North Korea's international trade in cigarettes - it's a circuitous route

North Korea and its trading partners in Singapore and Vietnam are apparently involved in an illicit trade of British cigarettes originally intended for the North Korean market. But desperate for hard currency, North Korean authorities have learned to export them back out to traders in China and Singapore, where its ultimate destination appears to be the Chinese market.

It's a circuitous route, to be sure, but N Korea and a few lucky traders are profiting handsomely, but the cigarette manufacturer remains unhappy.

"North Korean and other Asian trading entities started re-exporting State Express 555 cigarettes, manufactured by British American Tobacco, in February last year, just months before North Korea’s second nuclear test in four years prompted the United Nations to impose tougher sanctions on Pyongyang," said the Financial Times.

"BAT sold the so-called 'NK 555s', made and packaged in Singapore for the North Korean market, to a Singaporean distributor for shipment to Nampo, a port near Pyongyang.

"However, at least 15,000 cases worth $6.3m (€4.6m, £4.2m) rebounded out of Nampo to ports in Vietnam and the Philippines, according to documents seen by the Financial Times, to go to other markets where they commanded a higher price.

The paper explains that while a ban on exports to North Korea of luxury goods exist, member nations have been allowed to write up their own list, which has created a kind of loophole.

The U.S. Japan, Australia and Canada have banned a broad range of tobacco products, but the European Union and Singapore allow cigars to slip through. This has allowed British American Tobacco to continue exporting NK 555 cigarettes. BAT said it has halted shipments of cigarettes from Singapore to N Korea.

"International tobacco companies frown on 'grey market' or 'parallel' exports of their products to markets for which they were not intended," said the FT. "But national customs authorities target counterfeits rather than so-called 'diverted real product'. "

The Lonbond-based company sells the NK 555s to SUTL Group, a family-controlled distributor in Singapore, for shipment to Nampo, a port in N Korea.

"When we became aware of the diversion, we immediately launched an investigation," Pat Heneghan, global head of BAT’s anti-illicit trade division, told the FT. "We certainly didn’t like what we found."

BAT found no involvement in the illicit trade by SUTL, but they've had "a very hard discussion with the distributor", Mr. Heneghan said. Moreover, there is no evidence that the re-export of NK 555s by NK authorities nor other trading entities are illegal, though they may be considered illicit or unsanctioned. Customs authorities generally focus on counterfeits and smuggling.

"In August last year, BAT discovered a diverted NK 555 shipment in Singapore, which we assumed could be for transhipment to other markets in Asia," said a BAT spokeswoman. "But we were unable to inspect the shipment as we could not demonstrate any breach of Singapore law to the authorities."

In April 2009, re-exports were discussed in an email sent by a Singapore-based trader, Compass Inc, to a potential buyer in Manila. Compass began selling NK 555s to a Hong Kong-based trading company in early 2009. Email and other documents showed that they were subsequently shipped to Dalian, a Chinese port; then to Singapore; then finally sent to Haiphong, Vietnam. Then the trail runs cold. However, people tracking the shipments believe they headed for China, again.

"As a trader, we just get the product and buy and sell," said one Compass executive who declined to identify himself or comment on the NK 555 shipments when contacted by telephone, FT wrote. "Where it goes, who knows?"

Indeed, as the cigarettes go round and round, seeking its ultimate buyer, traders no doubt all take a little slice out of the cigarette profit pie. It's inefficiently circuitous but no less profitable for traders.