Illegal Pathways to Illegal Profits - Campaign for … Profits Illegal Pathways to Illegal Profits...

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Illegal Profits Illegal Pathways to Illegal Profits Illegal Pathways to Smuggling Cigarette Companies and International The Big Smuggling Cigarette Companies and International The Big Campaign for Tobacco-Free Kids Campaign for Tobacco-Free Kids

Transcript of Illegal Pathways to Illegal Profits - Campaign for … Profits Illegal Pathways to Illegal Profits...

Illegal

ProfitsIllegal

Pathways toIllegal

ProfitsIllegal

Pathways to

Smuggling

Cigarette Companiesand

International

The Big

Smuggling

Cigarette Companiesand

International

The Big

Campaign for Tobacco-Free KidsCampaign for Tobacco-Free Kids

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Campaign for Tobacco-Free Kids

Illegal

ProfitsIllegal

Pathways to

Smuggling

Cigarette Companiesand

International

The Big

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Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

Acronyms & Companies . . . . . . . . . . . . . . . . . . . . . . . . . viii

I. Global Problem—Global Culprits . . . . . . . . . . . . . . . . . 1

II. Cigarette Smuggling in Africa: BAT and Cameroon . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

III. Cigarette Smuggling in Latin America: Philip Morris and Colombia . . . . . . . . . . . . . . . . . . . 13

IV. Cigarette Smuggling in Asia:BAT and Bangladesh . . . . . . . . . . . . . . . . . . . . . . . . . 18

V. Cigarette Smuggling in Europe:RJR and Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

VI. Additional Smuggling Highlights . . . . . . . . . . . . . . . 27

VII. Ways to Stop Cigarette Company Smuggling . . . . . . 30

Appendix One: Sources of Additional Information . . . . . 33

Appendix Two: Copies of Some of the Key Company-Smuggling Documents . . . . . . . . . . . . 35

Table of Contents

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Cigarette smugglingtakes place on a

colossal scale.

Each year approximately 400 billioncigarettes, or one-third of all legally

exported cigarettes, end up illegallysmuggled across international borders.Cigarettes are the world’s most widelysmuggled legal consumer product.

Cigarette smuggling hurts theworld’s nations by evading otherwiseapplicable duty fees and taxes. Evenworse, it increases the number ofsmokers by providing a less-expensivesupply of cigarettes, especially for theyoung and the poor. National effortsto restrict access to cigarettes by chil-dren can be undermined by the avail-ability of cheap contraband cigarettes.In addition, cigarette smuggling thatsteals away public revenues leaves lessfunding available for public healthefforts. At the same time, it reducesavailable revenues for health care andlaw enforcement.

The major international cigarettecompanies say that the solution for theworld’s governments is to reduce ciga-rette taxes and duty fees to reduce theincentives to smuggle. But an enor-mous, growing body of evidence showsthat the major cigarette companies,themselves, have knowingly fosteredand have consciously supported ciga-rette smuggling. In doing so, they havebeen able to penetrate otherwise closedmarkets, to increase the sales of theirbrands by making them available atlower prices, and to provide an argu-ment against high or increased levels ofcigarette taxes or import duties.

In addition, international studieshave clearly established two key facts:

1. Raising national cigarette taxes isone of the most effective ways fora country to increase its revenuesand reduce smoking, especiallyamong youth—despite any relatedincreases in smuggling.

2. The amount of cigarette smug-gling in any given country hasless to do with its cigarette taxrates than it has to do with itsgovernment’s policies regardingcigarette smuggling, relatedenforcement efforts, and thegeneral acceptance of smugglingand black market sales of anykind among its populace.

This report presents some keyevidence and information about themajor cigarette companies’ involve-ment in international cigarette smug-gling in order to help readers developa better understanding of the problemand how it can best be addressed toimprove the finances and public healthof the world’s countries.

As this report concludes, smug-gling does not have to be accepted asan inevitable, undesirable by-productof national efforts to increase cigarettetaxes, reduce access to cigarettes, orotherwise reduce smoking. Understand-ing the key role the major cigarettecompanies have played in cigarettesmuggling over the years suggests anumber of readily available measuresthat could help eliminate large-scalecigarette smuggling, regardless ofhow high cigarette tax levels go.

With numerous references tointernal cigarette company documents

Executive Summary

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that have become publicly availablethrough various anti-tobacco lawsuits,this report details the inner workings ofthe major cigarette companies’ actionsto encourage and support cigarettesmuggling throughout the world.

While the cigarette companies’documents rarely talk about “smug-gling,” “black-market sales” or “contra-band cigarettes,” they contain severalcode words that mean exactly thesame thing. The companies refer tocigarettes that are illegally importedinto a country as “duty-not-paid” or“DNP” cigarettes. Cigarettes deliveredthrough smuggling routes rather thanlegal channels are called “transit,”“general trade” or “GT” cigarettes.

Based on company documentsthat use these terms, this report looksat the smuggling of cigarettes manu-factured by British American Tobacco,Philip Morris, and R.J. ReynoldsTobacco in four representative coun-tries—Bangladesh, Cameroon, Colombiaand Spain—to illustrate, in consider-able detail, the major cigarette com-panies’ various roles in internationalsmuggling operations.

As these examples show, themajor companies have gone wellbeyond knowingly selling cigarettesthat they know will end up in thehands of smugglers but have alsocarefully monitored and overseen thesmuggling of their brands into variouscountries, often treating the illegalimportation and contraband sales oftheir cigarettes as just one more regu-larly monitored distribution channel,along with ongoing legal cigarette

imports and sales. It is also clear thatknowledge of the companies’ effortsto promote and facilitate the smug-gling of its brands often reaches to thehighest-ranking company executives.

Among other things the examplesin this report show that the majorcigarette companies have also:

• Intentionally used small amountsof legal imports of certain brandsto mask the display and sale ofsmuggled cigarettes in a countryand to provide an excuse for theiradvertising and marketing effortsdesigned to promote the sales ofthe smuggled versions.

• Sent high-level executives tomeetings with the middlemancompanies directly in charge ofthe smuggling efforts to discussdetails of the smuggling opera-tions, including destinations,brands, routes, quantities andprices.

• Knowingly supplied cigarettesmuggling operations used byillegal drug traffickers for moneylaundering purposes.

RecommendationsIt is clear that the major cigarettecompanies could eliminate much ofthe international cigarette smugglingby more carefully marking their ciga-rettes, monitoring their sales andrestricting the ability of their cus-tomers to divert them away fromspecified legal destinations. Suchaction is, however, quite unlikelywithout more stringent laws and

enforcement, given the enormousprofits the cigarette companies obtainfrom expanded sales caused by thelarge-scale smuggling of their brands.In addition, taking such anti-smug-gling action unilaterally would putany single cigarette company at aserious competitive disadvantage.

Similarly, there is little any singlecountry can do to sharply curtail ciga-rette smuggling worldwide. Moreover,while there are steps each nation cantake to reduce the smuggling problemwithin its borders, complete successwill require international cooperation.

Accordingly, cigarette smugglingis an ideal subject for internationalcooperation through the FrameworkConvention on Tobacco Control (FCTC),which is currently being negotiatedby the world’s nations. Building onthe strong tradition of internationalagreements to reduce trafficking incontraband goods such as firearms,pharmaceutical products, alcohol andillegal drugs, the FCTC could applythe well-established policy tools forreducing smuggling in these othergoods, for the very first time, tocigarettes, as well.

Initial drafts of the FCTC and aproposed anti-smuggling protocolhave already offered many construc-tive provisions, including:

• Establish a comprehensive systemof marking cigarettes to allowbetter tracking and identificationof smuggled products, includingprominent hard-to-counterfeittax-paid, country-of-origin, andcountry-of-destination markings.

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• Establish mandatory licensing ofall parties involved in cigarettedistribution.

• Require chain-of-custody record-keeping by all parties involved inthe movement of cigarettes fromthe factory to the final countryof sale.

• Eliminate duty-free sales, whichoften serve as a major source ofsmuggled cigarettes.

Other key anti-smuggling optionsinclude:

• Reform the system for transportingcigarette products in internationalcommerce, including a requirementthat the country of destination,and all countries through whicha shipment passes, issue specificpermits, licenses or authorizationbefore a shipment is released intointernational commerce.

• Establish a system wherebyapplicable destination-countrycigarette taxes, or an equivalentbond, would be collected atthe original factory where thecigarettes are manufactured or

before shipments are releasedinto international commerce—with destination-country taxstamps attached (ideally, underthe cellophane) at the factoryto indicate tax collection.

• Hold the major cigarette compa-nies strictly liable for any of thebrands they manufacture endingup as smuggled contraband, withrelated penalties and the destruc-tion of all seized cigarettes. Suchstrict liability would follow theexample of the Basel Conventionon Transboundary Movement ofHazardous Waste.

An anti-smuggling protocol tothe Framework Convention on TobaccoControl that included provisions suchas those described here would notonly substantially reduce internationalcigarette smuggling and its attendantharms but also directly promotepublic health. Without such a protocol,the enormous problems caused bylarge-scale international cigarettesmuggling will continue.

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The following acronyms appear frequently in this paper:

B&H Benson & Hedges (cigarette brand)

B&W Brown & Williamson Tobacco Company

BAT British American Tobacco

BATCO British American Tobacco Corporation

BATUKE BAT (United Kingdom & Export)

BTC Bangladesh Tobacco Company

CAR or RCA Central African Republic

DNP Duty Not Paid

EU European Union

GT General Trade

LSF Lucky Strike Filters (cigarette brand)

PGL John Players Gold Leaf (cigarette brand)

RJR R.J. Reynolds Tobacco Company

SE555 State Express 555 (cigarette brand)

SUTL Singapura United Tobacco Ltd.

Acronyms &

Companies

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The following companies are mentioned in this paper:

Bollore Tobacco French cigarette company; appears in BAT documentsdiscussing smuggling in Africa

British American Transnational tobacco company; owns Tobacco (BAT) Benson & Hedges, Kent, and Lucky Strike brands

Brown & Williamson U.S. subsidiary of BAT

Copaco Panama-based company identified in EU case as havingsmuggled for RJR

Gallaher Tobacco Company United Kingdom-based tobacco company

Imperial Tobacco Company United Kingdom-based tobacco company

Japan Tobacco (JT) Partially owned by Japan’s Ministry of Finance, JT pur-chased RJR’s non-USA operations in 1999

Mansur Free Zone A longtime distributor of Philip Morris Trading Company brands in Latin America

Maraval Swiss company alleged to have handled orders for PhilipMorris cigarettes intended for smuggling

MITSA Andorran company contracted by BAT to manufactureBAT brands apparently intended for smuggling

Philip Morris U.S.-based transnational tobacco company; owns Marl-boro brand

R.J. Reynolds Tobacco U.S.-based tobacco company, formerly one of the largesttransnational tobacco companies until it sold its interna-tional operations to Japan Tobacco in 1999

Romar Aruba-based distributor of BAT brands

SODISA Bangui, CAR-based company, thought to participate inBAT-brand smuggling in Central Africa

Sorepex Anstalt Lichtenstein-based company thought to be BAT’s smug-gling middleman for West Africa

TEI Rothmans subsidiary in Niger

Vinataba Vietnamese state tobacco monopoly

Weitnauer Swiss company alleged to have arranged delivery ofcontraband Philip Morris cigarettes

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One in three of theworld’s exported

cigarettes turns up asillegal contraband.

