Tobacco Company Affiliate Pleads Guilty in Smuggling
In what Justice Department officials describe as the first conviction of its kind, an affiliate of a major U.S. cigarette company pleaded guilty Tuesday to avoiding cigarette sales taxes and aiding an operation that smuggled cigarettes into Canada.
The plea by Northern Brands, Inc., an affiliate of RJR Nabisco’s international tobacco unit, came after an intense four-year federal investigation.
The company was based in Winston-Salem, N.C., as is RJR Nabisco. Northern Brands agreed to pay $15 million in fines and forfeitures for failing to pay U.S. excise taxes on 26 truckloads of cigarettes in 1994 and 1995. Federal prosecutors said that more than $2.5 million in excise taxes were evaded as a result of the scheme.
The inquiry was conducted by the Justice and Treasury departments, along with agents from the FBI, the Bureau of Alcohol, Tobacco and Firearms and the U.S. Customs Service.
It is part of an ongoing investigation into the smuggling of tobacco and liquor products from the United States into Canada through the St. Regis Mohawk Indian Reservation in Northern New York. There already have been 20 felony convictions of individuals involved in the smuggling.
“This is the first time that an affiliate of a major tobacco company has been convicted of a federal crime in the United States,” said Thomas J. Maroney, U.S. attorney for the Northern District of New York.
The case provided a window into the problem of tobacco smuggling, which is skyrocketing worldwide, said David T. Sweanor, chief counsel for the Non-Smokers Rights Assn. of Canada, and various public health officials.
About 300 billion of the 1 trillion cigarettes that are exported from producer nations ultimately are handled by smugglers, up from 100 billion in 1989, according to Sweanor, who has studied the problem on several continents.
Other researchers have estimated that smuggling has cost various governments upwards of $16 billion a year in lost revenues.
The smuggling problem has worsened dramatically since the early 1990s according to the Bureau of Alcohol, Tobacco and Firearms, which is now conducting 75 investigations--a 500% increase since 1992--into contraband cigarette trafficking.
Justice Department officials would not say whether there is an ongoing investigation of Northern Brand’s parent company, RJR Nabisco, but company officials said they had cooperated with the investigation of Northern Brands, which is no longer operating.
“NBI’s actions were inconsistent with the way Reynolds does business,” said a statement from RJR Nabisco’s international unit. “The company very much regrets this episode,” the statement said.
“The company is confident that the enhanced internal controls, monitoring and compliance programs it is putting in place will substantially improve its ability to monitor distribution of its products in the future,” the statement said.
However, government officials and sources in the United States and Canada left little doubt that Northern Brands was set up primarily to market Canadian cigarettes back into Canada through the black market. There is virtually no market for Canadian cigarettes in the United States.
“Northern Brands was established with the understanding that there was money to be made by smuggling cigarettes back into Canada,” Maroney said.
Cigarette smuggling occurs primarily when foreign or state governments impose a higher excise tax on cigarettes than is found in surrounding jurisdictions.
For instance, in Canada, where high taxes on cigarettes were imposed at both the federal and provincial levels in the late 1980s and early 1990s, there was a ready market for contraband cigarettes. Northern Brands was established in 1992 and started doing business early in 1993, according to Justice Department officials.
Sweanor noted that in 1993, the Canadian operations of the three major multinational cigarette companies--Philip Morris, RJR, and London-based BAT Industries--shipped 20 billion Canadian cigarettes to the United States--at a time when there was an annual market for only about 500 million--purchased mostly by Canadian tourists.
“The cigarette companies knew those cigarettes were coming back,” Sweanor asserted.
Anti-smoking advocates in both countries hailed the conviction as a tremendous victory. They also said that it proved their contention that the black market, which the tobacco industry has used as a reason to oppose higher cigarette taxes, is something that the industry itself is involved in.
“Today’s guilty plea is proof that . . . the only way there will be a major black market is if the tobacco industry contributes to its creation,” said Matthew Myers, general counsel of the National Center for Tobacco Free Kids, a leading anti-smoking group.
“The tobacco industry controls the shipment of its products from factory to retail,” Myers said.
Rubin reported from Washington and Weinstein from Los Angeles.
