Smuggling Probes Add to Cigarette Makers’ Troubles

Top cigarette makers, already engulfed in lawsuits over the health effects of smoking, are now facing a surge of legal attacks involving their role in cigarette smuggling, a global problem that experts say cheats governments out of tax revenues and promotes smoking by keeping supplies of cheap cigarettes on the market.

Among recent legal developments, the European Union has announced plans to file suit against unnamed cigarette manufacturers to recover lost taxes; a federal grand jury in North Carolina is investigating cigarette smuggling; a group of Colombian states have sued Philip Morris Cos.; and the government of Ecuador has filed suit against major manufacturers, including British American Tobacco, R.J. Reynolds Tobacco and Philip Morris.

“Things are going in the right direction,” Luk Joossens, a consultant to the International Union Against Cancer, said Wednesday at a world tobacco conference that has focused on smuggling as a barrier to reducing the toll of smoking-related deaths.

According to some estimates, about 15 billion packs of cigarettes per year--nearly one-third of those in international commerce--get smuggled across national borders without duties or taxes being paid.

Cigarette makers deny they are responsible, saying they sell their products legally to distributors and can’t control what happens further down the supply chain. The black market, they maintain, results from high cigarette taxes creating enormous incentives for smuggling rings.

“Philip Morris does not condone, facilitate or support the smuggling of cigarettes and readily cooperates with governments in their efforts to prevent illegal trade,” Donald Harris, a vice president with Philip Morris International, told The Times on Wednesday, adding that the suits against the company are groundless. “We would welcome a world without contraband,” he said.

For cigarette makers, already suffering from terrible image problems and liability concerns, the smuggling allegations are emerging as an explosive new scandal. Government officials and others who may have little sympathy for legal claims by sick smokers nonetheless take a dim view of what critics portray as an unsavory tax-dodging scheme.

The tobacco companies’ “reputation is already rock bottom,” said Clive Bates, director of the British group Action on Smoking and Health. In defending smoker injury claims, they at least have the argument that smoking is a matter of choice, he said. “But this is like 10 times worse,” he said. “There really isn’t any other . . . major industry that has faced allegations as serious as this.”

Both Joossens, who is from Belgium, and Bates took part in a panel on smuggling at the 11th World Conference on Smoking or Health, which has drawn more than 4,000 public health officials and activists from 130 countries.

They said internal documents produced during the past two years through U.S. tobacco litigation have hardened suspicions about the complicity of cigarette makers into certainty.

Most of these papers were surrendered by BAT and have been culled from a document depository set up in Guildford, England. Some of the documents suggest that company officials at the highest levels were aware of smuggling of their brands in Asia, Africa and Latin America, and in fact relied on it to compete with rivals, such as Philip Morris, whom they assumed were doing the same.

Among tobacco multinationals, Philip Morris and BAT rank No. 1 and 2, respectively, with a combined world market share of about 30%. In some countries they are the dominant cigarette marketers and in others they are fighting for a foothold.

In one 1992 memo, a BAT director admonished the head of the firm’s Argentine subsidiary not to fret about the moral implications of black-market sales. “We will be consulting here on the ethical side of whether we should encourage or ignore” smuggling, he wrote.

“You know my view is that it is part of your market and to have it exploited by others is just not acceptable.”

At Wednesday’s panel on smuggling, Bates said the documents don’t suggest that someone “from BAT drives a truck across the border. They have middlemen that do this.”

The documents do show that “they had no regard for national law, for tax regimes, for customs,” Bates said. “The whole thing plays out as an astonishing . . . sort of adventure story,” in which BAT goes with “buccaneering spirit . . . into a wild, lawless frontier.”

His group is spearheading a campaign for a formal investigation by the Britain’s Department of Trade and Industry.

BAT officials maintain that the firm has done nothing wrong. But observers were stunned earlier this year by a blunt response to the scandal from Kenneth Clarke, former British chancellor of the exchequer and now a BAT director.

“Where any government is unwilling to act [against smuggling], or their efforts are unsuccessful, we act, completely within the law, on the basis that our brands will be available alongside those of our competitors in the smuggled as well as the legitimate market,” he said.

Wednesday’s panelists also recounted how a flood of smuggled cigarettes into Canada undermined a successful national effort to curb smoking through tax increases.

Awash in black-market cigarettes that had been exported duty-free to the U.S. and then smuggled across the border, Canada and five of its provincial governments slashed cigarette taxes in 1994.

In 1998, a subsidiary of R.J. Reynolds, Northern Brands International Inc., pleaded guilty to U.S. charges stemming from the smuggling scheme and agreed to pay $15 million in forfeitures and fines. Les Thompson, a veteran Reynolds marketing executive, also pleaded guilty and received a six-year prison sentence.

A $1-billion lawsuit by Canada against Reynolds was dismissed last month by a federal judge in upstate New York, who ruled that American courts cannot be used to collect another country’s taxes. The Canadian government plans an appeal.

Reynolds was not the only firm to benefit from Canadian smuggling operations. In a 1993 letter to officials of BAT, the head of its Canadian subsidiary, Imperial Tobacco Ltd., stated bluntly that the firm knew its cigarettes were being exported duty free to the U.S. and smuggled back to Canada.

“As you are aware, smuggled cigarettes . . . represent nearly 30% of total sales in Canada, and the level is growing,” wrote R. Don Brown to BAT director Ulrich Herter.

“Although we agreed to support the federal government’s effort to reduce smuggling by limiting our exports to the U.S.A., our competitors did not. Subsequently, we have decided to remove the limits on our exports to retain our share of Canadian smokers.”

More lurid was an investigation of cigarette smuggling from Hong Kong into China in which a potential witness was executed by Chinese gangsters. Former BAT executive Jerry Liu was convicted in the smuggling case in Hong Kong in June 1998 and sentenced to 3 1/2 years in prison. The conviction later was overturned on appeal, though prosecutors are seeking to have it reinstated.

Anti-smoking activists meeting here said the smuggling problem underscores the need for stronger international coordination among law enforcement agencies, and for adoption of a proposed global treaty on tobacco control being drafted by the World Health Organization.

Among other things, Joossens said, such an agreement might require a uniform series of chain-of-custody markings on cigarette packs to help authorities track smuggled products.