That’s about 400 billionsmuggled cigarettes

each year.

The results are devastating. Smuggledcigarettes are cheaper than their

legitimately imported counterparts, andlower cigarette prices increase the num-ber of smokers and the amounts theyconsume, especially among the youngand the poor. In many cases, govern-ment health policy efforts to reducesmoking and its attendant costs areundermined by the flood of cheap,smuggled cigarettes.2 To make mattersworse, government revenues—often invery poor countries—are reduced ascigarette taxes and import duties areavoided. Corruption of public officialsand others is fueled by payoffs at coun-tries’ borders and throughout the smug-gling routes. And government decision-making is compromised when the majorcigarette companies argue that the onlyway to combat smuggling is to cut cig-arette taxes.

Well-known international ciga-rette brands—Marlboro, State Express555, Benson & Hedges, Camel, Win-ston—are the smugglers’ brands ofchoice. This report adds to the growingvolume of evidence that firmly estab-lishes that the legal manufacturers ofthese cigarettes have knowingly fos-tered and have consciously supportedthe illegal smuggling of their ownbrands. As described herein, internalcompany documents have revealedthat the cigarette companies haveknown that cigarettes they sell to cer-tain distributors and importers wouldend up being illegally smuggled intovarious countries. Moreover, in manycases the companies have also carefullyoverseen and even directed the actionsof intermediaries in the smuggling

routes taken by some of their ciga-rettes, from the factories where theywere made right through to their finalillegal entry into the target countries.While the major cigarette companies,themselves, may not have driven thetrucks filled with contraband cigarettesover international borders, charteredthe ships that drop smuggled cigaretteson foreign shores, or bribed theenforcement officials who look theother way, it is clear that not only havethey known that all of these things aregoing on but they have also oftenencouraged and supported it, fosteredit and included it in their businessplans.

What Is Already Knownabout Cigarette CompanyInvolvement in SmugglingAs this report documents, the follow-ing key basic facts have already beenestablished from the currently avail-able evidence, including extensivereports by the Center for PublicIntegrity’s International Consortium ofInvestigative Journalists and by variousmajor newspapers.3

1. Although the major internationalcigarette companies make thesame amount of profit, per pack,on cigarettes they sell for legalimportation and those they sellfor illegal importation throughsmuggling, they have several eco-nomic incentives to smuggle:

a. Through smuggling, the ciga-rette companies can sell theircigarettes in countries other-

I. Global Problem—

Global Culprits

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wise closed to them because ofimport bans or because taxrates and duty fees make legalimports much more expensivethan domestic brands;

b. Even where legal imports arealready competitive with localbrands, smuggling expands thecompanies’ sales because theirsmuggled cigarettes, whichavoid applicable taxes andduties, are much cheaper thanthose they legally import, givingthe smuggled versions a com-petitive advantage against alllegally imported cigarettes soldin the country;

c. By helping to keep overallcigarette prices down, smug-gled cigarettes also help toincrease overall sales; and

d. Smuggling can give a com-pany’s brands a price and accessadvantage over its major com-petitors’ brands, unlessthe other companies are alsosmuggling in their own brandsor quickly get their own smug-gling operations under way.

2. Sharp differences between thecigarette tax levels of neighboringcountries can encourage small-scale cross-border smuggling byindependent, criminal entrepre-neurs, but that kind of smugglinghas been dwarfed by the large-scale smuggling supported by themajor cigarette companies, whichincludes smuggling routes thatoften go from one continent toanother and have little or nothingto do with price disparitiesbetween neighboring countries.

3. Smuggling has been an integralpart of the business activities ofglobal cigarette companies. Theseactions expand their markets andhelp them gain a competitiveadvantage over other cigarettecompanies.

4. Smuggling has been used bythe cigarette companies to gainpolitical leverage. They artfullyturn up the smuggling volume inorder to support their efforts topersuade governments to reducecigarette tax rates or duty feesor not increase them.*

The big cigarette companies oftenblame organized crime for the massiveamount of cigarette smuggling world-wide,4 but much of the organized

criminal smuggling that accountsfor the vast majority of all cigarettesmuggling worldwide has occurredwith the knowledge and assistance ofthe major cigarette companies them-selves, and would not occur withoutthe cigarette companies’ compliance.

The Cigarette CompanyDocuments thatReveal the TruthThese facts have been establishedlargely through previously secret, in-ternal cigarette company documents,which have become available throughvarious lawsuits against the companies.The documents describe extensiveknowledge, oversight, and supportof smuggling by the transnational

cigarette companies in numerouscountries.5 At the same time, only asmall portion of the smuggling-relateddocuments uncovered to date haveappeared in the press or elsewhere.Additional documents in the tobaccolawsuit document depositories thatchronicle the companies’ involvementin international cigarette smugglingmay yet be discovered—and others maycurrently exist only in the cigarettecompanies’ own files, if the companies

have not already destroyed them.†

Owing to differences between how thedifferent countries responded to thedemand for document production inthe various lawsuits against them, anoverwhelming number of the most rel-evant smuggling documents have beenobtained from those disclosed byBritish American Tobacco (BAT).6

Whereas Philip Morris and theother U.S.-based cigarette companiesnarrowly responded to the requests fordocument production during the law-suits’ discovery phases, BAT respondedmore broadly providing documentscovering a much wider range of topics.As a result, numerous BAT documentspertaining to smuggling have beenfound in the Guildford depository ofBAT documents, despite the fact thatthey have nothing to do with theunderlying legal actions. Such docu-ments are much rarer in the Minnesotadepository of the U.S. companies’documents or on the U.S. cigarettecompanies’ document websites.

* The companies oppose increases to ciga-rette taxes and duty fees because they pro-duce higher cigarette prices both inthe legal and illegal markets (contrabandprices are set in relation to legal prices),and higher overall cigarette prices reducesmoking levels and the total number ofpacks sold. [See, e.g., Chaloupka, F., et al.,“The Taxation of Tobacco Products,” inJha, P. & F. Chaloupka, Tobacco Controlin Developing Countries, Oxford UniversityPress, 2000.]

† Specific examples of company destructionof smuggling-related documents arepresented later in this report.

Well-known international

cigarette brands—Marlboro,

State Express 555, Benson &

Hedges, Camel, Winston—are the

smugglers’ brands of choice.

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Because the vast majority of thesecompany documents were producedpursuant to lawsuits starting in theearly to mid-1990s, almost all of thedocuments are dated 1995 or earlier.But more recent data show thatroughly a third of all exported cigarettesworldwide continue to be diverted intosmuggling supply lines, with major

international brands continuing to pre-dominate.7 There has also been no evi-dence since the time periods coveredby the disclosed industry documentsof any anti-smuggling initiatives orrelated reforms by any of the majorcigarette companies.

Beyond the extensive documen-tary evidence already in hand, some

current and former company employ-ees are cooperating with investigativeefforts, providing additional informa-tion and a deeper understanding ofthe existing documents’ terms andcontents. In addition, lawsuits havebeen commenced by the Canadianfederal government, the EuropeanUnion (EU), the governors of the Statesof Colombia and others to recoverdamages from BAT, Philip Morris, R.J.Reynolds (RJR), Brown & Williamsonand Japan Tobacco caused by theiralleged smuggling activities.8 Theselawsuits, currently under way in Ameri-can courts, are based in part on U.S.racketeering law, alleging that the cig-arette companies’ smuggling activitiesconstitute organized criminal activity.Other investigations into both civiland criminal wrongdoing related tocigarette smuggling by the cigarettecompanies, some public and somestill confidential, are also under way.9

The Cigarette Companies’Public DenialsDespite the overwhelming evidenceagainst them, the major cigarettemanufacturers and exporters have longcategorically denied any involvementin smuggling, often with sweepingstatements:

“[Philip Morris] will not condone,facilitate or support contraband…[and] we have been actively involvedin supporting governments’ anti-contraband programs in manycountries around the world.” 10

“British American Tobacco com-panies do not smuggle. We do notcondone smuggling, and we do notencourage or collude with others tosmuggle on our behalf. Smugglingis caused by tax differentials, weakborder controls, and import restrictionsand bans. It is not caused by compa-nies such as those in the BritishAmerican Tobacco Group, whichinvest heavily in well-manageddistribution networks and seek orderly,transparent markets for their goods.” 11

Tobacco Industry Executives’ Cynicism Concerning SmugglingWhile he was C.E.O. of Brown & Williamson Tobacco in the U.S., NickBrookes attacked proposed U.S. cigarette tax increases by saying that theywould directly cause cigarette smuggling into the United States over itsborders with Canada and Mexico and through major U.S. ports. In anopinion piece titled “Black Market Bonanza” that Brookes wrote for TheWashington Post (May 20, 1998), he stated that raising cigarette pricesthrough tax increases would “create” an illegal and unregulated under-ground market,” which he also described as “a massive black market, inwhich children will find it easier, not more difficult, to purchase cigarettes.”

But when Brookes wrote those words he should have been awarethat very little large-scale cigarette smuggling across international bordersoften occurs with the knowledge and support of one or more of the majorcigarette companies. In fact, documents indicate that Brookes also knewthat he had personally taken steps behind the scenes as a senior tobaccocompany executive to support and encourage the same kind of cigarettesmuggling he was deploring in his public statements.

For example, only a few years earlier, while Director of New BusinessDevelopment at BAT, Brown & Williamson’s parent company, Brookeshad noted that a potential joint venture between BAT and Vinataba, theVietnamese state tobacco monopoly, would reduce BAT’s sales of illegallysmuggled cigarettes in Vietnam (referred to as “GT” or General Trade sales).As his report back to senior BAT management stated: “BATCo will achieve1 billion GT sales of State Express 555 each year in perpetuity [without thejoint venture]…any State Express 555 sales by the JV is a sale lost to GT.”21

Other company documents show that while Director of New BusinessDevelopment at BAT, Brookes also received reports of the smuggling ofmajor cigarette brands into Colombia while using much smaller amountsof legal imports of the same brands to serve as an “umbrella” or cover.22

BAT appears to have adopted a similar strategy in Vietnam, after it didenter into the joint venture with Vintaba. As another document fromBrookes’ BAT files shows, BAT was very careful to adjust the pricing andother characteristics of the cigarettes made by Vintaba for legal sale inVietnam to account for and influence those of the illegally sold versions.As one document states—after recognizing the “excellent quality ofdistribution, presence, and value of the G.T. [smuggled] product”—“Both versions will have a role to play in the further building of thebrand, and the ’system’ profitability.”23

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R.J. Reynolds: “To suggest thatReynolds Tobacco has been involvedin smuggling activity—in Europe orelsewhere—is unsupportable anduntrue.” 12

Brown & Williamson: “We areaware that some of our products doenter markets other than throughthe legal channels, as do many otherbrands of cigarettes. We don’t condonethis. In fact, we work cooperatively withlaw enforcement to discourage smug-gling…smuggling is bad for governmentand society because taxes are lost,criminal activity increases, disrespectfor law grows, and law enforcementofficials are presented with more crimeto combat. High taxes and importrestrictions or bans cause smuggling.13

The Cigarette Companies’Self-ServingSmuggling MythsTo divert attention from their ownculpability, the cigarette companieshave promoted a number of mythsabout cigarette smuggling.

