Searching for Truth Behind the Smoke

Gregor Macek could not have imagined the strange scenario that would unfold when his client Japan Tobacco International gave him his marching orders.

The lawyer was to check out a tip that a shipment of counterfeit Monte Carlo cigarettes, one of Japan Tobacco’s big brands in Eastern Europe, was steaming toward the port of Koper on the Adriatic Sea. He raced to the docks from his home in Ljubljana, Slovenia, and discovered that 16 40-foot containers of the cigarettes already had come ashore.

When Macek implored customs agents to seize them, they refused. They were skeptical because the shipment bore none of the telltale signs of contraband. Rather than being hidden behind other goods and disguised by false shipping papers, the Monte Carlos weren’t concealed or declared on customs forms as something else. Moreover, the cache had been consigned to a firm called Jay Tea International, or JTI -- presumably a branch of the global tobacco concern.

“We had some really hot discussions,” Macek recalled. “I had to say to them, ‘You have to trust me, I know that these ... containers are counterfeit.’ ” He finally persuaded a customs supervisor he reached by cellphone to give the order to impound the smokes.

The haul: nearly 140 million cigarettes, exceeding the largest seizures known to the World Customs Organization.

Follow-up investigations by Japan Tobacco revealed that hundreds of millions of knock-off Monte Carlos already were in the market. The mysterious JTI and its affiliates had procured cigarettes from factories in Greece, Bosnia-Herzegovina and Dubai, United Arab Emirates. They had obtained perfect copies of Monte Carlo packaging from a printer in Milan, Italy.

And they weren’t content to just make the cigarettes look authentic. They also had contrived at least three “JTI” business names in the former Yugoslavia -- in effect, hijacking the identity of a global corporation, Japan Tobacco would claim.

The rival Monte Carlo purveyors say everything they have done is perfectly legal, although the matter is the subject of a criminal investigation.

The JTI affair underscores the growing importance of sophisticated counterfeiting rings in global cigarette smuggling, which has enriched criminal gangs and been used as a money-laundering vehicle by drug traffickers and terrorists, some authorities say.

Smuggling is deeply ingrained in the former Yugoslavia, where wartime sanctions and political corruption spawned a thriving trade in black-market goods.

Illegal tobacco sales have produced a windfall for organized crime and helped underwrite the territorial wars of Serbian strongman Slobodan Milosevic, according to testimony at his war crimes trial in The Hague. The region even has the dubious distinction of having a sitting leader, Montenegrin Prime Minister Milo Djukanovic, under criminal investigation in Italy for allegedly taking payoffs to help Mafia gangs funnel untaxed cigarettes into that country and Western Europe.

At the same time, counterfeits are a growing problem for tobacco companies as they try to shed their own baggage. Long accused of encouraging smuggling by deliberately oversupplying certain markets, cigarette makers have responded to legal pressure by cutting off some of their more dubious customers. Illegal traders have coped with shrinking stocks of genuine products by selling knockoff versions of famous brands.

Indeed, Japan Tobacco and its major rivals were busy chasing counterfeit rings at the time of the Koper bust. But they were unprepared for what looked like a brazen case of corporate identity theft.

Kent Brown, a Japan Tobacco vice president and former U.S. ambassador to the former Soviet republic of Georgia, called it “amazing and ridiculous.” Then again, it shouldn’t be a surprise, he said, “that these things happen in this part of the world.”

With help from a disgruntled lawyer who once worked for Japan Tobacco, the people behind the JTI sound-alikes had persuaded the federal Intellectual Property Office in Belgrade to declare them owners of the Monte Carlo trademark.

The decision came May 17, 2002 -- the day before Macek reached Koper -- though Japan Tobacco only got wind of it later. It turned out that Japan Tobacco’s rivals had begun procuring Monte Carlo packaging and cigarettes months before gaining the legal imprimatur of the trademark office.

A legal battle quickly ensued. Some 20 lawsuits have been filed in at least four countries, and a criminal investigation of the circumstances surrounding the trademark ruling is underway in Belgrade.

If upheld, the Monte Carlo trademark ruling would give the sound-alikes control of a popular brand in the smokers’ paradise of Serbia and Montenegro, as the former Yugoslavia now is called. These Monte Carlos also could leak across borders through exports, legal or otherwise, costing Japan Tobacco sales in other countries.

