It began with a basic mathematical equation: In 1995 two scholars in Europe found that almost one-third of the world's cigarette exports had simply vanished. Somehow, billions of cigarettes, once exported, had mysteriously gotten lost in transit.

Only it wasn't that mysterious. Starting in 1999, a team of reporters from the International Consortium of Investigative Journalists pored over thousands of internal industry documents and uncovered how leading tobacco companies were colluding with criminal networks to divert cigarettes to the world's black markets. Big Tobacco was doing it for profit -- to boost sales and gain market share -- as it avoided billions of dollars in taxes while recruiting growing numbers of smokers around the globe. The tobacco industry, as it turned out, did not merely turn a blind eye to the smuggling -- it managed the trade at the highest corporate levels.

Argentine security forces arrest smugglers trying to ship cigarettes across the Pilcomayo River from Paraguay, a top producer of contraband cigarettes. Credit: Prefectura Naval Argentina.

Those revelations, and others that followed, helped lead to government inquiries, lawsuits, and promises of a global treaty to crack down on the illicit cigarette trade. Since 2004, two major tobacco companies, Philip Morris Internationaland Japan Tobacco International, have agreed to pay a combined $1.65 billion to the European Community and 10 member states to settle litigation that would have further exposed their involvement in cigarette smuggling. They have also committed publicly to help fight trafficking in tobacco. Similarly, this July, Canada's two largest cigarette companies, Imperial Tobacco Canada and Rothmans Inc., pleaded guilty to aiding smuggling during the early 1990s; they are to pay a combined $1.12 billion, the largest such penalties ever levied in Canada.

Yet, despite the exposés, the lawsuits, and the settlements, the massive trade in contraband tobacco continues unabated. Indeed, with profits rivaling those of narcotics, and relatively light penalties, the business is fast reinventing itself. Once dominated by Western multinational companies, cigarette smuggling has expanded with new players, new routes, and new techniques. Today, this underground industry ranges from Chinese counterfeiters that mimic Marlboro holograms to perfection, to Russian-owned factories that mass produce brands made exclusively to be smuggled into Western Europe. In Canada, the involvement of an array of criminal gangs and Indian tribes pushed seizures of contraband tobacco up 16-fold between 2001 and 2006. "The big companies know that to some extent the golden period of smuggling is gone," observes Belgium-based sociologist Luk Joossens, a World Health Organization expert on tobacco smuggling and co-author of the 1995 study that first alerted the world that billions of exported cigarettes had gotten lost in transit. "You have still the normal small-scale smuggling, but you also have counterfeit production, illicit manufacturing. . . and a lot of small companies that are involved. So the whole area of illicit trade has become much more complex." Joossens also said that while Big Tobacco's participation in cigarette smuggling in Western Europe and North America has largely been curtailed, the situation remains murky in Africa and other developing areas of the world.

In late June 2009, smuggling experts, customs officials, and diplomats from an estimated 160 countries gathered in Geneva, Switzerland, to push for what has eluded governments for decades: a global crackdown on the black market in tobacco. Under the auspices of the WHO's three-year-old Framework Convention on Tobacco Control -- a global treaty to curb tobacco use -- delegates worked to implement a protocol to stop cigarette smuggling. But the proposed measures face plenty of challenges, with some countries showing limited concern over the issue, while others, including the United States, have so far refused to ratify the FCTC altogether.

Organized crime syndicates and terrorist groups such as the Taliban rely on cigarette smuggling to help finance their activities.

The stakes are formidable. Experts estimate that contraband accounts for 12 percent of all cigarette sales, or about 657 billion sticks annually. The cost to governments worldwide is massive: a whopping $40 billion in lost tax revenue annually. Ironically, it is those very taxes -- slapped on packs to discourage smoking -- that may help fuel the smuggling, along with lax enforcement and heavy supply. (A pack of a leading Western brand that costs little more than $1 in a low-duty country like Ukraine can sell for up to $10 in the U.K.) That potential profit offers a strong incentive to smugglers.

But it is more than lost revenue that is at risk. Illicit tobacco feeds an underground economy that supports many of the most violent actors on the world stage. Organized crime syndicates and terrorist groups such as the Taliban and Hezbollah facilitate global distribution and use the profits to finance their activities. In Canada alone, police believe that 105 organized crime groups are engaged in the illicit tobacco trade, including motorcycle gangs and the Italian Mafia. Criminal organizations "are doing more than just smuggling cigarettes," notes John W. Colledge, who oversaw international tobacco smuggling programs at the U.S. Customs Service between 1999 and 2002. "They are engaged in human, drugs, and weapons trafficking."

Perhaps even more troubling is the impact that smuggling has on the public health crisis caused by tobacco. Worldwide, one out of 10 adults dies prematurely from tobacco-related diseases such as lung cancer, emphysema, cardiovascular disease, and stroke. If current trends hold, tobacco will kill about 500 million people currently alive. By 2030, that figure will reach 8 million deaths a year, and with cigarettes being heavily marketed in poorer countries, 80 percent of those deaths will be in the developing world. Over the 21st century, say health experts, an estimated one billion people could die from tobacco use.

Resourceful smugglers hide contraband cigarettes in an industrial-size yogurt mixer. Credit: Guardia di Finanza.