Myth 1: “High cigarette taxescause cigarette smuggling.”

As some of these denial quotes show,the cigarette companies like to blamehigh cigarette taxes and import dutiesfor cigarette smuggling, but thatclaim tells only a part of the story.While cigarette smuggling evadescigarette taxes and import duties(or penetrates the markets of coun-tries that ban or severely restrict legalcigarette imports), those countrieswith the highest cigarette tax ratesor duties do not necessarily have thehighest levels of cigarette smuggling.Other key factors include the perva-siveness of preexisting smugglingroutes and black markets for otherproducts in the country, governmentpolicies toward cigarette smuggling,the levels of corruption amongenforcement personnel, and themajor cigarette companies’ chosen

marketing strategies for the country,including their reliance on smugglingfor economic or political purposes.14

Why do cigarette companies linksmuggling with tax rates? Cigarettetax increases help to reduce smokinglevels by increasing prices and alsobring in new government revenue.15

Accordingly, a World Bank reportconcluded in 1999 that:

“Smuggling is a serious problem,but…even where it occurs at highrates, tax increases bring greaterrevenues and reduce consumption.Therefore rather than foregoing taxincreases the appropriate responseto smuggling is to crack down oncriminal activity.”16

More broadly, large-scale cigarettesmuggling occurs regardless of thelevel of different countries’ cigarette

tax rates or duty fees worldwide.One reason is that the major cigarettecompanies transport their productsknowingly or at least recklessly tosmuggling middlemen or transiteers ordo not take reasonable precautions andother readily available steps to makesure their cigarettes are only legallydelivered to proper destinations.17

Myth 2: “We just sell our cigarettes todistributors and have no knowledge orcontrol over what they do with them.”

Beyond blaming high taxes, thecigarette companies claim that theysimply sell their brands to distributors,wholesalers and exporters, and haveno control over what happens withtheir cigarettes after that. For example,on British television in 1998, an exec-utive from the Gallaher cigarettecompany, based in the United King-dom, made the following claim:

“We sell cigarettes legally toour distributors in various countries.If people, if those distributors subse-quently sell those products on to otherpeople who are going to illegally bringthem back into this country, that issomething outside of our control…” 18

But a careful read of the industry’sown documents and statements showsthe cigarette companies’ claims ofnon-involvement are false, as describedin this report and in numerous publiclyavailable reports on industry involve-ment in cigarette smuggling.19 Forexample, when faced with the firstmajor report on cigarette companyinvolvement in global cigarette smug-gling by the Center for Public Integrity,the Deputy Chairman of BAT, KennethClark—a former Chancellor of theExchequer and Health Minister in

Conservative Party governments inthe United Kingdom and a currentMember of Parliament—publishedan opinion piece in The Guardiannewspaper in which he stated that“we act, completely within the law,on the basis that our brands willbe available alongside those of ourcompetitors in the smuggled as wellas the legitimate market.”*, 20

In response to Clarke’s admissions,The Guardian commented that “BAThad previously claimed that it merely

“...transit...is essentially

the illegal import of brands...

upon which no duty has been paid.”—BAT doc. 302000021, 1989

* Months later, Mr. Clarke contradicted him-self and returned to the more traditionalcigarette company denials, stating that“There is no evidence I have ever seenthat BAT is a participant in this smuggling.We seek to minimize and avoid it.” He evenstated that BAT is “a company of integrityand a good corporate citizen” that notonly follows the requirements of the lawsin the countries in which it operates butalso follows “good ethical standards.”[“DTI to Investigate BAT Smuggling Claims,”The Guardian, 30 October 2000.]

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turned a blind eye to smuggling butthe papers show it is central to thecompany’s operation.”24 One exampleis a 1994 BAT internal report thatincludes a “Distribution Channels”table which identifies the distributors

for BAT, its U.S. subsidiary Brown &Williamson, and its Brazilian subsidiarySouza Cruz in each of ten SouthAmerican countries, with separatelistings for those that handle the legal(duty-paid) and illegal (duty-not-paid)imports. Text accompanying the tablestates that “Due to the sensitivity,management, and coordination ofthe DNP [duty-not paid] business,all brands should be concentratedon one operator per channel.”25

A corollary to the companies’assertion that they sell to distributorswithout knowing what goes on after-wards is the contention that they areunable to track their cigarettes afterthey sell them and ship them to dis-tributors or importers. The evidencedemonstrates that the companieshave regularly tracked many of theirshipments destined for illegal import,through all the steps and intermedi-aries in their route to the final coun-tries where the cigarettes are sold.

Myth 3: “Any company involvementin smuggling is done by rogueemployees operating entirelyon their own.”

In many cases, when the major ciga-rette companies are confronted withthe smuggling evidence from theirown documents—or with guilty smug-

gling verdicts against their executivesor employees—they claim that anysmuggling activities by their personnelare simply the result of dishonestemployees operating entirely on theirown in direct violation of the compa-

nies’ anti-smuggling policies. Forexample, after the smuggling convic-tion of Les Thompson—the RJR execu-tive who headed its Canadian NorthernBrands subsidiary during its efforts tosupport smuggling of Canadian brandsback from the United States—StevenGoldstone, the Chief Executive Officerof RJR Nabisco, tried to deflect all theblame for the smuggling activitiesonto Thompson, himself:

“Employees are prohibited fromengaging in smuggling or other viola-tions of the law [but there will alwaysbe] the risk that dishonest employeeswill find ways to circumvent controlsfor their own personal benefit.” 26

Given Goldstone’s explanation,there are a surprisingly large numberof memos implicating a large numberof employees as being aware of thecompany’s involvement in smugglingactivities. Indeed, industry documentsshow that cigarette smuggling opera-tions have proceeded not only withthe knowledge, but also with thedirect support of some of the compa-nies’ most senior officers. For example,the then-Chairman of BAT Industries,Sir Patrick Sheehy, is directly implicatedin planned smuggling operations inSouth America in a 1993 memo sentfrom Keith Dunt (Territorial Directorfor Latin America & the Caribbean)

to Ulrich Herter (Managing Director,Tobacco, for BAT Industries), Tony deCastro (President and CEO of SouzaCruz, BAT’s Brazilian subsidiary), BarryBramley (Chairman, British AmericanTobacco) and others, all very seniorexecutives and officers of BAT. Thememo states:

“I am advised by Souza Cruz[BAT’s Brazilian subsidiary] that theBAT Industries Chairman has endorsedthe approach that the BrazilianOperating Group increase its shareof the Argentinean market via DNP[duty not paid or smuggling].” 27

The Structureof This ReportThe evidence that major cigarettecompanies are knowingly involvedin smuggling is overwhelming. Thisreport uses concrete country-specificexamples of the smuggling of BritishAmerican Tobacco, Philip Morris, andthe R.J. Reynolds Tobacco Companybrands in Africa, Latin America, Asiaand Europe. Building on the priorpublications that have presentedsome of the massive documentaryevidence, this report will show howthe cigarette companies have beenintimately involved in all the stagesof the ongoing global cigarette smug-gling problem, including strategicplanning; manufacture and packingspecifically for smuggling; settingquantities and prices for the contra-band; overseeing shipping and routechoices; assessing candidates foronward sale of the smuggled goods;and efforts to disguise the illegalactivities.

This report focuses on the fourcountry-specific smuggling examplesto provide readers with a better under-standing of how cigarette smugglingreally works—and to show how themajor cigarette companies track,oversee, and sometimes supervisethe progress of their brands from theoriginal factories where they are made

“...the BAT Industries Chairman

has endorsed the approach that

the Brazilian Operating Group

increase its share of the

Argentinean market via DNP.”—BAT doc. 500028732, 1993

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through their illegal diversion intoestablished smuggling routes to theirfinal illegal destinations. Evidence ofthese companies being involved in thesmuggling of their brands in manyother countries also exists, and othercompanies—such as Brown & William-son, Japan Tobacco, Rothmans andBollore—are also implicated.* Some ofthis information will be presented.

Cigarette Company CodeWords for SmugglingCigarette company documents do notuse the word “smuggling,” but insteaduse euphemisms or code words forthe activities whose meaning is clear.The companies are discreet with theiruse of language, and there are evenexamples where the companies soughtto avoid creating a paper record atall, either through the use of technol-ogy or a practice of not committingcertain material to paper:

“[I]n future, please do notdistribute such sensitive mattersbeyond myself and do not nameinterested parties. Ideally, all suchcommunication should be oral andonly personal hand-written notesmaintained. I recognize the practicalproblems, but the down-side risk isvery considerable.” 28

Where the paper record of ciga-rette company knowledge and par-ticipation in cigarette smuggling hasbeen uncovered, cigarette companyeuphemisms or code words for smug-gling are the norm. The most commonare: duty not paid (DNP), transit,general trade (GT), combined exports,parallel imports and recycled product.Usually, one can ascertain what they

really mean from context, sometimesfrom a direct statement, or fromhow the terms are defined or usedin other related company documents.Here are a few examples:

“With regard to thedefinition of transit it is essentiallythe illegal import of brands fromHong Kong, Singapore, Japan, etc.,upon which no duty has been paid.” 29

“[The DNPmarket] is the volume of cigarettesproduced in Venezuela, exported(mainly to Aruba) and re-enteringVenezuela as transit plus transitcigarettes produced elsewhere(mainly Ecuador and Brazil).” 30

“The importedsegment [in Taiwan] has increasedeach year and penetration reached32.6% in 1993. This figure includeslegal imports which accounted for6.7 bns in 1993…plus GT importsestimated at 7.6 bns (17.4% SOM[share of market]).” 31

In their documents, the cigarettecompanies also use terms like “whole-saler,” “distributor,” “buyer,” or “transitagent” to describe various parties inthe smuggling chain. Put simply,however, the cigarette companiesuse two basic categories of smugglingintermediaries:

Middlemen. The first is a regionaloperative with a long-standing rela-tionship with the company, oftencovering many countries. Along withthe cigarette company, they facilitatethe smuggling and deal with theday-to-day issues. In this paper thesefacilitators are called “middlemen.”

