Pubdate: Tue, 01 Feb 2000
Source: Los Angeles Times (CA)
Copyright: 2000 Los Angeles Times
Contact:  Times Mirror Square, Los Angeles, CA 90053
Fax: (213) 237-4712
Website: http://www.latimes.com/
Forum: http://www.latimes.com/home/discuss/
Author: Henry Weinstein, Myron Levin, Times Staff Writers

TOBACCO FIRM MEMOS SPEAK OF SMUGGLING

Cigarette giant British-American Tobacco encouraged and relied on smuggling 
to boost its sales in Latin America for at least several years, according 
to internal company memos in which senior executives discuss the role of 
smuggling in building market share and profits.

The documents, dating from the early to mid-1990s, do not prove that 
employees of British-American, the world's second-largest tobacco company, 
directly took part in smuggling operations. But they suggest that 
high-ranking officials could control the clandestine movement of cigarettes 
across national boundaries and sought to do so to compete with rivals they 
thought were doing the same.

Cigarette smuggling cheats governments of taxes and import fees and experts 
say it tends to increase smoking by holding prices down. Some countries 
such as Canada have imposed high taxes on cigarettes to discourage smoking, 
a policy that is undermined by smuggling.

The disclosures, and other smuggling episodes that governments have sought 
to blame on multinational tobacco companies, threaten to open a new front 
in the legal assault on the industry.

On Monday, Fanny Kertzman, Colombia's director general for taxes and 
customs, said the governors of 20 Columbian states are preparing a lawsuit 
against the tobacco industry to recover tax losses due to alleged smuggling.

They would be following the lead of Canada, which in December filed a 
$1-billion lawsuit against R.J. Reynolds Tobacco Co., accusing it of 
involvement in a smuggling operation that undercut a government program to 
discourage smoking through higher taxes.

Tobacco companies have acknowledged that huge volumes of cigarettes are 
smuggled in the international market, but they have denied sanctioning the 
practice, blaming it instead on organized crime, rogue employees and 
governments that invite smuggling by pushing cigarette taxes too high.

Company Plays Down Finding

Michael Prideaux, a spokesman for British-American Tobacco, said Monday 
that company officials are still reviewing the documents but believe that 
they have been "cherry-picked" from a huge volume of memos and 
correspondence to create a damning picture. Prideaux said there may be 
other documents that "make it perfectly clear that strenuous efforts were 
being made to get out of this business."

The papers were culled from a giant document depository in Guildford, 
England, that was established several years ago as part of U.S. 
anti-tobacco litigation by the states. The documents were first disclosed 
Monday as part of a report by the International Consortium of Investigative 
Journalists, part of the Washington-based Center for Public Integrity. The 
Times also has obtained some of the documents.

The documents paint "a devastating picture of a rogue industry," revealing 
that senior British-American executives "participated in actions which they 
knew led to cigarette smuggling in a systematic and massive basis 
throughout South America," said Matthew L. Myers, president of the Campaign 
for Tobacco-Free Kids.

The memos reflect strategy discussions among high-level company executives 
and directors, including the former chairman of British-American, Barry 
Bramley. Authors and recipients of the memos include several officials 
named in another set of British-American documents that revealed a 
systematic effort to cooperate with Philip Morris, the world's biggest 
cigarette maker, in fixing prices and dividing Latin American markets.

Those memos, first revealed by The Times in September 1998, were in marked 
contrast to the public display of tooth-and-nail competition between the 
world's two largest tobacco companies.

At least one of the memos discussing the role of smuggling is addressed to 
Nick Brookes, formerly a senior international marketing executive and 
currently chairman and chief executive of Brown & Williamson Tobacco Corp., 
British-American's major U.S. subsidiary.

In recent weeks, Brookes has spearheaded an image-building campaign in 
which B&W has sought to open a dialogue with customers and critics, 
including Internet chats and a speech last month to the National Press 
Club. In May, 1998, Brookes wrote an op-ed piece in the Washington Post on 
the role of high taxes in creating black markets in cigarettes. Brookes was 
unavailable for comment Monday.

Most of the memos avoid words such as "smuggling" and "contraband," but 
refer euphemistically to imported cigarettes that are either "DP," for duty 
paid, or "DNP," for duty not paid.

Jon Ferguson, former antitrust chief of the Washington state attorney 
general's office, who used British-American documents in that state's 
lawsuit against the tobacco industry in 1998, said, "The term 'duty not 
paid,' in so many words, means smuggled cigarettes."

And in its report, the journalists consortium quoted Les Thompson, a former 
R.J. Reynolds executive convicted in a Canadian smuggling scheme, as saying 
that "duty not paid" was "an industry-wide term" for smuggling.