At a time when nations are increasingly trying to crack down on smoking, smugglers put cheap cigarettes into the hands of those most vulnerable -- young people and the poor. In addition, the trade is pushing the supply steadily into the black market, selling cut-rate cigarettes of often dubious quality. Of special concern is the advent of a massive counterfeiting industry. Once a minor problem, today underground factories in China, Paraguay, and Eastern Europe manufacture literally billions of fake cigarettes -- Marlboros, Camels, 555s, Mild Sevens -- an uncontrolled industry that law enforcement is only beginning to grapple with. Many of the smokes are made from the lowest quality tobacco, full of stem and sawdust, and spiked with unusually high levels of nicotine. Other packs contain far worse. Tests reveal that counterfeit cigarettes carry a bevy of products that could further shorten even a heavy smoker's life: metals such as cadmium, pesticides, arsenic, rat poison, and human feces.

Despite the stakes, cigarette smuggling remains a tough crime to investigate and prosecute. Factories are set up in regions of the world with weak controls and high levels of corruption, such as the crime-ridden Russian exclave of Kaliningrad, Guangdong province in China, and South America's notorious Tri-border area between Argentina, Brazil, and Paraguay. The distribution systems are complex, the smuggling routes circuitous and hard to track.

Smugglers take advantage of an "in transit" system used in free trade zones and other shipping centers, which allows for temporary tax suspension while the tobacco is en route to a third country. As a result of lax controls, cigarettes get "lost" along the way, with huge numbers failing to arrive at their intended destination. Cigarettes, for example, may sit for weeks in free trade zones in Panama or Dubai until they are sold. Then they pass quickly through multiple buyers in a short period of time, complicating efforts to identify where "leakages" occur. On occasion, cigarettes are even illegally sold at sea, where vessels offload them to smaller boats that take them to shore. In the Balkans, they are sold by the trunk-load to smugglers who line their cars up at the borders of the European Union. And in the United States, tobacco suppliers ship millions of the tax-free smokes to Indian reservations, where they are unloaded to smugglers, bootleggers, and online merchants.

Counterfeit cigarettes have tested positive for a range of dangerous ingredients, from arsenic to rat poison.

Despite its broad impact on health, crime, and taxes, tobacco smuggling receives strikingly little attention from authorities. Lenient sentences are the norm; in some countries, cigarette smuggling is not even considered a crime. Nor is it a priority for law enforcement agencies, even in the West, which spend the majority of their resources tackling drug, arms, and terrorism cases. In the United States, for example, the Bureau of Alcohol, Tobacco, Firearms and Explosives devotes a paltry 2 percent of its personnel and budget to tobacco programs.

Seven years after its original series on tobacco smuggling, ICIJ assembled a new team of reporters to illuminate this shadowy transnational business. Based on reporting from 15 countries, our new project looks at the influence of organized crime and terrorist groups, as well as the continued complicity of distributors, wholesalers, and tobacco companies themselves. Since 2008, the series has exposed the billion-dollar smuggling of Russian-made Jin Ling cigarettes to the European Union; the involvement of North American Indian reservations in a massive black market in Canada and the United States; and the alleged role of Montenegro Prime Minister Milo Djukanovic in a decade-long smuggling scheme with the Italian Mafia.

Here, then, is ICIJ's latest series of articles. Among our findings:

• Terrorism and Tobacco: Extremists, Insurgents Turn to Cigarette Smuggling. Terrorists are increasingly turning to cigarette smuggling for funding. The move is part of a larger trend toward use of criminal rackets by terrorists, who find trafficking in cigarettes a high-profit, low-risk way to finance operations. Among the groups are Pakistan's Taliban militias, for whom cigarettes are now second only to heroin as a funding source.

• China's Marlboro Country: A Massive Underground Industry Makes China the World Leader in Counterfeit Cigarettes. China now produces an unprecedented 400 billion counterfeit cigarettes annually. Cheap Chinese fakes are now sold in major cities worldwide, from New York delis to London storefronts. Officials believe China is the source of 99 percent of U.S. counterfeit cigarettes and up to 80 percent of those in the European Union. Lab tests reveal the Chinese counterfeits release 80 percent more nicotine and 130 percent more carbon monoxide than brand-name cigarettes, and have impurities that include insect eggs and human feces.

• Smuggling Made Easy: Landlocked Paraguay Emerges as a Top Producer of Contraband Tobacco. Paraguay's renegade factories produce more than 20 times what the country consumes, and are now responsible for 10 percent of the world's contraband tobacco, experts estimate. The vast majority of the cigarettes -- up to 90 percent of production, worth an estimated $1 billion -- disappears into an often violent black market, law enforcement officials say.

• Ukraine's "Lost" Cigarettes Flood Europe: Big Tobacco's Overproduction Feeds $2 Billion Black Market. Each year, the world's four top multinational tobacco companies -- Philip Morris International, Japan Tobacco International, Imperial Tobacco, and British American Tobacco -- produce and import 30 billion cigarettes in Ukraine beyond what the country can consume, fueling a $2 billion black market that reaches across the European Union. Today, Ukraine is rivaled only by Russia as the top source of non-counterfeit cigarettes smuggled to Europe.

You can help. Have a tip on the illicit tobacco trade? Send ideas to icijtobacco@icij.org.