Transiteers. The second intermedi-ary is further along the distributionchannel, being the party who physi-cally carries the cigarettes acrossborders. This paper calls these com-pany intermediaries “transiteers.”

General Trade (GT).

Duty Not Paid (DNP).

Transit.

1 Joossens, L. & M. Raw, “Cigarette Smug-gling in Europe: Who Really Benefits?”Tobacco Control, July 1998, http://tc.bmjjournals.com/cgi/content/full/7/1/66.U.S. Foreign Agriculture Service, TobaccoGroup webpages, www.fas.usda.gov/cots/tobacco.html. See, also, Merriman, D., etal., “How Big is the Worldwide Cigarette-Smuggling Problem,” in Jha, P. & F. Cha-loupka, Tobacco Control in DevelopingCountries, Oxford University Press, 2000.

2 See, e.g., Non-Smokers’ Rights Associationof Canada, Cigarette Smuggling: A GlobalWeapon against Public Health Measures,5 April 2001, www.nsra-adnf.ca/english/smuggling.html.

3 See, e.g., Beelman, M., et al., InternationalConsortium of Investigative Journalists,Center for Public Integrity, Major TobaccoMultinational Implicated in CigaretteSmuggling, Tax Evasion, DocumentsShow, 31 January 2000, www.public-i.org/story_01_013100.htm; Beelman, M., et al.,International Consortium of InvestigativeJournalists, Center for Public Integrity,Global Reach of Tobacco Company’sInvolvement in Cigarette Smuggling Exposedin Company Papers, 2 February 2000,www.public-i.org/story_01_020200.htm;Marsden, W., et al., International Consor-tium of Investigative Journalists, Centerfor Public Integrity, Tobacco CompaniesLinked To Criminal Organizations In Lucra-tive Cigarette Smuggling, 3 March 2001,www.public-i.org/story_01_030301.htm;Dickey, C. & R. Nordland, “Big Tobacco’sNext Legal War: Cigarette Makers AreComing Under Fire As Governments AttackGlobal Smuggling,” Newsweek, 31 July2000; Bonner R. & Drew, C., “CigaretteMakers are Seen as Aiding Rise in Smug-gling,” The New York Times, 25 August1997; Bonner, R., “Two Cases Shed Lighton Cigarette Smuggling in Italy,” The NewYork Times, 2 September 1997; Bonner, R.,“Europe Inquiry on Smuggled CigarettesSeeks U.S. Aid,” The New York Times, 8 May1998; Marsden, W., “Tobacco Insider Talks:Major Firms Were Deeply Involved inCross-Border Smuggling, Former ExecutiveSays,” Montreal Gazette, 18 December1999, www.nsra-adnf.ca/english/gazinsider1.html; CBS, 60 Minutes IItelevision show, “Tobacco’s Other Secret,”18 January 2000; ASH-UK website onBAT and smuggling, www.ash.org.uk/html/smuggling/html/smuggling.html;Maguire, K. & D. Campbell, “TobaccoGiant Implicated in Global SmugglingSchemes,” The Guardian, 31, January 2000,www.guardian.co.uk/Archive/Article/0,4273,3956951,00.html; Rowell, A. &C. Bates, Tobacco Smuggling in the UK,October 2000, www.ash.org.uk/html/smuggling/html/uksmuggling.html.See, also, Appendix One.

4 See, e.g., British American Tobaccowebsite, “Smuggling: Our View,”www.bat.com/bat/bathome.nsf/0/53027513fc27f99e802569540030c0a1/$FILE/Smuggling_Our_View.pdf; Brown& Williamson, Organized Crime andthe smuggling of Cigarettes in theUnited States - The 1999 Update,www.brownandwilliamson.com/displaypage.cfm?ID=118&Sect=4&txtSearch=smuggling.

* After the time period covered by the avail-able industry documents, Japan Tobaccopurchased the non-U.S. operations of RJRand, consequently, has greatly increasedits presence in some of the markets wheresmuggling is most flourishing and nowinternationally produces and sells formerRJR brands that have historically beensmuggled.

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5 For the lawsuit settlement agreementscreating public access to these documents,see, e.g., State of Minnesota et al. vs.Philip Morris et al., Settlement Agreementand Stipulation for Entry of ConsentJudgment, Civil Case No. C1-94-8565,State of Minnesota District Court, SecondJudicial District, 08 May 1998 [hereafter“Minnesota Settlement”]; Master Settle-ment Agreement, between the U.S. statesand territories and the major U.S. cigarettecompanies, 23 November 1998, http://www.naag.org/tobaccopublic/library.cfm[hereafter “Multistate Settlement Agree-ment”]. For the reports on cigarettecompany involvement in smugglingbased on these documents, amongother evidence, see footnote 3 andAppendix One.

6 The state of Minnesota in the UnitedStates of America settled a cost recoverylawsuit against the tobacco industry in1998. The settlement stipulated that thedefendants had to create and operate forten years a depository giving public accessto the millions of documents obtainedduring what is known as the “discovery”phase of legal proceedings. BAT, uniqueamong the defendants, was permittedto run its own depository in Guildford,England, just outside of London. Similarprovisions were in the November 1998Multistate Settlement Agreement in theUnited States, which resulted in each ofthe U.S. cigarette companies establishingwebsites that provided public access tothe documents they disclosed in the law-suits (see, e.g., the Philip Morris documentwebsite at www.pmdocs.com). In sharpcontrast, the BAT documents at Guildfordcan only be viewed in person, by appoint-ment. To get an appointment, one mustwrite to BAT, requesting dates. The presentcontact information is: Ms. MelanieThomas, British American Tobacco, GlobeHouse, 4 Temple Place, London, WC2R 2PG,United Kingdom, fax: 44-20-7845-2783.Information on all of the major cigarettecompany document websites and hard-copylocations are provided in Appendix One.

7 Joossens, L. & M. Raw, “Cigarette Smug-gling in Europe: Who Really Benefits?”Tobacco Control, July 1998, http://tc.bmjjournals.com/cgi/content/full/7/1/66.U.S. Foreign Agriculture Service, TobaccoGroup web pages, www.fas.usda.gov/cots/tobacco.html.

8 European Union v. RJR Nabisco Inc. et al.,United States District Court, EasternDistrict of New York, Civil Case No. 1-00-06617-NGG, www.tobacco.org/Documents/001103euvpm,rjr.html; Attorney General ofCanada vs. RJR Tobacco et al., U.S. DistrictCourt for the Northern District of NewYork, Civil Case No. 99CV2194 [complaintavailable at www.public-i.org/download/canadacomplaint.pdf]; Colombian Gover-nors v. Philip Morris Companies, Inc. et al.,U.S. District Court, Eastern District ofNew York, Docket No. 00 Civ. 2881 (NGG),filed 08 November 2000, www.public-i.org/download/AmdendedColombiaSuit.pdf;Richards, M., “Ecuador Files Suit AgainstTobacco Industry, Associated PressNewswires, 05 June 2000. A New YorkDistrict Court dismissed the Canadianlawsuit on jurisdictional grounds, butthe Canadian Government’s lawyers haveappealed that decision. Dow Jones Busi-

ness News, “Canada to Appeal Dismissalof U.S. Smuggling Lawsuit,” 28 July 2000.

9 See, e.g., Levin, M., “Cigarette MakersTargeted On Smuggling,” Boston Globe,10 August 2000; Dickey, C. & R. Nordland,“Big Tobacco’s Next Legal War: CigaretteMakers Are Coming Under Fire As Gov-ernments Attack Global Smuggling,”Newsweek, 31 July 2000; Associated Press,“Grand Jury Probes RJR’s Export Sales,”21 August 2000.

10 Letter from Elizabeth Cho, Philip MorrisInternational, to Center for Public Integrity,January 2000.

11 British American Tobacco website, “Smuggling: Our View,” www.bat.com/bat/bathome.nsf/0/53027513fc27f99e802569540030c0a1/$FILE/Smuggling_Our_View.pdf.

12 Michaels, A. & D. Bilefsky, “BrusselsSues US Tobacco Groups in Crackdown,”Financial Times, 07 November 2000.

13 Brown & Williamson website, “Smuggling:Our View,” www.brownandwilliamson.com/index_sub2.cfm?ID=22.

14 Joossens, L. & M. Raw, “Cigarette Smug-gling in Europe: Who Really Benefits?”Tobacco Control, July 1998, http://tc.bmjjournals.com/cgi/content/full/7/1/66;Joossens, L., Smuggling and Cross-BorderShopping of Tobacco Products in theEuropean Union, UK National HealthService Health Development Authority& International Union Against Cancer,2000; Merriman, D., et al., “How Big is theWorldwide Cigarette-Smuggling Problem,”in Jha, P. & F. Chaloupka, Tobacco Controlin Developing Countries, Oxford UniversityPress, 2000; Joossens, et al., “Issues inthe Smuggling of Tobacco Products,”in Jha & Chaloupka, 2000.

15 Townsend, J., “The Role of Taxation Policyin Tobacco Control,” in Abedian, I., et al.,The Economics of Tobacco Control, AppliedFiscal Research Centre, University ofCapetown, 1998; Chaloupka, F., et al.,“The Taxation of Tobacco Products,” inJha, P. & F. Chaloupka, Tobacco Controlin Developing Countries, Oxford UniversityPress, 2000; Merriman, D., et al., “HowBig is the Worldwide Cigarette-SmugglingProblem,” in Jha, & Chaloupka, 2000.

16 World Bank Report, Curbing the Epidemic:Economics of Tobacco Control, June 1999.

17 For more on how to stop cigarettesmuggling, see the final section ofthis report and Joossens, L. & M. Raw,“How Can Cigarette Smuggling BeReduced?,” British Medical Journal321:947-950, 14 October 2000, http://bmj.com/cgi/content/full/321/7266/947.

18 BAT Bates No. 203474922, Brookes toM. Broughton, D. Allvey and U. Herter,BAT internal memo, 03 June 1993.

19 Beelman, et al., 31 January 2000.20 BAT Bates No. 203472751/55, McPhail,

P. letter to P.C. O’Keefe, 21 October1993, available at www.public-i.org/McPahil_to_Millbank.pdf; Beelman, M.,et al., 2 February 2000.

21 BBC Money Programme, 08 November1998.

22 Supra, notes 3, 6, 8. See, also, AppendixOne.

23 Clarke, K., “Dilemma of a CigaretteExporter,” The Guardian, 3 February 2000.For the report by the Center for PublicIntegrity’s International Consortium ofInvestigative Journalists, see Beelman, M.,et al., Major Tobacco MultinationalImplicated in Cigarette Smuggling, TaxEvasion, Documents Show, 31 January 2000,www.public-i.org/story_01_013100.html.

