOLDS TOBACCO COMPANY, INC.

and RJR NABISCO, and alleged that Tradinter Middle East Development Establishment had been granted by RJR the exclusive rights to sell RJR cigarettes into Iraq. IBCS, the codefendant of the RJR DEFENDANTS in the lawsuit, filed a responsive pleading to the lawsuit. In its responsive pleading, IBCS admitted sales of RJR products into Iraq, but only denied that there was an exclusive distribution agreement between IBCS, RJR, and Tradinter Middle East Development Establishment.

121. By May 1999, the RJR DEFENDANTS were actively maintaining a burgeoning business selling huge volumes of U.S.-made cigarettes into Iraq and laundering the

proceeds of those sales. In May 1999, the RJR DEFENDANTS sold their international operations, including their plant in Puerto Rico, to Japan Tobacco, Inc. and/or its affiliates. As a part of the purchase agreement, the RJR DEFENDANTS entered into a “transitional services agreement” under which, for a period of at least two years, the RJR DEFENDANTS would continue to manage and operate all or part of the international operations purchased by Japan Tobacco. The RJR DEFENDANTS therefore participated in and were materially responsible for the illegal transactions conducted by Japan Tobacco, Inc. regarding RJR products from at least May 1999 through May 2001. Additionally, from May 1999 through the present, all Winston cigarettes and other RJR-brand cigarettes sold internationally by the Japan Tobacco entities are sold under license of and with the complicity of the RJR DEFENDANTS. During that time, the RJR DEFENDANTS continued, and in fact increased, the volumes of cigarettes that were produced at the Puerto Rico plant for illegal sale into Iraq. In fact, during the first two-year period in which the transitional services agreement was in effect, the RJR DEFENDANTS, along with their coconspirator Japan Tobacco, Inc., produced and sold almost eight hundred forty-foot containers of United States-made cigarettes into Iraq, amounting to almost eight billion cigarettes. The majority of these cigarettes were delivered from Puerto Rico to Valencia and other ports in THE EUROPEAN COMMUNITY. There the cigarettes were offloaded and transferred to other ships that transported them to Cyprus. In this way, THE EUROPEAN COMMUNITY ports and facilities were misused as a part of this illegal scheme.

122. Following a brief period of warehousing in Cyprus, the cigarettes were sent to Iraq via Turkey. Shipments by way of the aforesaid route were so numerous that they cannot all be listed. However, said shipments included the following: Shipping Date from Cyprus Number of Containers Consignee to Iraq via Turkey

August 18, 1999 15 Akshimpex Trading Limited February 25, 2000 11 Akshimpex Trading Limited April 11, 2000 12 Akshimpex Trading Limited May 2, 2000 7 Akshimpex Trading Limited June 16, 2000 12 Akshimpex Trading Limited June 26, 2000 21 Akshimpex Trading Limited July 8, 2000 15 Akshimpex Trading Limited August 9, 2000 10 Akshimpex Trading Limited August 18, 2000 10 Akshimpex Trading Limited August 24, 2000 8 Akshimpex Trading Limited August 25, 2000 7 Akshimpex Trading Limited September 7, 2000 5 Akshimpex Trading Limited September 11, 2000 7 Akshimpex Trading Limited September 20, 2000 12 Akshimpex Trading Limited September 22, 2000 5 Akshimpex Trading Limited October 2, 2000 7 Akshimpex Trading Limited October 11, 2000 15 Akshimpex Trading Limited October 18, 2000 2 Akshimpex Trading Limited November 6, 2000 11 Akshimpex Trading Limited December 11, 2000 4 Akshimpex Trading Limited January 9, 2001 11 Akshimpex Trading Limited January 23, 2001 22 Akshimpex Trading Limited February 25, 2001 9 Akshimpex Trading Limited

April 16, 2001 10 Akshimpex Trading Limited April 25, 2001 18 Akshimpex Trading Limited April 30, 2001 15 Akshimpex Trading Limited May 8, 2001 10 Akshimpex Trading Limited May 14, 2001 18 Akshimpex Trading Limited May 21, 2001 18 Akshimpex Trading Limited May 28, 2001 4 Akshimpex Trading Limited June 3, 2001 21 Akshimpex Trading Limited June 9, 2001 13 Akshimpex Trading Limited June 18, 2001 11 Akshimpex Trading Limited June 23, 2001 23 Akshimpex Trading Limited June 30, 2001 13 Akshimpex Trading Limited.

123. As to each of the shipments listed above, the paperwork accompanying the shipments as they left the manufacturing plant in Puerto Rico carried the following notice: “UNITED STATES LAW PROHIBITS DISTRIBUTION OF THESE COMMODOTIES TO NORTH KOREA, VIETNAM, IRAQ, OR CUBA UNLESS OTHERWISE AUTHORIZED BY THE UNITED STATES.” (Emphasis added.) The United States government authorized none of these shipments.

124. Shipments similar to those identified above were made into Iraq as recently as February 2002. On January 15, 2002, ten containers of Winston cigarettes and one container of Magna cigarettes were delivered from IBCS to Akshimpex Trading Ltd. Shortly thereafter, the aforesaid containers were delivered into Iraq. On January 24, 2002, IBCS delivered another sixteen containers of Winston cigarettes to Akshimpex for delivery into Iraq. On February 12,

2002, IBCS delivered six containers of Winston cigarettes to Akshimpex for delivery into Iraq.

All the aforesaid cigarettes were transported through the Habur Gate, the entrance portal from Turkey into Iraq, to the town of Dohuk in Iraq.

125. The RJR DEFENDANTS and Japan Tobacco, Inc. knew of and participated in this scheme. Bills of lading and other shipping documents prepared by IBCS demonstrate that IBCS shipped the cigarettes in the aforesaid shipments to “AKSHIMPEX TRADING LTD. IN TRANSIT TO IRAQ.” Often IBCS directly invoiced customers in Iraq. The shipping company that transferred the cigarettes in question from Mersin, Turkey, to Iraq delivers the cigarettes into Iraq pursuant to a contract with Akshimpex. However, the shipping company often receives its instructions for shipment and delivery of the cigarettes by way of telephone calls from IBCS.

The shipping company is identified on shipping documents and ships’ manifests when the “real owner” of the cigarettes contacts IBCS and tells IBCS to identify the shipping company on the documentation.

126. The owner of Akshimpex also owns or operates two companies from the same location known as MBA Trading and KA International. Recently, shipments of Winston cigarettes bound for Iraq have been identified as consigned to MBA Trading or KA International, largely in an attempt to deceive law-enforcement authorities concerning their true owners and destination.

127. The RJR DEFENDANTS and/or their coconspirators expedited the sale of these cigarettes by creating false paperwork that would misstate the destination of these cigarettes, for example, by making official declarations to customs authorities that the ultimate destination of the cigarettes was Russia when in fact the intended destination was Iraq. These cigarettes were not smuggled; although the value of the cigarettes was grossly understated, by

and large, all the cigarettes in question were declared and certified as being exported from Turkey and therefore entered Iraq “legally.” This gross undervaluation of the cigarettes, “legal” importation based on false or misleading documentation, and sale of cigarettes on such a massive and sustained scale could only be accomplished and in fact were accomplished with the complicity of the Iraqi government and members of the ruling family.

128. The RJR DEFENDANTS and their coconspirators were well aware that they were violating United States law in providing economic benefit to the Iraqi regime by orchestrating this massive importation of cigarettes into Iraq. (Iraq Sanctions Act of 1990, Pub.

L. No. 101-513, §§ 586-586J, 50 U.S.C. § 1701 (1994 & Supp. IV 1998).) This massive scheme could not have occurred but for the full complicity of the RJR DEFENDANTS and their coconspirators, who made the scheme possible through their covert shipment of cigarettes and acceptance of covert payments.

129. Even following Japan Tobacco, Inc.’s acquisition of RJR’s international operation, the RJR DEFENDANTS remained actively involved in the sale of cigarettes into Iraq.

Employees of the RJR DEFENDANTS’ subsidiaries visited Turkey on a regular basis to oversee the delivery of RJR-brand cigarettes into Iraq and to ensure that the shipments in fact were being delivered from Turkey into Iraq. The RJR DEFENDANTS also employed a company to monitor the movements of their name-brand cigarettes through Turkey and into Iraq. RJR employees and/or agents even visited the Habur Gate, the entrance portal from Turkey into Iraq, to ensure that the cigarettes in question were being handled properly right up to the point where they were delivered across the border into Iraq. For example, RJR personnel visited the Habur Gate for this purpose in August 2001.

130. Additionally, in 2001 and 2002, the RJR DEFENDANTS produced and sold new brands of cigarettes that apparently were designed for the Iraqi/Middle East market. Two such brands were Easton and Barton. These cigarette brands, although virtually unknown in the West and unidentified in the RJR DEFENDANTS’ annual report, were manufactured by the RJR DEFENDANTS in North Carolina for sale into Iraq.

131. The Easton brand name is purportedly owned by a company known as GMB Inc. located at 401 North Main Street, Winston-Salem, North Carolina. This address is also the address for the corporate offices of the RJR DEFENDANTS. Although GMB Inc. ostensibly owns the brand-name rights to Easton cigarettes, the cigarettes themselves are manufactured by the RJR DEFENDANTS. Easton-brand cigarettes made in the United States are labeled in part: “Manufactured by RJ Reynolds Tobacco Co., Winston-Salem, NC USA exclusively for A.T.C. .

. .Made in USA.” The Barton Light cigarettes made in the United States are labeled in part: “Manufactured by RJ Reynolds Tobacco Co., Winston-Salem, NC USA. exclusively for A.T.C. .

. .Made in USA.” 132. The Barton and Easton brand cigarettes are sold through the RJR distribution network, including IBCS and Akshimpex, into Iraq. Shipments of Easton and Barton brand cigarettes, manufactured by the RJR DEFENDANTS, were sold illegally into Iraq as recently as April 2002. Shipments of Barton and Easton brand cigarettes were accompanied by promotional materials, including hats, cigarette lighters, key rings, and matches.

133. The following illegal shipments of RJR-brand cigarettes into Iraq took place between January and April 2002: Winston 59,500 master cases (10,000 cigarettes per master case) Magna 65,000 master cases

Winchester 10,909 master cases Aspen 7,022 master cases Doral 1,500 master cases Barton 4,500 master cases Easton 1,560 master cases.

Shipments into Iraq on March 2, 2002, March 23, 2002, March 31, 2002, April 6, 2002, and April 11, 2002, included advertising and promotional materials for the RJR-brand cigarettes.

134. The RJR DEFENDANTS and their coconspirator, Japan Tobacco, Inc., have used and continue to use the ports and facilities of THE EUROPEAN COMMUNITY and the MEMBER STATES to expedite the illegal sales of cigarettes into Iraq. For example, as recently as April 2002, IBCS had delivered ten containers of RJR-brand cigarettes to Turkey to sell into Iraq. However, in an effort to disguise the route of these cigarettes and to deceive U.S. and THE EUROPEAN COMMUNITY law-enforcement officials, IBCS, under the direction of RJR’s coconspirator, Japan Tobacco International, ordered that the cigarettes be shipped to a warehouse in Antwerp, Belgium. The aforesaid shipment was a complete ruse. The warehouse was instructed to hold the cigarettes temporarily and then ship them back to Turkey. The only purpose for shipping one hundred million cigarettes from Turkey to Belgium and back to Turkey was to attempt to conceal from U.S. and THE EUROPEAN COMMUNITY law-enforcement officials that the true destination of the cigarettes was Iraq.

135. In many instances, the cigarettes in question, even when ostensibly in the possession of IBCS, remained titled to the RJR DEFENDANTS or Japan Tobacco, Inc. Thus, the RJR DEFENDANTS and/or Japan Tobacco, Inc. maintained control over the shipping, handling, and ultimate delivery of the cigarettes up to and including the time the cigarettes enter

Iraq. The aforesaid scheme was accomplished through a continuing use of the U.S. wires and/or mails.

RJR and the PKK

136. Substantial portions of the cigarettes sold into Iraq were sold to or for the benefit of various terrorist groups, including the PKK (Kurdistan Workers’ Party). Throughout the 1990s and up to and including 2002, the RJR DEFENDANTS and their coconspirators have sold cigarettes into Iraq by way of the northern territories of Iraq, including the towns of Dohuk and Zokho. This region is wholly or partially controlled by terrorist groups, including the PKK.

The PKK and similar terrorist groups charge a fee for every container of cigarettes that is allowed to pass through their territory. These fees have been paid to the PKK by the RJR DEFENDANTS’ coconspirators. Consequently, the RJR DEFENDANTS and their coconspirators have provided direct financial benefits to the PKK and other terrorist groups.

Although the regime of Saddam Hussein is often at odds with Kurdish groups in Northern Iraq, the illegal cigarette trade is so lucrative to Saddam Hussein and his family that they allow several Kurdish groups to import these cigarettes. Saddam Hussein’s son Uday Hussein oversees and personally profits from the illegal importation of cigarettes into Iraq.

137. On October 8, 1999, Secretary of State Madeleine K. Albright designated the Kurdistan Workers’ Party (PKK) as a “Foreign Terrorist Organization” (FTO) pursuant to the Antiterrorism and Effective Death Penalty Act of 1996, Pub. L. No. 104-132, § 302, 110 Stat.

1214, 1248 (1996), as amended by the Illegal Immigration Reform and Immigrant Responsibility Act of 1996, Pub. L. No. 104-208, 110 Stat. 3009 (1996). As a result of this action, it became

illegal for a person in the United States or subject to the jurisdiction of the United States to provide funds or other material support to a designated FTO. On May 10, 2001, Secretary of State Colin L. Powell reaffirmed the designation of the PKK as an FTO on the ground that it has “continued to plan and prepare for possible acts of terrorism.” 138. The designation of the PKK as an FTO is consistent with its activities over the course of the past three decades. The PKK was established in the 1970s as a Marxist- Leninist insurgent group primarily composed of Turkish Kurds. In recent years, it has moved beyond rural-based insurgent activities to include urban terrorism. It seeks to establish an independent Kurdish state in southeastern Turkey, where the population is predominantly Kurdish. The PKK’s primary targets are the Turkish Government security force in Turkey, but it has also been active in THE EUROPEAN COMMUNITY against Turkish targets. The PKK conducted attacks on Turkish diplomatic and commercial facilities in dozens of West European cities in 1993 and again in spring 1995. In an attempt to damage Turkey’s tourism industry, the PKK has bombed tourist sites and hotels and kidnapped foreign tourists. PKK members in Europe have been involved in wholesale and retail distribution of heroin and other criminal activities to finance their operations, including the purchase of arms. The PKK has received aid and comfort from Syria, Iraq, and Iran.

139. The PKK has had a particularly adverse affect on THE EUROPEAN COMMUNITY. The PKK has launched numerous terrorist attacks within THE EUROPEAN COMMUNITY. Additionally, the PKK is known to commit an array of other criminal offenses within THE EUROPEAN COMMUNITY, including heroin trafficking and weapons trafficking.

Accordingly, the acts of the RJR DEFENDANTS, described in paragraphs 113-135 above, proximately and directly injure THE EUROPEAN COMMUNITY because the RJR

DEFENDANTS’ activities enable the PKK to engage in narcotics trafficking, weapons trafficking, and terrorist activities that occur within and to the detriment of THE EUROPEAN COMMUNITY and the MEMBER STATES. In April 2002, THE EUROPEAN COMMUNITY declared the PKK a terrorist group.

Corruption of Public Officials in the Balkans

140. Throughout the 1990s, the RJR DEFENDANTS sold large volumes of cigarettes and received large amounts of criminal proceeds through the Balkans, including Montenegro. The RJR DEFENDANTS capitalized on an ongoing war and corrupt government officials as a means to expedite the sale of their products and to help disguise the illegal nature of their actions.

141. Throughout the 1990s, huge amounts of money were paid to public officials in Montenegro and elsewhere to guarantee the security of the cigarettes and the illicit funds that were passing through the Balkans. For example, the Montenegrin government required that all cigarettes passing through Montenegro be handled by the official freight forwarder and handler of the Montenegrin government, Zetatrans. Zetatrans was paid approximately Thirty Dollars per case of cigarettes transited through Montenegro. This Thirty Dollars was divided up among various Montenegrin officials involved in this business and who controlled the “licenses” to ship cigarettes through Montenegro. These officials included Milo Djukanovic, now President of Montenegro; the now deceased former head of the Montenegrin Foreign Investment Agency, Milutin Lalic; and others.

142. As another example, in the mid 1990s, a company called Montenegrin Tabak Transit (MTT) was created by certain members of Italian organized crime in conjunction with Montenegrin government officials. The company was officially sanctioned by the Montengrin Foreign Investment Agency and operated under the special protection of Milo Djukanovic. MTT was granted the exclusive license to transit cigarettes through the Port of Montengro. Payments to MTT for the privilege of shipping cigarettes through Montenegro were made throughout the 1990s by members of Italian organized crime through Swiss money brokers, including but not limited to the Alfred Bossert money-laundering organization.

143. MTT, using banks in Switzerland and Liechtenstein, funneled payments from Italian organized crime groups to the Yugoslav federal government and Montenegrin regional governments. Payments through this process were delivered to Milutin Lalic, Milo Djukanovic, and others. “Licensing” payments by Italian organized crime organizations to MTT for the transportation of cigarettes reached almost one hundred U.S. dollars per case of cigarettes. Since tens of thousands of cases of cigarettes were transported through Montenegro as part of the money-laundering scheme throughout the 1990s, the net result was the payment of millions of dollars to government officials in the Yugoslav federal government and the Montenegrin regional government.

144. The RJR DEFENDANTS and their distributors sold cigarettes to their customers in Montenegro “CIF,” meaning that the price included cost, insurance, and freight in a lump sum. The RJR DEFENDANTS were well aware that these “licensing fees” were being paid by their coconspirators. The RJR DEFENDANTS’ employees traveled to Montenegro on a regular basis to inspect their cigarettes and service their customers and, as such, were well aware of these practices.

145. Political corruption in the Balkans causes economic harm to THE EUROPEAN COMMUNITY and the MEMBER STATES in numerous ways. Political instability in the region requires THE EUROPEAN COMMUNITY and the MEMBER STATES to expend large amounts of money to promote political stability. Additionally, THE EUROPEAN COMMUNITY and MEMBER STATES are required to expend large amounts of money to combat the criminality and economic instability fostered, promoted, and made possible by the existence of significant lawless regions so close to their borders which provide safe havens and staging grounds for criminal activities that directly affect THE EUROPEAN COMMUNITY and the United States.

Travel and Entertainment by RJR Employees

146. To advance the money-laundering schemes set forth above, the employees, executives, and managers of the RJR DEFENDANTS often traveled extensively, both to supervise the schemes and also to entertain RJR’s criminal customers. RJR executives such as Tom Brock and Richard Larocca traveled to Europe and South America to meet with, entertain, and maintain relations with RJR’s criminal customers. RJR executives and managers who engaged in such travel and entertainment often received large travel and entertainment budgets from the RJR DEFENDANTS. Some RJR executives received travel and entertainment budgets of up to one million dollars per year for the purpose of advancing the RJR DEFENDANTS’ illicit activities in this fashion.

147. During the years when the RJR DEFENDANTS sold cigarettes in moneylaundering operations conducted via Montenegro, RJR employees conducted direct and personal

supervision of such activities. RJR employees would periodically visit Switzerland, Italy, and Montenegro to gather market information for the RJR DEFENDANTS. The RJR DEFENDANT’S employees met and had discussions with various criminals and representatives of criminal groups to obtain information concerning the quantities of cigarettes being sold and the means by which they were sold. The RJR DEFENDANTS’ employees traveled to Montenegro on a regular basis to witness the operations, view the warehouses, and observe the loading and unloading activities relating to RJR cigarettes.

148. RJR invited criminal coconspirators of the RJR DEFENDANTS to Geneva, Switzerland, on several occasions so that those individuals could have meetings with the executives of RJR INTERNATIONAL. Such travel, entertainment, and meetings occurred throughout the 1990s.

RJR’s Efforts to Deceive the Plaintiffs

149. On many occasions, government officials of the MEMBER STATES such as Guardia di Finanza in Italy, pursuant to cooperation agreements entered into with RJR, have requested that the DEFENDANTS and/or their coconspirators, Japan Tobacco, Inc., inspect seized Camel and Winston cigarettes to determine whether they were legitimate product and the party to whom the cigarettes were sold. Almost invariably, the RJR DEFENDANTS and/or Japan Tobacco, Inc. have indicated that they are unable to determine to whom the product was sold. This was true even as to products that the RJR DEFENDANTS admitted were produced by them.

150. The representations by RJR and Japan Tobacco, Inc. that they could not identify the customers to whom the products were sold were false and fraudulent. The cigarettes in question contained markings that allow the RJR DEFENDANTS to identify at a minimum the first and second purchasers of the cigarettes. The RJR DEFENDANTS and Japan Tobacco, Inc.

deceived the Plaintiffs and refused to provide this information, which was known to them, in order to protect their valuable criminal customers and also to prevent the Plaintiffs’ lawenforcement authorities from conducting investigations that could demonstrate the RJR DEFENDANTS’ complicity in the money-laundering schemes.

151. When the RJR DEFENDANTS indicated that they were unable to identify to whom the products were sold, they made a false representation to the Plaintiffs regarding a matter of great importance to the Plaintiffs. The Plaintiffs reasonably relied upon the representations of the RJR DEFENDANTS because the DEFENDANTS were supposed to be acting in good faith pursuant to cooperation agreements that they entered into with the Plaintiffs.

The Plaintiffs have suffered great financial harm as a result of DEFENDANTS’ failure to identify the customers to which the seized products were sold. The RJR DEFENDANTS’ false statements have made it costly and/or impossible to apprehend the coconspirators who are trafficking in the cigarettes as a part of the scheme to launder criminal proceeds.

152. The RJR DEFENDANTS filed or caused the filing of false and fraudulent documents that misstated the destination and the value of cigarettes. This was done to advance the money-laundering scheme. In many nations, including the MEMBER STATES and Turkey, costly surety bonds are required of shippers that transport cigarettes across the country. By grossly undervaluing the cigarettes being shipped, the RJR DEFENDANTS and their coconspirators reduced the purported value of their shipments and thereby dramatically reduced

the surety bonds that must be paid on the cigarettes. In so doing, the DEFENDANTS and their coconspirators reduce their costs associated with the sale and delivery of the cigarettes.

153. With respect to cigarette sales into Iraq, the DEFENDANTS and/or their coconspirators filed false and fraudulent documents with Spanish authorities to conceal that the final destination of the cigarettes was Iraq. The value of the cigarettes in question was fraudulently understated by the DEFENDANTS and/or their coconspirators to expedite the delivery of cigarettes into Iraq with the payment of minimal surety bonds. THE EUROPEAN COMMUNITY and the MEMBER STATES reasonably relied upon such false and fraudulent documents to their detriment.

154. The RJR DEFENDANTS, and in particular R.J. REYNOLDS TOBACCO INTERNATIONAL, INC., through their agent Paul Bourassa and others, continually worked to prevent THE EUROPEAN COMMUNITY and the MEMBER STATES from discovering THE RJR DEFENDANTS’ role in the money-laundering scheme. The RJR DEFENDANTS cited Swiss secrecy laws and other excuses as an improper basis for refusing to provide THE EUROPEAN COMMUNITY and the MEMBER STATES with requested information concerning the criminal conduct of the RJR DEFENDANTS and their customers.

155. The RJR DEFENDANTS entered into an understanding or agreement, express or tacit, with their distributors, customers, agents, consultants, and other coconspirators, to participate in a common scheme, plan or design to commit tortious and illegal acts, including money laundering. In pursuance of the agreement, RJR and other tobacco companies formed, managed, and directed the affairs of several groups including, without limitation: (a) International Committee on Smoking Issues (“ICOSI”); (b) EEC Task Force on Consumerism; (c) International Duty Free Confederation (“IDFC”); (d) “Confederation of European

Community Cigarette Manufacturers Ltd.” (“CECCM”); and (e) CECCM’s “Duty Free Study Group” which was comprised entirely of company representatives, including those of RJR.

Acting through the aforesaid groups, RJR obstructed government oversight and falsely represented to Plaintiffs and the public that the RJR DEFENDANTS were not involved in illegal activities.

RJR’s Responsibility for its Agents, Employees, and Coconspirators

156. The acts and omissions of the individuals employed by the RJR DEFENDANTS are imputed to the RJR DEFENDANTS under the doctrines of vicarious liability and respondeat superior. The RJR DEFENDANTS actually benefited from the performance of predicate acts of racketeering through increased sales, profits, name-brand recognition, and market share.

157. The RJR DEFENDANTS and their employees were central figures and aggressors in the fraudulent scheme. RJR personnel, including Richard Larocca, Tom Brock, Renato Meyer, Diego Luchessa, Oscar Ivanissevich, John Dyson, Sergio Rotati, Bill Ventura, Orlando Morales, and other RJR executives, performed their fraudulent and illegal acts on behalf of the RJR DEFENDANTS within the scope and course of their employment with RJR. The officers and directors of the RJR DEFENDANTS, including RJR Chairman Steven F. Goldstone, had knowledge of, or were willfully blind and recklessly indifferent toward, the unlawful activity.

158. The RJR DEFENDANTS are liable under principles of agency. Each of the RJR DEFENDANTS is responsible for the conduct of its supervisory employees, including

Richard Larocca, Tom Brock, Renato Meyer, Diego Luchessa, Oscar Ivanissevich, John Dyson, Sergio Rotati, Bill Ventura, and Orlando Morales, who violated the law and caused the RJR DEFENDANTS to enter into and act to further money-laundering conspiracies.

RJR’s Use of Wires and Mails 159. During all relevant times, the RJR DEFENDANTS communicated with each other and with their coconspirators on virtually a daily basis, by means of interstate and international wires, as a means of obtaining orders for cigarettes, arranging for sale and shipment of cigarettes, and arranging for and receiving payment for the cigarettes in question. Under principles of conspiracy and concert of action, the RJR DEFENDANTS are jointly and severally liable for the actions of their coconspirators in the furtherance of the money-laundering scheme.

160. The RJR DEFENDANTS and their coconspirators utilized the interstate and international mail and wires, and other means of communications, to prepare and transmit documents that intentionally misstated the purchases of the cigarettes in question so as to mislead the authorities within the United States and THE EUROPEAN COMMUNITY in regard to the nature and objectives of the money-laundering scheme. THE EUROPEAN COMMUNITY and its MEMBER STATES, including the Kingdom of Belgium, Republic of Finland, French Republic, Hellenic Republic, Federal Republic of Germany, Italian Republic, Grand Duchy of Luxembourg, Kingdom of the Netherlands, Portuguese Republic, and Kingdom of Spain, reasonably relied on said misrepresentations of fact were damaged as a result, and continue to be damaged by such reliance.

161. The RJR DEFENDANTS, their subsidiary corporations, and their coconspirators have used the mail and telephonic and other wire forms of communication on a daily basis in furtherance of the money-laundering schemes described above. Specifically, the U.S. mails and wires are used by the RJR DEFENDANTS to bill and pay for the cigarettes, to confirm billing and payment for the cigarettes, to account for the payment of the cigarettes to the DEFENDANTS and their subsidiaries, and to maintain an accounting of the proceeds received by the RJR DEFENDANTS from the sale of the cigarettes, with said proceeds ultimately being returned to the RJR DEFENDANTS in the United States.

162. The RJR DEFENDANTS’ coconspirators, the distributors and money launderers, utilize the mail and wire communications on a continuing basis to advance the money-laundering schemes, specifically to determine marketing strategies, to order cigarettes, to arrange for sale of the cigarettes, to arrange for distribution of cigarettes, to arrange for payment of cigarettes, and to further support other aspects of the money-laundering schemes.

163. Because the money-laundering conspiracy is a multi-million dollar per year operation and is continuing on a daily basis, it is impractical and impossible, in advance of discovery, to delineate each and every fraudulent communication in what is a pervasive and ongoing use of the mails and wires in furtherance of the money-laundering activities. By conducting some of their activities in countries known for bank secrecy, the RJR DEFENDANTS have taken affirmative steps to prevent the victims of their fraud and illicit conduct from discovering the exact details of the vast number of wire and mail communications that furthered the money-laundering schemes, including orders for tobacco products, and repatriation of the proceeds of the money-laundering schemes to the United States.

164. In addition to using the mail and wire communications themselves to advance the money-laundering schemes, the RJR DEFENDANTS, caused the use of the U.S.

mails and wires in furtherance of the money-laundering schemes by acting with knowledge that the use of the U.S. mails and/or wires would follow in the ordinary course of business and/or could be reasonably foreseen as a result of their activities. The mailing or use of wire communications was for the purpose of executing the scheme, to wit, the money-laundering activities. These mail and wire transmissions furthered the money-laundering schemes and were essential to the success of those schemes, since such communications were necessary for the coconspirators, who were separated by great distances and national borders to effectuate their common goals within the money-laundering enterprises.