In one June 1992 memo, British-American director Keith S. Dunt appeared to 
rebuke the head of the firm's Argentine subsidiary for worrying more about 
smuggling than sales: "We will be consulting here on the ethical side of 
whether we should encourage or ignore the DNP segment. You know my view is 
that it is part of your market and to have it exploited by others is just 
not acceptable."

The memos show that the cheaper DNP cigarettes accounted for a large share 
of imported cigarettes in several South American countries, including 
Colombia and Argentina. But company officials faced the challenge of 
maintaining the right supply of smuggled cigarettes to avoid undercutting 
their other brands and bringing increased government attention.

In a May 1993 memo, for example, Dunt complained that British American's 
Brazilian subsidiary, Souza Cruz, was shipping such huge volumes of 
duty-not-paid cigarettes through Paraguay to Argentina that it was stealing 
sales away from its Argentine subsidiary, Nobleza-Piccardo, "rather than 
[the] competition."

Nobleza-Piccardo had forecast a decline in profits and market share, due in 
part to the "increasing volume being 'pumped' " by Souza Cruz "through the 
northern border," Dunt wrote.

Other documents cited the need to maintain enough duty-paid imports to 
avoid casting suspicions on advertising campaigns that could not be 
justified for brands available only through smuggling. For example, an 
August 1992 memo to Bramley noted that "a small volume of duty-paid exports 
would permit advertising and merchandising support in order to establish 
the brands, with the market being supplied initially primarily through the 
DNP channel."

And a February 1994 memo on marketing options in Colombia included a 
proposal to sell a new brand by shipping in "DP product" followed by "DNP 
product . . . two weeks after" the brand's launch.

Another document suggested British-American was concerned that its reliance 
on DNP cigarettes not be exposed. The 1994 memo said the firm's office in 
Bogota, Colombia, "will be clean by Q3/94 (third quarter of 1994) in 
reference to DNP information." Henceforth, "management of DNP will be in 
Caracas."

In 1996, two former mid-level sales executives with British-American's B&W 
unit were indicted in New Orleans on charges stemming from a scheme to 
smuggle cigarettes into Canada. The men pleaded guilty.

One of the documents released Monday--a 1993 letter from the chairman and 
chief executive of British-American's Canadian subsidiary, Imperial Tobacco 
Ltd.--stated bluntly that Imperial knew it was benefiting from cigarettes 
that were exported duty free to the U.S. and then smuggled back to Canada.

"As you are aware, smuggled cigarettes . . . represent nearly 30% of total 
sales in Canada, and the level is growing," R. Don Brown wrote to 
British-American 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. To do otherwise would place the 
long-term welfare of our trademarks in the home market at great risk."

Queried about the letter by the Center for Public Integrity, Brown said his 
comments in the letter "were simply of the nature of a factual 
observation," according to a response appended to the CPI report.

"We knew (along with the Canadian government, the media and the Canadian 
public) that a large portion of Canadian cigarettes exported to the United 
States were being brought back illegally into Canada, mostly by organized 
crime. As we have said countless times before, and as I am happy to repeat 
here, our company never knowingly sold cigarettes to smugglers."

Cigarette Tax Hike Scaled Back in 1994

The Canadian smuggling problem grew so serious that the government in 
Ottawa in 1994 scaled back a big cigarette tax increase that had been 
designed to raise revenue and promote health by curbing smoking.

In 1998, a subsidiary of R.J. Reynolds, Northern Brands Inc., pleaded 
guilty to involvement in a smuggling scheme in which Canadian cigarettes 
were exported to the U.S. and then shipped back into Canada through Mohawk 
Indian tribal lands straddling the border in upstate New York.

Les Thompson, a veteran RJR marketing executive, last year pleaded guilty 
in the case, received a six-year prison sentence, and now is cooperating 
with the Canadian government.

RJR has said that Thompson acted alone. But "nothing could be further from 
the truth," Thompson recently told CBS' "60 Minutes II."

Responding to the civil suit filed by Canada in December against RJR and 
its former Canadian subsidiary, RJR-MacDonald Inc., RJR officials said the 
company did nothing wrong.

The issue of cigarette smuggling arose in June at a Senate hearing, where 
Kertzman, the Colombian official, testified that 90% of the cigarettes 
imported into that country were contraband.

Sen. Charles E. Grassley (R-Iowa) said that "some Colombians have gone so 
far as to threaten to sue Philip Morris, arguing that the volume of 
advertising that Philip Morris chooses to have in Colombia is not justified 
by levels of legitimate sales."

Responding Monday to an inquiry by The Times, a spokeswoman for Philip 
Morris International said, "We believe the amount our Colombian affiliate 
spent on advertising was not out of line with the scale of its business 
there." 
- ---
MAP posted-by: Richard Lake