24 Maquire, K., “Clarke Admits BAT Link toSmuggling,” The Guardian, 3 February2000.

25 BAT Bates No. 301742119, undated butfaxed on 29 November 1993.

26 Marsden, W., “Tobacco Insider Talks: MajorFirms Were Deeply Involved in Cross-Border Smuggling, Former Executive Says,”Montreal Gazette, 18 December 1999.

27 BAT Bates No. 500028732, BAT memo,18 May 1993. See, also, BAT Bates No.500017305, BAT internal memo marked“Restricted,” P. Adams to B. Bramley,Chairman of BAT board, “Visit of SirPatrick Sheehy,” 11 February 1994.

28 BAT internal memo, Chris Reynolds toNeil Lovett, 08 March 1990. BAT BatesNo. 301659640.

29 BAT letter dated 25 August 1989.BAT Bates No. 302000021.

30 BAT internal document, file owner KeithDunt, “Venezuelan Market Definitionsand Assumptions, “ undated, BAT BatesNo. 500025647.

31 BAT internal document entitled “Reviewof Asia-Pacific Market,” January 1995,BAT Bates No. 502628801.

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The strong marketingpresence of British

American Tobacco (BAT)throughout Africa

mirrors the company’sinvolvement in African

smuggling of BAT brandsof cigarettes.

Internal BAT documents reviewedto date suggest that BAT has had

involvement in smuggling in about30 countries in sub-Saharan Africaalone.32

From the late 1970s throughat least the early 1990s, BAT organ-ized both its legal and illegal Africancigarette-sales operations into regionalgroupings based on geography andcontraband flows. Cameroon, alongwith Equatorial Guinea and severalinland smuggling destination countries,formed BAT’s “Unit II.”33 These countriesworked as a coordinated unit, particu-larly for contraband originally enteringAfrica from Europe and Latin America.

Countries involved in cigarettecompany smuggling efforts usuallyserve one of several purposes: eitherorigin countries, destination countriesor through transit countries for con-traband cigarettes. Cameroon is par-ticularly interesting because it servedmultiple roles for smuggled BAT brands.

Smuggling Routes intoWest Africa and CameroonA large percentage of the contrabandflows of BAT brands originated fromthe company’s Southampton factoryin England. In many regions of theworld, cigarettes marked “Made inEngland” enjoy a certain cachet orextra appeal. Indeed, the BAT sub-sidiary BATUKE (BAT United Kingdom& Export), which is in charge of allUK-made BAT brand exports, is amajor supplier of smuggled cigarettesworldwide. A BATUKE plan for 1993

to 1997, marked “SECRET,” states thatjust “two key General Trade marketswill account for 4.7 billion units or22% of BATUKE’s total shipments,”and £3.8 million (or approximately$6 million in US dollars) “will beinvested to grow our business in theGT markets.”34

From Southampton or other BATfactories, BAT’s cigarettes bound forillegal import into Cameroon—Benson& Hedges, Kent, Lucky Strike and oth-ers—frequently arrived in West Africathrough Malabo, a town located onthe north end of an island belongingto Equatorial Guinea. The island isconveniently located just offshore ofCameroon, only a quick boat trip away.A 1991 BAT document shows that BATrelied heavily on this smuggling routeto get their brands into Cameroon:

“[T]here are no legal imports[into Cameroon]…Unit II comprisessales to Malabo for which the endmarket is Cameroon.” 35

The importance of smuggling forBAT’s business plans in Africa, and thekey role Malabo played in facilitatingsmuggling into Cameroon and muchof both West and Central Africa, can-not be overstated as shown below.BAT’s contraband moved from Malabothrough various ports of entry inCameroon and other African countriesutilizing false shipping documentation.Senior BAT executive John Ticehurstreports on a 1989 trip to Malabo:

“[I] visited Juan Cabrera, whohas been established in Malabo over20 years…207 c/s [cases] had been‘exported,’ i.e., to Cameroon, although

II. Cigarette Smuggling

in Africa:BAT and Cameroon

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falsified documents indicated Nigerianimporters. (Sodisa followed the samedocumentation procedure as exportsto Cameroon are not allowed bycustoms.)” 36

Although BAT may have begun itssmuggling into Cameroon in order topenetrate a market that was otherwiseclosed to its brands, it is clear thatthe company was ready to continuesmuggling into Cameroon even afterit lifted its ban on foreign cigaretteimports. Typical is an internal 1991memo from Joe Green, a senior BATmarketing executive, who says thatin a scenario where legal imports arepermitted into Cameroon, BAT’s planis to continue supplying that countryprimarily via smuggling. In thatsituation, Green says:

“GT shipments will remain themainstay of our activity…The Malabodistribution channel will have to be

maintained…Maintain a minimumcover level of BHSF [Benson & HedgesFilter brand] via legal imports.” 37

Once imports were permitted,knowledge and decision making aboutusing smaller amounts of legal salesto cloak larger smuggling or GT opera-tions went all the way to the apex ofthe company, BAT Industries ChairmanSir Patrick Sheehy:

“When the issue of Unit II wasdiscussed where BATUKE wished toappoint a domestic importer enablingus to provide cover for advertisingand GT business, Sir Patrick felt thatit was perfectly acceptable for BATCameroon to recommend a domesticimporter for [Benson & Hedges].” 38, *

These internal documents, show-ing BAT actively making decisionsto organize and fuel the contrabandmarket, are in stark contrast to thepublic statements of BAT’s presentchairman, Martin Broughton, that“High duties create the conditions forsmuggling, not tobacco companies.”39

BAT’s SmugglingMiddleman for AfricaAs detailed below, BAT’s middlemanfor smuggling into West Africa in the1980s through the early 1990s wasa company called Sorepex Anstalt.Sorepex was based in Liechtensteinbut apparently run to a large degreefrom France. The BAT/Sorepex relation-ship closely resembles that betweenBAT and other well-known regionalsmuggling middlemen, such as Romarin Latin America and SUTL in Asia.40

L akeChad

CHAD

CENTRAL AFRICANREPUBLIC

NIGERIA

NIGER

DEM. REP.

OF THE CONGO

CONGOGABON

CALABAR

LAGOS

DOUALA

LIBREVILLE

YAOUNDE

BANGUI

GAROULA

MARADI

KOUSSERI N’DJAMENA

Chief entry pointto West Africa

Truck/airshipments

IrregularNiger/Cameroon

route

Truck/airshipments

Onward transitto Sudan

EquatorialGuinea

MALABO

Minor directroute to Nigeria

Contraband inflow,mostly from Europe

CAMEROON

BAT’s Smuggling Operations in Cameroon

* The cigarette companies’ use of relativelysmall amounts of legal imports to camou-flage or cover much larger amounts ofillegally smuggled imports is discussedmore fully later in this report.

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Sorepex provided organization andlogistical support for smuggling and afront for BAT, should people begin toscrutinize smuggling activity in WestAfrica. As one BAT document puts it:

“One of the main functions ofSOREPEX was to allow BAT to keep atarm’s length from transit customers—particularly in Cameroon.” 41

That front, however, was onlysuperficial. BAT remained the partyin firm control of the smugglingoperations:

“Our objective now is to preservethe ‘façade’ that Sorepex representsus and the sensitive markets of Togo,Benin, Niger (Unit I) and EquatorialAfrica (Unit II) but, at the same time,enable the BAT field force to take overthe management of this importantbusiness.” 42

An example of how BAT exercisedcontrol is seen in a 1989 Sorepex let-ter to senior BAT executive John Tice-hurst dealing with contraband salesdeparting from Malabo to northernCameroon and Chad. Three transiteersbrought the contraband BAT brandsacross these borders: Sodisa, Mouchiliand Bogno. Mouchili and Bogno wereprovided with extra financial induce-ments to participate.

<< En fait, c’est la ristournepar la BAT qui a été l’element décisifpour Mouchili et Bogno, qui recevrontchacun:

Mouchili: 3.000 FCFA par cartonBogno: 2.000 >>

“It’s the rebate from BAT thatwas the decisive element for Mouchiliand Bogno, who will both receive:

Mouchili: 3.000 FCFA per cartonBogno: 2.000 FCFA per carton” 43

BAT did an enormous amount ofbusiness with Sorepex. Indeed, in about1989 BAT provided Sorepex with arolling credit limit of £5 million (about$8.2 million U.S. dollars).44 In internaldiscussion BAT described its relationshipwith Sorepex in West Africa as a “gravy

train.”45 It was a relationship bothcompanies sought to maintain, leadingBAT to alter prices to accommodateSorepex in its transit operations.46

The closeness of the BAT/Sorepexrelationship, and the measures BATemployed to keep part of that secret,is seen in this quote from a 1979memo to file from “JLWC,” probablyBAT executive John Challiss:

Sorepex/BAT(UK&E) Relationship

“It is the policy of B.A.T (UK &Export) Limited to support fully Sorepexin the markets of Togo, Benin, Nigerand R.C.A. [Central African Republic]Transit. To achieve this support it isnecessary to create strategies and amodus operandi fully understood byboth parties. The highly politicalnature of these markets requires anystrategies to be flexible, which in turnmust result in a constant ongoingdialogue between the two parties.The domicile of M.H.J. Binst andBongard [both senior Sorepex opera-tives for Africa] should facilitatesuch dialogue.” 47

The sending of sensitive documentsto the homes of Binst and Bongard isconsistent with a strategy as previouslydescribed in this paper of keeping suchdocuments out of the office.

Despite the mutually beneficialrelationship between cigarette manu-facturers and their regional smugglingagents, problems sometimes arose.

This is to be expected given thefrequent opportunities and financialincentives to divert contraband. In oneinstance, Sorepex sold BAT brands toa transiteer other than BAT’s preferred

transiteer, resulting in parallel deliver-ies to two illegal sellers smuggling atthe same border town. The competi-tion between the two caused problemswith what had previously been accom-modating border officials. In responseto the conflict between competingBAT-brand smugglers, the officialsclosed the border to smuggled BATcigarettes.48, *

Cameroon and theSmuggling Pipelineto Central AfricaThe cigarettes smuggled into Cameroonwere not just for sale there. Cameroonalso served as a major conduit forsmuggling BAT cigarettes into centralAfrica, most notably into Chad andthe Central African Republic. Some ofthe contraband even crossed severalcountries, finally ending up in Sudan.The operations were carefully moni-tored by BAT and for the most partorganized by Sorepex.

* Other company documents show that BAT’sAmerican subsidiary, Brown & Williamson,also had a direct relationship with Sorepexthat it terminated in 1986, apparentlyto run its own West African operations.[BAT Bates Nos. 301627202-204 andNo. 301612514.]