VIII. IMPACT OF THE MONEY-LAUNDERING SCHEME ON THE UNITED STATES AND THE EUROPEAN COMMUNITY

165. International money laundering has become a threat to United States security, as well as to the security of THE EUROPEAN COMMUNITY and the MEMBER STATES. As Asa Hutchinson, Director of the United States Drug Enforcement Administration, has stated: “The illegal drug production that undermines America’s culture also funds terror and erodes democracies across the globe. They all represent a clear and present danger to our national security.” Since the money-laundering scheme that is the subject matter of this complaint is a fundamental part of the drug-production cycle, these money-laundering activities equally represent a threat to U.S. national security as well as the security of THE EUROPEAN COMMUNITY.

166. Money laundering through the purchase and sale of cigarettes has become a primary means by which terrorists finance their illegal activities. The RJR DEFENDANTS knowingly or negligently support the activities of terrorists when they allow terrorist groups to launder narcotics proceeds in THE EUROPEAN COMMUNITY through the purchase of United States-made cigarettes.

167. The majority of the conduct of the RJR DEFENDANTS that is material to this case is conducted by the RJR DEFENDANTS in the United States. There is a substantial effect experienced in the United States and in this district as a result of the schemes that are the subject matter of this complaint because:

(a.) The RJR DEFENDANTS receive, and have received, the profits and proceeds of said schemes in the United States. Such funds have been repatriated to this country through money laundering and other acts of concealment, all of which threaten the integrity of the U.S. financial system.

(b.) The money-laundering schemes that are the subject matter of this complaint, in particular those involving Russian organized crime, the Bank of New York, and Sinex Bank, are centered largely in and operate from this district. The majority of the moneylaundering activities described in relation to this portion of the scheme occurred in Queens, New York, and tens of millions of dollars of laundered criminal proceeds that constitute the subject matter of this complaint were laundered in Queens, New York.

(c.) Many millions of dollars of the laundered narcotics proceeds which are the subject matter of this lawsuit passed through The Bank of New York (BONY) to the RJR DEFENDANTS. The money-laundering activities at The Bank of New York proved to be so

pervasive that they damaged the integrity of that bank and had serious economic ramifications for other banks throughout the Eastern District of New York.

(d.) The United States and THE EUROPEAN COMMUNITY have recognized in international conventions their mutual interest in ending transnational moneylaundering schemes. The RJR DEFENDANTS’ conduct contravenes the vital public interest in stemming such illicit conduct.

(e.) Large volumes of false documents have been filed with the United States Customs Service and the Bureau of Alcohol, Tobacco and Firearms by the RJR DEFENDANTS and/or their coconspirators. The purpose of these filings was to deceive the United States Customs Service and the Bureau of Alcohol, Tobacco and Firearms and allow the criminal activity to continue.

(f.) The money-laundering schemes are intertwined with organized crime in New York City. Some of the largest and most dangerous narcotics traffickers in the world reside and conduct business in the Eastern District of New York. Furthermore, certain individuals who work and reside in the Eastern District of New York have established a multimillion dollar industry within the Eastern District of New York for the laundering of criminal proceeds through cigarette sales. Millions of dollars worth of real estate has been purchased within the Eastern District of New York in conjunction with this money-laundering scheme.

(g.) This district and its transportation facilities have been used by the RJR DEFENDANTS as a springboard for the transnational shipment of cigarettes as part of the money-laundering scheme.

(h.) The money-laundering scheme is advanced by numerous acts of wire fraud and mail fraud, many of which occurred in the United States. The United States has an

interest in preventing such schemes from being carried out through the U.S. telecommunications system and postal system.

168. Throughout THE EUROPEAN COMMUNITY, cigarettes and narcotics are routinely part of the same criminal transactions, and the incidence of violence associated with such trade is rising rapidly. High-ranking executives of RJR knew or reasonably should have known that their tobacco products were being sold to and through narcotics traffickers through illegal means. These RJR executives failed to act with reasonable care to investigate and abate these activities and failed otherwise to act to prevent the damage to Plaintiffs.

169. All the aforesaid activities occurred with both the knowledge and at the direction of persons at both middle management and high-level management positions within the RJR DEFENDANTS’ corporations. The vast majority of the cigarettes utilized in the moneylaundering schemes are shipped from the United States. The vast majority of the activities of the RJR DEFENDANTS that are the subject matter of this complaint, including management decisions and direction of the schemes, are conducted by the RJR DEFENDANTS in the United States and, more particularly, from the RJR DEFENDANTS’ offices in the State and City of New York.

All of the predicate acts set forth herein share the same purpose and the same victims, namely, THE EUROPEAN COMMUNITY and its MEMBER STATES, including the Kingdom of Belgium, Republic of Finland, French Republic, Hellenic Republic, Federal Republic of Germany, Italian Republic, Grand Duchy of Luxembourg, Kingdom of the Netherlands, Portuguese Republic, and Kingdom of Spain.

IX. CONTINUING DAMAGE TO THE PLAINTIFFS AND COMPELLING NEED FOR INJUNCTIVE AND EQUITABLE RELIEF

170. THE EUROPEAN COMMUNITY and the MEMBER STATES have the right and duty to make claims for, and to seek injunctive relief against, the money-laundering conspiracy that is the subject matter of this complaint.

171. The Plaintiff, THE EUROPEAN COMMUNITY, exists for the purpose of promoting the stability and economic welfare of its MEMBER STATES. Money laundering and the criminal activities associated with money laundering pose a severe threat to the stability and economic welfare of THE EUROPEAN COMMUNITY, the MEMBER STATES, and their citizens. As a result of the DEFENDANTS’ wrongful activities, THE EUROPEAN COMMUNITY and the MEMBER STATES have been injured in their businesses and deprived of money and property, and the DEFENDANTS have secured vast profits and proceeds from their illegal scheme. The injuries to the Plaintiffs include, but are not limited to, the following: (a.) Right, Title, and Interest in the Proceeds of Crime. Under the laws of the MEMBER STATES, the MEMBER STATES possess title in, or have a right to the proceeds of, any criminal activity conducted within their borders. This right is a civil right of reparation.

The RJR DEFENDANTS’ money-laundering scheme described in this Complaint causes a loss of business and property to THE EUROPEAN COMMUNITY and the MEMBER STATES because the laundering of the criminal proceeds prevents the MEMBER STATES from collecting the money and property constituting the proceeds of criminal activity, to which right or title has vested in the MEMBER STATES.

(b.) Right, Title, and Interest in the Instrumentalities of Crime. Under the laws of the MEMBER STATES, the MEMBER STATES possess title in, or have a right to, any property used in the commission of a crime conducted within their borders, including money and goods. This right is a civil right of reparation. The RJR DEFENDANTS’ money laundering described in this Complaint causes a loss of business and property to the MEMBER STATES because the laundering of the criminal proceeds prevents the MEMBER STATES from acquiring title in or rights to the instrumentalities used in the commission of criminal activity, which title or right has vested in the MEMBER STATES.

(c.) Money Laundering Facilitates Organized Crime. The moneylaundering scheme by the RJR DEFENDANTS facilitates organized crime including narcotics trafficking, arms trafficking, and other offenses. THE EUROPEAN COMMUNITY, the MEMBER STATES, and their citizens are the victims of these crimes. But for the active assistance of the RJR DEFENDANTS, money launderers and criminals could not have laundered the proceeds of their criminal activities to the detriment of THE EUROPEAN COMMUNITY and the MEMBER STATES.

(d.) Costs of Fighting Money Laundering. The RJR DEFENDANTS’ money-laundering scheme and related criminal activities cause direct economic losses to THE EUROPEAN COMMUNITY and the MEMBER STATES in the form of increased expenditures to prevent money laundering, including financial audits, anti-money-laundering protocols, and other expenditures that are necessitated by such conduct.

(e.) Costs of Regulating Transactions and Detecting Money Laundering.

Financial institutions in THE EUROPEAN COMMUNITY must train staff in detecting and reporting suspicious transactions and in any event report all transactions over EUR15,000 to the

authorities in the MEMBER STATES. Specifically constituted financial intelligence units (“FIU”) must then quickly investigate the reported transactions as well as carrying out other investigations into money laundering. As a result, the MEMBER STATES have been injured in their business and property because of the costs to financial institutions of detecting and reporting such transactions and because of the funds and resources required for MEMBER STATES to carry out investigations in order to detect money laundering.

(f.) Law-Enforcement Costs of Fighting Underlying Criminal Activity.

THE EUROPEAN COMMUNITY and the MEMBER STATES are required to expend large amounts of money on law-enforcement activities to combat the criminal activity that is facilitated by the money laundering and related activities of the RJR DEFENDANTS and their coconspirators.. Such criminal activity includes, but is not limited to, narcotics trafficking, weapons trafficking, terrorism, and an array of other organized criminal activities. But for the money-laundering activities of the RJR DEFENDANTS, the efficacy of these crimes would be diminished, the incentive to commit these crimes would be reduced, and the law enforcement and other costs incurred by THE EUROPEAN COMMUNITY and the MEMBER STATES would be accordingly diminished.

(g.) Damage to EUROPEAN COMMUNITY and MEMBER STATE Property. The means employed by the RJR DEFENDANTS and their coconspirators routinely result in damage to or the destruction of property of THE EUROPEAN COMMUNITY or the MEMBER STATES such as automobiles and vessels. This damage to the PLAINTIFFS’ property is foreseeable and anticipated by the RJR DEFENDANTS and their coconspirators, and results in additional expenditures by THE EUROPEAN COMMUNITY and MEMBER STATES to repair and replace the damaged property.

(h.) Damage to MEMBER STATES for Expenses to Store and Destroy Proceeds of Criminal Activity. As a result of the massive money-laundering scheme perpetrated by the RJR DEFENDANTS, the Republic of Italy has been required to warehouse, store, and ultimately destroy huge volumes of cigarettes and other property used in the scheme. As of early 2002, at one storage facility alone, the Republic of Italy is currently storing two million master cases of cigarettes that were purchased with the proceeds from crime. Often, such cigarettes must be stored for a long period of time because they will serve as evidence in legal actions.

Accordingly, the average case of cigarettes seized by law-enforcement authorities in Italy remains in storage approximately six years. The cost to the Italian government for the storage of these cigarettes, including warehouse facilities, employees, insurance, and costs associated with the full-time process of destroying cigarettes equals approximately thirteen dollars per case of cigarettes. Accordingly, the Italian government currently spends approximately twenty-six million dollars per year simply to warehouse, store, and destroy seized cigarettes. Of the cigarettes so stored, a substantial percentage are the products of the RJR DEFENDANTS. Other MEMBER STATES currently experience similar problems and resulting losses.

(i.) Damage to the Legitimate Economy. The RJR DEFENDANTS’ money-laundering scheme and related criminal activities cause a direct and adverse economic impact on THE EUROPEAN COMMUNITY and the MEMBER STATES because this underground economy competes illegally against the legitimate economy of THE EUROPEAN COMMUNITY and the MEMBER STATES, and thereby causes direct financial loss to the PLAINTIFFS.

(j.) Competitive Losses of the MEMBER STATES. The RJR DEFENDANTS’ money-laundering activities and their related criminality compete against the

legal cigarette trade within the MEMBER STATES and in particular compete against the MEMBER STATES that participate in the marketplace as either buyers or sellers of cigarettes.

Entities that purchase and sell cigarettes using laundered money enjoy an unfair competitive advantage over legitimate businesses due to favorable exchange rates, lack of government oversight, and other factors favoring the illegitimate trader. Legitimate purchasers, manufacturers, and/or distributors of cigarettes are direct competitors of the money-laundering conspirators. As participants in the marketplace, the MEMBER STATES suffer a direct loss of money and property as a result of this illegal activity.

(k.) Damage to Italy as a Distributor of Cigarettes. The Republic of Italy possesses the exclusive right to import and distribute cigarettes within Italy. The Republic of Italy is adversely affected in its business and property as a direct result of the massive moneylaundering scheme to convert criminal proceeds into cigarettes, which was designed, implemented, and controlled by the RJR DEFENDANTS. The unfair advantage that the moneylaundering scheme has afforded to the RJR DEFENDANTS has impaired the ability of the Italian government to compete effectively in the Italian cigarette market. As a result, warehouses and other distribution facilities have been closed or otherwise rendered useless, and the Republic of Italy as rightful distributor of cigarettes has lost millions of dollars, both in lost cigarette sales as well as in the cost associated with the closing of factories, discharge of employees, and other measures made necessary by the illegal acts of the RJR DEFENDANTS and their coconspirators.

(l.) Damage to MEMBER STATES as Manufacturers and Distributors of Cigarettes. A similar situation exists with other MEMBER STATES, because certain governments participate in the manufacture and/or distribution of cigarettes. The MEMBER STATES that are market participants have been adversely affected in their business and property

as a direct result of the money-laundering scheme designed, implemented, and controlled by the RJR DEFENDANTS. The unfair advantage that the money-laundering scheme has given to the RJR DEFENDANTS and their coconspirators has rendered these MEMBER STATES unable to compete effectively in their own cigarette markets. As a result, factories and distribution facilities have been closed, workers have been fired, and the affected MEMBER STATES have lost millions of dollars, both in lost cigarette sales as well as in the costs associated with the closing of factories, discharge of employees, and other measures made necessary by the illegal acts of the RJR DEFENDANTS and their coconspirators.

(m.) RJR DEFENDANTS’ Misuse and Disruption of the Marketplace.

THE EUROPEAN COMMUNITY provides at its expense a marketplace without internal frontiers that inures to the benefit of all commercial enterprises that operate within the borders of THE EUROPEAN COMMUNITY. This marketplace makes the sale of products such as cigarettes easier and more profitable. The money-laundering activities of the RJR DEFENDANTS and their coconspirators make illicit use of this marketplace for their own economic benefit and to the economic detriment of THE EUROPEAN COMMUNITY and the MEMBER STATES. Money laundering disrupts the legitimate trade and markets within THE EUROPEAN COMMUNITY, damages the economic viability of THE EUROPEAN COMMUNITY, and causes harm to the financial institutions and infrastructure within THE EUROPEAN COMMUNITY.

(n.) Damage to THE EUROPEAN COMMUNITY Financial Institutions.

The RJR DEFENDANTS’ money-laundering scheme and related criminal activities undermine and damage THE EUROPEAN COMMUNITY’S financial system. The integrity of financial institutions, including banks, is compromised when they are used to launder criminal proceeds.

Financial messaging systems such as the SWIFT system, based in Belgium, have been exploited because they have been used on a continuing basis to expedite this money-laundering scheme.

(o.) Frustration of the Duty to Prevent Harm to Financial Institutions.

The RJR DEFENDANTS’ money-laundering scheme and related criminal activities subvert and undermine THE EUROPEAN COMMUNITY’S duties, responsibilities, and legal authority, and inhibit the ability of THE EUROPEAN COMMUNITY to prevent harm to the financial institutions and infrastructure within THE EUROPEAN COMMUNITY.

(p.) Damage to MEMBER STATES (Bank Failures). When commercial banks fail as a result of money laundering, the MEMBER STATES sustain direct economic losses because they are often required to protect depositors who are victims of these bank failures.

(q.) Damage to MEMBER STATE Banks. Money laundering associated with the cigarette sales described in this Complaint has a direct and adverse impact on commercial banks owned wholly or partially by certain of the MEMBER STATES. The underground currency exchange deprives commercial banks of transaction fees and other sources of income associated with the international and/or foreign exchange transactions that are displaced by these money-laundering activities. When commercial banks fail as a result of money laundering, the MEMBER STATES sustain direct economic losses as a result of those failures.

(r.) Protection of MEMBER STATES’ Currency. When each of the MEMBER STATES issues its currency, the MEMBER STATE acts as a guarantor of the stability of the currency it issues (see however the Euro at paragraph (s.) below). The MEMBER STATE provides value to the currency by its willingness to maintain the strength and integrity of

that currency. When the RJR DEFENDANTS and their coconspirators launder the currency of a MEMBER STATE, they convert and make illicit use of the currency and thereby erode the stability and credibility of that currency thereby depriving the PLAINTIFFS of money and property.

(s.) Protection of the Euro. On January 1, 1999, THE EUROPEAN COMMUNITY created a new currency, the Euro. It is the ultimate duty and responsibility of THE EUROPEAN COMMUNITY and the MEMBER STATES to protect the public’s confidence in the Euro. When the RJR DEFENDANTS and their coconspirators launder the Euro, they convert and make illicit use of the Euro, thereby undermining public confidence in the Euro and in the financial institutions that are based on the Euro.

(t.) Devaluation of PLAINTIFFS’ Property. The money-laundering scheme of the RJR DEFENDANTS and their coconspirators involves the exchange for U.S.

dollars of the currencies of the MEMBER STATES often at deeply discounted unofficial exchange rates due to the criminal nature of these transactions. The exchange of tens of millions of dollars worth of the PLAINTIFFS’ currencies at a deep discount rate acts to devalue the Plaintiffs’ currencies. In that the Plaintiffs hold and own billions of dollars in their own currencies, the Plaintiffs suffer a direct loss of money and property when the money that they hold is thus devalued.

(u.) Distortion of the Money Supply. The process of laundering criminal proceeds through the purchase and sale of RJR cigarettes involves the unrecorded and irregular physical removal of huge amounts of local currency from the territory of the MEMBER STATES. The money-laundering activities of the RJR DEFENDANTS, when they involve an unrecorded and irregular removal of PLAINTIFFS’ currencies, act to affect and distort the

supply of money in the MEMBER STATES. This distortion directly and adversely affects the official calculations of the money supply performed and maintained by the MEMBER STATES, thereby causing additional expenditures of funds by the PLAINTIFFS to detect and compensate for the huge unrecorded and irregular physical removals of PLAINTIFFS’ currencies, depriving the PLAINTIFFS of money and property.

(v.) Balance of Payments. The process of laundering criminal proceeds through the purchase and sale of U.S.-made cigarettes involves the illegal conversion of local currency into U.S. dollars outside of the facilities provided by the MEMBER STATES for this exchange. The money-laundering activities of the RJR DEFENDANTS, when they involve an unrecorded and irregular conversion of the PLAINTIFFS’ currencies into United States dollars, distort the official balance of payments calculated and maintained by the PLAINTIFFS, thereby causing additional expenditures of funds by the PLAINTIFFS to detect and compensate for the huge unrecorded and irregular foreign exchange operations, depriving the PLAINTIFFS of money and property.

(w.) MEMBER STATES’ Contributions to EUROPEAN COMMUNITY Expenditures. The MEMBER STATES have suffered an injury to business and property because they have been required to contribute additional funding to THE EUROPEAN COMMUNITY as a result of the money-laundering activities of the RJR DEFENDANTS and their coconspirators.

(x.) MEMBER STATE Local Expenditures to Support EUROPEAN COMMUNITY Action. The MEMBER STATES have suffered an injury to business and property because they have been required to expend additional funds and resources to support, on a local level, the efforts of THE EUROPEAN COMMUNITY as a result of additional

activities carried out, and expenditures incurred by, THE EUROPEAN COMMUNITY due to the money-laundering activities of the RJR DEFENDANTS and their coconspirators.

(y.) Distortion of the “Fourth Resource.” Huge volumes of irregular transactions have gone unrecorded due to the RJR DEFENDANTS’ money-laundering scheme.

This has produced distortions in the system of contributions made by the MEMBER STATES to THE EUROPEAN COMMUNITY. As a result, some MEMBER STATES have suffered injury to their business and property because they have been required to contribute more than their correct share of the “fourth resource.” THE EUROPEAN COMMUNITY has been injured in its business and property because increased expenditures of funds and resources are required to detect and compensate for the distortions produced in the fourth resource contribution assessments by the huge money-laundering transactions of the RJR DEFENDANTS and their coconspirators.

(z.) Frustration of THE EUROPEAN COMMUNITY’S Duty to Fulfill Its Obligations to the MEMBER STATES. The money laundering and related criminal activities of the RJR DEFENDANTS and their coconspirators substantially inhibit the capacity of THE EUROPEAN COMMUNITY to execute its duties to regulate foreign commerce; to regulate customs territories, free trade zones, and customs bonded warehouses; to regulate transportation into THE EUROPEAN COMMUNITY or within its borders, including the use of the roads; to regulate the free movement of goods within THE EUROPEAN COMMUNITY; to regulate safety and security at sea; to combat money laundering; to protect and promote the economic well being of its citizens; and to abate harm to itself and the general public within THE EUROPEAN COMMUNITY.

(aa.) Damage to EUROPEAN COMMUNITY Regulation of its Customs Territory. THE EUROPEAN COMMUNITY has a Customs Territory and a Customs Border separate and apart from the borders of the MEMBER STATES. The violation and permeation of that Border and that Territory by money-laundering activities and the illegal transport of money into and out of THE EUROPEAN COMMUNITY violates the legal rights of THE EUROPEAN COMMUNITY, threatens the safety, security, and well-being of governmental personnel and property within THE EUROPEAN COMMUNITY, and interferes with and damages the regulatory system and authority of THE EUROPEAN COMMUNITY.

(bb.) Damage to the MEMBER STATES Regarding Protection of Their Borders. The MEMBER STATES each have a national territory and borders separate and apart from the borders of the other MEMBER STATES and THE EUROPEAN COMMUNITY. The violation and permeation of those borders and that national territory by money-laundering activities and the illegal transport of money into and out of the MEMBER STATES violates the legal rights of the MEMBER STATES, threatens the safety, security, and well being of governmental personnel and property within the MEMBER STATES, and interferes with and damages the regulatory system and authority of the MEMBER STATES. The MEMBER STATES suffer injury to their money and property from the additional expenditure required to counteract the scheme of the RJR DEFENDANTS and their coconspirators through additional equipment, personnel, border facilities, and other means.

(cc.) Injury to THE EUROPEAN COMMUNITY and MEMBER STATES Due to RJR DEFENDANT’S Support of Totalitarian Regimes. Illegal cigarette sales by the RJR DEFENDANTS and their coconspirators into Iraq and other areas have resulted in a direct financial benefit to totalitarian regimes and to terrorist groups that have caused harm to THE

EUROPEAN COMMUNITY and to the MEMBER STATES, including but not limited to destruction of public property, death and/or injury of government personnel, diminished economic productivity, increased law-enforcement expenses, and other costs associated with combating terrorism.

(dd.) Damage Caused by Bribery of Public Officials. Money-laundering activities, bribery of government officials, and other related criminal acts conducted in various countries and in particular the Balkans, have caused severe harm to THE EUROPEAN COMMUNITY and the MEMBER STATES including but not limited to increased lawenforcement and military expenditures, disruption of public services, expenses to stabilize unstable political situations in Eastern Europe that affect Western Europe, and damage to the trade and the economy of THE EUROPEAN COMMUNITY and the MEMBER STATES.

172. THE EUROPEAN COMMUNITY and the MEMBER STATES and their economies have suffered losses at least equal to, and properly measured by, the total amount of criminal proceeds laundered by the RJR DEFENDANTS. These losses were directly and proximately caused by the money-laundering activities of the RJR DEFENDANTS and their coconspirators. THE EUROPEAN COMMUNITY and the MEMBER STATES have the duty and responsibility to protect against, and to seek redress for, such losses.

173. As a direct and proximate result of the money-laundering activities that are conducted, aided, and encouraged by the RJR DEFENDANTS, losses of hundreds of millions of dollars per year are being suffered by THE EUROPEAN COMMUNITY and its MEMBER STATES, including the Kingdom of Belgium, Republic of Finland, French Republic, Hellenic Republic, Federal Republic of Germany, Italian Republic, Grand Duchy of Luxembourg, Kingdom of the Netherlands, Portuguese Republic, and Kingdom of Spain. THE EUROPEAN

COMMUNITY and the MEMBER STATES have been deprived of money and property in this manner throughout the 1990s and continuing through the present time. If the money-laundering activities of the RJR DEFENDANTS are not stopped, THE EUROPEAN COMMUNITY and the MEMBER STATES will continue to lose money and property in the future. In addition, THE EUROPEAN COMMUNITY and the MEMBER STATES have been required to expend large amounts of money in their efforts to stop money laundering and to recoup funds that they have lost as a result of the activities of the RJR DEFENDANTS. All of these losses will continue into the future, absent judgment in Plaintiffs’ favor and injunctive and equitable relief, including: (a.) RICO Injunctive and Equitable Relief. Under the RICO statute, 18 U.S.C. § 1964(a), and pursuant to inherent equitable powers of the Court, the U.S. District Court is empowered to prevent and restrain violations of 18 U.S.C. § 1962 by issuing appropriate orders, including without limitation : (i) ordering any person to divest himself or herself of any interest, direct or indirect, in any enterprise; (ii) imposing reasonable restrictions on the future activities or investments of any person that affect interstate or foreign commerce, including, but not limited to, prohibiting any person from engaging in the same type of endeavor as the enterprise engaged in; and (iii) ordering dissolution or reorganization of any enterprise, making due provision for the rights of innocent persons. In addition, under 28 U.S.C. § 1651(a), the U.S.

District Courts are empowered to “issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law.” Consistent with these powers, the MEMBER STATES seek an order that: (i) enjoins the RJR DEFENDANTS and their respective agents, servants, officers, directors, employees, and all persons acting in concert with them from laundering the proceeds of criminal activities through the sale of cigarettes; (ii)

compels each of the RJR DEFENDANTS who are found to have violated 18 U.S.C. § 1962 to disgorge all proceeds derived from any such violation and to make restitution to Plaintiff; (iii) enjoins the RJR DEFENDANTS and their respective agents, servants, officers, directors, employees, and all persons acting in concert with them from selling cigarettes and/or receiving payment for cigarettes without proper documentation, shipping records, markings, and similar indicia of compliance with law that will facilitate the proper tracking of the cigarettes and the funds with which they were purchased; (iv) enjoins the RJR DEFENDANTS and their respective agents, servants, officers, directors, employees, and all persons acting in concert with them from selling cigarettes to any distributor or any other person who cannot fully and accurately account for the source of the funds with which the cigarettes were purchased; (v) enjoins the RJR DEFENDANTS and their respective agents, servants, officers, directors, employees, and all persons acting in concert with them from engaging in any practices by which distributors, shippers, or wholesalers can pay for the cigarettes in question into offshore corporations, offshore bank accounts, or other locations that limit the ability of government officials to track the sale of cigarettes or the payment for said cigarettes; (vi) orders the RJR DEFENDANTS to create and utilize adequate protocols by which all cigarettes manufactured by the RJR DEFENDANTS and all payments made for such cigarettes into THE EUROPEAN COMMUNITY can be adequately tracked and monitored by government officials of THE EUROPEAN COMMUNITY and the MEMBER STATES; (vii) orders the RJR DEFENDANTS to take all reasonable and necessary steps to stop the money-laundering scheme, including the addition of any necessary labeling, tracking devices, or other means that would allow the RJR DEFENDANTS and/or THE EUROPEAN COMMUNITY and the MEMBER STATES to track and monitor the movement of cigarettes into and within THE EUROPEAN COMMUNITY;

(viii) orders the RJR DEFENDANTS to disclose all knowledge within their possession concerning the names, locations, activities, and procedures of their non-legitimate customers; (ix) orders the RJR DEFENDANTS to implement “know your customer” protocols and rules for the acceptance of payments for their products that will make it difficult or impossible for criminals to launder criminal proceeds through the purchase of their products; (x) orders the imposition of a constructive trust and equitable lien upon the RJR DEFENDANTS’ ill-gotten gains, including without limitation those profits and proceeds derived from the moneylaundering scheme, and compels the RJR DEFENDANTS to disgorge to Plaintiffs all ill-gotten gains derived from the money-laundering scheme; (xi) orders the imposition of a constructive trust and equitable lien upon all monies laundered by the RJR DEFENDANTS as a part of the money-laundering scheme and compels the RJR DEFENDANTS to disgorge to Plaintiffs an amount equal to the total amount of monies laundered through the aforesaid scheme; (xii) orders divestiture of all interests held by the RJR DEFENDANTS, directly or indirectly, in the enterprises involved in the money-laundering activities; and (xiii) orders the RJR DEFENDANTS to adopt, monitor and enforce appropriate compliance programs to deter and remedy money-laundering activities involving their products. For purposes of this complaint, all of the foregoing injunctive and equitable remedies and those injunctive and equitable remedies that may hereafter be sought by THE EUROPEAN COMMUNITY and the MEMBER STATES or ordered by the Court with respect to THE EUROPEAN COMMUNITY’S and the MEMBER STATES’ claims under RICO shall be referred to herein as “RICO Injunctive and Equitable Relief.” (b.) Common Law Injunctive and Equitable Relief. Under the common law, and pursuant to the inherent equitable powers of the Court, the U.S. District Court is

empowered to prevent and restrain the RJR DEFENDANTS’ and their coconspirators’ moneylaundering activities, enter prohibitory and mandatory injunctions, and impose other equitable relief, to provide full relief to Plaintiffs and to prevent continuing harm to the Plaintiffs’ interests. In addition, the federal courts are empowered under 28 U.S.C. § 1651(a) to “issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law.” Consistent with these powers, THE EUROPEAN COMMUNITY and the MEMBER STATES seek an order that: (i) enjoins the RJR DEFENDANTS and their respective agents, servants, officers, directors, employees, and all persons acting in concert with them from laundering the proceeds of criminal activities through the sale of cigarettes or otherwise engaging in conduct that violates any common law, statutory or equitable standard; (ii) compels each of the RJR DEFENDANTS that is found to have violated any common law, statutory, or equitable standard to disgorge all proceeds derived from any such violation and to make restitution to Plaintiffs; (iii) enjoins the RJR DEFENDANTS and their respective agents, servants, officers, directors, employees, and all persons acting in concert with them from selling cigarettes without proper documentation, shipping records, markings, and similar indicia of compliance with law that would allow the proper tracking of the cigarettes and the funds with which they were purchased so that they cannot be sold illegally; (iv) enjoins the RJR DEFENDANTS and their respective agents, servants, officers, directors, employees, and all persons acting in concert with them from selling cigarettes to any distributor or any other person who cannot fully and accurately account for where the cigarettes will ultimately be sold; (v) enjoins the RJR DEFENDANTS and their respective agents, servants, officers, directors, employees, and all persons acting in concert with them from engaging in any practices by which distributors, shippers, or wholesalers can pay for the cigarettes in question into offshore

corporations, offshore bank accounts, or other locations that limit the ability of government officials to track the sale of cigarettes or the payment for said cigarettes; (vi) orders the RJR DEFENDANTS to create and utilize adequate protocols by which all cigarettes manufactured by the RJR DEFENDANTS and all payments made for such cigarettes into THE EUROPEAN COMMUNITY can be adequately tracked and monitored by governmental officials of THE EUROPEAN COMMUNITY and the MEMBER STATES; (vii) orders the RJR DEFENDANTS to take all reasonable and necessary steps to terminate ongoing money laundering and prevent future money laundering, including the addition of any necessary labeling, tracking devices, or other means that would allow the RJR DEFENDANTS and/or THE EUROPEAN COMMUNITY and the MEMBER STATES to track and monitor the movement of cigarettes into and within THE EUROPEAN COMMUNITY; (viii) orders the RJR DEFENDANTS to disclose all knowledge within their possession concerning the names, locations, activities, and procedures of their non-legitimate customers; (ix) orders the RJR DEFENDANTS to implement “know your customer” protocols and rules for the acceptance of payments for their products that make it difficult or impossible for criminals to launder criminal proceeds through the purchase of their products; (x) orders the imposition of a constructive trust and equitable lien upon the RJR DEFENDANTS’ ill-gotten gains, including without limitation those profits and proceeds derived from the money-laundering scheme, and compels the RJR DEFENDANTS to disgorge to Plaintiffs all ill-gotten gains derived from the money-laundering scheme; (xi) orders the imposition of a constructive trust and equitable lien upon all monies laundered by the RJR DEFENDANTS as a part of the money-laundering scheme and compels the RJR DEFENDANTS to disgorge to Plaintiffs an amount equal to the total amount of monies laundered through the aforesaid scheme; (xii) orders divestiture of all interests held by the RJR

DEFENDANTS, directly or indirectly, in the enterprises involved in the money-laundering activities; (xiii) orders the RJR DEFENDANTS to adopt, monitor and enforce appropriate compliance programs to deter and remedy money-laundering activities involving their products.

