Tobacco Firm Relied on Smuggling in Asia Market, Memos Reveal

In an effort to enhance its share of the vast and lucrative Asian cigarette market, British American Tobacco relied on a broad smuggling network in that region, internal company documents reveal.

Company memos by senior BAT executives spanning a period from 1988 to 1996 contribute to an emerging picture of company-sanctioned smuggling as a global enterprise, apparently designed to circumvent cigarette taxes and boost market share by keeping prices low. The new documents shine an even brighter spotlight on the huge transnational market for smuggled cigarettes than ones released earlier this week about smuggling in Latin America.

The World Health Organization estimated last year that about 300 billion cigarettes--roughly one-third of all exports--annually enter nations as contraband. The Asia-Pacific region is the world’s largest cigarette market.

The documents refer to smuggling activity in Afghanistan, Bangladesh, Burma (now Myanmar), Cambodia, China, India, Laos, Malaysia, Pakistan, Thailand and Vietnam.

Some documents explicitly use the term “smuggling” and compare the company’s share of the legal market with the “general trade” or “transit” market in various countries. One internal 1989 BAT memo describes “transit” as “essentially the illegal import of brands from Hong Kong, Singapore, Japan, etc. in which no duty has been paid.”

The illegal market was so large that one 1993 document states that “two key General Trade markets will account for 4.7 billion units or 22%” of BAT’s total shipments from 1993-1997.

One November 1993 memo said a senior BAT executive would be put in charge of coordinating the company’s “general trade sales worldwide and for ensuring that globing supply channels and pricing structures are not being misused or undermined by unauthorized traders.” The memo emphasized that “the person performing this role must be absolutely trustworthy and permanently alert to the confidentiality needed in some areas of the business. Integrity is an absolute must.”

In all, more than 100 BAT documents were posted Wednesday on the Web site of Action on Smoking and Health-UK, a British anti-smoking organization. ASH leaders said, “The documents imply that smuggling was a central component of BAT’s marketing operations, sanctioned and controlled by executives at the highest level.”

Some of the documents were described in a story in the London Guardian, written by a team from the International Consortium of Investigative Journalists, a project of the Center for Public Integrity in Washington.

Release of the documents has set off a firestorm in Britain, with representatives of Parliament calling for an inquiry and an explanation from the company.

On Wednesday, BAT spokesman Michael Prideaux reiterated the company’s position that it would not comment on what he referred to as “cherry-picked” documents.

However, Kenneth Clarke, a company director and the former chancellor of the exchequer, submitted an op-ed piece to the London Guardian for publication today. Clarke said the company had not condoned tax evasion, but the piece said:

“If the demand for our brands is not met, consumers will either switch to our competitor’s brands or there will be the kind of dramatic growth in counterfeit products that we have recently seen in our Asian markets. Where any government is unwilling to act, 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.”

Several of the memos show that BAT officials apparently tried to assess the extent of smuggling in various markets on a regular basis.

For example, a January 1991 company market analysis lists the names of various types of BAT cigarettes “smuggled” into Vietnam. For example, the document states that 40% of BAT’s 555 brand came into Vietnam by sailors, an additional 25% were brought in by fishermen and 35% “from smuggling [by sea].” Fully 80% of the company’s Hero brand came in “from smuggling” by road through Thailand and Cambodia.

The memos also show that BAT officials were concerned about troubling questions being asked by some of their Asian agents, including a Vietnamese businessman who had asked pointedly about the presence of representatives of BAT and its Singapore affiliate in his country: “What are these people doing visiting Vietnam when the import of cigarettes is banned?” the man asked.

Still, a July 1992 memo noted that BAT officials saw “opportunities” to “continue exploiting the strategic location of Cambodia to move stock to Vietnam and Laos” and that the officials assume that “Cambodia will continue to service the Vietnamese market until the [Vietnamese import] ban is lifted.”

Several documents reflect BAT’s desire to penetrate China, whose people consume more cigarettes than those of any other nation.

In a 1993 memo, Ernest Pepples, a vice president at Brown & Williamson Tobacco Corp., BAT’s U.S. subsidiary, asked a BAT executive whether there was anything that B&W; “should be doing to advance the opening of the Chinese cigarette market.”

Pepples’ memo expressed doubts that B&W; could influence U.S. policy because the Clinton administration’s “health policy prevails over trade policy with respect to tobacco.”

Then, Pepples observed: “The Chinese market, of course, has a large supply of cigarettes sold through unofficial channels. . . . The best prospects for growth in the Chinese market continues to be the unofficial channels for the foreseeable future.”

In recent years, Chinese government officials have expressed growing concern about a burgeoning smuggling problem there. In June 1998, Jerry Lui, a former BAT official, was convicted on smuggling-related bribery charges in Hong Kong and sentenced to 3 1/2 years in prison.

The company denied involvement in his actions. But the Hong Kong judge in the case said the trial evidence suggested that the company was aware its “duty not paid” cigarettes would eventually be smuggled into China and that “to some extent such irresponsible behavior amounted to assisting criminals in transnational crime.”

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Times librarian Scott Wilson contributed to this report.