“GT shipments will remain the

mainstay of our activity...The

Malabo distribution channel will

have to be maintained...Maintain a

minimum cover level of BHSF

[Benson & Hedges Filter brand] via

legal imports.”—BAT doc 301773703, 1991

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Two separate smuggling routesoperated between Cameroon andSudan. In August 1990 a senior BATexecutive, John Ticehurst, described theprimary dry-season smuggling route astrucking BAT’s contraband cigarettesthrough northern Cameroon and thensmuggling them into Chad by crossingthe border at N’Djamena. Much of thecontraband BAT brands were thentaken onwards to Sudan, exiting Chadat the frontier town of Adre.49 The levelof BAT’s oversight of these routes issuggested by the fact that Ticehurstmonitored the prices of the smuggledcigarettes not only by the case, as theywould be sold to transiteers, but alsoby the pack, as they would be sold tovendors or smokers.50

A second, more southerly routefrom Cameroon to Sudan ran fromDouala in Cameroon to Bangui in theCentral African Republic, then onwardto Sudan exiting the Central AfricanRepublic near Birao. SODISA, a com-pany based in Bangui and a frequentparticipant in BAT-brand smuggling inthe region, moved many of the BATcigarettes through the Central AfricanRepublic.51 As with the northern route,the contraband was moved by trucksduring the dry season. During the wetseason, BAT’s documents indicate thatsmuggled cigarettes were shipped bymilitary aircraft, which would suggestsome government complicity with thesmuggling.52

Some of the logistical challengesfaced by Sorepex are presented ina 1988 report Sorepex sent to BAT.It states:

<<…j’ai demandé à Daher decréer un deuxième circuit de vente,parallèle à son circuit habituel, etde négocier directement avec lessoudanais…cela doit lui permettre debriser le monopole des commerçantsde Birao, tout en les conservantdans son camp (en leur payant unecommission et en leur vendant depetites quantités de cigarettes) car ces

gens son indispensables pour négocierle passage de la frontière…>>

“I asked [my transiteer] Daher tocreate a second sales circuit, parallelto his customary route, and to negoti-ate directly with the Sudanese…Thiswill enable him to crack the monopolyof the Birao dealers, whilst keeping[the Birao dealers] on his side (bypaying them commission and sellingthem small quantities of cigarettes)because these people are indispensa-ble in negotiating border crossings.” 53

The level of detail in Sorepex’sreports to BAT are indicated by aFebruary 1987 communication fromMichel Chevaly of Sorepex to BATabout smuggling into Cameroon:

<<Dans un premier temps, Bognoachètera par lot de 300 cartons:c’est la capacité de son camion,compte tenu des autres marchandisesqui “cacheront” les cigarettes. >>

“First, Bogno will buy loads of300 cartons: that’s the capacity ofhis truck given the fact that there isother merchandise which ‘will hide’the cigarettes.” 54

Cameroon: CigaretteSmuggling in a NutshellThe smuggling of BAT brands inCameroon is typical of much of thesmuggling of major cigarette companybrands that has occurred throughoutthe world. Elements from the smug-gling of BAT brands into Cameroonthat parallel the documented charac-teristics of cigarette smuggling invarious other countries include:

• Knowledge and assistance ofthe smuggling activities atthe highest levels within thecigarette company;

• Importation of a small amountof legal product to mask thedisplay of smuggled cigarettes andprovide an excuse for advertisingthe otherwise illegal products;

• Centralized entry points forcontraband flows;

• Falsification of shippingdocuments;

• Occasional changes to routing,including the development ofnew routes as required;

• Competition on the smugglingroutes by a (usually limited)number of traders operatingoutside of the control of thecigarette company;

• Coordination of the upstreamsmuggling activity with a smallnumber of middlemen—oftenwith longstanding and closeties to the cigarette company—sometimes with meetings todiscuss details of the operationsincluding brands, quantities,prices, routing, etc.;

• Use of a larger number of transi-teers, especially in so-called GToperations, to physically movethe cigarettes across borders;and

• Careful oversight by thecigarette company of the middleman and the transiteers.55

It should be noted, of course,that these elements do not necessarilyoccur together or in all cases.

32 See, e.g., the collection of some of thedocuments re BAT and smuggling in Africacompiled by ASH-UK on its website, http://www.ash.org.uk/html/smuggling/html/africa.html, for numerous countryreferences.

33 BAT internal document, unsigned, fromfile entitled “Africa Unit 2, 1991,”BAT Bates No. 301773722-723.

34 Beelman, M., et al., International Consor-tium of Investigative Journalists, Center forPublic Integrity, Global Reach of TobaccoCompany’s Involvement in CigaretteSmuggling Exposed in Company Papers,2 February 2000, www.public-i.org/story_01_020200.htm.

35 BAT internal document, unsigned,from file entitled “Africa Unit 2, 1991,”BAT Bates No. 301773722-723.

36 BAT memo to file, “Visit to Malabo—February 14-15, 1989, JM Ticehurst andM Chevaly,” John Ticehurst, 20 February1989, BAT Bates No. 301773735.

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37 BAT memo with apparent appendix,Joe Green to Tony Pereria, 01 November1991, BAT Bates Nos. 301773703-705.

38 BAT memo, Joe Green to Tony Pereria, 01November 1991, BAT Bates No. 301773703.

39 Dickey, C. & R. Nordland, “Big Tobacco’sNext Legal War,” Newsweek, 31 July 2000.

40 Campbell, D., et al., “Paper Trail to Marketsof the East,” The Guardian, 2 February2000, www.guardian.co.uk/Archive/Article/0,4273,3957775,00.html; Beelman, M.,et al., International Consortium of Inves-tigative Journalists, Center for PublicIntegrity, Major Tobacco MultinationalImplicated in Cigarette Smuggling, TaxEvasion, Documents Show, 31 January 2000,www.public-i.org/story_01_013100.htm;Beelman, M., et al., International Consortiumof Investigative Journalists, Center forPublic Integrity, Global Reach of TobaccoCompany’s Involvement in CigaretteSmuggling Exposed in Company Papers,2 February 2000, www.public-i.org/story_01_020200.htm.

41 BAT memo to file, “Note on Sorepex Meet-ing, Paris-28th June 1988,” John Ticehurst,05 July 1988, BAT Bates No. 301626935.

42 BATUKE letter, R Howe to M Binst,28 April 1988, BAT Bates No. 301626956.

43 Sorepex letter, M Chevaly to J Ticehurst,undated, BAT Bates No. 301773741.

44 BATUKE fax, J Green/B Johnston to P Sassoon, 20 November 1989,BAT Bates No. 301626853.

45 BAT “Secret” memo, R Howe to WJRV Rose,23 June 1987, BAT Bates No. 301627054.

46 BAT memo to file, “Minutes of SorepexMeeting, 3/6/87, Cannes, “ DB Yellowless,16 June 1987, BAT Bates No. 301627109.

47 BAT Memo, Sorepex/BAT (UK & E)Relationship, 19-07-1979,BAT Bates No. 301627024.

48 BAT handwritten memo, R Browneto R Cameroon, “BHSF Transit ex CARand Equatorial Guinea,” 03 April 1988,BAT Bates No. 301639050-053.

49 BAT memo to file, “Meeting with Sorepex—Working, 1/7/87,” DB Yellowless,BAT Bates No. 301627038.

50 BAT memo to file, “Notes on Visit to Chad,16th–18th July 1990,” John Ticehurst,03 August 1990, BAT Bates No. 301612414.

51 BAT handwritten memo, R Browne toR Cameroon, “BHSF Transit ex CARand Equatorial Guinea,” 03 April 1988,BAT Bates No. 301639050.

52 BAT handwritten memo, R Browne toR Cameroon, “BHSF Transit ex CARand Equatorial Guinea,” 03 April 1988,BAT Bates No. 301639050.

53 Sorepex letter, M Chevaly to R Bongardwith a copy to R Howe of BAT,25 March 1998, BAT Bates No. 301773794.

54 Sorepex letter from M Chevaly to J Ticehurst of BAT, 01 February 1989,BAT Bates No. 301773741.

55 These elements are reflected in theother sections of this report and in,e.g., Beelman, M., et al., InternationalConsortium of Investigative Journalists,Center for Public Integrity, Major TobaccoMultinational Implicated in CigaretteSmuggling, Tax Evasion, DocumentsShow, 31 January 2000, www.public-i.org/story_01_013100.htm; Beelman, M., et al.,International Consortium of InvestigativeJournalists, Center for Public Integrity,Global Reach of Tobacco Company’sInvolvement in Cigarette Smuggling Exposedin Company Papers, 2 February 2000,www.public-i.org/story_01_020200.htm;Marsden, W., et al., International Consor-tium of Investigative Journalists, Centerfor Public Integrity, Tobacco CompaniesLinked To Criminal Organizations InLucrative Cigarette Smuggling, 3 March2001, www.public-i.org/story_01_030301.htm.

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Parts of the cigarettesmuggling story in

Colombia have alreadybeen made public

through the media,particularly BAT’s

activities.

However, the alleged role of nar-cotics money and drug traffickers

in the smuggling of Philip Morrisbrands in Colombia has not yet beenadequately discussed, despite the pres-ence of allegations to that effect inthe lawsuit filed by some of the Gov-ernors of Colombia.57

As presented below, the smugglingof Philip Morris brands in Colombiabears many smuggling hallmarks seenelsewhere. Competent middlemen werekey. There was convoluted ordering andindirect delivery. And much of the con-traband flow was funneled through asmall number of entry points.

My Belmont orYour Belmont?In the smuggling lawsuit broughtagainst Philip Morris by the governorsof 25 of Colombia’s 32 states plus thecapital district of Bogotá, the plead-ings filed with the court describe twomain smuggling routes, one regionaland one transatlantic.58 The regionalroute arose due to the pressure ofcompetition and a curiosity of trade-mark ownership in the region. In theearly to mid-1990s, Philip Morris andBAT had a major dispute over whohad the rights to sell the Belmontbrand in Colombia. A February 2, 1995BAT memo outlined the company’soptions should it lose. These includedgetting its Belmont packs into Colom-bia via smuggling.59

Philip Morris won the trademarkbattle giving it the exclusive right tosell the Belmont brand in Colombia.

BAT retained its exclusive right to sellBelmont in Venezuela. This conflict inownership between the two countriescreated an incentive for one companyto smuggle its Belmont into theneighboring country, where it couldundersell the legal versions andcannibalize the market share of itscompetitor. BAT-made Belmonts weresoon smuggled into Colombia fromVenezuela.60 In response, the Colom-bian governors’ court filings statedthat Philip Morris began to smuggleits own Belmont cigarettes intoColombia from Ecuador, both directlyand via Panama,61 essentially fightingcontraband with contraband.