For purposes of this complaint, all of the foregoing injunctive and equitable remedies, and those injunctive and equitable remedies that may hereafter be sought by Plaintiffs or ordered by the Court on Plaintiffs’ common law claims, shall be referred to herein as “Common Law Injunctive and Equitable Relief.” COUNT I MEMBER STATES (AS TO ALL RJR DEFENDANTS) (RICO, 18 U.S.C. § 1962(a)) 174. The MEMBER STATES restate and reallege paragraphs one (1) through one hundred seventy-three (173) and further allege: 175. The RJR DEFENDANTS, along with their coconspirators in the moneylaundering schemes, including associated distributors, shippers, currency dealers, wholesalers, money brokers, and other participants in the schemes identified above, were, at relevant times, an association-in-fact of individuals and corporations engaged in, and the activities of which affected, interstate and foreign commerce, and thus constituted an “enterprise” within the meaning of 18 U.S.C. § 1961(4) (the “RJR Money-Laundering Enterprise”). These persons and entities were and are associated in fact for the purpose, among others, of illegally laundering criminal proceeds of criminal activity to the economic detriment of Plaintiffs. The RJR Money- Laundering Enterprise is an ongoing organization whose constituent elements function as a

continuing unit for the common purpose of maximizing the sale of tobacco products through illegal means and carrying out other elements of the RJR DEFENDANTS’ scheme. The RJR Money-Laundering Enterprise has an ascertainable structure and purpose beyond the scope of the RJR DEFENDANTS’ predicate acts and the conspiracy to commit such acts. The Enterprise has engaged in and its activities have affected interstate and foreign commerce. The Enterprise continues through the concerted activities of the RJR DEFENDANTS to disguise the nature of the wrongdoing, to conceal the proceeds thereof, and to conceal the RJR DEFENDANTS’ participation in the Enterprise in order to avoid and/or minimize their exposure to criminal and civil penalties and damages. The role of each DEFENDANT in the RJR Money-Laundering Enterprise has been set forth above.

176. In connection with the fraudulent schemes set forth above, and to further their illegal aims, the RJR DEFENDANTS have engaged in numerous acts of “racketeering activity,” and each of the RJR DEFENDANTS has aided and abetted each other of the RJR DEFENDANTS and other coconspirators in committing those acts of “racketeering activity” within the meaning of RICO. 18 U.S.C. §§ 1961, et seq.; 18 U.S.C. § 2. The RJR DEFENDANTS have committed multiple predicate acts of racketeering including, but not limited to: (a.) Money Laundering. (18 U.S.C. §§ 1956(a)(1), 1961(1)(B)). Knowing that the property involved in certain financial transactions represented the proceeds of some form of unlawful activity, the RJR DEFENDANTS conducted or attempted to conduct financial transactions in interstate and foreign commerce involving the proceeds of specified unlawful activity with the intent to promote the carrying on of specified unlawful activity; or did so knowing that the transactions were designed in whole or in part to conceal or disguise the nature,

the location, the source of ownership, or the control of the proceeds of specified unlawful activity, or did so knowing that the transactions were designed in whole or in part to avoid a transaction reporting requirement under state or federal law. The RJR DEFENDANTS knew that the funds they received in exchange for cigarettes represented the proceeds of specified unlawful activity, including without limitation narcotics trafficking, wire fraud, mail fraud, and violations of the Travel Act. The RJR DEFENDANTS also knew that such transactions constituted offenses against a foreign nation involving the manufacture, importation, sale, or distribution of a controlled substance. The RJR DEFENDANTS knowingly conducted and attempted to conduct such financial transactions with the intent to promote the carrying on of such unlawful activity. In addition, the RJR DEFENDANTS knowingly conducted and attempted to conduct such financial transactions with the intent to conceal or disguise the nature (proceeds of racketeering activity), the location, the source (drug traffickers, money launderers), the ownership, or the control of the proceeds of specified unlawful activity. Finally, the RJR DEFENDANTS knowingly conducted and attempted to conduct such financial transactions to avoid transaction-reporting requirements under state or federal law, including without limitation currency and monetary instrument reports.

(b.) International Money Laundering. (18 U.S.C. §§ 1956(a)(2), 1961(1)(B)). The RJR DEFENDANTS transported, transmitted, and/or transferred monetary instruments or funds to a place in the United States from or through a place outside the United States with the intent to promote the carrying on of specified unlawful activity, or did so knowing that the monetary instruments or funds involved in the transportation, transmission, or transfer represented the proceeds some form of unlawful activity and knowing that such transportation, transmission, or transfer was designed in whole or in part to conceal or disguise

the nature, the location, the source, the ownership, or the control of the proceeds of a specified unlawful activity, or to avoid a transaction reporting requirement under state or federal law. By such conduct, the RJR DEFENDANTS engaged in financial transactions within the meaning of 18 U.S.C. § 1956(c)(4). Among other things, the RJR DEFENDANTS knew that money orders and funds sent from South America, the Caribbean, and Europe to the United States to pay for cigarettes purchased in bulk represented the proceeds of specified unlawful activity, including without limitation wire fraud, mail fraud, and violations of the Travel Act. The RJR DEFENDANTS also knew that such specified unlawful activity was an offense against a foreign nation involving the manufacture, importation, sale or distribution of a controlled substance. The RJR DEFENDANTS also aided and abetted violations of 18 U.S.C. § 1956(a)(1) and § 1956(a)(2).

(c.) Conspiracy to Engage in Money Laundering. 18 U.S.C. §§ 1956(h), 1961(1)). The RJR DEFENDANTS conspired to commit offenses defined in 18 U.S.C. § 1956 – including § 1956(a)(1) and § 1956(a)(2). The RJR DEFENDANTS, by their words and actions, agreed to accept currency, monetary instruments, and funds with the knowledge that the currency, monetary instruments, and funds represented the proceeds of specified unlawful activity conducted by themselves and their coconspirators. The RJR DEFENDANTS adopted the common purpose of the conspiracy and participated in its consummation. The goal of the money-laundering conspiracy was to deprive Plaintiffs of money and property, while assuring that the profits derived from cigarette sales were repatriated to the benefit of the RJR DEFENDANTS in a clandestine manner to avoid detection and prosecution.

(d.) Money Laundering (18 U.S.C. §§ 1957, 1961(1)). DEFENDANTS knowingly engaged or attempted to engage in monetary transactions in the United States, in

criminally derived property having a value greater than $10,000 and derived from specified unlawful activity. 18 U.S.C. § 1957(f)(3) and § 1956(c)(7). DEFENDANTS engaged in monetary transactions, including deposits, withdrawals, transfers, or exchanges, in or affecting interstate or foreign commerce, involving funds or monetary instruments by, through, or to financial institutions. DEFENDANTS knew that the funds or instruments received in exchange for their cigarettes represented the proceeds of specified unlawful activity, including but not limited to, wire fraud, mail fraud, and violations of the Travel Act. The RJR DEFENDANTS knew that such specified unlawful activity included offenses against foreign nations involving the manufacture, importation, sale, or distribution of controlled substances.

(e.) Money Laundering of Proceeds of Offenses against Foreign Nations.

(18 U.S.C. § 1956(c)(7)(B)(vi); 18 U.S.C. § 1961(1)(B)). The RJR DEFENDANTS, knowing that the property involved in a financial transaction represented the proceeds of some form of unlawful activity, conducted or attempted to conduct financial transactions in interstate and foreign commerce involving the proceeds of specified unlawful activity with the intent to promote the carrying on of specified unlawful activity; or did so knowing that the transactions were designed in whole or in part to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; or did so knowing that the transactions were designed in whole or in part to avoid transaction reporting requirements under state or federal law. The RJR DEFENDANTS knew that the proceeds of transactions with narcotics traffickers, participants in organized crime, money launderers, and others engaged in criminal conduct represented the proceeds of specified unlawful activity, including without limitation offenses with respect to which the United States would be obligated by a multilateral treaty either to extradite the alleged offender or to submit the case for prosecution, if the offender

were found within the territory of the United States. Specifically, the RJR DEFENDANTS laundered the proceeds of offenses that are subject to multilateral treaties, including without limitation the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988), and the International Convention for the Suppression of the Financing of Terrorism (2001), and the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Adopted November 21, 1997, entered into force in the United States: February 15, 1999).

(i.) The RJR DEFENDANTS have laundered the proceeds of various offenses covered by the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, including, for example: (i) the conversion or transfer of property, knowing that such property is derived from narcotics trafficking, or from an act of participation in such offense or offenses, for the purpose of concealing or disguising the illicit origin of the property or of assisting persons involved in the commission of such an offense or offenses to evade the legal consequences of their actions; (ii) the financing of narcotics trafficking; (iii) the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from narcotics trafficking or from an act of participation in such an offense or offenses; (iv) the acquisition, possession or use of property, knowing, at the time of receipt, that such property was derived from narcotics trafficking or from an act of participation in such offense or offenses; and (v) participation in, association or conspiracy to commit, attempts to commit, and aiding, abetting, facilitating and counseling the commission of acts of, narcotics trafficking.

(ii.) The DEFENDANTS have laundered the proceeds of various offenses covered by the International Convention for the Suppression of the Financing of

Terrorism (2001), including, for example, providing material support and resources to persons and entities engaged in terrorist activities, and providing assets, including products and services, to those persons and entities, acting with knowledge that such persons and entities, including without limitation the PKK and the Iraqi regime, were engaged in terrorism or the sponsorship of terrorist activities. Such persons and entities that engage in terrorist activity are so tainted by their criminal conduct that providing any assets, material support or resources to any of them facilitates such terrorist activities.

(iii.) The DEFENDANTS have laundered, and conspired to launder, the proceeds of various offenses covered by the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Adopted November 21, 1997, entered into force in the United States: February 15, 1999), including for example the proceeds of transactions obtained or continued as a consequence of payments, direct and indirect, to foreign public officials. As alleged above, DEFENDANTS made payments or provided things of value to foreign public officials, retained or obtained business as a result of such payments, and laundered the proceeds of those transactions, often through venues known for bank secrecy.

(f.) Money Laundering of Proceeds of Terrorism. (18 U.S.C. § 1956(c)(7)(D); 18 U.S.C. § 1961(1)(B); 18 U.S.C. § 1961(1)(G)). The RJR DEFENDANTS, knowing that the property involved in a financial transaction represented the proceeds of some form of unlawful activity, conducted or attempted to conduct financial transactions in interstate and foreign commerce involving the proceeds of specified unlawful activity with the intent to promote the carrying on of specified unlawful activity; or did so knowing that the transaction was designed in whole or in part to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; or did so knowing that

the transaction was designed in whole or in part to avoid a transaction reporting requirement under state or federal law. DEFENDANTS knew that the proceeds of transactions with persons and entities engaged in terrorism represented the proceeds of specified unlawful activity, including but not limited to acts of terrorism.

(g.) Money Laundering of Proceeds of Offenses against a Foreign Nation Involving Narcotics Trafficking. (18 U.S.C. § 1956(c)(7)(B); 18 U.S.C. § 1961(1)(B)).

Knowing that the property involved in a financial transaction represented the proceeds of some form of unlawful activity, the RJR DEFENDANTS conducted or attempted to conduct financial transactions in interstate and foreign commerce involving the proceeds of specified unlawful activity with the intent to promote the carrying on of specified unlawful activity; or did so knowing that the transaction was designed in whole or in part to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; or did so knowing that the transaction was designed in whole or in part to avoid transaction reporting requirements under state or federal law. The RJR DEFENDANTS knew that the proceeds of transactions with narcotics traffickers, money launderers and others engaged in criminal activity represented the proceeds of specified unlawful activity, including an offense against a foreign nation involving the manufacture, importation, sale or distribution of a controlled substance.

(h.) Money Laundering of Proceeds of Offenses against a Foreign Nation Involving a Scheme to Defraud Foreign Banks. (18 U.S.C. § 1956(c)(7)(B)(iii); 18 U.S.C. § 1961(1)(B)). The DEFENDANTS, knowing that the property involved in a financial transaction represented the proceeds of some form of unlawful activity, conducted or attempted to conduct financial transactions in interstate and foreign commerce involving the proceeds of specified

unlawful activity with the intent to promote the carrying on of specified unlawful activity; or, knowing that the transaction was designed in whole or in part to conceal or disguise the nature, the location, the source of ownership, or the control of the proceeds of specified unlawful activity, or, knowing that the transaction was designed in whole or in part to avoid a transaction reporting requirement under state or federal law. DEFENDANTS engaged in and facilitated financial transactions and acts of money laundering that deprived foreign banks, including those belonging to Plaintiffs, of money and property that would have been paid to such bank through the lawful transaction of business. DEFENDANTS knowingly engaged in financial transactions designed to launder the proceeds of fraud, or a scheme or attempt to defraud, foreign banks belonging to Plaintiffs.

(i.) Money Laundering of Proceeds of Violations of Foreign Corrupt Practices Act. (18 U.S.C. § 1956(c)(7)(D); 18 U.S.C. § 1961(1)(B)). In general, the Foreign Corrupt Practices Act (FCPA) makes it unlawful for DEFENDANTS, or any officer, director, employee, or agent thereof, to pay or promise to pay money or any thing of value to any foreign official for purposes of influencing any act or decision of the foreign official in his or her official capacity, inducing such official to do or omit to do any act in violation of the lawful duty of such official, or securing any improper advantage, or inducing such foreign official to use his or her influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, in order to assist DEFENDANTS in obtaining or retaining business for or with, or directing business to, any person. “Foreign official” means any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of such entities.

The DEFENDANTS, acting through intermediaries, provided money or things of value to foreign officials to obstruct oversight of DEFENDANTS conduct, preclude discovery of their involvement in money laundering and other criminality, and thereby permit their business to continue. The DEFENDANTS, knowing that the property involved in a financial transaction represented the proceeds of some form of unlawful activity, conducted or attempted to conduct financial transactions in interstate and foreign commerce involving the proceeds of specified unlawful activity with the intent to promote the carrying on of specified unlawful activity; or, knowing that the transaction was designed in whole or in part to conceal or disguise the nature, the location, the source of ownership, or the control of the proceeds of specified unlawful activity, or, knowing that the transaction was designed in whole or in part to avoid a transaction reporting requirement under state or federal law.

(j.) Providing Material Support or Resources to Designated Foreign Terrorist Organizations. (18 U.S.C. § 2339(B) and 18 U.S.C. § 1961(1)(G)). Beginning in or about 1990, and continuing until 2002, in the United States and elsewhere, the RJR DEFENDANTS, Audeh Trading and Consultancy Service and IBCS, with each other and with others known and unknown, did knowingly provide, conspire to provide, and aid and abet others in providing, material support or resources to the PKK, a designated FTO, in violation of 18 U.S.C. § 2339(B). The object of the conspiracy was to provide funds, goods, services, and other assets to the PKK, which caused the DEFENDANTS’ cigarette shipments to be sent into Iraq and financed the PKK’s terrorist activities and operations.

(k.) Wire fraud and mail fraud. (18 U.S.C. §§ 1341, 1343, 1961(1)(B)).

The RJR DEFENDANTS devised a scheme or artifice to defraud and/or to obtain money by means of false pretenses, representations, or promises, and used the mails and wires for the

purpose of executing the scheme, and acted with a specific intent to defraud by devising, participating in, and/or abetting the scheme. The wire and mail communications were made during the course of the conspiracy that covered at least 1991 to 2002. Hundreds of telephone conversations and faxes were made to further the fraudulent scheme on virtually a daily basis during the course of the conspiracy, including without limitation those identified in paragraphs 47, 68, 73, 83, 94, 106, and others. These telephone conversations, mailings, and wire transfer of funds furthered the scheme by expediting the secret payments to the RJR DEFENDANTS of funds that constituted the proceeds of criminal activity and were part of a clandestine system for the remittance of such proceeds to the RJR DEFENDANTS. The RJR DEFENDANTS, acting through their employees, agents, and coconspirators, made or caused to be made such telephone calls, mailings, and wire transfers of funds to further the scheme. The RJR DEFENDANTS knew that their coconspirators, in the course of carrying out the RJR DEFENDANTS’ directions and orders, would use or cause to be used the interstate and international wires and mails. The motive for committing fraud is plain: the acquisition of criminals as additional customers by laundering their criminal proceeds meant increased profits and market share for the RJR DEFENDANTS.

(l.) Violation of the Travel Act. (18 U.S.C. §§ 1952, 1961(1)(B)). The RJR DEFENDANTS traveled in interstate or foreign commerce, and used facilities in interstate and foreign commerce, including the mail, with intent to distribute the proceeds of unlawful activity, and to promote, manage, establish, carry on, or facilitate the promotion, management, establishment, or carrying on of unlawful activity, and thereafter performed or attempted to perform unlawful activity. The RJR DEFENDANTS knew that the funds provided to them represented the proceeds of unlawful activity, including trafficking in narcotics and controlled

substances, and knew that, by accepting such payments, they aided the efforts of the drug traffickers to launder their ill-gotten gains. The RJR DEFENDANTS and their representatives and coconspirators traveled across national borders and otherwise used the facilities of foreign commerce to distribute the proceeds of unlawful activity to the benefit of the RJR DEFENDANTS. By this conduct, the RJR DEFENDANTS promoted, managed, established, and facilitated such unlawful activity.

177. The acts described above form a “pattern” of racketeering activity within 18 U.S.C. § 1961(5). The DEFENDANTS and others with whom they have been associated have been related in their common objectives of maximizing global cigarette sales and utilizing money laundering to achieve this end. The DEFENDANTS’ predicate acts have had the same or similar purposes, results, participants, victims, and methods of commission, and occurred over at least a ten-year period. The predicate acts have been consistently repeated and are capable of further repetition.

178. The DEFENDANTS’ pattern of racketeering activities dates from at least January 1, 1985, through the present and threatens to continue in the future.

179. The RJR DEFENDANTS used or invested, directly or indirectly, racketeering income, or a part thereof, or the proceeds of such income, to acquire an interest in, establish, and operate, the RJR Money-Laundering Enterprise, which is and was engaged in, or the activities of which affect and have affected, interstate or foreign commerce, in violation of 18 U.S.C. § 1962(a). The RJR DEFENDANTS were principals in the racketeering scheme. The MEMBER STATES suffered multiple injuries to their economic interests as a result of this use and investment of racketeering income.

180. Specifically, the RJR DEFENDANTS received the income and proceeds of a pattern of racketeering activity in which they participated as principals, including an international money-laundering scheme, acts of wire fraud and mail fraud, and violations of the Travel Act. Upon their receipt of such ill-gotten gains by wire transfers from money launderers and/or their associates, the RJR DEFENDANTS used and invested such income and proceeds, or a portion thereof, to acquire an interest in, establish, and operate the RJR Money-Laundering Enterprise, which was and is engaged in interstate and foreign commerce. In particular, the RJR DEFENDANTS used the proceeds of the scheme: (a) to operate the RJR Money-Laundering Enterprise; (b) to replenish the supply of cigarettes for ultimate sale to known money launderers; (c) to acquire, purchase, and subsidize facilities necessary to the RJR Money-Laundering Enterprise, including manufacturing, sales, and distribution operations (e.g., the Puerto Rico plant), secret offices and offshore companies and bank accounts (e.g., Swiss companies and bank accounts); (d) to compensate employees and agents of the RJR DEFENDANTS engaged in the money-laundering activities; (e) to pay expenses incurred in connection with money-laundering activities such as telephone bills incurred in the wire fraud scheme and travel costs incurred by such employees; and (f) to establish a money-laundering scheme, infrastructure, and network. In sum, the RJR DEFENDANTS did not reinvest the proceeds of racketeering activity in their general business operations, but instead used and invested such proceeds to establish the infrastructure of, acquire an interest in, and operate the RJR Money-Laundering Enterprise, and it was this use and investment that harmed the MEMBER STATES. The use and investment of the proceeds of racketeering activity occurred in several ways, including but not limited to the following:

(a.) The proceeds from the money-laundering enterprise finance the sales and marketing operations that promote the increase of sales in succeeding years.

(b.) The increased market volume and premium prices charged to moneylaundering customers are utilized to offset the additional expenses incurred by the DEFENDANTS when they pay for the additional shipping and handling charges associated with the clandestine movement of the cigarettes through the circuitous routes established by the DEFENDANTS.

181. The MEMBER STATES were injured in their business and property by reason of the RJR DEFENDANTS’ use and investment of racketeering income to acquire, establish, and operate the RJR Money-Laundering Enterprise. Absent this use and investment of racketeering income, the criminals who launder their criminal proceeds through the purchase of cigarettes would find their crimes less profitable and more difficult to commit, and the economic injury to the MEMBER STATES would have been avoided in whole or in part.

182. As a direct and proximate result of the violations set forth above, the Plaintiffs, the MEMBER STATES, have been injured in their business and property as set forth more fully above in paragraphs one hundred seventy (170) through one hundred seventy-three (173). The DEFENDANTS’ violations of 18 U.S.C. § 1962(a) caused these losses. Under the provisions of 18 U.S.C. § 1964(c), the MEMBER STATES are entitled to bring this action and recover herein treble damages, the cost of bringing the suit, pre-judgment interest, and reasonable attorneys’ fees.

COUNT II MEMBER STATES

(AS TO ALL RJR DEFENDANTS) (RICO, 18 U.S.C. § 1962(b))

183. The MEMBER STATES restate and reallege paragraphs one (1) through one hundred eighty-two (182) and further allege:

184. The RJR DEFENDANTS acquired or maintained, directly or indirectly, through a pattern of racketeering activity, an interest in and control of the RJR Money- Laundering Enterprise, which was and is engaged in, or the activities of which affect and have affected, interstate or foreign commerce in violation of 18 U.S.C. § 1962(b). The Plaintiffs, the MEMBER STATES, have been injured by the DEFENDANTS’ acquisition and maintenance of an interest in and control of the enterprise through a pattern of racketeering activity.

185. The DEFENDANTS, through a pattern of racketeering activity, acquired or maintained, directly or indirectly, an interest in and control of the RJR Money-Laundering Enterprise that engaged in and the activities of which affect interstate and foreign commerce.

Specifically, the RJR DEFENDANTS maintained control of the RJR Money-Laundering Enterprise by means of racketeering activities, including, for example: (a) interstate and international wire communications in violation of 18 U.S.C., § 1343 (orders and instructions for payment were placed telephonically and RJR had total control over the enterprise and the payment for their product); (b) money laundering in violation of 18 U.S.C., §§ 1956 and 1957 (RJR controlled and concealed the flow of the proceeds of the cigarette sales – a key aim of the scheme – through money laundering); and (c) violations of the Travel Act, 18 U.S.C., § 1952 (cross-border travel and transactions to facilitate money laundering and other illicit activities).

Through this pattern of racketeering activities, which also included transmitting false statements to government authorities, the RJR DEFENDANTS were able to acquire and maintain an interest in and control of the RJR Money-Laundering Enterprise. This interest and control furthered, concealed, and protected the operations of the money-laundering enterprise, and thereby permitted the RJR Money-Laundering Enterprise to flourish without detection.

186. As a direct and proximate result of the DEFENDANTS’ acquisition and maintenance of an interest in and control of the RJR Money-Laundering Enterprise, the Plaintiffs, the MEMBER STATES, have suffered the loss of money and property as set forth more fully above in paragraphs one hundred seventy (170) through one hundred seventy-three (173). The DEFENDANTS’ violations of 18 U.S.C. § 1962(b) caused these losses. Under the provisions of 18 U.S.C. § 1964(c), the MEMBER STATES are entitled to bring this action and recover herein treble damages, the cost of bringing the suit, pre-judgment interest, and reasonable attorneys’ fees.

COUNT III MEMBER STATES

(AS TO ALL RJR DEFENDANTS) (RICO, 18 U.S.C. § 1962(c)) 187. The MEMBER STATES restate and reallege paragraphs one (1) through one hundred eighty-six (186) and further allege.

188. The RJR DEFENDANTS, through the commission of two or more acts constituting a pattern of racketeering activity, directly or indirectly participated in the operation

or management of the RJR Money-Laundering Enterprise, the activities of which affect interstate or foreign commerce.

189. At all relevant times, the RJR DEFENDANTS participated in the operation or management of an “enterprise,” within the meaning of 18 U.S.C. § 1961(4). The RJR DEFENDANTS, operating together and individually, directed and controlled the RJR Money- Laundering Enterprise. The RJR DEFENDANTS operated, managed, and exercised control over the money-laundering enterprise by, among other things: (a) establishing a money-laundering scheme in which the coconspirators facilitated the money-laundering scheme and concealed and remitted to the RJR DEFENDANTS the proceeds of the money-laundering scheme; (b) compelling their customers to sell cigarettes at a price set by the DEFENDANTS; and (c) investing and using the proceeds of the money-laundering scheme in the enterprise.

190. As a direct and proximate result of the violations set forth above, the Plaintiffs, the MEMBER STATES, have been injured in their business and property as set forth more fully above in paragraphs one hundred seventy (170) through one hundred seventy-three (173). The DEFENDANTS’ violations of 18 U.S.C. § 1962(c) caused these losses. Under the provisions of 18 U.S.C. § 1964(c), the MEMBER STATES are entitled to bring this action and recover herein treble damages, the cost of bringing the suit, pre-judgment interest, and reasonable attorneys’ fees.

COUNT IV MEMBER STATES

(AS TO ALL RJR DEFENDANTS) (RICO, 18 U.S.C. § 1962(d))

191. The MEMBER STATES restate and reallege paragraphs one (1) through one hundred ninety (190) and further allege: 192. The RJR DEFENDANTS entered into an agreement with each other and with distributors, shippers, currency dealers, and wholesalers to join in the conspiracy to violate 18 U.S.C. §§ 1962(a), 1962(b), and 1962(c). Each DEFENDANT entered into an agreement to join the conspiracy, and took acts in the furtherance of the conspiracy and knowingly participated in the conspiracy. The purpose of the conspiracy was to acquire and service new customers by laundering the proceeds of their criminal activity to the economic detriment of Plaintiffs and to the economic benefit of the RJR DEFENDANTS. The conspirators carried out the scheme and each conspirator was put on notice of the general nature of the conspiracy, that the conspiracy extended beyond the individual role of any single member, and that the conspiratorial venture functioned as a continuing unit for a common purpose. The RJR DEFENDANTS adopted the goal of furthering and facilitating the criminal endeavor. Their stake in the money-laundering venture was in making profits and increasing market share through their informed and interested cooperation with their criminal customers, and their active assistance, stimulation, and instigation of the money-laundering activities.

