Pubdate: Tue, 26 Aug 1997 Source: International Herald Tribune , NYTimes contact: Tobacco Firms Know: Where There's Smoke, There's Smuggling Billions of Dollars Involved in Black Markets By Raymond Bonner and Chrstopher Drew New York Tirnes Service NEW YORKThe largest tobacco companies are selling billions of dollars of cigarettes each year to traders and dealers who funnel them into black markets in many countries, say law enforcement officials and participants in the trade. In the last decade, the volume of cigarette smuggling around the world has nearly tripled, according to a leading tobacco research organization. This reflects a general surge in cigarette sales abroad, especially for U.S. brands. And industry of ficials acknowledge that a sizable share theresearchers say onefourthof the cigarettes sold overseas pass through smuggling rings set up to evadeR foreign taxes and sell major brands at a discount. The companies say they do nothing to encourage the smuggling and do not condone it. But recent criminal investigations in several countries show that people in the tobacco industry have played a significant role at times in stimulating and fueling it. In one case, two sales rnanagers for Brown & Williamson Tobacco Corp. have pleaded guilty to aiding smugglers. But what law enforcement agents say is far more common is for the compa nies to sell huge quantities of top brands to traders and dealers who are little more than pipelines to the smugglers. For instance, newly available court documents show that R.J. Reynolds Tobacco Co., the secondlargest U.S. cigarene maker, sponsored trips to a posh Canadian fishing resort for several dealers who have since been charged with conspiring to smuggle cigarettes into Canada. On onefishing trip in 1995, aReynolds salesman even joked with the dealers about the smuggling. Some of the dealers admit that they pour huge volumes of cigarenes into the smuggling networks. One of Europe's biggest cigarette traders Michael Haenggi, said in an interview that he had been buying Winstons from Reynolds for 15 years and had resold many of them to smugglers in Spain. Mr. Haenggi said his threeperson trading company in Switzerland had handled $100 million in sales last year. "Of course I know where the cigarenes are going," he said. "But is that my problem?" Other inquiries show that two organizedcrime groups in Italy take in $500 million a year by smuggling in Marlboros they buy from Swiss dealers selling products made by Philip Morris Cos., America's largest cigarette maker. Hong Kong prosecutors plan to place a former marketing manager for BritishAmerican Tobacca Corp., a subsidiary of BAT In dustries PLC and a British affiliate of Brown & Williamson, on trial this year on charges that he took more than $3 million in bribes from dealers involved in smuggling cigarettes into China. Spokesmen for the three cigarette companies said they did not knowingly sell to dealers who supply smugglers and refused to discuss any of the criminal .cases. But they said that while a few salesmen might have been too aggressive, their executives had done nothing wrong and that the companies should not be held accountable for what happens once they sell their products. The smuggling costs foreign governments an estimated $16 billion a year in lost revenue. But more important, health experts say it threatens to undermine initiatives in many nations to discourage smoking, particularly among teenagers. That is because young people tend to smoke more when they can buy cigarettes cheaply, and smuggled brands often sell for about a third less than ones on which taxes and customs duties have been paid. The sheer scope of the smuggling also could force changes in the $368.5 billion settlement being negotiated with the U.S. tobacco industry. The proposed agreement says that before the government could order the companies to lower the nicotine in cigarettes, it would have to guarantee that smugglers would not bring in more potent substitutes. But given how easily smuggling can take place, President Bill Clinton said last month that this provision was unreasonable and should be changed. The recent surge in blackmarket sales has many causes, from the relaxation of customs inspections in Europe to the opening of vast new markets in Russia and Eastern Europe. Market Tracking International Ltd., a research firm in London that provides data to tobacco industry publications, estimates that 280 billion of the 1 trillion cigarettes exported each year by all producing nations pass through the hands of smugglers, up from 100 billion in 1989. The rise in smuggling also has coincided with a massive push by U.S. cornpanies to expand overseas, which they see as a way to offset a decline in sales at home. American cigarettes are regarded as top quality and are seen as chic in many countries. But as popular as American and other Western brands are, the companies also run into various sales barriers, including high taxes, limits on imports and countries where cigarette distribution is corrupt. The smugglers, though, have increasingly maneuvered around such limits. To be sure in cities from Naples to Bogota, the image of street peddlers hawking contraband cigarettes has been an enduring one. The manufacturers benefit in that they normally receive the same price for cigarettes whether they end up in contraband markets or not. And despite markups by dealers, smugglers and salespeople, contraband cigarettes can still be sold cheaply and profitably because the savings from evading taxes can be so great. Law enforcement officials say that the dealers usually provide such a distance between the companies and the smugglers that it would be hard to consider charging the companies with doing anything illegal. Yet, even some dealers say that they and the companies sell the cigarettes so indiscriminately that they both know certain sales are headed for the black market. If the companies say they do not, "it's a lie," said Corrado Bianchi, who said he had sold PhiliD Morris cizarettes as a dealer in Switzerland before retiring two years ago. "Of course they know." Mt. Bianchi said he had sold large quantities of Philip Morris brands "to 200 people maybe, and they come from all over, Dutch people, Germans, Spanish, Greeks, Italians." But, he said, he never asked the buyers what they were going to do with the cigarettes. "In our work you can't ask what they do with the cigarettes." One result is that Mr. Bianchi ended up selling Philip Morris products to an organizedcrime figure now on trial in Italy, prosecutors there say. Mr. Bianchi himself is not a defendant, and he has denied that he did anything wrong. Andre Reiman, a senior vice president for a Philip Morris subsidiary in Europe, questioned whether the company had sold cigarettes directly to Mr. Bianchi. "As far as we can determine, he has never been a customer," he said. "I am not going to sit here and tell you there is not contraband in cigarettes," Mr. Reirnan added. "It's there. The causes are just a little more complicated than people believe." Philip Morris executives in New York said smugglers competed with the company's distribution system and jeopardized investments in overseas factories. Adam BryanBrown, a spokesman for Reynolds's international tobacco subsidiary in Geneva, said governments were responsible. "The root causes of eontraband are well knownthe high duties and taxes imposed on cigarettes," he said. But Per Brix Knudsen, the director of an antifraud unit for the European Union, said: "It's astonishing that these big producers are not more concerned that such a large quantity of their nroduct is arriving on the illegal market. How is it that such a trade can take place?" Much of Europe's tobacco trade takes place in Switzerland, where the law basically does not view selling cigarettes to people who smuggle them into another country as a crime. Investigators in the rest of Europe say that Swiss authoriticsand tobacco companies themselvesare rarely willing to cooperate.