How British American Tobacco sold cigarettes to North Korea despite sanctions

As a strengthened US and UN sanctions regime was bearing down on North Korea in the summer of 2017, an employee at a Singaporean subsidiary of a British-based tobacco giant was kicking around ideas about how to conceal continued shipments of cigarettes to the North Korean embassy.

The employee of British American Tobacco’s Singaporean subsidiary emailed a counterpart at a local distributor with instructions to remove any mention of North Korea from purchase orders. The distributor suggested labelling the client as the “Korean Embassy”. Instead, they settled on simply calling the embassy “a . . . customer”.

The details of what US Department of Justice officials called an “elaborate scheme” by BAT and its subsidiary to evade US sanctions on North Korea came to light as part of court filings and settlements associated with a major investigation by US authorities. The probe came to a head on Tuesday with BAT, the maker of Dunhill and Lucky Strike brands, entering a deferred prosecution agreement with the DoJ. The company paid a cumulative $635mn fine, the biggest North Korean sanctions penalty in the department’s history.

BAT and its subsidiary — British-American Tobacco Marketing (Singapore) — accepted it had violated US sanctions by supplying nearly $30mn worth of cigarettes to North Korea’s Singaporean embassy. It also accepted processing just over $250mn worth of payments from sanctioned North Korean banks in return for indirectly exporting cigarettes into the communist country through US financial institutions.

Almost all Western multinationals cut ties with the pariah state — now led by Kim Jong Un, himself a chain smoker — by the late 2000s as sanctions intensified over North Korea’s development of nuclear and ballistic missiles, according to Hugh Griffiths, a former co-ordinator of the UN panel of experts monitoring North Korea sanctions breaches.

But BAT’s management in London, including its then-chief executive Paul Adams, approved a plan in 2007 to divest its stake in a joint venture with a North Korean state-owned company to a “friendly 3rd party” — its local distributor — in Singapore.

The state-owned company was Ryugyong Corporation, according to documentation from the UN panel investigation and seen by the FT. It is the entity that handles the domestic production and overseas distribution of opium and tobacco products on behalf of the Kim regime.

BAT declined to comment.

BAT’s Singaporean subsidiary agreed to continue supplying the joint venture with tobacco, filters and papers with which to manufacture cigarettes after the divestment, according to the US Office of Foreign Assets Control, which carried out the investigation in collaboration with the DoJ.

US authorities said in court filings that BAT maintained “significant influence” over the joint venture and used its distributor “as a shell company at various points during the relevant time period”.

The BAT settlement comes as the US administration of Joe Biden has taken a tougher stance on corporate misconduct, after critics accused former president Donald Trump’s White House of excessive leniency.

Deputy US attorney-general Lisa Monaco last year laid out policy reforms aimed at fulfilling her pledge to crack down on corporate wrongdoers. The new measures included rewarding businesses that recover pay from employees who break the law, as well as a stricter use of deferred prosecution agreements, with Monaco disfavouring multiple arrangements of this kind with the same company.

Emails and witness testimony from the period, cited in court filings, reveal the level of BAT’s control over the North Korean joint venture. In one email, a BAT accountant told a colleague at the British company’s Singaporean subsidiary that the joint venture “was still under BAT control” for the purpose of accounting rules. An employee of the distributor told investigators that BAT used the company as an “insurance policy” so it could stay operating in North Korea.

Griffiths said: “There are no other examples of a Western-based multinational interacting with the North Koreans on this scale and in such a sustained way.” He said it was typical of tobacco companies’ “appetite for risk to drive profits”.

Just a month before the email exchange in summer 2017, BAT belatedly terminated its business dealings with the joint venture after nearly a decade of indirectly exporting cigarettes to North Korea through the entity. The last shipment of materials happened in July 2016. BAT first acknowledged the US investigation in company filings in February 2020, setting aside $540mn in July 2022 to pay the fine.

Up until 2016, the North Korean joint venture remitted profits, including payments owed to BAT’s Singaporean subsidiary, through a rabbit warren of accounts, including some overseen by North Korea’s Korea Kwangson Banking Corporation and the Foreign Trade Bank, which have been sanctioned by the US since 2009 and 2013 respectively.

BAT never dealt directly with KKBC or FTB, but the US Treasury Department said the cigarette maker “exposed itself to liability” when it formed the scheme to continue exporting cigarettes after divesting its stake in the North Korean joint venture in 2007.

“For years, BAT partnered with North Korea to establish and operate a cigarette manufacturing business and relied on financial facilitators linked to North Korea’s weapons of mass destruction proliferation network in the process of enriching itself,” Brian Nelson, under-secretary of the Treasury, said on Tuesday.

Evidence presented by Ofac on Tuesday also suggests that BAT intentionally concealed its sanctions violations from financial institutions. In response to a query from a bank in 2014, BAT acknowledged that its Singaporean subsidiary did indirectly export kit sets — the parts used to manufacture cigarettes, such as tobacco and filters — but it stated it checked all banks used by its group companies and third-party suppliers when handling sanctioned countries.

Jack Bowles, BAT’s chief executive who previously served as head of the tobacco company’s Asia-Pacific division between 2013 and 2017, on Tuesday said the cigarette maker “deeply [regretted] the misconduct arising from historical business activities”. Bowles has not been accused of any wrongdoing.

Griffiths said: “This is more than just a failure of due diligence. BAT is now the poster child for US sanctions enforcement and the very real costs they can carry. The case shows how such greed turns out to be extremely expensive.”