193. The RJR DEFENDANTS, together with each member of the conspiracy, agreed and conspired to violate: (1) 18 U.S.C. § 1962(a) by using, or causing the use of, income they derived from the above-described pattern of racketeering activities in the acquisition,

establishment, and/or operation of the enterprise, the activities of which affect interstate or foreign commerce; (2) 18 U.S.C. § 1962(b) by acquiring or maintaining, or causing the acquisition or maintenance of, through a pattern of racketeering activity, an interest or control in the enterprise, the activities of which affect interstate or foreign commerce; (3) 18 U.S.C. § 1962(c) by participating, directly and indirectly, in the conduct of the affairs of the enterprise through a pattern of racketeering activity, including an agreement that the conspirators, or one of them, would commit or cause the commission of two or more racketeering acts constituting such a pattern; and (4) violating the USA Patriot Act.

194. The RJR DEFENDANTS participated in and cooperated with each other and with their coconspirators in the aforementioned conspiracy that enabled each cigarette manufacturer and distributor to enhance its market share, suppress its competition, and promote sale of its products.

195. As a result of the conspiracy, the RJR DEFENDANTS and their coconspirators were able to facilitate the laundering of large volumes of money that constituted the proceeds of criminal activity.

196. The membership of the conspiracy in question included the RJR DEFENDANTS and tobacco distributors, the shippers, the wholesalers, currency brokers, and the RJR DEFENDANTS’ subsidiary corporations; who act in concert to produce the cigarettes, mislabel or fail to properly label the cigarettes, sell the cigarettes, and arrange for payment in a way that is undetectable by governmental authorities, with said payment ultimately being returned to the DEFENDANTS in the United States. As coconspirators, the RJR DEFENDANTS are liable for all of the actions committed by all of the coconspirators within the conspiracy and are liable for all of the damages sustained by the MEMBER STATES that were

caused by any members of the conspiracy, regardless of whether the RJR DEFENDANTS were themselves directly involved in a particular aspect of the enterprise.

197. As a direct and proximate result of the violations set forth above, the Plaintiffs, the MEMBER STATES, have been injured in their business and property as set forth more fully above in paragraphs one hundred seventy (170) through one hundred seventy-three (173). The DEFENDANTS’ violations of 18 U.S.C. § 1962(d) caused these losses. Under the provisions of 18 U.S.C. § 1964(c), the MEMBER STATES are entitled to bring this action and recover herein treble damages, the cost of bringing the suit, pre-judgment interest, and reasonable attorneys’ fees.

COUNT V MEMBER STATES

(AS TO ALL RJR DEFENDANTS) (RICO, 18 U.S.C. §§ 1964(a), 1964(c), 28 U.S.C. § 1651(a))

198. The MEMBER STATES restate and reallege paragraphs one (1) through one hundred ninety-seven (197) and further allege: 199. The United States District Court is empowered to prevent and restrain violations of 18 U.S.C. § 1962 by issuing appropriate orders, including, but not limited to: ordering any person to divest himself or herself of any interest, direct or indirect, in any enterprise; imposing reasonable restrictions on the future activities or investments of any person, including, but not limited to, prohibiting any person from engaging in the same type of endeavor in which the enterprise engaged, the activities of which affect interstate or foreign commerce; or

ordering dissolution or reorganization of any enterprise, making due provision for the rights of innocent persons. 18 U.S.C. § 1964(a).

200. The RJR DEFENDANTS currently are actively engaged in the activities set forth within this complaint that promote and support the money laundering that is the subject matter of this complaint.

201. The DEFENDANTS intend to continue said activities and to interfere with investigations by governmental officials into the DEFENDANTS and their coconspirators’ money-laundering activities.

202. The DEFENDANTS, by their conduct of selling cigarettes to money launderers, creating false and misleading documents, improperly labeling shipments of cigarettes, and setting forth mechanisms of payment by which criminals may pay for the cigarettes without being detected by government investigations, all continue to damage the MEMBER STATES.

203. As a result of the DEFENDANTS’ conduct in violation of 18 U.S.C. §§ 1962(a), 1962(b), 1962(c), and 1962(d), the MEMBER STATES have been and continue to be irreparably injured as is alleged more fully above.

204. As a result of the nature of the money-laundering activities, it would be functionally impossible for the MEMBER STATES to put a complete halt to said moneylaundering activities as long as the DEFENDANTS continue to conduct these activities. In addition, the MEMBER STATES continue to suffer injury to business and property to an extraordinary degree.

205. Money damages will not provide a full and complete remedy for DEFENDANTS’ unlawful conduct. There is no adequate remedy at law that will protect the

MEMBER STATES in the future from these money-laundering activities if the DEFENDANTS do not cease their involvement in and support of money-laundering activities. Pursuant to 18 U.S.C. §§ 1964(a), 1964(c), as well as 28 U.S.C. § 1651(a), the MEMBER STATES demand full RICO Injunctive and Equitable Relief.

COUNT VI EUROPEAN COMMUNITY AND MEMBER STATES

(AS TO ALL RJR DEFENDANTS) (COMMON LAW FRAUD)

206. Plaintiffs restate and reallege paragraphs one (1) through two hundred five (205) and further allege: 207. The RJR DEFENDANTS and their coconspirators intentionally falsified documents, falsified shipping records, and generated false and misleading billing records concerning the payment for cigarettes so as to mislead the Plaintiffs, THE EUROPEAN COMMUNITY and the MEMBER STATES, as to the purchasers of and source of funds for payment for their cigarettes. The RJR DEFENDANTS and their coconspirators made these false and material statements and representations and failed to disclose material information in such documents and records with intent to defraud the Plaintiffs. The DEFENDANTS made these material misrepresentations and omissions with the knowledge and intention that the Plaintiffs, THE EUROPEAN COMMUNITY and the MEMBER STATES, would reasonably rely on said documents. The RJR DEFENDANTS entered into an understanding or agreement, express or tacit, with their distributors, customers, agents, consultants, and other coconspirators, to participate in a common scheme, plan, or design to commit the aforesaid tortious acts, and

thereby launder criminal proceeds to the detriment of THE EUROPEAN COMMUNITY and the MEMBER STATES. In pursuance of the agreement, RJR and its distributors, customers, agents, consultants, and other coconspirators acted tortiously by, among other things, committing the aforesaid acts constituting fraud, thereby causing harm to Plaintiffs. The RJR DEFENDANTS, through agreement and joint action with their coconspirators, acted tortiously, recklessly, and unlawfully to the detriment of Plaintiffs. By means of the aforesaid concerted action, the RJR DEFENDANTS and their coconspirators are jointly and severally liable for the torts and other wrongful conduct alleged herein.

208. Plaintiffs reasonably relied upon the DEFENDANTS’ misrepresentations, and incurred damage as a result of such reliance. Specific examples of the process by which these activities occurred are set forth above.

209. The Plaintiffs, THE EUROPEAN COMMUNITY and the MEMBER STATES, reasonably relied upon falsified or misleading documents produced or procured by the DEFENDANTS, and were thereby misled in the course of performing their duty to fight against money laundering and related criminal activity.

210. Furthermore, the RJR DEFENDANTS knowingly and intentionally generated false, misleading, and material information, and intentionally concealed other material information, concerning their role in money laundering in connection with the sale of their products.

211. The Plaintiffs, THE EUROPEAN COMMUNITY and the MEMBER STATES, reasonably relied upon data and information provided to them by the DEFENDANTS and/or their coconspirators and agents in acting or refraining from acting with respect to moneylaundering activities.

212. The RJR DEFENDANTS, in falsifying documents to expedite money laundering, in providing misleading information, and in concealing material and true information concerning their money-laundering activities, acted in willful, wanton, gross, and callous disregard for the rights of the Plaintiffs, THE EUROPEAN COMMUNITY and the MEMBER STATES. The aforesaid actions were taken knowingly for the purpose of supporting the activities of the DEFENDANTS’ coconspirators and with the intent of increasing the profits and sales of the DEFENDANTS and harming THE EUROPEAN COMMUNITY and the MEMBER STATES.

213. DEFENDANTS were duty-bound to disclose the material information concerning the destination of tobacco shipments and the concealed sources of funds used to purchase cigarettes. By law, no person may make false statements to the government. Having undertaken to make representations to THE EUROPEAN COMMUNITY and the MEMBER STATES, DEFENDANTS were obligated to provide full, complete, and truthful information concerning the destination of tobacco shipments and the sources of funds to purchase their products. DEFENDANTS had superior, if not exclusive, knowledge of such information, and it was not readily available to the Plaintiffs. DEFENDANTS intended and knew, or should have known, that Plaintiffs would reasonably rely, act, and refrain from acting, on the basis of false and/or incomplete information provided to Plaintiffs by DEFENDANTS, and Plaintiffs did so to their detriment. Under these circumstances, DEFENDANTS’ conduct amounts to fraudulent misrepresentation and fraudulent concealment, and an effective conversion of Plaintiffs’ money and property.

214. As a direct and proximate result of the RJR DEFENDANTS’ fraud and the Plaintiffs’ reliance upon said fraud, the Plaintiffs have suffered economic damages as are set

forth more fully above in paragraphs one hundred seventy (170) through one hundred seventythree (173). The Plaintiffs demand judgment for damages, both compensatory and punitive, as well as full Common Law Injunctive and Equitable Relief.

COUNT VII EUROPEAN COMMUNITY AND MEMBER STATES

(AS TO ALL RJR DEFENDANTS) (PUBLIC NUISANCE)

215. Plaintiffs restate and reallege paragraphs one (1) through two hundred fourteen (214) and further allege: 216. Plaintiffs are governmental authorities.

217. Money laundering and related criminal activities are a violation of law and a public nuisance.

218. The money-laundering activities in the United States and THE EUROPEAN COMMUNITY of the RJR DEFENDANTS: (a) have substantially and unreasonably interfered with, offended, injured and endangered, and continue to interfere with, offend, injure and endanger, the public health, morals, safety, convenience, and well-being of the general public, the financial infrastructure of THE EUROPEAN COMMUNITY, and the operation of the market for tobacco products in THE EUROPEAN COMMUNITY and the MEMBER STATES and have interfered with and endangered the Customs Territory, Customs Border and free market which THE EUROPEAN COMMUNITY is bound to protect; (b) constitute conduct that is proscribed by applicable laws, administrative regulations, and directives; (c) constitute conduct of a continuing nature and/or have produced a permanent or long-lasting effect, and the

DEFENDANTS know or should know that said conduct has a significant harmful effect upon the public right.

219. The money-laundering activities of the RJR DEFENDANTS in the United States, THE EUROPEAN COMMUNITY, and the MEMBER STATES have been, and continue to be, effectuated through widespread criminal activity, including mail fraud, wire fraud, and other illegal acts.

220. The RJR DEFENDANTS facilitated the laundering of criminal proceeds by means of a variety of acts and omissions conducted in or directed from the United States, including the following: (a) The RJR DEFENDANTS laundered criminal proceeds by covertly receiving funds that they knew or should have known were the proceeds of criminal acts and took steps to conceal the source and nature of the criminal proceeds. (b) The RJR DEFENDANTS arranged a process by which cigarettes purchased by criminals could be paid for by secret payments into Swiss corporations and/or Swiss bank accounts so as to conceal revenues derived from criminal activities. (c) The DEFENDANTS filed or caused the filing with THE EUROPEAN COMMUNITY and/or the MEMBER STATES of false and fraudulent documents that misstated the value of, the intended destination of, and the source of funds for the purchase of cigarettes that were placed within customs bonded warehouses and/or free trade zones within THE EUROPEAN COMMUNITY. (d) The RJR DEFENDANTS sold large volumes of United States-made cigarettes into Iraq in violation of United States laws and to the detriment of the Plaintiffs. (e) The RJR DEFENDANTS failed to supervise the distribution of their tobacco products to assure that such products were not sold into criminal channels or paid for with illicit funds. (f) The RJR DEFENDANTS failed to act reasonably when they were put on notice of their involvement with money launderers. (g) The RJR DEFENDANTS entered into an

understanding or agreement, express or tacit, with their distributors, customers, agents, consultants, and other coconspirators, to participate in a common scheme, plan or design to commit the aforesaid tortious acts and thereby launder money to the detriment of THE EUROPEAN COMMUNITY and the MEMBER STATES. In pursuance of the agreement, RJR and its distributors, customers, agents, consultants, and other coconspirators acted tortiously by, among other things, committing the aforesaid acts constituting public nuisance, thereby causing harm to Plaintiffs. The RJR DEFENDANTS, through joint action with their coconspirators, acted tortiously, recklessly, unlawfully, and negligently to the detriment of Plaintiffs. By means of the aforesaid concerted action, the RJR DEFENDANTS and their coconspirators are jointly and severally liable for the torts and other wrongful conduct alleged herein.

221. Through these and other intentional and negligent acts and omissions, the RJR DEFENDANTS have substantially and unreasonably offended, interfered with, and caused damage to the public in the exercise of rights common to all, in a manner such as to (a) offend public morals, (b) interfere with use by the public of a public place, (c) endanger and injure the property, life, health, safety, and comfort of a considerable number of persons; and (d) injure and interfere with the market for tobacco products in THE EUROPEAN COMMUNITY and the MEMBER STATES; and (e) injure the economic well being of the citizens of THE EUROPEAN COMMUNITY and the MEMBER STATES. The acts and omissions of the RJR DEFENDANTS constitute a public nuisance. This public nuisance, or some part of it, continues unabated to the detriment of Plaintiffs’ interests and has undermined and endangered the Customs Territory, Customs Border, and free market that THE EUROPEAN COMMUNITY is bound to protect.

222. The RJR DEFENDANTS knew, or reasonably should have known, that their acts and omissions relating to money laundering created great dangers to the community, including Plaintiffs’ economic and non-economic interests. The DEFENDANTS directly, or through their coconspirators, undermined THE EUROPEAN COMMUNITY’S duties and authority to regulate ports; to regulate foreign commerce; to regulate customs territories, free trade zones, and customs bonded warehouses; to regulate transportation into THE EUROPEAN COMMUNITY or within its borders; to ensure and regulate the free movement of goods within THE EUROPEAN COMMUNITY; to regulate safety and security at sea; to regulate and take action to protect against breaches of THE EUROPEAN COMMUNITY Customs Territory or THE EUROPEAN COMMUNITY Customs Border; and to regulate and set rules to combat money laundering, all harms different from those suffered by members of the general public or the Member States, and all wrongs which it is the duty and responsibility of THE EUROPEAN COMMUNITY to redress.

223. The RJR DEFENDANTS have acted maliciously, wantonly, and with a recklessness that bespeaks an improper motive and vindictiveness, and have engaged in outrageous and oppressive conduct and with a reckless or wanton disregard of safety and rights.

Their conduct amounts to a fraud on the public.

224. As a direct and proximate result of the acts and/or omissions of the RJR DEFENDANTS, which constitute a public nuisance, Plaintiffs have sustained and continue to sustain injury as set forth more fully in paragraphs one hundred seventy (170) through one hundred seventy-three (173). THE EUROPEAN COMMUNITY and the MEMBER STATES each have the right to recover damages as set forth in paragraphs one hundred seventy (170)

through one hundred seventy-three (173) in that each has suffered damages that are unique to it and which are of a kind different from those suffered by the general public.

225. By reason of the injury to their economic and non-economic interests due to the public nuisance described in the preceding paragraphs to this complaint, Plaintiffs are entitled to an award of damages, including actual, compensatory, and punitive damages. In addition, damages do not constitute a full and adequate remedy at law, and for this reason Plaintiffs are therefore entitled to full Common Law Injunctive and Equitable Relief, including a judgment permanently enjoining DEFENDANTS from the continuation of activities constituting a public nuisance, and compelling DEFENDANTS to take steps to abate and prevent the money laundering that is the subject matter of this complaint.

COUNT VIII EUROPEAN COMMUNITY AND MEMBER STATES

(AS TO ALL RJR DEFENDANTS) (UNJUST ENRICHMENT)

226. Plaintiffs restate and reallege paragraphs one (1) through two hundred twenty-five (225) and further allege: 227. The RJR DEFENDANTS were unjustly enriched at Plaintiffs’ expense. The acts and omissions of these DEFENDANTS and others have placed in the possession of these DEFENDANTS money under such circumstances that in equity and good conscience they ought not to retain it.

228. The RJR DEFENDANTS were unjustly enriched through their moneylaundering scheme. The RJR DEFENDANTS entered into an understanding or agreement,

express or tacit, with their distributors, customers, agents, consultants, and other coconspirators, to participate in a common scheme, plan or design to commit the aforesaid tortious acts and thereby launder the proceeds of criminal activity to the detriment of THE EUROPEAN COMMUNITY and the MEMBER STATES. In pursuance of the agreement, RJR and its distributors, customers, agents, consultants, and other coconspirators acted tortiously by, among other things, committing the aforesaid acts constituting unjust enrichment, thereby causing harm to Plaintiffs. The RJR DEFENDANTS, through joint action with their coconspirators, acted tortiously, recklessly, unlawfully, and negligently, to the detriment of Plaintiffs. By means of the aforesaid concerted action, the RJR DEFENDANTS and their coconspirators are jointly and severally liable for the torts and other wrongful conduct alleged herein.

229. THE EUROPEAN COMMUNITY provides at its expense a marketplace without internal frontiers that inures to the benefit of all commercial enterprises that operate within the borders of THE EUROPEAN COMMUNITY. It is this marketplace makes the sale of products such as cigarettes more expeditious and profitable. The DEFENDANTS and their coconspirators in laundering the proceeds of criminal activity, make illicit use of this marketplace to their economic benefit and to the economic detriment of THE EUROPEAN COMMUNITY and the MEMBER STATES. The RJR DEFENDANTS were unjustly enriched through their money-laundering scheme. By reason of their money-laundering scheme, the RJR DEFENDANTS were enabled to illegally enhance profits, market share, and the sales price of their international tobacco operations.

230. The unjust enrichment of the RJR DEFENDANTS was accomplished at the expense of Plaintiffs. By reason of the money-laundering scheme, Plaintiffs were, and continue

to be, deprived of money and property, and have suffered other economic and non-economic injuries, and DEFENDANTS reaped vast profits and proceeds from their illegal scheme.

231. Under these circumstances, the receipt and retention of the money derived from money-laundering operations are such that, as between Plaintiffs and DEFENDANTS, it is unjust for DEFENDANTS to retain it.

232. Equity and good conscience require the RJR DEFENDANTS to pay damages and restitution to Plaintiffs, disgorge their ill-gotten gains and, to effectuate these remedies, a constructive trust and equitable lien should be imposed by this Court upon the proceeds obtained by DEFENDANTS by reason of money-laundering activities, which proceeds are rightly owned by and belong to Plaintiffs. Plaintiffs have suffered damages as set forth more fully in paragraphs one hundred seventy (170) through one hundred seventy-three (173), and are entitled to recover actual, compensatory, and punitive damages. Judgment in Plaintiffs’ favor should include full Common Law Injunctive and Equitable Relief.

COUNT IX MEMBER STATES

(AS TO ALL RJR DEFENDANTS) (UNJUST ENRICHMENT)

233. Plaintiffs restate and reallege paragraphs one (1) through two hundred thirtytwo (232) and further allege: 234. DEFENDANTS received funds, including the proceeds of narcotics trafficking, and received the instrumentalities of illicit conduct. Such funds and

instrumentalities, and the proceeds thereof, were and are the property of the MEMBER STATES as of the time of the commission of the illicit conduct.

235. By appropriating Plaintiffs’ funds and property for themselves, DEFENDANTS have been enriched at Plaintiffs’ expense. DEFENDANTS have rejected demands for compensation.

236. Under the circumstances, in good conscience and equity, DEFENDANTS cannot retain such funds and instrumentalities, and the proceeds thereof.

237. Equity and good conscience require the RJR DEFENDANTS to pay damages and restitution to Plaintiffs, disgorge their ill-gotten gains and, to effectuate these remedies, a constructive trust and equitable lien should be imposed by this Court upon the proceeds obtained by DEFENDANTS by reason of money-laundering activities, which proceeds are rightly owned by and belong to Plaintiffs. Plaintiffs are entitled to damages, including actual, compensatory, and punitive damages, and their injuries are set forth more fully above in paragraphs one hundred seventy (170) through one hundred seventy-three (173). Judgment in Plaintiffs’ favor should include full Common Law Injunctive and Equitable Relief.

COUNT X EUROPEAN COMMUNITY AND MEMBER STATES

(AS TO ALL RJR DEFENDANTS) (NEGLIGENCE)

238. Plaintiffs restate and reallege paragraphs one (1) through two hundred thirtyseven (237) and further allege:

239. DEFENDANTS owed, and continue to owe, a duty of reasonable care to refrain from causing foreseeable loss to the Plaintiffs. DEFENDANTS were and are obligated to avoid negligently causing harm to Plaintiffs and were and are duty-bound to: (a.) design, implement, and utilize effective monitoring and oversight procedures, including appropriate compliance programs, to deter and detect money launderingrelated activities by their employees and agents; (b.) investigate and terminate the money laundering-related conduct of their employees and agents, particularly inasmuch as their managerial personnel with decisionmaking authority were put on reasonable notice of such illicit conduct; (c.) deal with the Plaintiffs, and their representatives, in an honest, good faith, and forthright manner; (d.) terminate sales of their tobacco products to or through persons or entities known to be engaged, directly or indirectly, in money laundering; (e.) comply with federal and state statutes and the standards of care reflected therein; (f.) produce, market, and distribute their cigarette products lawfully and with due care; and (g.) use proper practices and procedures in the hiring, selection, approval, instruction, training, supervision, and discipline of employees and agents engaged in the production, marketing, and distribution of their products, some of whom the DEFENDANTS knew, or reasonably should have known, were assisting and otherwise engaged in money laundering.

240. As manufacturers, distributors, and dominant participants in the marketplace, DEFENDANTS had, and continue to have, the authority and ability to act reasonably to prevent money laundering in connection with the sale of their products for the protection of Plaintiffs.

Reasonable steps could and should have been taken by the DEFENDANTS to prevent or reduce the risk of their products being sold to persons who were using the purchase of cigarettes to launder the proceeds of criminal activity.

241. DEFENDANTS, as manufacturers, distributors, and dominant participants in the marketplace, have a special ability and duty to exercise reasonable care to detect and guard against the risks associated with the distribution of their products, for the benefit and protection of those foreseeably and unreasonably placed at risk of harm from the distribution of their products, including Plaintiffs.

242. DEFENDANTS’ unreasonable acts and omissions created and enhanced the risk that their products would be distributed to persons who would use the purchase of cigarettes to launder criminal proceeds.

243. DEFENDANTS’ unreasonable acts and omissions affirmatively and foreseeably caused substantial economic and non-economic damages to the Plaintiffs, and otherwise obstructed their ability to protect themselves from harms associated with money laundering. DEFENDANTS, acting with and through their employees, agents, and coconspirators, breached their duty of care, as aforesaid, by acts and/or omissions that posed an unreasonable and foreseeable risk of harm to Plaintiffs. The RJR DEFENDANTS entered into an understanding or agreement, express or tacit, with their distributors, customers, agents, consultants, and other coconspirators, to participate in a common scheme, plan, or design to commit the aforesaid tortious acts, and thereby launder criminal proceeds to the detriment of

THE EUROPEAN COMMUNITY and the MEMBER STATES. In pursuance of the agreement, RJR and its distributors, customers, agents, consultants, and other coconspirators acted tortiously by, among other things, committing the aforesaid acts constituting negligence, thereby causing harm to Plaintiff. The RJR DEFENDANTS, through joint action with their coconspirators, acted tortiously, recklessly, unlawfully, and negligently, to the detriment of Plaintiffs. By means of the aforesaid concerted action, the RJR DEFENDANTS and their coconspirators are jointly and severally liable for the torts and other wrongful conduct alleged herein. DEFENDANTS’ breach proximately caused, and continues to cause, damage to the economic and non-economic interests of the Plaintiffs, as set forth more fully in paragraphs one hundred seventy (170) through one hundred seventy-three (173).

244. The RJR DEFENDANTS have acted maliciously, wantonly, and with a recklessness that bespeaks an improper motive and vindictiveness, and have engaged in outrageous and oppressive conduct and with a reckless or wanton disregard of safety and rights.

Their conduct amounts to a fraud on the public.

245. By reason of the injury to their economic and non-economic interests due to the negligence of the DEFENDANTS, as aforesaid, Plaintiffs are entitled to an award of damages, including actual, compensatory, and punitive damages. In addition, damages do not constitute a full and adequate remedy at law, and for this reason, Plaintiffs are entitled to full Common Law Injunctive and Equitable Relief, including a judgment permanently enjoining DEFENDANTS from the continuation of activities constituting negligence, and compelling DEFENDANTS to take steps to abate and prevent the laundering of criminal proceeds through the purchase and sale of their product.

COUNT XI EUROPEAN COMMUNITY AND MEMBER STATES

(AS TO ALL RJR DEFENDANTS) (NEGLIGENT MISREPRESENTATION)

246. Plaintiffs restate and reallege paragraphs one (1) through two hundred fortyfive (245) and further allege: 247. The DEFENDANTS owed, and continue to owe, a duty of reasonable care to refrain from causing foreseeable loss to Plaintiffs. DEFENDANTS have assumed the special duty to speak truthfully to government officials, and particularly due to their superior knowledge of their own conduct, were bound to speak with due care. DEFENDANTS were and are obligated to avoid negligently causing foreseeable harm to Plaintiffs, and were and are dutybound to exercise reasonable care to: (a) refrain from negligently misrepresenting — through documents and other forms of communication that the DEFENDANTS knew or should have known would be reasonably relied on by Plaintiffs — the payment for and/or value of cigarettes; the destination of cigarettes; and the sources of funds with which cigarettes are purchased; (b) be truthful in their representations to Plaintiffs and their representatives concerning money laundering and other improper activities as aforesaid; and (c) avoid misleading Plaintiffs when providing Plaintiffs with such information as DEFENDANTS possess concerning the money laundering associated with DEFENDANTS’ products into THE EUROPEAN COMMUNITY.

248. DEFENDANTS breached their duty to Plaintiffs by negligently making various material misrepresentations and/or failing to disclose material information to Plaintiffs and their representatives as aforesaid.

249. The DEFENDANTS have acted maliciously, wantonly, and with a recklessness that bespeaks an improper motive and vindictiveness and have engaged in outrageous and oppressive conduct and with a recklessness or wanton disregard of the Plaintiffs’ interests and rights. Their conduct amounts to a fraud on the public.

250. DEFENDANTS, acting with and through their employees, agents, and coconspirators, breached their duty of care, as aforesaid, by acts and/or omissions that posed an unreasonable risk of foreseeable harm to Plaintiffs.

251. Plaintiffs reasonably relied on DEFENDANTS’ misrepresentations and, as a result, DEFENDANTS’ breach proximately caused, and continues to cause, damage to the economic interest of Plaintiffs. The RJR DEFENDANTS entered into an understanding or agreement, express or tacit, with their distributors, customers, agents, consultants, and other coconspirators, to participate in a common scheme, plan or design to commit the aforesaid tortious acts and thereby launder the proceeds of criminal activity to the detriment of THE EUROPEAN COMMUNITY and the MEMBER STATES. In pursuance of the agreement, RJR and its distributors, customers, agents, consultants, and other coconspirators acted tortiously by, among other things, committing the aforesaid acts constituting negligent misrepresentation, thereby causing harm to Plaintiffs. The RJR DEFENDANTS, through joint action with their coconspirators, acted tortiously, recklessly, unlawfully, and negligently, to the detriment of Plaintiffs. By means of the aforesaid concerted action, the RJR DEFENDANTS and their coconspirators are jointly and severally liable for the torts and other wrongful conduct alleged herein.

252. By reason of the injury to its interests due to the negligence, malice and recklessness of the DEFENDANTS, as set forth more fully in paragraphs one hundred seventy

(170) through one hundred seventy-three (173), and Plaintiffs are entitled to an award of damages, including actual, compensatory, and punitive damages. In addition, damages do not constitute a full and adequate remedy at law, and for this reason, Plaintiffs are entitled to full Common Law Injunctive and Equitable Relief, including a judgment permanently enjoining DEFENDANTS from the continuation of activities constituting negligence.

COUNT XII MEMBER STATES (AS TO ALL RJR DEFENDANTS) (COMMON LAW CONVERSION) 253. The MEMBER STATES restate and reallege paragraphs one (1) through two hundred fifty-two (252) and further allege: 254. DEFENDANTS received funds, including the proceeds of narcotics trafficking, and received the instrumentalities of illicit conduct. Such funds and instrumentalities, and the proceeds thereof, were and are the property of the Member States as of the time of the commission of the illicit conduct.