Cigarettes and CocaineThe transatlantic smuggling route forother Philip Morris brands includesalleged associations between cigarettesmuggling and money laundering forthe narcotics cartels, especially inrelation to Colombia. The pleadingsin the Colombian governors’ case stateit simply:

“Since at least 1991, the PHILIPMORRIS DEFENDANTS were sellingcigarettes to individuals whom theyknew were reputed drug smugglers.” 62

More specifically, the Center forPublic Integrity has reported that:

“For more than 50 years, PhilipMorris’ main distributor in LatinAmerica was the Mansur Free ZoneTrading Company, N.V.…In August1994, the United States indictedcousins Eric and Alex Mansur alongwith 52 others allegedly involved in

III. Cigarette Smuggling

in Latin America:Philip Morris and Colombia

56

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a massive drug money-launderingenterprise. The investigation, dubbedOperation Golden Trash, targeted analleged conspiracy that used narcodollars to purchase cigarettes, alcoholand household electronics, which weresold to individuals and businesses inColombia. The proceeds would thenflow to cocaine barons. OperationGolden Trash was part of a muchlarger money-laundering investigationcalled Operation Polar Cap. In theearly 1990s, U.S. law enforcementauthorities froze numerous bankaccounts of tobacco distributors,charging they were part of a drugmoney-laundering conspiracy.” 63

Rather than terminate its rela-tionships with these distributors, theColombian governors contend thatPhilip Morris simply switched to moresecretive sales routes so that thesmuggling and money launderingcould continue but with a reducedlikelihood of detection by law enforce-ment officials.64 Specifically in regardto the Mansurs, Philip Morris told theCenter for Public Integrity that ithad cut all business ties with them in1998. The Center reports, however,that the Mansurs still control SuperiorTobacco Co. N.V., an Aruba companythat manufactures Marlboro Red and

Marlboro 100 cigarettes as a PhilipMorris licensee.65

Describing these money launder-ing schemes, a lawyer for the Colom-bian Governors stated in court onNovember 27, 2000 that “It’s a matterof taking the money from the moneylaunderer who initially wrote thechecks, through the Philip Morrisdistributor, through the bank of thatdistributor, and up to Philip Morris.”66

As described in the Colombianlawsuit and elsewhere, the allegedsmuggling activity of Philip Morrisin Colombia illustrates how a majormultinational cigarette company

Pacif ic

Ocean

BRAZIL

VENEZUELA

PERU

ECUADOR

PANAMA

COSTARICA

COLOMBIA

USA EUROPE

Philip Morris’ Alleged Smuggling in Colombia

ARUBA

MAICAOBARRANQUILLACOLON

IPIALES

CARACAS

BOGOTA

Colombiancocainesales Using Narco dollars,

verbal order placedwith Maraval Company,Switzerland

E U.S.-made Philip Morris CigarettesShipped to the Netherlands or Belgium

Contraband profitssmuggled out ofColombia

Note: Belmont is a regionalcigarette brand owned invarious countries by bothBAT and PM

GNeed to launder

cocaine profits

Narcodollars

Smuggled PMBelmont

C

B

Ordered cigarettes delivered by Weitnauer Company,Switzerland, from the Netherlands or Belgium,smuggled chiefly via Panama and Aruba

Smuggled PMBelmont

DA

Smuggled BAT Belmont

F

Smuggling_Smuggling.qxd 4/27/01 6:24 PM Page 14

15

worked with narcotics dealers. Ciga-rette smuggling offers a money laun-dering opportunity for drug dealers.Cocaine profits could be used topurchase cigarettes, which in turncould be quickly sold at a handsomeprofit and generate the appearanceof legitimacy.67 Narcotics dealers couldbe excellent smuggling middlemen:they have a ready supply of cash;they have the institutional capacityto maintain illegal distribution chan-nels; and they have no qualms aboutsmuggling an otherwise legal product.

The Long Route to BogotáThe smuggling process began withverbal orders for cigarettes beingplaced with Philip Morris agents inremote offices. According to Courtpapers, the orders were then passed onto a Swiss company, Maraval. Switzer-land was convenient for its companysecrets laws:

“The PHILIP MORRIS DEFENDANTSmade arrangements by which smug-glers and those who distributed tosmugglers could pay for their ciga-rettes in Switzerland so as to avoiddetection of these payments. In fact,PHILIP MORRIS has moved the recordsconcerning many of its illegal activi-ties worldwide to Switzerland so asto escape the surveillance of thegovernments which are victimizedby PHILIP MORRIS’ illegal activities.” 68

The governors go on to say thata second Swiss company, Weitnauer,arranged delivery of the contrabandPhilip Morris cigarettes. Providingfurther detail, the Center for PublicIntegrity has reported that:

“Philip Morris documents fromJanuary 1993 identify Weitnauer asa Philip Morris customer dealing in‘various DF’ markets, an apparent ref-erence to duty-free markets. Thomp-son, the RJR sales manager convictedof smuggling, said Weitnauer was oneof “the most widely used customers

servicing the southern borders blackmarket. They are financially encour-aged to penetrate the border throughthe guise of normal duty free opera-tion.” Weitnauer was also listed in BATdocuments as a “general trade” and“transit” client, though in the 1980sBAT refused to do any further busi-ness with Weitnauer apparentlybecause the company was divertingcigarettes beyond BAT control.” 69

According to the ColombianGovernors’ complaint, Marlboro ciga-rettes, made in the United Statesand ultimately destined for Colombiawould be first shipped from Miami,Florida, across the Atlantic Ocean toThe Netherlands. In later times, thepoint of entry in Europe was changedto Belgium to take advantage ofwhat may have been lax port control.Maraval would then be paid for the

cigarettes. After payment, the ciga-rettes would be shipped back acrossthe Atlantic, likely to either Aruba orPanama, where false paperwork wouldpermit redirection of the cigarettesinto Colombia.70 For example, a 1998invoice shows that the Swiss Maravalcompany billed the Mansur-ownedMarlex SA company for the sale ofalmost $500,000 worth of U.S.-madePhilip Morris cigarettes.71 The gover-nors’ lawsuit states that this circuitousroute was designed to distance PhilipMorris from the ultimate smugglingof the cigarettes into Colombia andmake it harder for enforcementofficials to distinguish between legaland illegal shipments.72

According to the documents, oneof Philip Morris’s main distributorswithin Colombia was SantanderLopesierra, a former Liberal PartySenator. Lopesierra is also named ina U.S. federal court affidavit filed insupport of the previously mentionedmoney-laundering indictments asbeing part of a scheme to laundernarcotics dollars through shipments ofvarious goods bound for Colombia.73

Company Perksfor the SmugglersThe pleadings in the Colombian caseallege that these smuggling operationswere so beneficial to Philip Morris thatsmugglers were granted particularlyfavourable financing terms. Theseterms permitted later payment on thedelivered contraband than would beoffered to legitimate cigarette traders.With these incentives, the volume ofsmuggled cigarettes moving intoColombia was kept very high.74

It is also alleged that BAT alsofunneled much of its Colombia-boundcontraband through the Caribbean(especially Aruba) and Panama, withits Aruba-based distributor, Romar,playing a key role.75 Both Philip Morrisand BAT are alleged to have enter-tained the smuggling middlemen:

“In fact, PHILIP MORRIS has moved

the records concerning many of its

illegal activities worldwide to

Switzerland so as to escape the

surveillance of the governments

which are victimized by PHILIP

MORRIS’ illegal activities.”—Colombian Governors’ Lawsuit against

Philip Morris et al., 2000

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“[T]he BAT DEFENDANTS treatedthe executives of Romar like regular,valued customers. Executives fromRomar were invited to travel to Londonto meet with BAT executives, attenddinners with them, and even attendthe tennis matches at Wimbledonwith BAT executives.” 76

These events are also reflected ina 1992 BAT letter to one of the Romarexecutives who accepted the invitationto Wimbledon.77 Moreover, the Colom-bian governors’ case states that in1990, high level Philip Morris execu-tives—including Mark Goldberg, asenior vice president, and Hal Quick,the head of duty free sales for PhilipMorris—attended a function arrangedfor the company’s alleged Colombiansmuggling clients.78

Hiding the EvidenceThe Colombian pleadings capture oneof the inherent challenges in provingcigarette smuggling cases: the lack ofa fully comprehensive documentaryrecord. As noted earlier, companieshave become more careful about whatthey put on paper, and Philip Morrisand the other U.S. cigarette companiesappear to have initially taken muchmore care than BAT to avoid unneces-sarily disclosing any incriminatingdocuments not specifically requiredby the various tobacco lawsuits. Thepleadings further allege that:

“PHILIP MORRIS’ own recordsshow that in the 1990s, the PHILIPMORRIS DEFENDANTS destroyedrecords, including correspondence andorder files, related to “Zeinal,” “MansurTrading” and others—all entities thatPHILIP MORRIS has openly describedas its “tax-free” customers.” 79

BAT also attempted to avoiddetection of its Colombian smugglingoperations through the removal ofdocuments, in one documented casespiriting them out of the country bythe third quarter of the year:

“The Bogota office will be cleanby Q3/94 in reference to DNP infor-mation. Management of DNP willbe in Caracas.” 80

Nevertheless, various documentsstill remain that implicate both PhilipMorris and BAT in cigarette smuggling,including documents that serve as thefoundation for the Colombian gover-nors’ lawsuit and many that havebeen revealed in earlier reports.81

Adding to the Competition:Smuggled Brown &Williamson and RJR BrandsBAT’s documents show that brandsfrom its United States subsidiary, theBrown & Williamson Tobacco Com-pany, were also smuggled throughAruba. Starting as early as 1985, thesecigarettes were probably destined forColombia.82 The minutes of a February1994 coordination meeting of the BATGroup, pertaining to an item 36 deal-ing with “Colombia/Paraguay” records,state that:

“B&W will hand over these twomarkets to BATCO by March 1…B&Wand BATCO will closely coordinatebusiness in Panama with [allegedsmuggling middleman] Pangelli [sic].Otherwise, the B&W border business inSouth America transfers to BATCO.” 83

BAT intelligence reports also indi-cate that R.J. Reynolds was involvedin Colombian cigarette smuggling, aswell. A 1994 assessment of the Colom-bian market, undertaken by BAT’sVenezuelan subsidiary, says:

“[R.J. Reynolds] launched Winston,Camel F.F. [full flavour] and Lights,Yves Saint Laurent, Salem in D.P. [dutypaid market] in 1993…Reynolds worksin the D.N.P. [duty not paid] channelswith Doral F.F., Lights and Mentholsin low price segments.” 84

Lessons LearnedThe Colombia lawsuit illustrates whatcan occur if smuggling is permitted togrow unchecked. Smuggling of onecigarette company’s brands can leadto smuggling by another, and thenanother. Cigarette smuggling becomescommonplace, enforcement canbecome lax and often corrupt, so thatsmugglers can act without fear ofgovernment interference. In theprocess, smuggling takes desperatelyneeded cigarette-tax revenues awayfrom the government. Colombia, forexample, reportedly lost $305 millionper year.85 This reduction in taxrevenues, especially in developingcountries, can lead to a reduction inavailable resources for public educa-tion, law enforcement and the publichealth care system. Indeed, cigarette-tax revenues lost to smuggling oftenresult in direct cuts to national effortsto reduce smoking and its attendantharms and costs.86

Today, Colombian tax and customsauthorities report that they are stillseizing large quantities of smuggledcigarettes, despite signed agreementswith Philip Morris and BAT pledgingto do everything in their power tohalt the illegal trade.87

56 See, e.g., Beelman, M., et al., InternationalConsortium of Investigative Journalists,Center for Public Integrity, Major TobaccoMultinational Implicated in CigaretteSmuggling, Tax Evasion, Documents Show,31 January 2000, www.public-i.org/story_01_013100.htm; Marsden, W., et al.,International Consortium of InvestigativeJournalists, Center for Public Integrity,Tobacco Companies Linked To CriminalOrganizations In Lucrative CigaretteSmuggling, 3 March 2001, www.public-i.org/story_01_030301.htm; Marsden, W., “TheMob and Big Tobacco,” Montreal Gazette,4 March 2001, www.montrealgazette.com/news/pages/010303/5033773.html; Colom-bian Governors Lawsuit vs. Philip Morriset al.; Maguire, K. & D. Campbell, “TobaccoGiant Implicated in Global SmugglingSchemes,” The Guardian, 31 January 2000,www.guardian.co.uk/Archive/Article/0,4273,3956951,00.html.

