EU Probes Cigarette Deal That May Have Aided Syria

The European Union is investigating whether its Syrian sanctions were violated by the sale of cigarettes to a firm linked to cousins of Syrian President Bashar al-Assad, according to corporate documents seen by The Wall Street Journal. The sale by a Switzerland-based unit of Japan Tobacco Inc. 2914.TO +0.30% in May 2011 went to a firm then at least partly owned by the Makhlouf family, according to the documents. The Makhloufs, first cousins of Mr. Assad, are helping finance his bloody crackdown on the Syrian uprising, according to both the U.S. and the EU. Syrian dissidents said this sale and a larger one involving millions of cartons to the Syrian state tobacco company provided the regime with a cash infusion at a time of growing economic isolation, because the cigarettes could be resold for much more than they cost.

The dissidents added that the Assad government uses cigarettes as a form of payment for the irregular military forces and militias, known as the shabeeha, who have had a central role in its violent crackdown. "Cigarettes are a favorite form of payment for the shabeeha," said Ammar Abdulhamid, a Syrian dissident and human-rights activist based in Washington. Businessman Rami Makhlouf is the scion of the family and widely regarded as Syria's richest man. The EU placed financial sanctions on him, as well as on his brothers Iyad and Ihab, on May 23, 2011, for their alleged role in helping to finance Mr. Assad's actions.

Four days later, the corporate documents show, Japan Tobacco International SA, or JTI, delivered 450,000 cartons of cigarettes through a Cyprus-based distributor to a firm called Syria Duty Free Shops Ltd. that JTI acknowledges was then at least partly Makhlouf-owned. The EU's antifraud office, OLAF, confirmed it is investigating the business of JTI, which is based in Geneva, but declined to provide any details. Guy Côté, a spokesman for JTI, said it strictly adheres to all EU sanctions and is cooperating with the investigation. "We have not processed any sales to Syria Duty Free since May 19, 2011," he said. This would have been four days before the EU imposed sanctions on the Makhloufs. Mr. Côté said that the EU has never banned trade with Syria Duty Free Shops itself, and that Rami Makhlouf was removed from the list of that firm's owners in 2008.

Mr. Côté confirmed that Syria Duty Free Shops documents showed that one Makhlouf brother, Ihab, was among its owners last year. "After the arrival of that single shipment, we learned that one of the owners was on the sanctions list," Mr. Côté said. He said JTI stopped all cigarette sales to anyone in Syria this past February. Syria Duty Free Shops has subsequently been sold to a Kuwaiti company, according to Arab media reports. JTI parent Japan Tobacco Inc. is 50%-owned by the Japanese government. An official at the Japanese Foreign Ministry's Middle East section said that "we are not aware of" an EU investigation or JTI's cigarette shipments to Syria.

A Syrian embassy spokeswoman in Washington declined to comment. Attempts to reach Rami Makhlouf were unsuccessful. Japan has imposed its own Syrian sanctions. It placed sanctions on Rami Makhlouf and his father in the second half of 2011. U.S. and EU sanctions against Syria focus especially on energy and finance. The Journal reported last week that the Syrian regime had laid plans to use Russian banks as part of an effort to avoid these sanctions and export some of its oil to raise hard currency. Russia and China have blocked attempts at the United Nations Security Council to pass similar international sanctions.

Some fighters in the rebel Free Syrian Army also are paid in cigarettes. "If you can't provide your people with cigarettes, they won't stay with you," said Louay Sakka of the Syrian Support Group, which lobbies for the Free Syrian Army. On the same day in May 2011 when JTI cigarettes were delivered to the Makhlouf-linked company at the Syrian port of Latakia, JTI delivered 4.2 million cartons of Winstons to Syria's state-owned tobacco company, General Organization of Tobacco, or GOT, according to the documents seen by the Journal. GOT wasn't on the EU's sanctions list at the time; it has since been added. GOT paid roughly 24 cents a pack—an average reduced by some 160,000 10-pack cartons of Winstons provided free to the state company—according to the documents, which JTI didn't dispute.