255. DEFENDANTS were obligated to either remit such funds and instrumentalities to Plaintiffs, or refuse to accept such funds and instrumentalities.

DEFENDANTS did neither. Instead, DEFENDANTS appropriated the funds and instrumentalities for their own use.

256. DEFENDANTS misappropriated Plaintiffs’ money and property, and have rejected demands for compensation.

257. DEFENDANTS have assumed and exercised ownership over funds and instrumentalities belonging to the Plaintiffs. Plaintiffs have sustained and will continue to sustain damages as a result of DEFENDANTS’ conversion, for which DEFENDANTS are liable to Plaintiffs.

258. The RJR DEFENDANTS have acted maliciously, wantonly, and with a recklessness that bespeaks an improper motive and vindictiveness, and have engaged in outrageous and oppressive conduct and with a reckless or wanton disregard of safety and rights.

Their conduct amounts to a fraud on the public.

259. By reason of the injury to their economic and non-economic interests due to the negligence of the DEFENDANTS, as set forth more fully above in paragraphs one hundred seventy (170) through one hundred seventy-three (173), Plaintiffs are entitled to an award of damages, including actual, compensatory, and punitive damages. In addition, damages do not constitute a full and adequate remedy at law, and for this reason, Plaintiffs are entitled to full common law Injunctive and Equitable Relief, including a judgment permanently enjoining DEFENDANTS from the continuation of activities constituting negligence, and compelling DEFENDANTS to take steps to abate and prevent the laundering of criminal proceeds through the purchase and sale of their products.

COUNT XIII MEMBER STATES

(AS TO ALL RJR DEFENDANTS) (MONEY HAD AND RECEIVED)

260. The MEMBER STATES restate and reallege paragraphs one (1) through two hundred fifty-nine (259) and further allege: 261. DEFENDANTS knowingly received money belonging to Plaintiffs, including funds representing the proceeds of illicit conduct.

262. DEFENDANTS benefited from the receipt of money, the benefit of which remains with DEFENDANTS. A trust or equitable lien is impressed upon such money and the proceeds thereof.

263. Under principles of equity and good conscience, DEFENDANTS should not be permitted to keep the money and the proceeds thereof. DEFENDANTS knew that the funds in question were the proceeds of illicit conduct and, as such, were the property of Plaintiffs.

Through deceit and acts of concealment, DEFENDANTS received, handled, deposited, and transferred such funds to their own accounts. Plaintiffs have changed their positions as a result of DEFENDANTS’ conduct and have been precluded from taking action against those persons involved in the illicit conduct, including DEFENDANTS, at the time of such conduct.

DEFENDANTS’ conduct was tortious, a trespass upon the rights and interests of Plaintiffs, and fraudulent.

264. Equity and good conscience require the RJR DEFENDANTS to pay damages and restitution to Plaintiffs, disgorge their ill-gotten gains and, to effectuate these remedies, a constructive trust and equitable lien should be imposed by this Court upon the

proceeds obtained by DEFENDANTS by reason of money-laundering activities, which proceeds are rightly owned by and belong to Plaintiffs. Plaintiffs are entitled to damages, including actual, compensatory, and punitive damages, and their injuries are set forth more fully above in paragraphs one hundred seventy (170) through one hundred seventy-three (173). Judgment in Plaintiffs’ favor should include full Common Law Injunctive and Equitable Relief.

DEMAND FOR JUDGMENT

WHEREFORE, the Plaintiffs demand judgment in their favor and against DEFENDANTS as follows:

265. Pursuant to COUNT I, damages, including interest, against the RJR DEFENDANTS, jointly and severally, the precise amount to be supplied to the Court upon a trial on the merits; treble the actual damages pursuant to 18 U.S.C. § 1964(c), along with an award of the costs of the suit and a reasonable attorney’s fee.

266. Pursuant to COUNT II, damages, including interest, against the RJR DEFENDANTS, jointly and severally, the precise amount to be supplied to the Court upon a trial on the merits; treble the actual damages pursuant to 18 U.S.C. § 1964(c), along with an award of the costs of the suit and a reasonable attorney’s fee.

267. Pursuant to COUNT III, damages, including interest, against the RJR DEFENDANTS, jointly and severally, the precise amount to be supplied to the Court upon a trial on the merits; treble the actual damages pursuant to 18 U.S.C. § 1964(c), along with an award of the costs of the suit and a reasonable attorney’s fee.

268. Pursuant to COUNT IV, damages, including interest, against the RJR DEFENDANTS, jointly and severally, the precise amount to be supplied to the Court upon a trial on the merits; treble the actual damages pursuant to 18 U.S.C. § 1964(c), along with an award of the costs of the suit and a reasonable attorney’s fee.

269. Pursuant to COUNT V, RICO Injunctive and Equitable Relief against the RJR DEFENDANTS, jointly and severally, along with an award of the costs of the suit and a reasonable attorney’s fee.

270. Pursuant to COUNT VI, against the RJR DEFENDANTS, jointly and severally, an award of compensatory and punitive damages, with interest, the precise amount to be supplied to the Court upon a trial of the merits; Common Law Injunctive and Equitable Relief; and the costs of the suit and a reasonable attorney’s fee.

271. Pursuant to COUNT VII, against the RJR DEFENDANTS, jointly and severally, an award of compensatory and punitive damages, with interest, the precise amount to be supplied to the Court upon a trial of the merits; Common Law Injunctive and Equitable Relief; and the costs of the suit and a reasonable attorney’s fee.

272. Pursuant to COUNT VIII, against the RJR DEFENDANTS, jointly and severally, an award of compensatory and punitive damages, with interest, the precise amount to be supplied to the Court upon a trial of the merits; Common Law Injunctive and Equitable Relief; and the costs of the suit and a reasonable attorney’s fee.

273. Pursuant to COUNT IX, against the RJR DEFENDANTS, jointly and severally, an award of compensatory and punitive damages, with interest, the precise amount to be supplied to the Court upon a trial of the merits; Common Law Injunctive and Equitable Relief; and the costs of the suit and a reasonable attorney’s fee.

274. Pursuant to COUNT X, against the RJR DEFENDANTS, jointly and severally, an award of compensatory and punitive damages, with interest, the precise amount to be supplied to the Court upon a trial of the merits; Common Law Injunctive and Equitable Relief; and the costs of the suit and a reasonable attorney’s fee.

275. Pursuant to COUNT XI, against the RJR DEFENDANTS, jointly and severally, an award of compensatory and punitive damages, with interest, the precise amount to be supplied to the Court upon a trial of the merits; Common Law Injunctive and Equitable Relief; and the costs of the suit and a reasonable attorney’s fee.

276. Pursuant to COUNT XII, against the RJR DEFENDANTS, jointly and severally, an award of compensatory and punitive damages, with interest, the precise amount to be supplied to the Court upon a trial of the merits; Common Law Injunctive and Equitable Relief; and the costs of the suit and a reasonable attorney’s fee.

277. Pursuant to COUNT XIII, against the RJR DEFENDANTS, jointly and severally, an award of compensatory and punitive damages, with interest, the precise amount to be supplied to the Court upon a trial of the merits; Common Law Injunctive and Equitable Relief; and the costs of the suit and a reasonable attorney’s fee.

278. Such other and similar relief as the Court deems just, proper, and equitable; and trial by jury as to all issues triable as of right by jury.

Dated: New York, New York October 30, 2002

SPEISER, KRAUSE, NOLAN & GRANITO
By: ________________________
John J. Halloran, Jr. (JH-2515)
Frank H. Granito, III (FG-9760)
Frank H. Granito, Jr. (FG-1969)
Kenneth P. Nolan (KN-3388)
Two Grand Central Tower
140 East 45th Street, 34th Floor
New York, New York 10017
212-661-0011 telephone
212-953-6483 facsimile
and
KRUPNICK, CAMPBELL, MALONE,
BUSER, SLAMA, HANCOCK, McNELIS,
LIBERMAN & McKEE, P.A.

Kevin A. Malone, Esquire
Carlos A. Acevedo (CA-6427)
100 Courthouse Law Plaza
700 Southeast Third Avenue
Fort Lauderdale, Florida 33316
954-763-8181 telephone
954-763-8292 facsimile
and
Edward F. Farrell, Esquire
Principe de Vergara 17, Piso 8
28001 Madrid, Spain
011-3491-575-0370 telephone
and
SACKS & SMITH, L.L.C.

Andrew B. Sacks, Esquire
Stuart H. Smith, Esquire
John K. Weston, Esquire
510 Walnut Street, Suite 400
Philadelphia, PA 19106
800-578-5300 telephone
215-925-8200 telephone
ATTORNEYS FOR PLAINTIFFS

Uploaded on Jan 16, 2011

“bailouts after 2008 = financial Coup d’état”

control of the food-supply => implementing a global digital currency?

(indian gov forces it’s people to digitalize)

without transparency – crime will always pay(off) in an (death)economy – how can we make it expensive to be an criminal?

“controlling a very important physical asset (oil, food) is almost essential to currency-control”

“The battle is Centralized vs Decentralized” – “keep the money locally” – “community-bank”

Catherine explains what is going on and wrong in the financial sector, especially Wallstreet New York: “In an emergency situation – does the body send all the blood to the toe? No! It sends it to the lungs, heart and brain. But in the financial sector – we send all blood to the toes.”

“if you go through the household-budgets and cash-flows in every community – and you start looking to see – how can i take the blood out of the toes and engineer it back into the heart and lungs that makes me money – those opportunities are abundant – particularly if enough of us start to see them and do them”

“Tape-worm-Economy” = “Eisenhower’s Military-Industrial-(Financial)-Complex” = “few insiders can constantly drain subsidy from the outsiders in a way that preserves their wealth – but it shrinks total wealth – because the host is getting weaker and weaker and weaker”

“The Media feeds us information (tape-worm-drug) what is good for the tapeworm and bad for us”

“they (the tape-worms) get richer and we (the host) get poorer”

Every kid a laptop – jobs shipped to China – US-middle-class is toast – gov says no – instead of every kid get’s a laptop – we are going to have a housing-bubble – instead of building new skills we gonna build bigger houses – while everybody is building bigger houses and watching TV – we gonna quietly move all the money out of the country – and when it is all set and done – it will be too late – because they will instead of having less debt more debt – they will have fewer small businesses – so we gonna have a party and nobody notice – by the time they notice it will be too late.

The average US family was encouraged to take mortgage-debt, auto-debt, credit-card-debt that in many respects did not know they could not afford.

The amazing thing: Governments and Banks knew that they could not afford it.

In another words: They encouraged them to take this debt – knowing – that the policies would be engineered that caused their incomes to fall later on.

Example:

Man with family two kids – software developer – you feel like you are doing very well.

A hole things are going on behind the scenes – you are going to loose your job in 3-5 years – this is statistically very probable – you don’t know that – but the financial institutions are knowing that.

The banks don’t tell you what they know about your financial situation – here – have more debt that you can not repay – thanks – we take your house.

fraudulent inducement

the vast majority of mortgages were done after 1996 –  were fraudulent induced.

The reality is – our pension funds own them – so we just sold our fraudulent induced mortgages into the pensions funds – and if we can not pay of those mortgages – guess what happens with our retirement-savings.

Spiritual Frontier Foundation International

how the money works on organized crime” – “narco dollars for dummies” – https://altcoopsys.org/2017/01/14/catherine-austin-fitts-how-the-money-works-on-organized-crime-narco-dollars-for-dummies/

“EU sues Tobacco Company RJR Nabisco for money-laundering (owned by KKR = Blackstone and TPG pay $325m to settle collusion lawsuit

https://solari.com/blog/rjr-takeover-wars/

“RJR Nabisco, Inc., was an American conglomerate, selling tobacco and food products, headquartered in the Calyon Building in Midtown Manhattan, New York City.[1] RJR Nabisco stopped operating as a single entity in 1999; however, both RJR (as R.J. Reynolds Tobacco Company) and Nabisco (now part of Mondelēz International) still exist.”

“gov is using their governmental authorities to force profits into the pharmaceutical-tape-worm”

“a whole bunch of corporations use government to engineer more profits into them”

“greatest reason for bankruptcy is people with health-care-problems”

groups behind shadow-governments – if you look at the provisions that have been discussed – controlling doctors – dictating doctors what their policies would be – requiring disclosure to the government of all sorts of private info about people and their health – you are looking at the most effective tool to implement fascism that i have ever seen”

“if you walk into Washington what do you see? 21 agencies?

I see 3x defense contractors (Lockheed Martin, DynaCorp…(Revenue US$ 3.047 billion (2010)) control and operate the database/it-systems for all 21 agencies in Washington”

“what that means is – your whole life can be engineered to serve the corporations and not you”

“Black details the ongoing business relationship between Watson’s IBM and the emerging German regime headed by Adolf Hitler and his National Socialist German Workers Party (NSDAP).

Hitler came to power in January 1933; on March 20 of that same year he established a concentration camp for political prisoners in the Bavarian town of Dachau, just outside the city of Munich. Repression against political opponents and the country’s substantial ethnic Jewish population began at once. By April 1933, some 60,000 had been imprisoned.[7] Business relations between IBM and the Hitler regime continued uninterrupted in the face of broad international calls for an economic boycott.[8] Indeed, Willy Heidinger, who remained in control of Dehomag, the 90%-owned German subsidiary of IBM, was an enthusiastic supporter of the Hitler regime.[9]

On April 12, 1933, the German government announced plans to conduct a long-delayed national census.[10] The project was particularly important to the Nazis as a mechanism for the identification of Jews, Gypsies, and other ethnic groups deemed undesirable by the regime. Dehomag offered to assist the German government in its task of ethnic identification, concentrating upon the 41 million residents of Prussia.[11] This activity was not only countenanced by Thomas Watson and IBM in America, Black argues, but was actively encouraged and financially supported, with Watson himself traveling to Germany in October 1933 and the company ramping up its investment in its German subsidiary from 400,000 to 7,000,000 Reichsmark—about $1 million.[12] This injection of American capital allowed Dehomag to purchase land in Berlin and to construct IBM’s first factory in Germany, Black charges, thereby “tooling up for what it correctly saw as a massive financial relationship with the Hitler regime.”[12]

https://en.wikipedia.org/wiki/IBM_and_the_Holocaust

From Wiki:

“Fitts served as managing director and member of the board of directors of the Wall Street investment bank Dillon, Read & Co. Inc., as Assistant Secretary of Housing and Federal Housing[2] Commissioner at the United States Department of Housing and Urban Development in the first Bush Administration, and was the president of Hamilton Securities Group, Inc., an investment bank and financial software developer.”

src: https://en.wikipedia.org/wiki/Catherine_Austin_Fitts

Fitts has a BA from the University of Pennsylvania, an MBA from the Wharton School and studied Mandarin at the Chinese University of Hong Kong.

“Former Assistant Secretary of Housing under George H.W. Bush Catherine Austin Fitts blows the whistle on how the financial terrorists have deliberately imploded the US economy and transferred gargantuan amounts of wealth offshore as a means of sacrificing the American middle class. Fitts documents how trillions of dollars went missing from government coffers in the 90’s and how she was personally targeted for exposing the fraud.”

Community Wizard:

“In late 1995, The Hamilton Securities Group began work on Community Wizard, a software tool designed to facilitate community Internet access to all public data and some private data on local resource use, including federal tax, expenditures and credit data. The initial response to the tool from Congress, HUD and our technology networks was astonishing. People were ecstatic to realize that they did not have to continue to live and work in the dark financially. It was a relatively easy thing for new software tools to help people learn about the flow of money and resources in their community. Additional software tool development also resulted in numerous tools to analyze subsidized housing in a place-based context, including detailed pricing tools that combined significant databases on government rules and regulations with all of our pricing data from the various loan sales, with databases about mortgage, municipal and stock market financing of homebuilding and home ownership. Such tools would allow people to take a positive and proactive role in insuring that government resources were well used. Such tools would allow investors to improve the performance of local investment — particularly venture and equity investment in small businesses and farms.”

Links:

https://prisonplanet.tv/signup.html

http://www.dunwalke.com/11_Hamilton_Securities.htm

http://www.ratical.org/co-globalize/CAFmrl.html

Documents:

( PDF | ASCII text formats )

The following is mirrored from its source at: http://www.scoop.co.nz/mason/stories/HL0208/S00055.htm


The Myth of the Rule of Law:
or
How the Money Works: The Destruction of Hamilton Securities Group
by Catherine Austin Fitts
12 August 2002
Originally published in SRA Quarterly, London, November 2001

 

Contents

“As long as I can get government subsidies, what do I care if people have education or jobs?”

–Dick Ravitch, Chairman, AFL-CIO Housing Trust,
Developer of HUD & Mitchell Lama Housing in NYC

 

“The Latin American drug cartels have stretched their tentacles much deeper into our lives that most people believe. It’s possible they are calling the shots at all levels of government.”

–William Colby, former CIA director, 1995

Over the course of several years my company Hamilton Securities and I were subjected to a government investigation that ultimately resulted in the destruction of Hamilton and the loss of my personal fortune. This spring the government finally dropped its investigation, having failed to find or establish any evidence of wrongdoing at Hamilton or by me. This was not a surprising result, because there was none to find. Nevertheless, over the course of five years and at a cost of millions of taxpayers’ dollars, Hamilton and I were harassed into financial oblivion. Why?

It started in 1996 — at the same time that the San Jose Mercury News was preparing a story exposing the US government’s marketing of crack cocaine into South Central Los Angeles in the 1980’s. The year before Hamilton Securities had launched a company in the inner city to provide data servicing for our software tool, Community Wizard. The Wizard used geographic information systems software (GIS) to map the geographic patterns of government investment, including defaulted mortgage loans of the Department of Housing and Urban Development (HUD). At that time we put three maps up on the Internet site for a place-based survey for the HUD loan sales. They showed defaulted HUD mortgages in New Orleans, the District of Columbia and South Central Los Angeles.

High and expensive rates of HUD mortgage defaults coincided with areas of heavy narcotics trafficking in South Central LA. It seemed understandable that someone might want the Wizard team to be otherwise occupied when the San Jose Mercury News published the “Dark Alliance” series regarding the Iran-Contra drug dealing in South Central Los Angeles. Otherwise we might notice the suspicious patterns that exist between HUD defaulted mortgages and government sponsored narcotics trafficking.

After initial efforts to shut us down failed, a team of investigators working for the Department of Justice (DOJ) seized our office and destroyed our software tools and databases. If Wizard and supporting databases had not been stolen or ordered wiped clean from our computers, it would have linked national housing data to local housing data. It would have linked the databases on local housing down to the street address and local mortgage originations to the data on pools of housing tax-exempt bond and mortgage securities whose credit was backstopped by FHA and Ginnie Mae at HUD.

Wizard may have revealed that allegations that some US-guaranteed mortgage securities were fraudulently issued and were illegally draining HUD’s reserves merited serious investigation. Was it possible that the US Treasury and the Office of Management and Budget (OMB) were operating HUD as a slush fund to illegally finance black budget operations? The possible securities fraud implications would be without precedent. Were covert operations and political graft the political raison d’être for HUD’s existence?

The targeting of Hamilton and Fitts stopped in 2001. The final attempt to frame me was closed after 18 audits and investigations and a smear campaign that reached into every aspect of my professional and personal life. Years of hard evidence as to the baselessness of the government’s goals and the criminality of its conduct had been ignored. The corruption of the courts, lawyers and the Department of Justice had become painfully visible, then predictable, then comical. The flood of federal credit, subsidies and contracts bought off everyone around us and showed what happens when human greed and the need for safety mixes with cheap money.

Several things helped to finally bring relief. In 2000, we began to put all documentation on a website (www.solari.com) thus creating a pool of evidence freely available to reporters, editors and readers. A second factor was that a great deal of money was unaccounted for from the US Treasury. This now totals over $3.3 trillion based on General Accounting Office (GAO) reports. The notion that the US Treasury, OMB and DOJ might be capable of significant fraud was gaining credibility in the investment community. A handful of courageous reporters published stories about what was happening.

However, in a deeper sense, the targeting started long ago when narcotics trafficking and HUD fraud destroyed the Philadelphia neighbourhood where I grew up. It was then, as a young person, that I learned that the law was a tool of coercion — that there was no rule of law. It is a terrible truth. As a white, Anglo-Saxon protestant I had been counting on the rule of law to protect me. I found, instead, that it is a powerful myth, which has fuelled great wealth for those who run and rule the economy — both legal and illegal. The rule of law is the basis of liquidity. That is why so much time and money goes into sustaining the myth.

Capital gains are highest for those who can combine liquidity, the value creation of stock price multiples, and the power of new technology with the high margins of narcotics trafficking, financial fraud and control of the Congress, the courts and the enforcement agencies to create and protect markets. Transaction costs rise and market multiples fall as the myth deteriorates. The destruction of Hamilton Securities is a case study in the disintegration of the myth of the rule of law. As that disintegration debases the treasuries and currencies of nations and destroys the equity of communities, it is making its way to your door one way or another.

 

Why Target Hamilton Securities? For years rumours circulated that the National Security Council was managing narcotics trafficking directly from the White House under the direction of Oliver North and Vice President George Bush as part of an operation that came to be known as Iran-Contra. The story never seemed to catch on. It was unthinkable to most Americans that the White House was marketing drugs wholesale to be retailed to their children in order to pursue a foreign policy objective. No major media business could carry the story if it meant all the drug money pulled out of their stock. A sell off like that could kill a business over night. The truth is that the inability of America to come to grips with the Iran-Contra disclosures about narcotics trafficking by the US government indicated the extent to which our economy had become addicted to drug profits.

A note from our founder on Iran-Contra In the mid 80s two covert operations of the American government overseen by the National Security Council of the Reagan administration and sanctioned by the highest levels of political authority were exposed. These were the illegal sale of weapons to Iran and the provision of convert aid to the Contra insurgency in Nicaragua in violation of a Congressional vote banning such aid. An independent counsel was appointed to investigate the matter. The investigation resulted in no fewer than fourteen individuals being indicted or convicted of crimes. These included senior members of the National Security Council, the Secretary of Defence, the head of covert operations of the CIA and others. After George Bush was elected president in 1988, he pardoned six of these men. The independent counsel’s investigation concluded that a systematic cover-up had been orchestrated to protect the president and the vice president.

The sheer breadth of the covert operations was stunning. Indeed, it involved not only arms sales to Iran but also the solicitation of funds from third party governments as well as from wealthy Americans to pursue a foreign policy agenda in Central America that was not only controversial but illegal. During the course of the independent counsel’s investigation, persistent rumours arose that the administration had sanctioned drug trafficking as well as a source of operational funding. These charges were successfully deflected with respect to the independent counsel’s investigation, but did not go away. They were examined separately by a Congressional committee chaired by Senator John Kerry, which established that the Contras had indeed been involved in drug trafficking and that elements of the US government had been aware of it.

It was not until Gary Webb’s Dark Alliance expos originally published in the San Jose Mercury News that the government’s links to drug trafficking in the United States became established beyond a reasonable doubt. This in itself is curious, because Webb was hardly the first investigator to document the links between American intelligence and narcotics. Alfred McCoy, writing in the 70s, had documented the involvement of the CIA and the military in heroin and opium trafficking in Southeast Asia. Indeed, narcotics had been a source of covert funding and political leverage for years, extending at least as far back as the invasion of Sicily during World War Two. In retrospect, what was so startling about Iran-Contra was the scale of the financing operations involved, which reached even into the American banking system and included various forms of financial fraud. This gave the operation a link to the scandals that enveloped the savings and loan industry in the late 80s. Most observers do not connect these apparently diverse events when in fact they are part of a whole.

The Clintons’ rise to the White House was fuelled by the Iran Contra operations in Arkansas. The drugs and arms transhipment point in Mena Arkansas had allegedly been one of the most significant operations operating under the aegis of the NSC’s Oliver North. Some said that as much as $100MM a month of arms and drugs flowed through the airport at Mena Arkansas. The stories and lore — whether about the goings on or the deaths of the many people who tried to stop or expose them — took up thousands of pages on the Internet but never seemed to work their way into the “official reality” of national TV and newspapers.

When the Clintons arrived in Washington there were numerous efforts to investigate government narcotics trafficking and fraud. Sally Denton and Roger Morris probably got the closest. Their article on Mena was pulled by the Washington Post at the very last minute, eventually to run in Penthouse in the summer of 1995. But the journalist who finally broke through the nation’s mass denial was Gary Webb. And he made it through thanks to the Internet — a medium much harder to control than the broadcast or printed press.

In August of 1996, the San Jose Mercury News broke Webb’s story of illegal narcotics dealing by the US government, targeting South Central LA with crack cocaine. The story was told from the point of view of Ricky Ross, the legendary dealer who built the market in South Central. And what an incredible story it was.

While the San Jose Mercury News was not a big deal inside the Washington beltway and in New York media circles, it was a very big deal to the new markets growing up on-line. It was known as having the finest website of any newspaper on the World Wide Web. Its location in Silicon Valley meant that the techies read it and took it seriously.

When the News broke the story in mid-August, the story was serialised in a relatively short form, as news has to be. What was different was that the News website crew took the time to scan in thousands of pages of supporting legal documents available to read or download from its website. By the time the various intelligence agencies and major media centres had organised and succeeded in shutting down the story and getting Gary Webb transferred and then essentially fired, a rich network of alternative and minority radio stations and internet news sites had downloaded the documents and covered the story.

All the kings’ horses and all the kings’ men could not put Humpty Dumpty back together again. Thousands of Americans had copies of the original documentation. The evidence was hard. The allegations were true. The story was now out of the control of the official reality cops. The Internet created a vehicle that was helping America come to understand that one of the most profitable businesses in America might not be run by black teenagers and Colombian warlords, but by representatives of their own government.

America wanted the Dow Jones up, and Hamilton Securities’ Community Wizard threatened to provide a hard link between Gary Webb’s exposure of American intelligence’s narcotics trafficking connections and money laundering. In the corridors of power, there was no contest. The Dow Jones won.

 

Catherine Austin Fitts: Enemy of the State Though just a movie, Enemy of the State with Will Smith and Gene Hackman shows how the money really works in Washington. Will Smith plays a Washington lawyer who is targeted in a phoney frame and smear by a US intelligence agency. The spook types have high-speed access to every last piece of data on the information highway — from Will’s bank account to his telephone conversations — and the wherewithal to engineer a smear campaign. The organiser of an investment conference once introduced me by saying, “Who here has seen the movie Enemy of the State? The woman I am about to introduce to you played Will Smith’s role in real life.”

One day I was a wealthy entrepreneur with a beautiful home, a successful business and money in the bank. I had been a partner and member of the board of directors of the Wall Street firm of Dillon Read, and an Assistant Secretary of Housing during the Bush Administration. I had been invited to serve as a governor of the Federal Reserve Board and, instead, started my own company in Washington, The Hamilton Securities Group. Thanks to our leadership in digital technology, financial software and analytics, Hamilton was doing well and poised for significant financial growth.

The next day I was hunted, living through 18 audits and investigations and a smear campaign directed not just at me but also members of my family, colleagues and friends who helped me. I believe that the smear campaign originated at the highest levels. For more than two years I lived through serious physical harassment and surveillance. This included burglary, stalking, having houseguests followed and dead animals left on the doormat. The hardest part was the necessity of keeping quiet lest it cost me more support or harm my credibility. Most people simply do not believe that such things are possible in America. They are.

In 1999, I sold everything to pay what to date is approximately $6 million of costs. My estimate of equity destroyed, damages and opportunity costs is $250 million and rising. I moved to a system of living in four places on an unpredictable schedule in the hope that this would push up the cost of surveillance and harassment and so dissuade my tormentors from following.

One of my new homes is a small first floor apartment in a row house on 54th Street in the West Philadelphia not far from the neighbourhood where I grew up. It was here as a child that I watched the financial disintegration begin. Another new home was in Hickory Valley in Hardeman County Tennessee, a small farming community where my father’s family has lived since the 1850’s. For several years, I have travelled back and forth by car between Philadelphia and Hickory Valley. Travelling has given me a different perspective on what I call the financial holocaust. It is not just billions of dollars of wholesale capital movements. It is not just defaulted HUD mortgages, US Treasury market interventions, Federal Reserve bailouts of hedge funds and IMF bailouts of Wall Street investors, money laundering out of Russia or narcotics trafficking.

Now I see the signs of financial holocaust through the eyes of people who are being destroyed. Their currency is debased. Their children are targets of both “legal” and “illegal” drug trafficking and are condemned to learn in dumbed-down schools. Their small business equity is being extracted from under them. It is they who are carrying the burden of taxes without the benefits that government investment is supposed to provide. The cruel twist is that citizens are funding the financial ruin that is killing them and their children.

Now I understand the process by which the rich get rich and the poor get exhausted. I see it through the eyes of the ladies who run the food marts; the farmers who can not cover their costs; the small town banker who makes character loans; the teenagers who deal and take the drugs; the mothers who try to stop the schools from forcing their kids to take Ritalin; and the small business people who try to make it through life honestly. They are overwhelmed by the sadness of what they see happening and do not understand.

