For the past decade, one of the world's largest tobacco companies has illegally funneled millions of dollars worth of cigarettes into Iraq in direct violation of U.S. trade sanctions and has knowingly helped Russian organized crime and Colombian drug traffickers launder billions of dollars more, the European Union alleges in a lawsuit filed recently in New York.

The lawsuit alleges a vast conspiracy in which R.J. Reynolds Tobacco Holdings Inc. and its subsidiaries set up special operating units to help launder money for criminal organizations, using special accounting methods, offshore tax havens and false invoicing. In exchange, the suit says, the criminal groups pushed Winston and Camel cigarettes into markets the company was seeking to penetrate and helped RJR increase its profit margins by accepting sales and credit terms that paid far more than those for legitimate customers.

The 144-page complaint, filed on Oct. 31 in the Eastern District of New York, alleges that RJR executives "at the highest corporate level" made it "part of their operating business plan to sell cigarettes to and through criminal organizations and to accept criminal proceeds in payments for cigarettes by secret and surreptitious means."

In a statement, RJR called the lawsuit "absurd" and said the company and its subsidiaries "operate their businesses in a legal, responsible manner. The plaintiff's allegations that any of these companies were either involved in or aware of money laundering, conspiracy or any other illegal activities are unfounded."

But European and U.S. law enforcement sources said the detailed allegations in the lawsuit were developed by the law enforcement resources of the 10 European countries that filed the suit. Several, such as Italy, have been investigating cigarette smuggling for years.

Dean Boyd, a spokesman for the U.S. Customs Service, would not comment specifically on the lawsuit, but he said the agency is actively investigating organized illegal cigarette sales because "tobacco smuggling is a global, multibillion-dollar problem that involves any number of criminal organizations, ranging from terrorists to money launderers to drug smugglers."

U.S. officials said there is one ongoing criminal investigation of cigarette smuggling into Iraq, but they would not say which tobacco company is the focus of the probe.

Cigarette transactions have long been favored by drug traffickers as a means of laundering their illicit proceeds. It is often difficult for drug traffickers to move the money they make from the sale of drugs in the United States and Europe back to their homelands because law enforcement agencies have cracked down on wire transfers and the sheer weight of cash makes it difficult to transport.

Instead, drug traffickers often buy millions of dollars worth of cigarettes with the proceeds, smuggle the cigarettes into their home countries and resell them to recoup their profits.

A lawsuit against several tobacco companies filed by the EU in the same jurisdiction was dismissed in February because it sought to recover billions of dollars in tax revenue lost to cigarette smuggling. U.S. District Judge Nicholas G. Garaufis ruled that such claims were improper, but he said he would consider a suit based on money laundering allegations. If the current lawsuit goes forward, sources close to the case said, similar ones will be filed against other major tobacco companies.

In its statement, RJR said it believes the new lawsuit should also be dismissed. "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 statement said.

While the suit does not specify the damages sought, sources familiar with the case said they would amount to hundreds of millions of dollars.

The new EU lawsuit goes far beyond any previous allegations, accusing RJR of direct complicity in facilitating not only money laundering schemes but also other criminal enterprises.

According to the lawsuit, RJR maintained lists of "direct customers of RJR," which "included special handling instructions for shipments designated for RJR customers that RJR knew were involved in criminal activities." The special handling, the suit said, included making sure some cases of cigarettes that criminals did not want traced would be "neutralized and decoded" -- meaning marks and numbers that make the tobacco traceable would be removed.

"These direct customer lists clearly demonstrated that the RJR defendants knew they were selling to criminal customers and thereby demonstrated that RJR knew that they were receiving criminal proceeds in payment for their product," the lawsuit alleges.

As part of the scheme, the lawsuit says, RJR companies constantly switched banks where they received payments for illicit sales to make it impossible for U.S. and EU investigators to detect the transactions. "This process was known within RJR as 'musical banks,' " the lawsuit says.

The suit also alleges that Iraqi President Saddam Hussein and his son, Uday, reaped millions of illicit dollars from the sale of cigarettes in Iraq by RJR, as did the Kurdistan Worker's Party (PKK) -- a group that has carried out bombings and kidnappings in Europe in its bid for an independent Kurdish homeland and that was designated a terrorist entity by the United States in 1998. The group controls parts of northern Iraq and extracts a fee for each container of cigarettes it allows to pass from Turkey into Iraq, the lawsuit alleges.

RJR knowingly sold billions of cigarettes to Iraq in violation of U.S. and United Nations sanctions, the suit alleges, by setting up a special operation in Cyprus. Part of the plan included creating false paperwork that would misstate the destination of the cigarettes, usually listing Russia instead, the lawsuit says.

Sales of the cigarettes brought millions of dollars to Hussein's regime and specifically to Uday Hussein, who "oversees and personally profits from the illegal importation of cigarettes into Iraq."

The suit alleges that RJR knew that the PKK charged a fee for each container of cigarettes and that, by paying the fee, the tobacco company and its co-conspirators "have provided direct benefits to the PKK and other terrorist groups."