A COURT CASE filed in New York last month tells a gripping story involving terrorists and drug traffickers, Swiss banks and the Russian mob, the Italian Mafia and money launderers.

At its base is not cocaine or heroin or guns or explosives, but cigarettes. The 10 countries of the European Community have brought suit against the R.J. Reynolds Tobacco Holdings Inc., claiming that it knowingly supported smuggling its cigarettes not only into Europe but also into Colombia -- where they helped drug cartels launder money -- and into Iraq -- where one of the prime beneficiaries was Saddam Hussein's son.

The suit alleges that Reynolds moved tens of millions of cigarettes into Iraq -- even creating two brands, Easton and Barton, for the market -- despite the trade embargo with that country. "The RJR defandants and their co-conspirators were well aware that they were violating United States law in providing economic benefit to the Iraqi regime by orchestrating this massive imporation of cigarettes into Iraq," the suit states.

"I have been in the tobacco control area for 20 years, and I do not have a lot of respect for this industry," says Judith Wilkenfeld, director of international programs at the Washington-based Campaign for Tobacco-Free Kids. "Even I was shocked by what is in this case, the things tobacco companies are willing to do to push their product."

R. J. Reynolds strongly denies the allegations in the suit. In a statement, the company says, "We operate our businesses in a legal, responsible manner. Any allegations that we were involved in, or aware of, money laundering, conspiracy or any other illegal activities are completely absurd."

But anti-tobacco advocates are hoping that this case will rip the lid off what they say is a decades-old problem of cigarette smuggling, a multi-billion dollar international business that deprives governments of revenues, funds a variety of criminal activities and puts cheap cigarettes into the hands of people who might otherwise never start smoking.

"Smuggling is one of the primary problems facing the world with regard to tobacco," says Wilkenfeld.

She and others point to the fact that between one-quarter and one-third of the cigarettes in the international trade vanish from the radar screen. Some 400 million cigarettes are exported from one country but never officially imported into another one.

"They are never legally imported anywhere," says David Sweanor, lawyer for the Non-Smokers Rights Association in Canada. "They just disappear. What legitimate industry would not be concerned about that?"

Yet, the anti-smoking activists say, the tobacco industry says there is nothing it can do once the cigarettes are sold. The court case says otherwise, claiming that R.J. Reynolds was very involved in the process that got these cigarettes into unsavory hands, including those of Uday Hussein -- Saddam's son -- who got American-brand cigarettes into Iraq via Turkey and Cyprus.

"The industry is up to their eyeballs in smuggling," says Wilkenfeld. "It isn't just gangs out there hot-dogging, trying to make money off a lucrative product, this is the industry itself involved in it."

Brussels-based Luk Joosens has studied smuggling for years for the World Health Organization and as a consultant to the International Union Against Cancer. He says the smugglers target cigarettes that are officially "in transit" -- that is, they are destined for another country than the one they are shipped to so no duty has been paid.

"What happens is that a container-load of cigarettes, about 10 million, without any taxes, is sold in a completely legal transaction," he says. "Then it goes off to different countries, payments are made at each step, perhaps to a Swiss bank account to make it more difficult for investigators. After about the fourth or fifth transaction, the container disappears from these legal trading routes and becomes illegal."

At this point, Joosens says, the cigarettes are put in a container with another product label, perhaps hidden behind some toys or toilet paper or furniture. They are then shipped to their destination free of tobacco duty, sometimes with the help of corrupt customs officials.

According to the European Community case, Colombian drug traffickers converted their bundles of cash into cigarettes, laundering their money into a commodity that is almost as liquid. American cigarettes are so well-known in so many countries that they are practically a currency.

"Certain things do function as a currency," says Sweanor. "And in the global market, few things are as effective as Marlboros, Camels and Winstons. It is practically a cash transaction."

Joosens and others say the tobacco companies have nothing to lose in this smuggling operation because they get their money in the first sale. And, they allege, the companies have much to gain because they get their products into markets at cheaper prices, making them more popular.

"They are just selling higher quantities of cigarettes, they don't care who is consuming them," says Richard A. Daynard of the Boston-based Tobacco Products Liability Project.

High prices' allure

Or, as the suit states, "In general it was immaterial to the RJR defendants whether the cigarettes were sold legally or illegally, so long as the cigarettes were sold in the target markets."

Many of the smuggled cigarettes make their way into less-developed countries, seen as the growth market for the tobacco industry as smoking declines in the U.S. and Europe.

"Cigarette companies are pursuing new markets, especially in the developing world, where the government has not taken strong actions against tobacco and where the public is woefully uninformed about the dangers of smoking," says Ronald M. Davis, director of the center for health promotion and disease prevention at the Henry Ford Health System in Detroit.

Countries that impose high tariffs and taxes on cigarettes often do that not just for the revenue but also to reduce smoking.

"One thing we have learned is that one of the best control measures is a high price," says Wilkenfeld. "It keeps kids from starting, encourages others to quit. If cigarettes are available in a steady supply on the black market at a reduced price, you lose that control."

The tobacco industry opposes these levies, saying that they effectively encourage smuggling. But the anti-tobacco groups say that becomes a self-fulfilling prophecy as the industry makes sure cigarettes are smuggled around the import barriers. They point, in part, to the astonishing detail in the European Community suit that lists names, dates, places, even bank account numbers and records of deposits.

The suit alleges that R.J. Reynolds had a "direct customer" list of buyers "that RJR knew were involved in criminal activities." It accuses the company of constantly switching banks to avoid detection, a scheme called "musical banks."

But first the European Community has to establish its standing in U.S. courts. A Canadian case against R.J. Reynolds seeking lost revenues from smuggled cigarettes was thrown out by a federal appellate court under a 200-year-old legal doctrine called the Revenue Rule. Originally used to protect privateer raiding ships, it prohibits foreign governments from using domestic courts to recover lost revenues. The Justice Department backed this reading of the law when the case was appealed to the Supreme Court, which refused to hear it.

This ruling led to a U.S. judge dismissing the original European Community suits against American tobacco companies that also sought to recover lost revenues. The new suit, filed Oct. 30, uses, in part, an anti-money-laundering provision of the Patriot Act passed in the wake of the Sept. 11 attacks.

'Allegations ... untrue'

In its statement, R.J. Reynolds says, "We believe the lawsuit filed recently by the European Community should be dismissed, as were the other two EC cases filed in U.S. court. However, if this case ever goes to trial, it will be the burden of the plaintiffs to prove their allegations, and they will be unable to do so because their allegations are simply untrue."

The anti-tobacco groups say otherwise, in large part because they are so impressed with the work of the European Community investigators. They note that the Canadian case was based on reconstructing events, but the European case followed the events as they unfolded in a decade-long investigation.

And if it goes forward, they say, the case could have a real impact. "When I was in the government as a regulator, I thought we were like gnats taking little bites," says Wilkenfeld. "This case could be more like a big dog bite on the leg."