I used what I had learned about how the money worked to destroy Hamilton Securities Group to see how the money worked to destroy neighbourhoods and the people in them — one neighbourhood at a time. Families and neighbourhoods are the basic building blocks of the global economy. When the bubble bursts, all the key decisions must first be made there at ground zero. So that is where we shall start.

 

How the Money Works: the Destruction of Neighbourhoods The model works about the same in every country, although the particulars vary between domestic and international agencies and the military and enforcement bureaucracies. Some call it the securitisation process. Some call it corporatisation. Some call it privatisation. Some call it globalisation. What this means in layman’s terms is that the management of resources is centralised. This is done through a system of securitisation based on privilege and coercion rather than performance and the rule of law.

From the viewpoint of the neighbourhood there are six ways to centralise local capital:

  • First, you consolidate all retail sales into a few large corporations, including franchise operations, cutting out local small business.
  • Second, you outsource (“privatise”) all local government functions to a few large corporations or subject them to such an overwhelming amount of federal regulation that they can be controlled and managed for the benefit of a few large corporations and their investors.
  • Third, you buy up all the land and real estate, or encumber them with mortgages in a way that is as profitable as possible and allows you to get control when you want it.
  • Fourth, you finance the entire process with the profits from narcotics and organised crime that you market into the neighbourhood. This enables you to finance your expansion in a manner that lowers your cost of capital in a way that conveniently lowers the initial price of your investment and/or weakens your competition. I buy your business and land with your money at a fraction of the cost. No one sells her home faster and cheaper than a mother trying to make bail or pay a lawyer to save her family from jail or death. That is why narcotics trafficking is the ultimate form of neighbourhood leveraged buyout.
  • Fifth, you leverage all of this with tax shelters, private tax-exempt bonds, municipal bonds, government guarantees, and government subsidies — all protected with complex securities arrangements.
  • Sixth, you ensure that the only companies and mutual funds allowed meaningful access to capital are those run by syndicate-approved management teams. To raise significant campaign funds candidates for political office appoint syndicate-approved management teams. Investment syndicates define the boundaries of managed competition that cycle all capital back through their pipelines. That means the only local boys who can make good are those who play ball with the syndicate.

In this way the private equity in a community can be extracted at a near infinite rate of return to investors and a highly negative rate of return to taxpayers.

 

How the Money Works: Hardeman County, Tennessee My home in rural Tennessee shows the pattern well. A few years ago, about thirty small businesses shut down within six months after the new Wal Mart opened with the blessings of local government. The result within a year was that we transferred substantial equity and employment from local to corporate control without asking for a percentage of the equity to be created. Now a majority of our retail purchases produce not a dime of knowledge or equity for us. The knowledge of how to build and run retail businesses is leaving our workforce. We have no access to the data on how our retail money works locally.

At about the same time, a national prison company based in Nashville, Correction Corporation of America (CCA) got the deal to build and operate two prisons down the road in Whiteville. Local and state government provided them with a package of zoning, infrastructure, contracts, tax-exempt bonds and assumption of risk that created lots of equity for CCA and its investors. Hardeman County, of course, got zero. After the deal was over, we had the risk, and they had the equity, although rumours abound about the local officials who got stock. A little later, a Tennessee paper reported that the former chairman of the Tennessee Republican state party sold his CCA stock for $17 million. Government, that is to say taxpayers, paid the ticket, and the private investors and management reaped the equity.

The numbers on the prison deal help to explain the War on Drugs and welfare reform. The American people who make about $36,000 per year on average will not support paying $55,000 per year for a woman and her 1.8 children to live in HUD housing on welfare and food stamps. So the game of using HUD housing subsidies and tax shelters to warehouse people in communities can be extended only long enough to refinance the equity out of or gentrify investor’s current investments in HUD housing. The HUD development game is being replaced in part by a prison privatisation and development game that warehouses the same folks in prisons at a $154,000 all-in cost per person per year. The result is a rush of prison deals with government contracts, tax-exempt bond financing, and tax shelters combined with stock deals. Prisons have been sold to farming communities as “economic development.” In the meantime, corporations have consolidated control of seeds, agricultural biotech farming, food processing and distribution here and abroad.

During the mid-90’s, you could see it beginning inside the beltway in Washington. Mandatory sentencing legislation or an announcement to sell government prison facilities on a negotiated basis generates significant capital gains immediately. Who wants to work hard in the real world when one can make quick up-front profits on their prison stocks?

Drugs came to Hardeman County before I moved there. One of my friends is a farmer who said that she first noticed the drugs in 1986. Interesting. That coincides with activities at the airport in Mena, Arkansas — allegedly a significant drugs and arms transhipment point used during the Iran Contra operation. Mena is only a puddle jump away from our local airport in Bolivar, the county seat. It makes sense that with so much coming through Mena in the early 1980’s that the distribution routes would push into the surrounding states.

Fifteen years on, we are overwhelmed. Should you pass the airport late at night, very likely you would see a private plane landing. When a private plane lands at a rural municipal airport at 4am on Sunday morning, it does make you wonder. This summer, we have had a major drug bust at a farm half a mile down the road, robberies, and high-speed convoys of sheriff’s cars with sirens wailing every day for the last few weeks. A man down the road could not get off crack and so, at the age of 30, drank a bottle of acid and died. Who is taking all these drugs? They say it is the kids. The only statistics that I can find indicate that marijuana is Tennessee’s largest cash crop — bigger than cotton and hardwood. This may be so, but where is it growing and who is growing it?

The money-laundering situation fits the picture. If you travel by car enough you notice how many fast food restaurants and gas station food marts are far from doing the total retail necessary to support overhead and capital investment. One night I drove ten miles to Bolivar to go through the car wash at the local Amoco station. I tried to pay for a three-dollar car wash with quarters. I was told they would not take coins. It was a policy. Counting coins was too much work, explained two attendants as they chatted with friends, with no other customer but me. So I got back in my car and drove ten miles home and washed the car with a hose and some paper towels. The symbolic economy is too busy processing the proceeds of crime to do the work necessary in the real economy. Indeed, it makes you wonder, which one is the real economy?

I don’t mean to say that Hickory Valley is not wonderful. It is. The land is beautiful; we have wonderful churches and more than a few fine neighbours. The reality is, however, that too many people are making money by destroying what we have.

A note from our founder on PROMIS software… The significance of PROMIS software is that it was sold to banks, who wittingly or otherwise bought it with a trap door that allowed those with the requisite codes to get in. The software was allegedly developed in the 70s by a company called Inslaw. We say allegedly because there are those who believe that William and Nancy Hamilton, the owners of Inslaw, stole it themselves in the first place. The Hamiltons sued the government for stealing it. They charged that the government modified it to enable intelligence agencies to access bank records, accounts, and databases. The Promis affair is a difficult one to research, with much mis- or disinformation floating about. A reporter, Danny Casolaro who was investigating the story, was killed — officially ruled a suicide. Casolaro had, however, told friends that he was working on something dangerous and if he died he would have been murdered.

While the PROMIS potential alone is worrysome, the fact that intelligence agencies might have a software entry to most of, if not all, the banks around the world, is truly sobering. The implications are enormous. Aside from the obvious issues raised by the possession by spooks of entry into your bank account, there are other, mundane, questions raised. What is all the fuss about money laundering if the government has, and has had, such access to the financial system’s records? Who is kidding whom here?

You can read about the PROMIS story at the web site of Insight Magazine (www.insightmag.com) in a series of articles written by Insight investigative journalist Kelly Patricia O’Meara. For our own part, considering the number of US espionage cases in recent years, which often seem to involve the sale of software codes to foreign powers, we wonder about who else around the world has access to our bank accounts, and why?

 

How the Money Works: West Philadelphia, Pennsylvania Georgie lives upstairs from my apartment on 54th street. She does not understand how her richest friend could now be one of her poorest friends, and what am I going to do about it. Georgie can’t figure out why the Department of Justice will not pay Hamilton for work performed and accepted by the government. I have explained that the Department of Justice says that the US is now money laundering $500 billion – $1 trillion a year. Such a volume would require significant pro-active leadership from the US Treasury, the Federal Reserve and the Department of Justice. Between the fed wire system and tools like PROMIS software, it is fair to say that the war on drugs is more about keeping the price of drugs up and the costs down than denying retail narcotics distributors access to our children. We drew a map of the US to demonstrate that the four largest state markets in drug import-exports, California, Texas, New York and Florida, are also the four largest states in money laundering and the four largest states in banking and investment. California, New York, Texas and Florida along with the law firms, lobbyists and government contractors in the DC area generate almost half of the national campaign contributions.

Georgie said that looking at the big picture was simply too overwhelming and wondered how this could affect our block in West Philadelphia? So we got out a piece of paper and started to estimate.

Daily, two or three teenagers on the corner deal drugs across the street. Georgie and I did a simple exercise. We figured that our three street dealers had a 50% deal with a supplier, did $300 a day each, and worked 250 days a year. Their supplier could run the profits through a local fast food restaurant that was owned by a publicly traded company. So those three illiterate teenagers could generate approximately $2-3MM in stock market value and a nice flow of deposits and business for the Philadelphia banks and insurance companies. Indeed, if the DOJ is correct about $500 billion – $1 trillion of annual money laundering in the US, then about $20-40 billion should flow at some point through the Philadelphia Fed. Assuming a 20% margin and a 20x multiple, the total feasible stock market cap pre-leverage could be as much as $80-160 billion. Imagine the stock market crash if all those black teenagers stopped dealing drugs and all these kids stopped taking them.

What does this say about a society that we believe that a highly sophisticated multibillion-dollar financial business is managed and controlled by black teenagers, Colombian warlords and a few Italians? How is it that a military-enforcement complex with a $350 billion budget and a Federal Reserve system that controls the bank wire transfer system is helpless to stop them?

 

What’s HUD Got to Do with It? Using government guarantees to insure mortgages in a neighbourhood like ours makes sense. It protects investors from concern about the value of real estate. The value of residential real estate reflects first and foremost the safety and well being of the neighbourhood. If West Philadelphia were financed with private mortgages from big Philadelphia banks, then they would lose money on the economic withering of neighbourhoods. If they pooled all the mortgages in mortgage pass-throughs and sold them to the pension funds without government guarantees of any kind, the pension funds would start losing money if defaults started to happen.

For the banks, of course, it is impossible to refuse to make mortgage loans in a neighbourhood in which they are channelling the reinvestment of narcotics profits. First, there is the branding problem: they can not tell people they won’t finance their homes because they prefer to reinvest the profits of folks who sell narcotics to their children and they can not make money on both. That is a problem as well because the banks’ core business is based on using taxpayer’s credit, and moving the losses to the taxpayers when things go wrong. For large banks and corporations to extract equity out of a neighbourhood, it is essential that the local values not impair their assets or the mortgage securities they create and service. That is where government credit provided by agencies like HUD comes in.

More money can be made from narcotics if the housing market has enough liquidity and the neighbourhood deposits come your way. So government guarantees ensure that (a) the taxpayer foots the bill and (b) the politicians can say that they are doing something to improve local housing conditions. The beauty of government credit is that banks and mortgage companies and investment banks can finance communities and not worry about whether the neighbourhood is safe or the schools are decent. Add the rich tax shelters and credits offered by Treasury and the subsidies from HUD, and who cares what the fundamental economics are?

As an economic development consultant from Philadelphia said to me, “I don’t understand. I just had lunch with a guy from a large bank. They are financing housing that costs $150,000 per unit and selling it for $50,000. He says they are making a ton of money. How can that be?” I then explained what happens when you can create various combinations of tax shelters and tax credits and tax write-offs and tax exempt bonds and empowerment zones and mortgage pass-throughs with rich guaranteed financing and subsidies, all in no-risk packages. Investors such as pension funds, endowments and foundations do not even have to pay taxes on their income and capital gains.

The beauty of the “don’t worry, be happy” model of financing communities with obfuscated taxpayer losses divorced from the economic reality of risk, is that everyone eventually buys into it. Local residents do not want the neighbourhood to get better because their rents or home taxes would rise and they would be forced out. Local small businessmen would lose their livelihood if commercial rents went up. Local organisations are increasingly dependent on government subsidies that they win by persuading someone that things are dire and people need lots of expert help as they — by some mystery — are unable to turn off their TVs and go down to the library or community college to get an education. Everyone adjusts to a perverse model: neighbourhood equity down, Dow Jones Index up, debt up, crime up. It is all because that is how his or her financial incentives have come to work.

Meantime, the guys making all the money on the drugs take a small portion that they write off by moving it into charities and foundations. That means some of their principal can be invested tax exempt in perpetuity. Meanwhile the percentage of income that is spent for charitable purpose can go for a series of activities that keeps the bleeding hearts preoccupied. That way no one interferes with the fundamental issues and instead are preoccupied on token successes and systemic failures that help brand the donors as good and the poor as hopeless.

And so HUD plays an important role in the transition of neighbourhoods in which all the players have a vested interest in the neighbourhood succeeding in the most cost effective manner, to one in which the players make money on failure or indifference. HUD has over $500 billion of mortgage insurance outstanding and an equivalent amount of mortgage securities backed up by the taxpayer’s full faith and credit through HUD’s mortgage agency, Ginnie Mae.

 

Bubblemania Aside, 2 Plus 2 Still Adds Up to 4 There are two problems with federal investment in the US. The first is the imbalance between sources and uses. The second is that rates of return are negative. Let’s look at what is going on and why.

In a nutshell, Washington is a financial mechanism that raises $1 from the American people and then invests $2 dollars back. If the politicians in Washington ask for another dollar to balance the equation, they are voted out of office. If they borrow another dollar to balance the equation, they are criticised soundly. If they cut spending by a dollar, they are again voted out of office. It is easy to see why the debt has gone up.

In 1997, we did an analysis for a group of investors in the Philadelphia area. We estimated that the return on investment to taxpayers on total federal investment — subsidies, operations and financing — was negative. The majority of federal taxation and investment was lowering the Philadelphia share of the GNP. So the problem is not just that the government spends more than it taxes. There is an insidious shift from high return functions to low and negative return functions. The two dollars that Washington is spending is not generating four dollars or even the one-dollar that it is taking out for taxes. That means the local economy is losing five dollars from the proposition. Let’s look at this in the context of HUD.

HUD has a program called Hope VI, which is the construction of new public housing. Here is how the money works on Hope VI. We tax people who make $36,000 a year. We then take the money and use it to build housing that costs $150-250,000 (inclusive of all overhead, etc) per apartment unit, which we use to warehouse people who make $10,000 a year or less in a manner in which they are unlikely to become taxpayers. This generates a large number of jobs, profit, and private equity for a group of lawyers, accountants, developers, consultants and others who tend to make substantially in excess of $36,000, say anywhere from $75,000 to $500,000 or more a year. In the HUD programs, a surprising number of them went to Harvard, Harvard Business School, the Harvard Kennedy School, and last but most special, Harvard Law School. If not Harvard, someplace more like it than the University of Tennessee agricultural school.

A few years back I took the pricings on the HUD defaulted mortgage portfolio to the head of Hope VI. I explained that HUD had substantial single-family inventory in those same communities. Empty single-family homes could be bought and repaired at a fraction of the price of new construction of public housing by private developers. The HUD official said, “but then how would we generate fees for our friends?” You just have to love a woman who is that honest.

The result of this situation is summed up by this statistic: twenty or thirty years ago, 70 cents of every dollar of federal spending went into the pocket of someone in the neighbourhood it was targeted at. Today that number is less than 30 cents. What that means is that investment in community development has enjoyed about a 300-400% increase in overhead, at the same time that technology has actually made it possible for overhead to drop dramatically The public policy “solution” has been to outsource government functions to make them more productive. In fact, this jump in overhead is simply a subsidy provided to private companies and organisations that receive thereby a guaranteed return regardless of performance. We have subsidies and financing to support housing programs that make no economic sense except for the property managers and owners who build and manage it for layers of fees. We have a horde of service providers to federal programs who are “expert” at helping communities of people who rarely show signs of improvement.

At HUD, it is primarily defence contractors such as Lockheed, American Management Systems (AMS) and Dyncorp who run these same programs. Such companies tend to have numerous private conflicts of interest through companies owned directly or indirectly by their investors. They make money from the programs and serve as a revolving door for personnel between them and the government. Not surprisingly, they find it impossible to run HUD efficiently no matter how much they are paid. Incompetence is a moneymaker.

Take AMS of Fairfax, Virginia, for example. It is reported to have earned $206MM since 1993 to build and run the HUD accounting system, HUD CAPS. That system has had mysterious periods of not working during which everyone was too busy to use a pencil and paper to reconcile the checkbook with Treasury. In fiscal 1999, HUD refused to publish audited financial statements. Total reported undocumentable adjustments to force balanced books in fiscal 1998-1999 are now $149 billion.

When you see a company hired to operate financial control and accounting systems paid $206 million to mismanage or misreport $149 billion, you begin to appreciate the economics of bubblemania.

One way to prevent such discrepancies would be to check that the revenues flowing out the door at HUD matched up with the revenues reported to the IRS at Treasury. This is a reasonable idea. However, today the head of the IRS is the former Chairman of AMS (who was provided with a waiver that allows him to keep his significant position in AMS stock).

The truth is that the private sector is eating government programs and administration alive. This means that fundamental economic productivity is decreasing while government investment earns a constantly decreasing rate of return to taxpayers. This has been going on for a long time. For example, in 1988, I was invited to a budget briefing for business leaders by Secretary of Defence Weinberger at the Pentagon. For eight hours he and his corporate guests painted a clear and detailed picture as to how the top corporations in America would protect themselves during globalisation. This would be accomplished by substantially increasing the amount of cost-plus fixed price contracts they would be guaranteed from Washington. I had little appreciation then for what this meant Wall Street might be cooking up in the mortgage and mortgage securities market.

 

How the Money Works: RTC and the Prelude to HUD Loan Sales In 1989, US financial institutions experienced a wave of single family, multifamily and commercial mortgage defaults known as the Savings and Loan crisis. The resolution of the so-called S&L crisis saw the development of the Resolution Trust Corporation (RTC). The RTC was a mechanism by which the American taxpayers underwrote approximately $500 billion of waste, tax shelters and fraud in a manner that allowed the investors to buy the assets at a discount.

Two of the biggest winners were the large banks that were bust but did not go bust and the large banks that were not bust who enjoyed the ride. The former were floated out by a nicely upward sloping yield curve thanks to Alan Greenspan, Federal Reserve Chairman. The Fed pumped Citibank out of a negative equity position with royal amounts of federal credit arbitrage. Citibank could borrow short and reinvest long at a 500 basis point spread and just keep doing it until it had generated sufficient profits to comply with its regulatory requirement for equity capital. In the meantime, NationsBank and those who started with positive equity positions were having an even better time. Congress never discussed or voted on it.

In 1993, I had lunch with the head of corporate lending in the DC area from NationsBank. He explained that NationsBank had no plans to make small business loans of any meaningful volume in the district. I had checked their latest SEC filings that morning. NationsBank had approximately $110 billion in long treasury bonds on their balance sheet. Essentially, the American taxpayers were providing them with the mechanism to borrow short term at a low price using our credit, collect up all our deposits using our credit, then lend to our government long term at a 550 basis point spread where they had a recourse guarantee of our credit, and refuse to lend to my small business since it was not good enough business for them. The net result was that I could finance my government handing out more subsidy and credit to large corporations while I financed my small business with my credit card, paying them 18% to borrow my money provided with my credit and deposits.

As a board member at Sallie Mae at the time, I also got to see firsthand how the Government Sponsored Enterprises were doing. About a third of our balance sheet at Sallie Mae was borrowing short to invest long in what was essentially the same federal government credit arbitrage. It appeared that Freddie Mac and Fannie Mae were doing the same thing.

What we were creating was a society in which certain institutions were not only not allowed to fail, but were guaranteed profits using taxpayers’ credit. The best part yet was that every time the taxpayers and their credit bailed these folks out, they and their investors got to keep 100% of the equity. So heads you win, tails you stick the losses to the taxpayers. Large banks are not allowed to fail. This set the stage for a long series of taxpayer financed rescues: the Mexican bailout, the “restructuring” of Russia, and the Long Term Capital Management bailout.

 

A Word About Place-based Financial Disclosure When I joined the Bush Administration in 1989 as Assistant Secretary of Housing, I read the budget for the Federal Housing Administration. It described a $300 billion portfolio of mortgage insurance with about $50-100 billion a year of annual originations. I asked the person responsible for the comptroller function to direct me to the place in the budget where it explained how much we were making and losing. I was told there was no such place. I asked where the financial statements were. I was told that the accountants had them, that they reported to a different Assistant Secretary and that I was not allowed to speak with them. The Government Accounting Office (GAO) had audited our financial statements several years ago. We could not afford an outside auditor, let alone every year. Besides, we operated on a cash basis. The Office of Management and Budget (OMB) would never permit accrual statements.

After months of working with a variety of parties at HUD, OMB and in the Administration, and with much support from GAO, the accounting group was moved over to my area and legislation was introduced and passed that required a comptroller for the FHA Funds, a chief financial officer for the department, and a legal requirement for annual audited financial statements and actuarial statements.

When we got access to our financial information, it turned out that we were losing $11 million a day in the single-family fund, the Mutual Mortgage Insurance Fund, and more in the multifamily and special risk fund called the General Insurance Fund. What is more, I discovered that we had never tracked our financial results on a place-based basis. In other words, ten regional and eighty field offices had no idea how they were doing. So we put together crude place-based cash flows. What we found was simply astonishing.

First, the national data on which the portfolio was based turned out to be the irrelevant product of averaging. A look at all ten regions and eighty field offices showed that no one part of the portfolio fit the image depicted by the national averages. Our vision of our business had been substantially distorted by the way in which the data had been presented.

Second, it turned out that over 100% of our losses were generated in two regions. The first was headquartered in Texas, and included Oklahoma, Louisiana and Arkansas. We discovered that the Texas region had lost over $2 billion the year before. They had no idea. The second was headquartered in Colorado. What the numbers showed was that S&L fraud and HUD fraud were perpetrated by the same networks and in the same places involving the use of federal credit.

Meantime, back in Washington, everyone was talking about these two scandals — the S&L scandal and the HUD scandal — as if they were separate. It was clear that place-based financial data would have told us what had happened, who had profited and how to prevent it from happening again. It also became apparent that our investments in communities conflicted with the other federal, state and local investment in that place. There was no mechanism to optimise total government investment and operations within a place.

Federal spending seemed intentionally designed to insure that there could be no flexibility between categories. We were spending $55,000 a year for a woman and 1.8 children to live in a place and in a manner such that they would and indeed could never become taxpayers and get off the dole. We were spending $150-250,000 to build public housing while HUD foreclosed homes that could be bought and fixed up for $50,000 were available a block away. We were paying large corporations $35-150 dollars an hour to do things that people who lived in those neighbourhoods could be trained to do. The implications were enormous: theoretically, at least, there was the opportunity, using more accurate place-based information, to place public finances on a sounder footing in which the tax payers’ investment returns were positive. Therein lay a problem however, because there was no political constituency for place-based financial statements. Return on investment to special interests was not compatible with a positive return on investment to taxpayers. There were two kinds of special interests. The first were technically legal. The second were illegal. The second was growing. My refusal to follow illegal orders and success at cleaning up Iran Contra fraud ultimately led to my leaving the Administration in 1990. I was told the day after I left that the preparation of place-based financial accounting and statements had been terminated.

That was one of the reasons I turned down the opportunity to serve at the Federal Reserve and instead started Hamilton upon leaving the Bush Administration. It was the reason why we at Hamilton built Community Wizard. The Community Wizard made it possible for anyone to put together a sources and uses statement for government activities (taxes, time use, spending, credit, regulation, operations, and more) in their community. An easy step was just linking to the Consolidated Financial Reports (CAFRS). The shock of finding so much in the way of hidden assets and where the money was really going was always a pleasure to watch. Why should the finance committee chairmen of the political campaigns be the only ones to see the information on how the money works by place?

Luis Mendez, one of my partners at Dillon Read, visited me in Washington in 1996. He said that Wizard was a stupid idea that would not work. Things were hopeless, he said. I showed Luis a printout of the CAFR for his community of Bronxville, New York. When he saw the figures, he exploded in rage. The first item was $4 million of flood insurance. This was the worst form of corruption, Luis said. Apparently, Bronxville was on a hill. The next day Luis spent two hours on the phone with the Deputy Mayor of Bronxville going through each item and informing him this was all going to stop. Apparently, things were far from hopeless, once one had the information. It just took one good map to see how to fix thousands of little things, one at a time.

 

How the Money Works: HUD Loan Sales As non-performing mortgages cascaded into the RTC and private financial institutions in the late 1980’s and early 1990’s, auction markets in those loans developed. There were a wide variety of buyers — real estate investors looking to get control of properties, mortgage brokers buying and selling whole loans and securities firms looking to pool mortgages and issue new securities in the pools. The technology of mortgage workouts boomed.

HUD was the only major financial institution that stayed on the sidelines and simply let its portfolio grow, until by 1993 it had approximately $4 billion of performing and non-performing single family mortgages and $8 billion of multifamily mortgages. The cost of holding these mortgages in portfolio was substantial. The cost to nearby homeowners and residents was also substantial as homes sat empty and foreclosed or apartment buildings in need of workout went unattended. As field offices were overwhelmed, contractors were hired to help service the various portfolios. As the portfolio and losses grew, so did their business. And so did the criticisms. The HUD Inspector General criticised HUD for not having a loan sales program and the large portfolio of defaulted mortgages was listed as a “material weakness” by HUD’s outside auditor and the OMB.

This mess on the back end of the lending and borrowing process was also shutting down the ability to continue origination volume on the front end. Credit reform legislation passed during the Bush Administration was designed to prevent S&L type scandals happening with the $1.2 trillion of federal credit, of which HUD mortgage insurance as about one third. In addition to requiring annual financial statements and actuarial statements, new originations required loan loss reserves funded through appropriations.

In 1993, the Clinton Administration’s plan to issue lots of mortgage insurance faced a funding problem. High default rates on the mortgage insurance portfolio and low recovery rates on the defaulted mortgage portfolio had serious implications for the cost and volume of new originations. That meant that the pressure was intense to substantially improve the recovery rates.

At the end of 1992, HUD issued a competitive request for proposals from contractors to improve loan loss recoveries, a competition that Hamilton won in late 1993 due in part to the total disinterest of the financial advisory industry. The experts were confident that HUD could never successfully put into operation debt servicing options, including auctions. While we shared the widespread assessment of the difficulties of getting things done, HUD’s pool of data — the richest data on how all the money worked by place — was a significant attraction.

I also wanted to prototype the reengineering of government and private investment by place. HUD afforded a rare opportunity to transfer substantial amounts of assets to the private markets in a way that would encourage equity-based financing of communities — moving communities to a healthier and more productive economic basis. Hamilton sought to prototype the Community Wizard, through which the integration of new technology combined with the privatisation of government and the securitisation of the illiquid economy could create the greatest wealth.

To widespread surprise, the HUD loans sales were an astonishing operational and economic success. HUD sold $10 billion of loans between 1994 and1997, generating $2.2 billion of credit reform profits, and increasing recovery rates from 35% to 70-90%. The performance was attributed to a variety of factors, including several innovations introduced by Hamilton:

  • Low cost access to due diligence databases and packages and forward auction calendars, through the Internet, the World Wide Web and proprietary on line systems.
  • Optimisation bid technology adapted by AT&T Bell Labs from their original technology used to route telephone call and airline flight crew schedules. This allowed bidders to stratify the portfolio the way they wanted to. It dramatically increased competition between all sectors of the real estate, mortgage and securities market, both large and small. This also allowed HUD to calculate the performance of numerous groups of bidders and the financial costs of less attractive measures. In short, the facts were at hand for the first time.
  • The process was improved through adaptation of software development models to bid design and management by HUD. Auctions were designed on line through the creation of detailed design books owned by the government that allowed for much more precise communication and agreements between numerous parts of the government. This instilled accountability and clarity in a highly political environment — as well as radically reducing transaction costs and the ability to ensure that HUD was not dependent on a handful of contractors.
  • The HUD loan sales were a procedural but not a political success. Numerous groups and the trade and financial press were initially glowing. Barron‘s wrote an article entitled “Believe It or Not, HUD Does Something Right for Taxpayers” (Jim McTague, April 10, 1995) Congress and OMB were initially thrilled. The Administration and industry now had the means to fund the growth of new mortgage insurance originations. However, there were groups that felt the pinch:
  • Loan servicers were losing contract business as the defaulted portfolio decreased.
  • The enforcement teams in the Inspector General’s office and General Counsel’s office, which generated revenues for the government through civil money penalties on the defaulted portfolio, were unhappy. While they admitted that sales were better for HUD, they took the position that they were worse for their performance goals. Their message to the program staff was, in essence: to hell with the taxpayers, we only care about our stuff.
  • Property owners complained loudly about no longer getting below market workouts at 35%, and alluded to “special deals” they had been promised that loan sales now violated. Harvard Endowment’s NHP was the most vociferous and aggressive in their lobbying against the loan sales, working through the National Association of Homebuilders and the National Multi-Housing Council. Given how many people from Harvard populated the key political appointments at Treasury, OMB, DOJ and HUD, including the lawyers who ran the real deal behind the protection of attorney-client privilege and a maze of secrecy laws, this was a concern. Bob Rubin, Secretary of the Treasury, had been on the board of Harvard Endowment. His deputy, Lawrence Summers, had been a professor at Harvard (and would return as President in 2001). The current Harvard Endowment board member involved in Harvard’s HUD investments, Pug Winokur, was also the lead investor in and Chairman of Dyncorp. DynCorp was one of the leading military and intelligence agency contractors in the War on Drugs with contracts at DOJ, HUD and the State Department. DynCorp had a vested interest in neighbourhoods not working. DynCorp was one of the managers of the PROMIS system at DOJ and the lead contractor on DOJ’s Asset Forfeiture Fund.
  • Optimisation study results showed that the traditional HUD property managers and bankers were substantially under performing the bidding groups, coming in 25% or more below the winning bid levels. The message to everyone at HUD was that the absence of open disclosure and competition in their programs had cost them dear. If HUD applied the principles of disclosure and competition to new allocations of subsidy and credit, Harvard would be one of the larger losers.
  • Owners, general partners and limited partners in HUD-subsidised portfolios anticipated an immediate renewal of their subsidy contracts. If the principles of SEC standards of disclosure and competition were applied to them in the future, they could face tax recapture and potential securities fraud liability.
  • Other HUD contractors — HUD is essentially run and controlled by a group of defence contractors — appeared concerned that Hamilton’s financial software and portfolio strategy tools gave political appointees too much knowledge of how the money worked at HUD. This would harm their purpose and the profits of their networks. Lockheed and EDS personnel regularly made it difficult to access databases that they managed for HUD.