Claim of Coincidence

Rusmir Kadragic, head of the upstarts’ main company and a former official of a state-run tobacco plant in Bosnia, said his firm’s initials stand for Jugo Tabak International, or JTI d.o.o. -- the Serbian abbreviation for a limited-liability company. That the JTI acronym has long belonged to a multinational giant is just coincidence, Kadragic said by telephone and e-mail from his office in Trieste, Italy.

Besides, he said, Japan Tobacco, by continuing to sell its Monte Carlo cigarettes after the trademark ruling, is the one breaking the law.

“Japan Tobacco never was owner of the trademark,” Kadragic said. “We are a small company, and we are against, like, an elephant.”

Two-thirds owned by the Japanese government, Japan Tobacco has always dominated its home market. It turned itself into a global power in 1999 by acquiring the international business of R.J. Reynolds Tobacco Co.

With the $8-billion purchase, Japan Tobacco leaped to No. 3 among the world tobacco giants, behind Altria Group Inc. subsidiary Philip Morris and British American Tobacco. It owns three of the world’s five top sellers -- Camel, Winston and Mild Seven -- along with a portfolio of regional brands.

One of them, Monte Carlo, has a murky pedigree. Although Monte Carlos had been sold for years by RJR, the government of Monaco even earlier had launched a cigarette named for the renowned gambling resort. The tiny principality never mass-marketed Monte Carlos but registered the trademark in some countries, including Yugoslavia. And in the early 1990s, Monaco demanded that RJR stop using the Monte Carlo name.

Vincent F. Bick Jr., vice president for intellectual property at Japan Tobacco, said negotiations produced an informal truce: Monaco would not sue RJR, and the company would not seek to cancel Monaco’s registrations for nonuse, as provided under trademark laws. Officials in Monaco did not respond to interview requests or written questions.

Shortly before Japan Tobacco acquired RJR’s international business, a stealth strategy to resolve things in RJR’s favor was advanced by an RJR lawyer in Belgrade, Zoran Drljaca (pronounced “drel YA cha”). In a memo, he warned RJR that it was playing with fire by leaving the trademark issue hanging. Some opportunists might succeed in canceling Monaco’s trademarks, and then register Monte Carlo for themselves. Better, Drljaca advised, to beat them to the punch.

“I have a friend who will cancel the registrations ... and then hold the [trademark] in trust for you,” he suggested, Bick said. Citing the truce with Monaco, Bick said RJR spurned the idea.

Not long after buying RJR’s international interests, Japan Tobacco dumped Drljaca, saying it needed a bigger firm in Belgrade than his one-man shop. “Drljaca did not take this decision kindly,” Bick recalled. “He got very upset.”

Trademark Quest

Soon, the scenario Drljaca warned of began to take shape. A company called PMT petitioned the Intellectual Property Office in Belgrade to cancel the Monte Carlo trademark held by the principality. Then, in December 2001, J Trademarks Inc. applied to take the trademark for itself.

This JTI, incorporated in Delaware, described its business as “trademark protection.” It listed one director, Jakov Seizovic, 41, a Pasadena resident who has a doctorate from Caltech.

The co-founder of a software firm in Arcadia and an officer of a charity called Save Displaced Serbs, Seizovic has professed to know nothing about J Trademarks’ business.

“I registered the company as a favor and upon request of my friend who, for technical reasons, could not do it himself,” Seizovic said in an e-mail after turning down an interview request. The friend, he acknowledged, was Drljaca.

During the next few months, Drljaca appeared before the trademark office on behalf of a daisy chain of firms involved in the Monte Carlo grab. His efforts should have gone nowhere, because laws bar the registering of trademarks that are identical or similar to ones that already exist or for which applications have been filed.

Although three of Monaco’s registrations for Monte Carlo had been canceled, the newest remained in force. What’s more, there were two applications by Japan Tobacco: one for a Monte Carlo line of clothing and another for a Monti Carla cigarette, which the company had no plan to market but sought to register as a defense measure.

Records show that in April 2002, Drljaca filed papers to withdraw Japan Tobacco’s application for the Monte Carlo clothing line -- an interesting move since at the time he no longer represented the firm.

A few days later, he represented J Trademarks in the transfer of its application for a Monte Carlo trademark to Courtin International Trading, whose lawyer just happened to be Drljaca.

