Philip Morris Accused in Smuggling Scheme

Philip Morris engaged in a sophisticated conspiracy to smuggle cigarettes into Colombia for a decade, defrauding 22 Colombian states out of billions in tax revenue, according to a lawsuit filed in federal court in Brooklyn.

The lawsuit contends that Philip Morris, the world’s largest cigarette maker, engaged in a host of illegal acts including smuggling, wire fraud, money laundering, and the creation of a labyrinth of third-party payments and Swiss bank accounts in order to hide the illegal acts. The company also maintained relations with drug dealers as part of the smuggling operation, according to the suit.

Filed on behalf of 22 Colombian states and the city of Bogota by a New York law firm that specializes in complex civil litigation, the suit contains some of the most stark charges ever made about a cigarette company and is likely to intensify concern about international cigarette smuggling.

The suit cites court records and industry documents in an attempt to buttress the allegations. Sources said the plaintiff’s lawyers also have used private investigators to develop evidence.

“The Philip Morris defendants created a circuitous and clandestine distribution chain for the sale of cigarettes in order to facilitate smuggling within the departments of the Republic of Colombia,” according to the complaint lodged May 19 and made public Wednesday by Speiser, Krause, Nolan & Granito. “The decision to establish and maintain the distribution chain was made at the highest executive levels of the Philip Morris defendants,” the suit alleges.

Five Philip Morris entities--including the parent company, the international division and the company’s Latin American sales corporation--are named defendants.

Philip Morris attorney Michael York branded the suit “pretty wacky. There really is no factual or legal basis for the claims in this lawsuit.”

The suit contends that Philip Morris’ goal was to increase its market share and profit while evading taxes. In addition to losing tax revenue, Colombian officials have expended large sums of money in unsuccessful efforts to stop smuggling, according to the suit, which states that a border guard station “was destroyed by smugglers using an antitank weapon.”

The new case marks the second time in six months that a U.S. cigarette manufacturer has been accused of violating the Racketeer Influenced and Corrupt Organizations (RICO) law in connection with smuggling. Canada filed the first such suit last December, accusing R.J. Reynolds Tobacco Co. in federal court in Syracuse, N.Y., of involvement in a smuggling operation that undercut a government program to discourage smoking through higher taxes.

In January, two public interest organizations--Britain’s Action on Smoking and Health and the Washington-based Center for Public Integrity--released a cache of documents that suggested British American Tobacco Corp. encouraged and relied on smuggling to boost its sales in Latin America and Asia.

More recently, on March 30, U.S. Customs Commissioner Raymond W. Kelly told a Senate subcommittee that “international cigarette smuggling has grown to a multibillion-dollar-a-year illegal enterprise linked to transnational organized crime and international terrorism. Profits from cigarette smuggling rival those of narcotics trafficking.”

The new lawsuit seeks about $3 billion in damages and an injunction to curb Philip Morris’ alleged illegal practices.

John H. Halloran Jr., a former Justice Department lawyer who is the co-lead counsel for the plaintiffs, declined to comment on the suit. But the 74-page complaint describes events starting in 1990 and as recent as February 2000. It includes the names of several Philip Morris officials who allegedly participated in these events. Meetings at John F. Kennedy International Airport in New York and other events in Belgium, Colombia, Ecuador, Holland, Panama, Switzerland and Venezuela are detailed in the complaint.

Some of the most explosive charges in the lawsuit concern Philip Morris’ alleged relationship to drug dealers. The suit states that as long ago as 1994 “court records that were available to the Philip Morris defendants demonstrate that one of” the individuals the company was selling cigarettes to “had actually told U.S. government informants that he was involved in drug trafficking. Specifically, he had told U.S. law enforcement agents that he was involved in the ‘pool system’ of drug trafficking whereby he would combine his load of drugs with those of other drug dealers into a single large shipment destined for the United States.”

The suit also states that this individual--who is not named in the suit--told U.S. law enforcement officials about how the drug money was laundered in the U.S. and gave the names of U.S. businesses to whom the money was delivered, and that this information was available to Philip Morris because it is in court records. “In spite of this fact, the Philip Morris defendants continued to sell large volumes of cigarettes to this individual so that he could smuggle them into Colombia and use those sales to launder drug money,” according to the complaint.

Along the same line, the suit alleges that the Miami bank accounts of some Philip Morris cigarette distributors were frozen in the early 1990s by U.S. law enforcement officials “because funds credited to those accounts were laundered drug money. The freezing of these accounts was well known to Philip Morris.”

The suit also contends that Philip Morris employees “were personally involved in the laundering of the proceeds of illicit narcotics sales. Various employees of the Philip Morris defendants personally traveled to Colombia and entered the country illegally, paying bribes to ensure that their passports were not marked to reflect that they had entered Colombia. These employees on multiple occasions received large volumes of cash that they took into their personal possession or these employees would be present when large volumes of cash were turned over to the distributors with whom the Philip Morris employees were traveling. These individuals would then smuggle the cash out of Colombia and into Venezuela, with the cash ultimately being deposited into the coffers of the Philip Morris defendants.”

The suit also accuses Philip Morris of:

* Selling cigarettes to smugglers or distributors who are known to sell to smugglers.

* Shipping cigarettes designated for one port realizing that they will be diverted to another port and then smuggled.

* Creating false shipping documents to facilitate smuggling.

* Using Swiss bank accounts in an attempt to hide the proceeds of cigarette smuggling and to protect smugglers from government investigations.

Domestic cigarette companies in Colombia have complained for some time that their market share was being undercut by sales of cigarettes by international companies, such as Philip Morris and BAT, that had been smuggled into their country.

Last June, at a U.S. Senate hearing, Fanny Kertzman, Colombia’s director general for taxes and customs, testified that 90% of the cigarettes imported into that country was contraband.