While the loan sales were an improvement over doing nothing, they represented only a first step. The loan sales had improved recovery rates from 35% to 70-90%, generating several billions of savings. However, there was still more room for improvement. The direction in which the loan sales and the portfolio strategies were being developed created some political problems.

  • Simple auctions gave the advantage to bidders that were bidding with “hot money”. So, arguably, the narcotics trafficking operation that had undermined neighbourhoods in a way that resulted in a mortgage going into default, had the money to bid the most aggressively on the auction.
  • HUD was moving to organise its bids on a place-based basis and to establish trusts in which the winning bid and performance was measured in terms of total savings to the government, not just to HUD. Such structures, once successfully prototyped and developed, would have produced a far better return for both government and the community. It would counter balance the hot money problem by providing local players with a way of outperforming national players.
  • Auctions held regularly from the field offices could move portfolio faster in a way that could help mitigate the deterioration in value while the mortgage was held in portfolio for national auctions.

There was a direct conflict between the interests of both taxpayers and community homeowners and residents on the one hand, and the interests of various intermediaries and special interests on the other. Decades of inertia had created a significant infrastructure of people who made money from managing poverty-not ending it. This infrastructure included contractors, property managers, not-for-profit institutions, mortgage bankers, investment bankers, consultants, state housing finance agencies and low income activists who made money from the average American not having access to education, jobs and capital based on performance. Performance was judged on the return on investment to special interests, not the return on investment to taxpayers. The two had devolved to a point where they were pitted in a win-lose relationship.

On the face of things, the loan sales were a grand success in the capital markets, in the technology world, in the reengineering world, and to the bottom line. Behind the scenes they were unhelpful for the Democrats who had to raise money in the 1996 elections and to the Republicans who were putting forward Jack Kemp, the former secretary of HUD. Everyone needed more pork and patronage to hand out, not less.

HUD was a slush fund. Some say the loan sales were initially used to increase slush fund resources. If Treasury colluded with Wall Street bidders, it is entirely possible to have stolen large amounts of resources without anyone on the HUD loan sales team knowing. In addition, loan sales generated the credit subsidy and high recovery rate assumptions needed to fund large increases of new originations. Were new originations needed to keep slush fund operations going? If so, once enough credit subsidy profits were generated to fund new originations, Wizard and the place-based trusts may have exposed slush fund operations.

In the end, HUD decided to resolve its ongoing single-family mortgage defaults with a foreclosure process that rejected resolution methods that could produce a 90% recovery rate. Instead, it chose a foreclosure and inventory property sales system that had historically produced 35% recovery rates. It was much more expensive for both defaulting and nearby homeowners, costing the HUD mortgage funds in the billions annually. The justification given by the deputy in charge of the single-family program was that maintaining a large foreclosed property inventory was essential to being a “full service real estate operation.” Losing billions a year so that a government agency is “full service” is bureaucrat-speak that intentionally obscures other objectives. Proof lay in the silence of the private mortgage insurance companies and the mortgage industry. These practices were fine with them. When the private sector concedes large market share to government graciously, something is up.

 

The National Security Council’s Point of View I used to have a partner who would always say, “Cash flow is more important than your mother.” If you want to understand anything, sit in the top guy’s chair and simulate the cash flows. Everything becomes very clear quickly.

Put yourself in this man’s shoes: It is 1996, and you are the Secretary of the Treasury, Bob Rubin. Your job is to keep the stock market up and the deficit financed. While you would like the economy to be good, the reality is that you need the profits and capital gains of the men who run all the money to be healthy and for their reinvestment to cycle back through your financial system’s pipeline.

To do this, you are dependent on the $500 billion to $1 trillion per annum of money laundering that passes through the American banking system as estimated by the Department of Justice. To get a proper idea of the importance of this flow to the banks that are your charge, imagine for the sake of example that the banks earn fees and commissions of 1% on those volumes. (Considering that the source of that money is illegal, 1% is almost certainly too low.) That amounts to $5 to $10 billion in pre-tax profits. Clearly, you need that number to grow. You need worldwide capital to move through your pipelines. One way to keep that flow growing is with government credit. Government credit supports the capital markets and prospective capital gains from those markets attracts more money. The growth of federal and federal supported credit was simply stupefying during the 1990’s. Republicans and Democrats tripped over each other in the competition to slap out ever more.

Another way is to run your enforcement, intelligence and military operations to consolidate the money laundering market and overall capital flow into those financial institutions that cycle the deposits and investments though the US financial markets. If you were Bob Rubin and the members of the National Security Council in 1996, you would have felt the pressure to keep the cash flow that comes through your pipelines growing. There was an election to win.

The1996 Presidential campaign was an unusually partisan one. The competition for fundraising was intense — involving lots of alleged money laundering schemes that tied into money abroad. Needless to say, the nostrum “it’s the economy, stupid” that informed the 1992 Democratic campaign and victory still held. That meant that for the incumbents to win, the stock market needed to be high and interest rates and gold prices low.

With substantial fundraising coming from the states (New York, California, Texas, Florida and the DC area) representing the highest money laundering flows, the reality of raising money was brought home by ex-CIA chief William Colby’s statement in 1995 that the drug cartels may now be calling the shots at all levels of government. Rumours abounded about money laundered into campaign coffers from government credit and deals extended to Russia and China.

 

From the NSC’s Point of View: What Does HUD Have to Do With It? Let’s look at HUD from Rubin’s point of view.

First, global money laundering and capital attraction is a lot easier with federal credit. No one needs to bother about credit quality, and it is readily marketable around the world. A significant amount of federal credit, whether on balance sheet through HUD, VA or Farmers Home, or off budget through FDIC and the GSE’s, backs the US mortgage finance system. It may seem counter intuitive to imagine that federal credit could be a vehicle for money laundering, but in reality it is simplicity itself.

It is well explained in Gary Webb’s book, Dark Alliance. It was published in 1998 after he was fired from the San Jose Mercury News for publishing the expose of the same title in 1996. In it, Ricky Ross, the dealer who led the crack cocaine explosion in South Central Los Angeles, explains to his Iran Contra supplier that he has a cash problem. The problem is that he has millions in cash underneath his bed and it just keeps growing. What can he do with the cash? The supplier says, “Don’t you know, you buy real estate.” So Ricky bought a string of properties. He wasn’t alone. Some estimates of the volume of Florida real estate transactions funded by illicit cash are as high as 70%. The lesson is clear. Publicly traded homebuilding and mortgage banking operations can be both a turbo-charged cash and capital gains machine. As of 1996, homebuilding and mortgage banking was unimpeded by any money laundering enforcement.

The following encounter illustrates this. At the Money Laundering Alert’s annual conference in Miami in the spring of 2000, I asked the senior representative of the US Treasury’s money laundering group, FinCen, what plans they had for protecting the federal credit programs particularly the ones in homebuilding and mortgage banking from money laundering. To her credit, she answered, “not only do I not know the answer to your question, I do not know enough about the federal credit programs to understand your question.”

I then visited the vendor fair. All the software providers who helped banks comply with money laundering regulation said that their banking clients would not let them near their mortgage banking subsidiaries, which were booming. A visit with the Lexus-Nexus affiliate indicated that the only reference he could find to money laundering enforcement in US homebuilding and mortgage banking indicated that HUD was the responsible enforcement authority — which means there was none.

 

The NSC’s Point of View: The Dark Alliance Allegations Another one of Bob Rubin and the NSC’s problems in 1996 was that the information regarding government narcotics trafficking kept seeping into the public awareness in a manner that could impair essential narcotics trafficking profits and reinvestment thereof.

Government deficit financing both in the US and worldwide had for decades depended on an ever-expanding illegal narcotics trade. Narcotics had been a banking business from the beginning, controlled for the benefit of those who wanted large pools of deposits to finance new investments or to take in payment for trade from those who could not access credit.

As head of the arbitrage desk at Goldman Sachs for many years, Rubin would have seen the process by which organised crime profits, cycled through Wall Street, bought up corporate America through mergers and acquisitions and leveraged buyouts. This was a game he must have understood.

 

The NSC’s Point of View: Missing Money and Slush Funds One of my accomplishments in the Bush Administration was to persuade the Office of Management and Budget to allow us to create a legal requirement that HUD and its component parts have a Chief Financial Officer (CFO) and audited annual financial statements with actuarial studies, and then to require it of all the other federal credit programs. After we won OMB’s support, the notion of CFOs, accrual statements and outside audits caught on all round the government. One of the reasons the “missing money” problems have come to the fore is that GAO is continually announcing that such and such an agency can not produce audited financials as required and the amount of the adjustments without documentation it requires to get the agency and the US Treasury to agree is such and such.

In March 2000, the HUD Inspector General testified that HUD would not publish financial statements for fiscal 1999 and that the undocumentable adjustments made so far to balance the books was $59 billion. A close reading of the undecipherable preliminary audit indicated that, in fact, the number was $17 billion in fiscal 1998 and $70 billion on the asset side and $59 billion on the liability side in fiscal 1999. As a practical matter, since HUD was assuring us that their systems did not work and that they had simply not bothered to check their accounts and cash balances in the old fashioned way using paper and pencil, we had no numbers of any meaning. In fact, anything was possible. Worse yet, GAO reports of the Treasury accounting systems — both as to their reliability and control by private contractors — are also disturbing. With little or no “info-sovereignty”, the internal controls are insufficient to assure that cash balance reconciliation between an agency such as HUD and Treasury are accurate.

When an agency can issue government guarantees and not record what they have issued correctly and then write checks that are not recorded correctly, then one or more of the players that handle the money, namely the US Treasury, the Federal Reserve Bank of New York, AMS and Lockheed, may be in a position to steal literally hundreds of billions of dollars with no one the wiser except those enjoying the fruits.

Such a thought seemed far-fetched not that long ago. Indeed, in 1994 after the first FHA/HUD financial audit was published, a mortgage banker came to see me. He was a serious engineering type who clearly worked hard and mastered the details of his business. He was distressed, he said. For decades he had been keeping a tally of total outstanding FHA/HUD mortgage insurance credit. He had brought printouts of his database for me. It turned out that the government’s published financial statements showed the amount outstanding was substantially less than the actual amount outstanding. He was sure.

I assumed that the guy was crazy. If what he said were true, then the US Treasury and the Federal Reserve would have to be complicit in significant fraud, including securities fraud. This was inconceivable. To this day, I regret not accepting a copy of the printouts from his databases. I wonder if they might have illuminated what our Wizard and other portfolio tools were about to find. They might have helped explain why our efforts to distribute information on the HUD outstanding mortgage and defaulted mortgage portfolios inspired such opposition and distress.

The indications are growing that Treasury and OMB are engaging in fraudulent transactions and that the key financing, accounting and payments systems are run by contractors who are either in on the deal or turn a blind eye. What this means is that the financial disclosure provided by the federal government may be essentially meaningless. It does not take long to realise that in a world with no financial controls — with the fox in control of the chicken coop — anything is possible. Life in the federal government is an endless series of shortcuts under impossible political stress and risk. With no internal financial controls, things can go far off course with no way for reasonable people to stop it.

The allegations about HUD missing money and slush funds that have come my way in the last few years are many and I have no way to sort through what is fact and what is fiction. At some point, however, there is merit to the saying that was thrown in my face so many times over the last six years, “where there is smoke there is likely to be fire.” Here are some of them:

  • HUD is being used to finance covert intelligence and military operations and research projects both domestically and globally.
  • Some of this funding is “black budget”; that is, it is not disclosed to or approved by Congress. That means it is in violation of the US Constitution.
  • HUD is one of the federal slush funds used to manage the accounts for domestic narcotics trafficking and to inventory profits on-shore where they are safe from foreign interference
  • State and local housing agencies that are used as local managers and distributors of HUD mortgage credit and subsidies are part of the money laundering chain. Allegations regarding the Arkansas Finance Development Agency, ADFA, give examples of how this works.
  • One of the mechanisms used to provide slush fund monies is with mortgage securities that are created in whole or in part with fraudulent mortgages. Churning mortgage defaults back through HUD supports debt service.
  • The Treasury conspired with winning bidders to rig some of the HUD loan sales
  • The HUD loan sales were used to launder money from abroad back into the Treasury’s Exchange Stabilisation fund (ESF).
  • PROMIS software was used by winning bidders — to help them submit winning bids.
  • Treasury, DOJ, and the intelligence agencies all have access to PROMIS as do one or more other governments, including Israel
  • Slush fund monies were used to fund the Treasury’s ESR’s funding of Swiss reparations to the Jewish victims of Nazi seizures.

While it would be nice to learn the truth of what fraud, if any, has transpired, what is important is to get our tax dollars managed properly and if money is missing, get it back. Scandals and blame games are not as useful as getting a proper system of resource management in place and recovering any stolen money.

For three years now I have listened to descriptions by retired military and intelligence folks about why so much money has gone missing at HUD and HUD’s role in a series of slush funds around the government.

The reality is that I have no idea what is true and what is false, what is information, what is exaggeration, what is misinformation and what is disinformation or incompetence. I am simply not qualified to say.

What I do know from twice trying to help run HUD on a financially responsible basis is that what they are saying is compatible with what I have experienced over the last twelve years. Nothing that I have experienced would indicate that their allegations are not feasible. I am convinced that some combination is true.

In 2000 I visited with a senior staff assistant to the Chairman of one of the appropriations committees for HUD. I asked him what he thought was going on at HUD. He said, “HUD is being run as a criminal enterprise.”

Based on the documentary evidence, that is absolutely correct.

 

Catherine Austin Fitts is the President of Solari, Inc, an investment advisor created to invest in equity managed by solaris, investment databanks and investment advisors for places of up to 10,000 people. She is a former Assistant Secretary of Housing-Federal Housing Commissioner in the first Bush Administration, a former managing director and member of the board of Dillon, Read & Co, Inc (now UBS) and President of The Hamilton Securities Group, Inc. Catherine provides risk management services to investors through Sanders Research Associates in London. She writes “The Real Deal” column for Scoop Media New Zealand.
Website: www.solari.com
E-mail: Catherine@solari.com

 

Copyright © 2001 Catherine Austin Fitts
Copyright © 2002 Scoop Media
Reprinted for Fair Use Only.

Narco-Dollars for Beginners
“How the Money Works” in the Illicit Drug Trade
by Catherine Austin Fitts
Special to the Narco News Bulletin
2001

Contents

Narco News Publisher’s Note: Catherine Austin Fitts is a former managing director and member of the board of directors of Dillon Read & Co, Inc, a former Assistant Secretary of Housing-Federal Housing Commissioner in the first Bush Administration, and the former President of The Hamilton Securities Group, Inc. She is the President of Solari, Inc, an investment advisory firm. Solari provides risk management services to investors through Sanders Research Associates in London.

“The Latin American drug cartels have stretched their tentacles much deeper into our lives than most people believe. It’s possible they are calling the shots at all levels of government.”

–William Colby, former CIA Director, 1995

 


Part I: Narco Dollars for Dummies TOP


A Simple Framework:
The Solari Index and the Dow Jones Index

The Solari Index is my way of estimating how well a place is doing. It is based upon the percentage of people in a place who believe that a child can leave their home and go to the nearest place to buy a popsicle and come home alone safely.

When I was a child growing up in the 1950’s at 48th and Larchwood in West Philadelphia, the Solari Index was 100 percent. It was unthinkable that a child was not safe running up to the stores on Spruce Street for a popsicle and some pin ball. The Dow Jones was about 500, the Solari Index was 100 percent and our debt per person was very low. Of course I did not think about it that way at the time. All I knew was that life on the street with my buddies was sweet.

Today, the Dow Jones is over 9,000, debt per person is over $100,000 and my favorite hairdresser in Philadelphia, Al at the Hair Hut in West Philadelphia, and I just had a debate yesterday afternoon while Al was cutting my hair about whether the Solari Index in my old neighborhood was 0 percent (my position) or 10 percent (Al’s position). Men always think it is higher than women.

Despite the boy-girl spread between us, it is fair to say that Al and I agree that the Solari Index is in the tank — both in the streets of Philadelphia and throughout America.

Life on the street ain’t sweet any more. I watched the slide of the Solari Index as a child. A lot of it had to do with narcotics trafficking and the people that narco dollars put in power on our streets — and in city hall, in the banks, in Congress and the corporations and investors down town and that ring the city.

My mission is to see the Solari Index return to 100 percent and to do so in a manner that moves the Dow up and our debt per person down and makes me and my partners a whole pile of money.

A few years back when my efforts to improve the Solari Index were threatening to reduce narcotics profits in a few places, I discovered that I could not look to the enforcement or the judicial establishment funded with my tax dollars to protect me. Narco dollars had the upper hand throughout government and the legal establishment.

That’s when I decided that I would have to learn how the money works on the drug trade.

Here is what I have learned that has been useful to me — and may help you have a better map of how narco dollars impact you, your business, your family and the Solari Index in your neighborhood.


| Top |

The Economics of Production:
Sam and Dave Do Boat Loads of White Agricultural Substances

Okay, let’s start at ground zero. It is 1947, and World War II is over. America is ready to go back to work to build the corporate economy. We are in New Orleans on the docks.

Two boats pull into the docks. The first boat is full of a white agricultural product grown in Latin America called sugar. The owner of the cargo, lets call him Sam, sells his boat load of white agricultural substance to the sugar wholesaler on the docks for how much money?

Ok, so let’s say that Sam sells his entire boatload of sugar to the sugar wholesaler on the docks for X dollars.

Now, after Sam pays his workers and all his costs of growing and transporting the sugar, and after he and his wife spend the weekend in New Orleans and he pays himself a bonus and buys some new harvest equipment and pays his taxes, how much cash does he have left to deposit into his bank account? Or, another way of saying this is: What is Sam’s net cash margin on his sugar business?

Well, it depends on how lucky and hard working and smart Sam is, but let’s say that Sam has worked his proverbial you know what off and he makes around 5-10 percent. Sam the sugar man has a 5-10 percent cash profit margin. Let’s call Sam’s margin S for slim or SLIM PERCENTAGE.

Back on the docks, the second boat — an exact replica of the boat carrying Sam’s sugar — is a boat carrying Dave’s white agricultural product called drugs. In those days this was more likely to be heroin, these days more likely to be cocaine. Whatever the precise species, the planting, harvesting and production of this white agricultural substance, Dave’s drugs, are remarkably like Sam’s sugar.

Ok, so if Sam the sugar man sold his sugar to the sugar wholesaler for X dollars, how much will Dave the drug man sell his drugs to the drug wholesaler for? Well, where Sam is getting pennies, Dave is getting bills. If Sam had sales of X dollars, let say that Dave had sales of 50-100 times X. Dave may carry the same amount of white stuff in a boat but from a financial point of view, Dave the drug man has a lot more “sales per boat” than Sam the sugar man.

Now, after Dave pays his workers and all his costs of growing and transporting the drugs, and after he and his wife spend the weekend in New Orleans and he pays himself a bonus and buys some new harvest and radar equipment and spends what he needs on bribes and bonuses to a few enforcement and intelligence operatives and retainers to his several law firms, how much cash does he have left to deposit into his bank account? Or, another way of saying this is what is Dave’s net cash margin on his drug business?

It’s also going to be a multiple of Sam’s margin, right? Maybe it will be 20 percent or 30 percent or more? Let’s call it B for Big, or BIG PERCENTAGE. Dave the drug man has a much bigger “cash profit per boat” than Sam the sugar man. Part of that is, of course, once Dave has set up his money laundering schemes, even after a 4-10 percent take for the money laundering fees, it’s fair to say his tax rate of 0 percent is lower than Sam’s tax rate. While it is expensive to set up all the many schemes Dave might use to launder his money, once you do it you can save a lot avoiding some or all of the IRS’s take.

Look at your estimate of Sam and Dave’s sales and profits. Now answer for yourself the following questions.

  • Who is going to get laid more, Sam or Dave?
  • Who is going to be more popular with the local bankers, Sam or Dave?
  • Who is going to have a bigger stock market portfolio with a large investment house, Sam or Dave?
  • Who is going to donate more money to political campaigns, Sam or Dave?
  • Whose wife is going to be bigger in the local charities, Sam or Dave’s?
  • Whose companies will have more prestigous law firms on retainer, Sam or Dave’s?
  • Who is going to buy the other’s company first, Sam or Dave? Is Dave the drug man going to buy Sam the sugar man’s company, or is Sam the sugar man going to buy Dave the drug man’s company?
  • When they want to buy the other’s company, will the bankers, lawyers and investment houses and politicians back Sam the sugar man or Dave the drug man?
  • Whose son or grandson has a better chance of getting into Harvard or getting a job offer at Goldman Sachs, Sam or Dave’s?

Don’t listen to me. And don’t listen to Peter Jennings, Dan Rather or Tom Brokaw. Who do you think pays their salaries? Who owns the companies they work for? Sam or Dave?

Don’t listen to anyone else. Think about the numbers and listen to your heart. What do you believe?

There is very little about how the money works on the drug trade that you cannot know for yourself by coming to grips with the economics over a fifty year period of Sam and Dave and their boat loads of white agricultural substance. It is the magic of compound interest.

As one of my former partners used to say, “Cash flow is more important than your mother.”


| Top |

Many Boatloads Later

It’s more than fifty years now since the boats transporting Sam and Dave’s white agricultural products docked in New Orleans. I don’t know what the Narco National Product (Solari’s term for that portion of the GNP coming from narco dollars) was in 1947, but lets say it was a billion dollars or less. Today, the Narco National Product that number is estimated to be about $400 billion globally and about $150 billion plus in the United States.

It helps to look at the business globally as the United States is the world leader in global money laundering. According to the Department of Justice, the US launders between $500 billion — $1 trillion annually. I have little idea what percentage of that is narco dollars, but it is probably safe to assume that at least $100-200 billion relates to US drug import-exports and retail trade.

Ok, so let’s think about how much Sam and Dave have in accumulated profits in their bank and brokerage accounts.

Let’s assume that the US narco national product in 1947 was $1 billion and it has grown to about $150 billion today. Assume a straight line of growth from $1 billion – $150 billion, so the business grows about $3 billion a year and then tops out at $150 billion as the Solari Index has bottomed out at or near 0 percent. America is about as stoned on illegal drugs as it can get, and growth in controlled “Schedule II” substances has moved to Ritalin and other cocaine-like drugs for kids that government programs and health insurance will now finance.

Let’s take the BIG PERCENT margin that we estimated for Dave the drug man’s net cash margin. Let’s say that every year from 1947 through 2001, that the cash flow sales available for reinvestment from drug profits grew by $3 billion a year, throwing off that number times BIG PERCENT. Okay, assume that the reinvested profit grew at the compound growth rate of the Standard & Poor’s 500 as it got reinvested along the way.

That amount is an estimate for the equity owned and controlled by those who have profited in the drug trade. Total narco dollars. How much money is that? I made an Excel spread-sheet once to estimate total narco capital in the economy.

My numbers showed that Dave the drug man had bought up not only Sam’s companies, but — if you throw in other organized crime cash flows — a controlling position in about most everything on the New York Stock Exchange.

When you think about it, this analysis make sense. The folks with the BIG PERCENT — big cash margin — would end up rich and in power and the guys working their you-know-what off for SLIM PERCENT — a low cash margin — would end up working for them.

 

| Top |

NYSE Chairman Richard Grasso Embracing a FARC Commmander (Colombian Rebel Group)

A Real World Example:
NYSE’s Richard Grasso and the Ultimate New Business “Cold Call”

Lest you think my comment about the New York Stock Exchange is too strong, let’s look at one event that occurred before our “war on drugs” went into high gear through Plan Colombia, banging heads over narco dollar market share in Latin America.

In late June 1999, numerous news services, including Associated Press, reported that Richard Grasso, Chairman of the New York Stock Exchange flew to Colombia to meet with a spokesperson for Raul Reyes of the Revolutionary Armed Forces of Columbia (FARC), the supposed “narco terrorists” with whom we are now at war.

The purpose of the trip was “to bring a message of cooperation from U.S. financial services” and to discuss foreign investment and the future role of U.S. businesses in Colombia.

Some reading in between the lines said to me that Grasso’s mission related to the continued circulation of cocaine capital through the US financial system. FARC, the Colombian rebels, were circulating their profits back into local development without the assistance of the American banking and investment system. Worse yet for the outlook for the US stock market’s strength from $500 billion — $1 trillion in annual money laundering — FARC was calling for the decriminalization of cocaine.

To understand the threat of decriminalization of the drug trade, just go back to your Sam and Dave estimate and recalculate the numbers given what decriminalization does to drive BIG PERCENT back to SLIM PERCENT and what that means to Wall Street and Washington’s cash flows. No narco dollars, no reinvestment into the stock markets, no campaign contributions.

It was only a few days after Grasso’s trip that BBC News reported a General Accounting Office (GAO) report to Congress as saying: “Colombia’s cocaine and heroin production is set to rise by as much as 50 percent as the U.S. backed drug war flounders, due largely to the growing strength of Marxist rebels”

I deduced from this incident that the liquidity of the NY Stock Exchange was sufficiently dependent on high margin cocaine profits (BIG PERCENT) that the Chairman of the New York Stock Exchange was willing for Associated Press to acknowledge he is making “cold calls” in rebel controlled peace zones in Colombian villages. “Cold calls” is what we used to call new business visits we would pay to people we had not yet done business with when I was on Wall Street.

I presume Grasso’s trip was not successful in turning the cash flow tide. Hence, Plan Colombia is proceeding apace to try to move narco deposits out of FARC’s control and back to the control of our traditional allies and, even if that does not work, to move Citibank’s market share and that of the other large US banks and financial institutions steadily up in Latin America.

Buy Banamex anyone?

 


Part II: Narco Dollars On Your Map TOP

It helps to look at the drug markets by looking at a map of the United States.

What are the four states with the largest market share in illegal narcotics trafficking? Draw a map if you want and shade them in on your map.

Yup. You got it.

New York, California, Texas and Florida.

It makes sense. Those are the biggest states. They have big coastal areas and borders and big ports. It would make sense that the population would grow in the big states where the trade and business flow grows. If you check back to Part I of “Narco Dollars for Dummies”, we described two businesses. One was Sam’s sugar business that had a SLIM PERCENTAGE profit. The other was Dave’s drug business that had a BIG PERCENTAGE profit. It would make sense that these four states would be real big in both Sam’s sugar business and Dave’s drug businesses.

OK. Now. What are the four states with the biggest business in money laundering of narco profits and other profits of organized crime?

Not surprising? Same four states. They are all known as banking power places.

New York, California, Texas and Florida.

What’s next? What are the four states with the biggest business in taking the laundered narco profits and using them to deposit money in a bank, or to buy another company, or to start a new company, or just buy stock in the stock market? That’s what I call the reinvestment business.

Same four, right? New York, California, Texas and Florida.

Who were the governors of these four states in 1996?

Well, let’s see. Jeb Bush was the governor of Florida. Governor Jeb was the son of George H. W. Bush, the former head of an oil company in Texas and Mexico and the former head of the CIA and the former head of the various drug enforcement efforts as Vice President and President. Then George W. Bush, also the son of George H. W. Bush, was the governor of Texas. So the governors of two of the largest narco dollar market share states just happen to be the sons of the former chief of the secret police.