On May 16, an analyst with the Intellectual Property Office filed a report that should have doomed the application. Citing Monaco’s trademark and the Monti Carla filing, the report said Courtin International’s bid should be rejected. But the analyst was overruled the next day by the agency’s director, who awarded the trademark to Courtin even as the bogus Monte Carlos were arriving in the port of Koper.

Courtin swiftly transferred its trademark rights to JTI d.o.o. Its lawyer was Drljaca too.

Within days of figuring out what had happened, Japan Tobacco filed lawsuits that challenged the trademark ruling and sought to bar the sound-alikes’ use of “JTI” and the Monte Carlo pack design. J Trademarks and JTI fired back with suits against Japan Tobacco and its distributors, accusing them of breaking the law by continuing to sell Monte Carlo cigarettes in Serbia and Montenegro.

“These cases should be slam dunks,” said Bick of Japan Tobacco, but “the fix is in.” Nonetheless, the dispute settled into the endless back and forth of a legal quagmire.

Making a Political Plea

Japan Tobacco took its case to the political arena in a high-profile lobbying campaign. In letters to then-Yugoslav President Vojislav Kostunica and the late Serbian Prime Minister Zoran Djindjic, John H. Koach, JTI’s senior vice president and chief legal officer, described the trademark ruling as “part and parcel of a massive smuggling and counterfeiting scheme that is flooding the Yugoslavian market with illegal Monte Carlo cigarettes.”

Company investigators had been targets of threats and bribery attempts, Koach added.

This complaint centered on the company’s lead investigator in Belgrade, Vukasin “Wolf” Minic.

The swaggering, tough-talking Serb, always ringed by a troop of bodyguards, was prone to giving interviews in which he linked police corruption to the smuggling trade and various unsolved murders. A deal maker too, Minic had brokered a formal agreement between Japan Tobacco and the United Nations Mission in Kosovo, the Serbian province, in which they forged an alliance against cigarette smuggling.

On his way to a reception celebrating the signing of the pact in July 2002, Minic and his bodyguards were swarmed by gun-wielding members of an elite police unit, the Intervention Brigade. They turned up a .357 magnum in a search of Minic’s car and arrested him for illegal possession of a handgun, a charge viewed as odd in a society armed to the teeth. Minic was held for more than 20 days, until Japan Tobacco posted $275,000, reportedly the largest bail in the country’s history.

Minic recently told The Times that he was sure the police were looking for an excuse to kill him on the spot. In fact, he said, the day before he had received telephone threats from a high-ranking official of the Serbian interior ministry, who had warned that “he’s going to finish me, that he’s going to put me in my place.” Minic said he taped the conversation and would play the tape in court if the gun charge, still pending, ever went to trial.

But the battle has continued on other fronts. Early last year, Japan Tobacco filed an ethics case against its erstwhile lawyer, Drljaca, with the Belgrade bar association. Drljaca resigned from the bar, saying that he was innocent of wrongdoing but that the case was “too heavy” to fight.

In an interview with The Times, Drljaca said he had not been the brains behind the grab for Monte Carlo. He had merely agreed to perform routine legal legwork for the sound-alikes, he said; since he no longer represented Japan Tobacco, he had not seen that as a problem.

Separately, the public prosecutor in Belgrade is investigating the circumstances of the trademark ruling, including allegations that some documents filed in the case were forged. Subjects of the criminal probe include Drljaca and Blagota Zarkovic, the former director of the Intellectual Property Office.

In an e-mail to The Times, Zarkovic defended his actions and accused Japan Tobacco of fanning a conspiracy theory that is “unscrupulously false, as much as it is funny.”

While the litigation stalemate continues, Japan Tobacco so far has prevailed on the issue that matters most: Federal authorities have continued to sell the company tax stamps to put on their Monte Carlo packs, while refusing to sell stamps to the sound-alikes. For now, the copycat version of Monte Carlos can’t legally be sold in the country.

The affair would be good material for a novel, said Nenad Milovanovic, a Japan Tobacco lawyer in Belgrade, but does not speak well of legal or government institutions in Serbia and Montenegro.

“Obviously, this is a very clear case of corruption,” he said. There have been “so many mistakes made by different officials, by so many judges ... that simply cannot be considered as a coincidence.”

But eventually, he said, “we are going to win.”