Do you think it is possible to become the governor of a state with the support of the SLIM PERCENTAGE profit businesses and the opposition of the BIG PERCENTAGE profit businesses, particularly after the BIG PRECENTAGE profits have bought up all the SLIM PERCENTAGE profit businesses?

What about president?

Of course, George W. is President today fueled by the single most successful campaign fundraising in the history of Western civilization. Now do you know why Hillary Clinton wanted to be a Senator from New York? Now do you know why Andrew Cuomo wants to be New York governor and is reported to be doing polls to see if people associate him with the Mafia and organized crime?

When you think about it, the President would need to win the majority of the people who donate from the SLIM PERCENTAGE profit businesses but control the reinvestment of the BIG PERCENTAGE profit industry cash flow to win. The competition for the support of the people who control the reinvestment from the BIG PERCENTAGE profit business cash flow in the biggest states would be fierce.

According to the Center for Responsive Politics analysis of the 2000 elections, donors in California, New York, the District of Colombia Metro Area (which is full of lawyers and lobbyists who represent all the other states), Texas and Florida contributed $666.8 million, or approximately 47 percent of a total of $1.427 billion in donations.

I can just paraphrase Tina Turner singing in the background. Care to hum along with us? . . . .”What’s drugs got to do . . . got to do . . . with it?”


| Top |

Getting Out of Narco Dollars HQ

In 1996, my company and I were targeted by a private informant and a group of investigators working for the Department of Justice and the Department of Housing and Urban Development (HUD). If you have ever seen the movie Enemy of the State with Will Smith and Gene Hackman, then you understand how the drill works.

Will Smith plays a successful Washington lawyer who is targeted in a phony frame and smear by a US intelligence agency. The spooky types have high-speed access to every last piece of data on the information highway — from Will’s bank account to his telephone conversations — and the wherewithal to engineer a smear campaign through the papers and the Council on Foreign Relations types.

The organizer of an investment conference once introduced me by saying, “Who here has seen the movie Enemy of the State? The woman I am about to introduce to you played Will Smith in real life.”

One day I was a wealthy entrepreneur with a beautiful home, a successful business and money in the bank. I had been a partner and member of the board of directors of a Wall Street firm and then Assistant Secretary of Housing-Federal Housing Commissioner during the Bush Administration. I had been invited to serve as a governor of the Federal Reserve Board and instead started my own company in Washington, The Hamilton Securities Group. Thanks to our leadership in digital technology, financial software and analytics, Hamilton was doing well and poised for significant financial growth.

One of my software tool innovations, Community Wizard, helped communities access data about how all the money works in their place. Accessible through the World Wide Web, Community Wizard was illuminating an unusual pattern of defaults on HUD mortgages and other government and homeowner losses in areas in which the CIA had admitted to facilitating cocaine trafficking by Iran Contra supporters.

According to the CIA, we were paying our government to help the narco dollars make money in a way that — if you read Community Wizard’s comic book-like money maps — was losing taxpayers and homeowners billions of dollars.

The next day I was hunted, living through 18 audits and investigations and a smear campaign directed not just at me but also at members of my family, colleagues and friends who helped me. I believe that the smear campaign originated at the highest levels. For more than two years I lived through serious physical harassment and surveillance. This included burglary, stalking, having houseguests followed and dead animals left on the doormat. The hardest part was the necessity of keeping quiet about the physical danger lest it cost me more support or harm my credibility. Most people simply do not believe that such things are possible in America.

In 1999, I sold everything to pay what to date is approximately $6 million of legal and administrative costs. My estimate of equity destroyed, damages and opportunity costs is $250 million. I moved to a system of living in several places on an unpredictable schedule in the hope that this would push up the cost of surveillance and harassment and so dissuade my tormentors from following.

The places were chosen to move me as far away as possible from the corridors of power in Washington and on Wall Street filled with people benefiting from narco dollars and their reinvestment. That strategy-combined with excellent legal and administrative work by a first rate team of very courageous people — has been successful in besting the targeting. It made it possible for me to understand how our economic addiction to narco dollars worked and how to it was draining our neighborhoods. I teamed up with the members of my family and friends and their neighbors who were getting drained.

Four days after Insight Magazine published its cover story on me this summer, the head investigator targeting us resigned unexpectedly. Three weeks later the last of 18 audits and investigations was suddenly closed down. A follow-up article by Insight’s Paul Rodriguez described the closed investigation as something that “many inside both HUD and the Department of Justice regarded as a political vendetta against Fitts.”

The miracle had happened. We have overcome a serious targeting. Like in the movie where Will Smith comes out fine, my story has a happy ending. It’s a wonderful feeling. As Winston Churchill’s once said, “Nothing is more exhilarating than being shot at without result.”

I believe that one of the reasons for my happy ending was that our actions to deal with the investigation reflected the understanding of narco dollars that I acquired from living and traveling throughout America and talking with people from all walks of life about how narco dollars were impacting our lives and neighborhoods in many different places.

Understanding narco dollars is something I need to know to help entrepreneurs around the country build the profitable deals and businesses that will get the Solari Index and Dow Jones in our neighborhoods rising together.

Where I live, folks do not want to know about what is wrong on the Titanic. They do not want to know that a flood of narco dollars is rolling over us. They know these things. What they want to know is how to build arks.


| Top |

Georgie, West Philadelphia and the Stock Market

One of my new homes is in the city in Philadelphia, near where I grew up in West Philadelphia. Another is in a very beautiful and close knit farming community in Hickory Valley, Tennessee where my father’s family has lived since the 1850’s.

Once a month I drive to Philadelphia from my home in Hickory Valley to attend a board meeting. I stay in a lovely little apartment in the first floor of a row house owned by my friend Georgie.

Georgie is one of my favorite people in the world. She lives in the apartment on the second floor. Just about my favorite thing in the world is hanging out with Georgie. We watch Oprah, we talk, we go to movies, and we giggle over ice cream with long names and cookies. Georgie is an awesome cook and my little apartment fills up daily with the smells of something delicious that Georgie is making.

One day, Forest, my dog, and I were up in Georgie’s apartment to enjoy a fresh plate of scrapple that Georgie had fried up that morning. The conversation turned to narco dollars. Georgie said that looking at the big picture was simply too overwhelming. Couldn’t I explain this without using the words millions or billions — just dollars and cents in terms of our neighborhood in West Philadelphia?

I always have this problem explaining international money flows to moms and grandmoms. Most really great women want to know about the real world. The world of real people — her world full of her kids and grandkids and other kids she loves.

So we got out a blank piece of paper and started to estimate.

Every day there are two or three teenagers on the corner dealing drugs across from our home in Philadelphia. We figured that if they had a 50% deal with a supplier, did $300 a day of sales each, and worked 250 days a year that their supplier could run his net profits of approximately $100,000 through a local fast food restaurant that was owned by a publicly traded company.

Assuming that company has a stock market value that is a multiple of 20-30 times its profits, a handful of illiterate teenagers could generate approximately $2-3 million in stock market value for a major corporation, not to mention a nice flow of deposits and business for the Philadelphia banks and insurance companies.


| Top |

The Narco Dollar Double Bind:
Dow Jones Index Up, Solari Index Down

As described in Part I, the Solari Index is my way of estimating how well a place is doing. It is based upon the percentage of people in a place who believe that a child can leave their home and go to the nearest place to buy a Popsicle and come home alone safely. The Solari Index is about how safe you feel you and your neighbor’s kids are.

When I was a child growing up in the 1950’s at 48th and Larchwood in West Philadelphia, the Solari Index was 100 percent. It was unthinkable that a child was not safe running up to the stores on Spruce Street for a Popsicle and some pinball. The Dow Jones was about 500, the Solari Index was 100 percent and our debt per person was very low. Of course I did not think about it that way at the time. All I knew was that life on the street with my buddies was sweet.

Today, the Dow Jones is over 9,000, debt per person is over $100,000, and I think the Solari Index in my old neighborhood is 0 percent.

Life on the street ain’t sweet anymore.

To understand how this works, we need to understand “pop.”


| Top |

It’s Not Just About Profit, It’s About the Pop

Here is the part that is particularly hard for women. It took several times at our sheet of paper before Georgie understood what I was saying.

The power of narco dollars comes when you combine drug trafficking with the stock market.

The “pop” is a word I learned on Wall Street to describe the multiple of income at which a stock trades. So if a stock like PepsiCo trades at 20 times it’s income, that means for every $100,000 of income it makes, it’s stock goes up $2 million. The company may make $100,000, but its “pop” is $2 million. Folks make money in the stock market from the stock going up. On Wall Street, it’s all about “pop.”

The people who own a corporation make money on the stock going up. So a company has investors, with the most powerful investors typically being large institutions who are typically represented on the board of the company. The board is the group of people who decides what goes. The senior management officials who run the company day to day are also on the board. Most of the money they make comes from stock options that they get to encourage them to get the stock to go up for the investors. That means that what everyone who runs the company wants is for the stock to go up. The way to do that is to increase net income or to increase the multiple at which the stock trades.

So in the case of PepsiCo described above, if the management increases soda pop sales in a way that net income goes up by $100,000, the stock goes up $2 million. Now let’s say, the board and management do a whole series of things to attract new investors and improve the company’s image and, as a result, the stock starts trading at 22 times profits. Then, the stock value goes up even more. Whether increasing net income or increasing the multiple at which the stock market values the company profits, the board and the management are focused on making the stock go up. That is how their money works.

The winner in the global corporate game is the guy who has the most income running through the highest multiple stocks. He is the winning pop player. Like the guy who wins at monopoly because he buys up all the properties on the board, he can buy up all the other companies.

So if I have a company that has a $100,000 of income and a stock trading at 20 times earnings, if I can find a way to run $100,000 of narcotics sales by a few teenagers in West Philadelphia through my financial statements, I can get my stock market value to go up from $2 million – $4 million. I can double my “pop.” That is a quick $2 million profit from putting a few teenagers to work driving the Solari Index down in their neighborhood. Bottom line, I can make a lot of quick money on the stock going up and the Solari Index going down

OK, now what does this all mean for the Solari Index in Philadelphia? If I am a group of mothers in my neighborhood who want the Solari Index to go back up to a 100%, what’s stopping me?

Well, if the Department of Justice is correct about $500 billion-to-1 trillion of annual money laundering in the US, then about $20-40 billion should move annually through the Philadelphia Federal Reserve District.

Assuming a 20% margin for the BIG PERCENTAGE profits and a 20 times multiple on the stock of the companies that Dave and his investors and banking partners were using to launder the money, let’s look at how much of the stock market value would be “addicted” to the drug and money laundering profits flowing through the Philadelphia area.

The total stock market value generated in the Philadelphia area with $20-40 billion in narco retail sales would be about $80-160 billion. If you add all the things you could do with debt or and other ways to increase the multiples, and you could get that even higher, say $100-250 billion.

Assuming that there are 3 million people in the greater Philadelphia area, the total stock market value generated would average anywhere from $27,000-to-$85,000 per person. Imagine what would happen to the economy in Philadelphia if this stock market value suddenly disappeared because all the teenagers in Philadelphia stopped dealing or buying drugs?

Imagine what happens to your stock multiple if you are a Philadelphia corporate chieftain and you don’t run narco dollars or large purchases fueled by narco dollars through your financial statements and you don’t attract narco dollars to reinvest in your stock? What happens to your corporate income and your stock profit if the ones who invest narco dollars — accumulated over the last fifty years compounding at their magical compound interest — don’t like you? How is everyone in Philadelphia who loses money on your stock going down going to feel about you?

The Department of Justice says that we launder $500 billion – $1 trillion. Multiply those times a BIG PERCENTAGE cash flow profit margin. Now figure how much of that “income” gets run through the income statement of publicly traded banks and companies and multiply that number by the multiple of income at which their stocks trade.

Voila. I don’t know what your number is. All I know is that, as Ed Sullivan used to say, it is “really, really BIG.”

 


Understanding Money Laundering in America
Part III: Drugs as Currency
TOP

“Who can compete with the government?”

–John Gotti, Jr.


The Hickory Valley-Philadelphia Fast Food Franchise Pop

Two things helped me understand money laundering in America. First, as I drove from Hickory Valley to Philadelphia once a month and drove around the country with my dog Forest all sorts of people started to teach me about how the money worked truckers and the ladies who run the brand-name motels and the folks who work the late shifts at the gas station food marts. Second, I read Black Money, a mystery novel by Michael Thomas, a former partner of the Wall Street firm, Lehman Brothers.

In Black Money a government investigator investigating S&L fraud starts to look into the revenues and expenses of a fast food chain, which is experiencing far more deposits from sales than it is selling pizzas. As Thomas walks you through a handful of the near infinite number of possible money laundering schemes known to mankind, you start to get a sense for some of the economics of fast food franchises that have nothing to do with feeding people.

After I finished Black Money I started to pay attention to “how the money works” at the fast food and motel franchises at every interstate exit between Tennessee and Philadelphia. What I noticed about them was that no matter when I drove by — day or night, weekday or weekend — some of them were suprisingly empty. Indeed, one or two name brands were defined by their perpetual emptiness. Conversations every time I stopped filled in a lot here and there about how much cash was coming in and going out on the food and retail business.

Some quick estimation on what was being spent per interstate exit to start up and operate all the retail establishments versus what was coming in the door in terms of legitimate business said that some businesses had to be an excuse, an excuse to generate stock market capital gains by combining laundered money or phony profits with retail franchises — or both.

The problems this presents to people trying to run an honest business are numerous. The problems it creates for our work ethic and culture are numerous too. It increasingly puts the low performance people in charge, and everyone starts to behave like and follow them.

For example, I drove ten miles to Bolivar, our county seat, one night to go through the car wash at the local big chain publicly traded gas station. I tried to pay for a three-dollar car wash with quarters. I was told they would not take coins. It was a policy. Counting coins was too much work, the person at the register and then the manager said as they sat and gossiped with their friends, no other customers in sight. So I got back in my car and drove ten miles home and washed the car with a hose and some paper towels, the symbolic economy being too busy to care about steady customers or to do the real work in the concrete world.

If you are feeling energetic, go drive around to a few areas with a heavy concentration of retail fast food and motel franchises. Try estimating out the numbers. See how they work for you in your place. Are your local businesses in the retail business or the money laundromat business or both?

Another quick and dirty estimation technique for your neighborhood is to take the Department of Justice’s figure of $500 billion – $1 trillion and divide by 281 million Americans for a “per American” estimate of money laundering market share. Now multiply that times the number of people in your area. Now divide by the number of local banks. What do the numbers say to you?

The next time you are out on the streets, see if you can guess where the money is. It’s bound to be there someplace.


| Top |

Enforcement: At the Heart of the Double Bind

I tend not to get bogged down in discussions about how the various police, enforcement and prosecution industries relate to narco dollars.

Here is my bottom line on how the money works on enforcement and the war on drugs.

Every year since I was a child the Solari Index goes down and the budgets that I pay for as a taxpayer to fund more enforcement, prosecution and incarceration go up. If you look at what taxpayers are paying, you would think we were picking up all the narco dollar industry’s expenses.

The more we pay for enforcement, the more the Solari Index goes down and drug profits go up. The more we pay for national security, the more thousands of boat loads of white agricultural products seem to have no problem moving back and forth across the borders.

After fifty years, the correlation is documented and clear.

What is also clear is that the person who has inside help from the national security, intelligence, enforcement and prosecution bureaucracies will have the biggest BIG PERCENTAGE cash margin (see Parts I & II for background on BIG vs. SLIM PERCENTAGE).

John Gotti, Jr, not a reliable source, when asked by a reporter whether or not the New York Gotti family was dealing in narcotics said, “No, who can compete with the government?”

The CIA, also not a reliable source, backs up Mr. Gotti’s postion. According to the CIA’s own Inspector General, the government has been facilitating drug trafficking. Indeed, according to the CIA and DOJ (Dept. of Justice), the CIA and DOJ created a memorandum of understanding that permitted the CIA to help its allies and assets to traffic in drugs and not have to report it.

Where I come from powerful people pay for performance. I can only presume that the narco dollars are getting the performance they want from the expenditure of our tax dollars for more and more enforcement. After all, enforcement keeps profit margins up and the franchise controlled.

The best example I know is my own case. My estimate is that the federal enforcement establishment may have spent more to target me over the last six years than they spent to get Bin Laden before September 11. They clearly were not hampered in my case by having to respect the spirit or the letter of the law. I deduce from that only that the Solari model is not as good for the narco dollar and money laundering businesses as Bin Laden was — at least until recently.


| Top |

Drugs as Currency

One of challenges of doing the numbers on the narcotics business is that narcotics are not always a commodity — sometimes narcotics are a currency used to pay for other things.

The arms industry sometimes markets to third world countries, or groups such as terrorists, who cannot pay with cash, but can pay with drugs. So, for example, it is not unusual to see arms-drugs transshipment operations, in which payment for arms is taken with drugs and then the drugs retailed in the US to facilitate the arms trading and profits.

A case in point is the Iran-Contra operation at Mena, Arkansas. It has been alleged that Oliver North and the White House (National Security Council) were dealing drugs through Mena not to make money, but to facilitate arms shipments. Mena has received attention as a result of its alleged financial contribution to Bill and Hillary Clinton’s rise to national prominence.

You also see the arms-drugs relationship as you estimate how the money works on the private profits from various taxpayer funded wars. Vietnam, Kosovo, Plan Colombia, Afghanistan, what do they all have in common? Drugs, oil and gas, arms. Add gold, currency and bank market share and you have the top of my checklist for understanding how the money works on any war or “low intensity conflict” around the globe.

Many of the members of our global leadership were trained in wartime narcotics trafficking in Asia during WWII. George H. W. Bush and his generation watched our ally Chang Kai Shek finance his army and covert operations with opium. I am told that the Flying Tigers were the model that taught Air America how to fly dope.

If you trace back the history of the family and family networks of America’s leaders and numerous other leaders around the world, what you will find is that narcotics and arms trafficking are a multigenerational theme that has criss-crossed through Asia, North America, Europe, Latin America and Eurasia and back through the City of London and Wall Street to the great pools of financial capital. Many a great American and British fortune got going in the Chinese opium trade.

One of the benefits of learning how narco dollars work is that it will help you sort through the money laundering and insider trading news on the War on Terrorism. Terrorism and narcotics trafficking often get linked through narcotics as currency. Terrorists need guns. Narco dollars need private protection and covert operations.


| Top |

In Defense of the American Drug Lords

It’s 1947. You want to make sure that America wins in the great game of globalization. The winner will be the country that accumulates the largest pool of capital to finance its corporations and investment in new technology. That is a problem because Americans vote for leaders who help them spend, not save. No matter how hard Sam the sugar man works and no matter how much he saves, how much capital can be pooled at SLIM PERCENTAGE? It is fair to say it is not enough to beat the investment network that can pool capital at BIG PRECENTAGE growth rates. (See Part I for the story of Sam and Dave).

Indeed, what a history of narcotics trafficking and piracy and various other forms of organized crime over the last five hundred years show is that our leaders have been in a double bind for centuries. The only thing more dangerous than getting caught doing organized crime, is not being in control of the reinvested cash flows from it. This is why monarchs played footsie with pirates in Elizabethan times and no doubt have been doing so ever since.

After taxation, organized crime is a society’s way of forming lots of pools of low cost cash capital. Organized crime is a banking and venture capital business.

So the reality is that if you want to control the cash flow and capital that controls the overworld, you’ve got to control the cash flows getting generated by the underworld. Indeed, you’ve got to have an underworld. If it does not exist, you need to outlaw some things to get one going.

Here is the bottom line on how the money works on narco dollars. Unless Sam switches to dope, Dave will win his wife, his mistress, his banker, buy his company, buy his Congressman and be the star at the local charities. Everyone will admire and pay attention to Dave.

It’s the power of compound interest.

It’s 1947. If you don’t do it, you will be the loser. What would you do?


| Top |

The Pogo Problem: We Have Met the Enemy and It is Us

The Sam and Dave dilemma of “to deal or not to deal” is made worse by the power of popular opinion.

Last summer, I made a presentation called “How the Money Works on Organized Crime” to a wonderful group of about 100 people at an annual conference for a spiritually focused foundation in Philadelphia. This is a group of people who are committed to contributing to the spiritual evolution of our culture.

After walking through the various Sam and Dave dilemmas with Sam’s SLIM PERCENTAGE profits sugar business and Dave’s BIG PERCENTAGE profits drug business, as well as the intersection between the stock market and campaign fundraising and narco dollars for about an hour, I asked the group what would happen to the stock market if we decriminalized or legalized drugs?

The stock market would crash, they said.

What would happen to financing the government deficit if we enforced all money-laundering laws? Since most of the bank wire transfers are batched and run through the New York Federal Reserve Bank, this should not really be that hard, right?

Their taxes might go up. Worse, yet, their government checks might stop, they said.

I then asked them to imagine a big red button at the front of the lectern. By the power of our imaginations, if they pushed that button they could decriminalize narcotics trafficking and stop all money laundering in the United States.

Who would push the button?

It turns out that in an audience of approximately 100 people committed to spiritually evolve our society that only one person would push the button. Upon reflection, 99 would not. I asked why.

They said that if they pushed the button, their mutual funds would go down and their government checks might stop.

I commented that what they were proposing is that an entire infrastructure of people continue to market narcotics to their children and grandchildren to ensure that their mutual and pension funds stay high in value.

They said, yes, that’s right.

Which is why I say that America is not addicted to narcotics as much as it is addicted to narco dollars.


| Top |

The National Security Council’s Double Bind in 1996

Here is the acid test.

It’s August 1996. Gary Webb has just broken the story in the San Jose Mercury News about the CIA helping to deal drugs into South Central LA. He has put the legal documents up on their website. The proof is hard. The government is dealing drugs.

Catherine Austin Fitts’s company is publishing a tool on the web called Community Wizard that shows maps with Geographic Information Systems software that include patterns of defaults on HUD mortgages in the areas of LA with the heaviest concentration of CIA supported Iran Contra drug trafficking.

The patterns between HUD defaulted mortgages and narco dollars are much too close for comfort.

What would you do if you were Bob Rubin (Secretary of Treasury, now Co-Chairman of Citicorp), Larry Summers (Deputy Secretary of Treasury, now President of Harvard), John Hawke (Undersecretary of the Treasury; now Comptroller of the Currency), Al Gore (Vice President, now teaching) and John Deutch (Director of the CIA, now teaching) sitting on the national security council or the related narco dollars task force?

Would you target Webb and get him fired and the story discredited or would you let the story grow and flourish?

Would you target Fitts and have her business and her software tools and databases destroyed or would you let her business flourish, allowing every community to see and track the narco dollars that were helping to drive their Solari Index to 0% while driving the Dow Jones Index higher?

Which will it be in an election year? Will you do everything you can do to attract the reinvestment of the narco dollars into your campaign and into the stock market or will you let Fitts and Webb continue to illuminate “how the money works” on narco dollars in a way that might crash the stock market and make it harder and more expensive for the government to finance the deficit?

Before you answer, let me tell you one more story.

In 1999, I was at a revival for Christian women. One of the presidential candidates made a guest appearance. A friend of mine, an Afro-American minister, who used to work for the Drug Enforcement Agency (DEA), leapt to her feet to applaud him with tremendous enthusiasm. I was surprised at her response given that she understood his success in attracting narco dollars not to mention his and his colleague’s silence on Gary Webb’s Dark Alliance reports and the subsequent CIA admission of drug dealing by the government.

She looked at me and said, “He is going to be the winner.” So I said, “You mean, I am a loser because I tried to stop the corruption and he is a winner because he profited from it and helped it grow. So you will clap for him and not for me.” She replied, “That’s right. You are a loser. He is a winner”

Not such an easy decision to vote for the “rule of law” is it?

Indeed, Webb got fired and Fitts’ was targeted and, after spending $6 million on legal and related expenses, my fortune sank down to the same 0% as the Solari Index.

But whatever I do, I can’t blame it just on the top guys. Whatever they did, whoever it was, they were doing what it took to please and win the crowd.

Americans love a winner.


| Top |

Solari Index Up, Dow Up, Debt Down

The good news on all of this is that there are solutions. New technology blesses us with the potential tools we can use to radically increase productivity in a way that can “jump the curve” on our narco dollar addiction.

Will it happen? I don’t know.

My pastor says, “If we can face it, God can fix it.” The question is can we face our addiction to narco dollars? Can we do it in a way that entrepreneurs like me can build successful businesses and transactions that profit from getting the Solari Index and the Dow Jones Index to go up together?

Sound impossible? Far from it. It’s quite possible. Add up all the current income generated by small businesses in America. It is currently valued at a multiple of 1-5 times because it is private-not publicly traded in a liquid stock market. Investors have no way to invest in a liquid publicly traded stock.

The creation of a solari, a local knowledge manager/databank that publishes neighborhood financial statements and information and tracks the Solari Index in your place, can make it possible for your neighborhood to create a mutual fund that could channel capital to the profitable small businesses in your neighborhood so that participating small business income could start to trade at a multiple of 10 times — even 20 times or 30 times eventually. The potential capital gains are in the trillions of dollars.

That is a lot of low cost capital that local entrepreneurs can use to create jobs and to build their businesses — even start new ones.

Better yet, while your doing that how about reengineering billions of federal, state and local government investment that has a negative return on investment to both taxpayers and communities to a positive return on investment. More big capital gains that can be securitized and traded in a liquid stock market — again the potential profits are in the trillions.

Finally, add up the value of all the homes and real estate in your community. OK, what would happen to the value of that equity if the Solari Index went back up to 100 percent? Real estate financed through a local trust or REIT or mutual fund that could be traded in the stock market would create a way for investors to start to “trade places.” That means they would profit from the Solari Index going up along with local real estate owners, homeowners and small business folks. Add some more trillions to the potential capital gains.

Helping the Solari Index rise back to 100% is the biggest capital gains opportunity in America, particularly when combined with reengineering government investment and pooling small business equity in a manner that provides competitive access to the stock market. Generations of accumulated narco dollars could do very well investing successfully in such a capital gains opportunity.

A trillion here, a trillion there — pretty soon you are talking about a lot of “pop.”

It can only happen if we can look into the face of our addiction and start having a conversation about how we move out of our current financial incentives that keep the Solari Index down to a more positive, sustainable and wealthy future for our children and grandchildren. For example, think about what would happen if every government worker in America had their annual salary fluctuate based on the performance of the Solari Index in their jurisdiction? I bet it would take about three years to get the Solari Index back to 100%.

That is why all the yah-yah in Washington about new stricter money laundering laws to deal with terrorism won’t work. If government officials and bankers can keep making money when the Solari Index is at 0%, it will not rise no matter how many people — innocent or guilty — we put in jail. The day we decide that government officials only make money for performance and all the companies that get money from government — whether contractors or banks that use taxpayers credit — only get money if we are better off and the Solari Index is rising, is when we will start to face and solve the real problems in a money making way.

It’s time to face our addiction to narco dollars and to grapple with how to reverse our incentive systems. It is time to figure out how publicly traded companies and our banks and insurance companies can make more money from our kids succeeding then from them failing. Indeed, it can be done.

So here is my last message on how the money works on narco dollars. Now that we have run the Solari Index down to near 0% while fueling the rise of the Dow Jones about 20X since I was a kid, the new opportunity is going to be the fortunes to be made on businesses and investment vehicles that fuel the Solari Index rising.

Wouldn’t you pay for streets to be sweet for your child once again? Especially if it made you a whole bunch of money on an IPO of your neighborhood mutual or venture fund in the stock market?

I want to make money on kids succeeding. I want to teach Dave a way to make more money by getting out of narco dollars and backing Sam starting a solari and “trading places.”

My money is on Solari rising.

 

For more on starting a solari for your neighborhood, see www.solari.com, or contact Catherine at catherine@solari.com

 

Bibliography TOP

After three years of plowing through hundreds of books, videos and articles, here are the sources that I found most useful to helping me understand “how the money works” in the drug trade.

Assuming that you are a busy person who knows nothing about narco dollars and does not want to become an expert — you just want to have a good map of “how the money works” in your world — I have put an (*) next to my top four book and one video recommendations. These are the ones that will be the most useful to help you understand the drug trade and what it means to you, your family, your business and the Solari Index in your neighborhood.

Books:

Articles:

Mena, Arkansas: Various articles:

Catherine Austin Fitts:

Videos:

  • Air America, Mel Gibson
  • Bullworth, Warren Beatty
  • From http://www.fromthewilderness.com/store/videos.html:
    • CIA Director John Deutch in Watts Video: Special Town Hall Meeting with John Deutch & Juanita McDonald, October 15, 1996 (*)
    • Mike Ruppert on CIA & Drugs: The Confession & The Impeachment, From The Wilderness. Video, 1999.
    • The Salon At Fraser Court, Mike Ruppert, From the Wilderness Video, 1999.
  • Enemy of the State, Will Smith & Gene Hackman
  • Telefon, Charles Bronson and Lee Remick
  • Wag the Dog, Dustin Hoffman

For More Narco News go to www.narconews.com

Copyright © 2001 Catherine Austin Fitts
Copyright © 2001 Narco News
Reprinted for Fair Use Only.