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57 Colombian Governors v. Philip MorrisCompanies, Inc. et al., U.S. District Court,Eastern Distr. Of New York, Docket No.00 Civ. 2881 (NGG), filed 08 November2000, www.public-i.org/download/AmdendedColombiaSuit.pdf. See, also,Farah, Douglas, “Money Cleaned, ColombiaStyle: Contraband Used to Convert DrugDollars,” The Washington Post, 30 August1998.

58 Colombian Governors v. Philip MorrisCompanies, Inc. et al., U.S. District Court,Eastern Distr. Of New York, Docket No. 00Civ. 2881 (NGG), filed 08 November 2000[hereafter “Colombian Governors LawsuitAgainst Philip Morris et al.”].

59 Beelman, M., et al., Major TobaccoMultinational Implicated in CigaretteSmuggling, Tax Evasion, DocumentsShow, 31 January 2000, [BAT documentexcerpt available at www.public-i.org/story_01_013100_ref.htm].

60 Beelman, M., et al., International Consor-tium of Investigative Journalists, Centerfor Public Integrity, Major TobaccoMultinational Implicated in CigaretteSmuggling, Tax Evasion, Documents Show,31 January 2000, www.public-i.org/story_01_013100.htm; Maguire, K. &D. Campbell, “Tobacco Giant Implicated inGlobal Smuggling Schemes,” The Guardian,31 January 2000, www.guardian.co.uk/Archive/Article/0,4273,3956951,00.html.

61 Colombian Governors Lawsuit vs.Philip Morris et al., paragraph 37(s).

62 Colombian Governors Lawsuit vs. PhilipMorris et al., 37(i).

63 Marsden, W., et al., International Consor-tium of Investigative Journalists, Centerfor Public Integrity, Tobacco CompaniesLinked To Criminal Organizations In Lucra-tive Cigarette Smuggling, 3 March 2001,www.public-i.org/story_05_030301.htm.See, also Marsden, W., “The Mob and BigTobacco,” Montreal Gazette, 4 March 2001,www.montrealgazette.com/news/pages/010303/5033773.html.

64 Colombian Governors Lawsuit vs. PhilipMorris et al., 37(j).

65 Marsden, W., et al., Tobacco CompaniesLinked To Criminal Organizations In Lucra-tive Cigarette Smuggling, 3 March 2001.

66 Marsden, W., et al., Tobacco CompaniesLinked To Criminal Organizations In Lucra-tive Cigarette Smuggling, 3 March 2001.

67 See, e.g., Farah, D., “Money Cleaned,Colombia Style: Contraband Used toConvert Drug Dollars,” Washington Post,30 August 1998.

68 Colombian Governors Lawsuit vs. PhilipMorris et al., 37(v).

69 Marsden, W., et al., Tobacco CompaniesLinked To Criminal Organizations In Lucra-tive Cigarette Smuggling, 3 March 2001.

70 Colombian Governors Lawsuit vs. PhilipMorris et al., 37(m), (n) and (t). See, also,Farah, D., “Money Cleaned, Colombia Style:Contraband Used to Convert Drug Dollars,”The Washington Post, 30 August 1998.

71 Marsden, W., et al., Tobacco CompaniesLinked To Criminal Organizations InLucrative Cigarette Smuggling, 3 March2001[invoice available at www.public-i.org/download/tob_maraval.pdf].

72 Colombian Governors Lawsuit vs. PhilipMorris et al., 37(m), (n) and (t).

73 Marsden, W., et al., Tobacco CompaniesLinked To Criminal Organizations In Lucra-tive Cigarette Smuggling, 3 March 2001.

74 Colombian Governors Lawsuit vs. PhilipMorris et al., 37(l).

75 Marsden, W., et al., Tobacco CompaniesLinked To Criminal Organizations In Lucra-tive Cigarette Smuggling, 3 March 2001;Beelman, M., et al., International Consor-tium of Investigative Journalists, Centerfor Public Integrity, Major TobaccoMultinational Implicated in CigaretteSmuggling, Tax Evasion, DocumentsShow, 31 January 2000, www.public-i.org/story_01_013100.htm; Colombian Gover-nors Lawsuit vs. Philip Morris et al., paras.37(m) & (r).

76 Colombian Governors Lawsuit vs. PhilipMorris et al., 38(hh).

77 BAT letter from BAT executive Watsonto Romar’s Harris, 15 June 1992,BAT Bates No. 301675006. Availablefrom the Center for Public Integritywebsite at http://www.public-i.org/download/HarmstoWimbledon.pdf.

78 Colombian Governors Lawsuit vs.Philip Morris et al., 37(k).

79 Colombian Governors Lawsuit vs.Philip Morris et al., 37(ii).

80 BAT memo to file, “Visit Notes, ColombiaMeeting-23 February 1994,” this copybelonging to Keith Dunt (who was inattendance), Claudio Figueiredo,16 March 1994, BAT Bates No. 503891629.

81 Colombian Governors Lawsuit vs. PhilipMorris et al. See, e.g., Marsden, W., et al.,International Consortium of InvestigativeJournalists, Center for Public Integrity,Tobacco Companies Linked To CriminalOrganizations In Lucrative Cigarette Smug-gling, 3 March 2001, www.public-i.org/story_01_030301.htm; Beelman, M., et al.,International Consortium of InvestigativeJournalists, Center for Public Integrity,Major Tobacco Multinational Implicatedin Cigarette Smuggling, Tax Evasion,Documents Show, 31 January 2000,www.public-i.org/story_01_013100.htm.

82 B&W internal memo, GE Kirschner toJ Anders et al., copied to Tome Whitehair,25 February 1985, B&W Bates No.464022683.

83 BAT internal document, “Minutes ofGroup Coordination Meeting, February 8& 9- London,” unsigned, 1994, B&WBates No. 670943747.

84 BAT internal document, “Country Com-petitive Report: Colombia 1994,” unsigned,undated but faxed on 06 May 1994,BAT Bates No. 500151875.

85 Souder, E., “Philip Morris to Help ColombiaHalt Cigarette Smuggling,” Dow JonesNews Service, 20 March 2000.

86 See, e.g., Non-Smokers’ Rights Associationof Canada, Cigarette Smuggling: A GlobalWeapon against Public Health Measures,5 April 2001, www.nsra-adnf.ca/english/smuggling.html.

87 Marsden, W., et al., Tobacco CompaniesLinked To Criminal Organizations In Lucra-tive Cigarette Smuggling, 3 March 2001.

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The smugglingoperations to bring

British AmericanTobacco’s brands intoBangladesh have been

quite sophisticated andfollow many of the

patterns seen in dozensof other countries.

As the company’s own internaldocuments show, large volumes

of BAT cigarettes have been smuggledinto Bangladesh for many years.Although BAT has knowingly fosteredcigarette smuggling throughout muchof Asia, Bangladesh was a particularlykey destination, probably because of itslarge population, the local preferencefor British-style cigarettes, and itslocation adjacent to the burgeoningmarket for major-brand cigarettesin India.88

Smuggling from Bangladesh intoIndia is alluded to in a 1991 corre-spondence between senior BAT execu-tive Bruce Davidson and the WorkingOffice:

“In answer to your questionson India: (1) There is clearly potentialof 555 and B&H and also existingdemand. Whilst there is some GTfrom neighbouring countries it isvery small relative to the size of themarket; this is due to a vigilant policyenforced by Indian authorities—whilstwe continue to explore routes I donot foresee much development ofthis business…” 89

The State Express 555 and Benson& Hedges brands identified as movinginto India from its neighbours are pre-cisely the BAT brands being smuggledinto Bangladesh. A 1991 documentlisting some of the BAT-brand contra-band flows in the subcontinent indi-cates that 25 times the volume ofthese two BAT brands were smuggleddirectly into Bangladesh than weresmuggled into Afghanistan, supporting

the theory that Bangladesh functionedas a supplier. This is further supportedby the fact that the volumes of smug-gled BAT brands in Bangladesh wereoften orders of magnitude larger thantheir legal duty-free volumes goingelsewhere in the subcontinent.90

Smuggling as Part ofBAT’s Everyday OperationsSo integrated was smuggling into themarketing of BAT brands in Bangladeshthat the company conducted monthlyproduct quality ratings of smuggledcigarettes, quantifying the quality ofboth the cigarette and the appearanceof the package. Heading the list inmid-1991 were the Benson & Hedgesand State Express 555 brands, bothidentified by BAT as smuggled brands.91

The fact that BAT oversight ofBangladesh cigarette smuggling was aregular part of its business operationsis revealed further by the casualnessof a 1994 memo by Patrick O’Keefe,then a senior BAT executive in Eng-land. In the memo, he discusses acompany reorganization that includedthe transfer of responsibility overBangladesh and Afghanistan smugglingfrom one regional group to another.92

BAT’s activities in Bangladesh areillustrated by its careful monitoringand monthly reporting of the smug-gled volumes of its own brands as wellas those of other cigarette companies,including Philip Morris. A January1994 monthly report on BAT’sBangladesh activities is typical:

IV. Cigarette Smuggling

in Asia:BAT and Bangladesh

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“GT volume was estimated atonly 16 million against 35 millionlast month…Brandwise breakdownis as follows:

B&H 15.30 MillionSE 555 0.14 MillionMarlboro 0.14 MillionOthers 0.60 Million” 93

BAT also endeavoured to controlthe price on its smuggled cigarettes inthe subcontinent. The company appar-ently did this through the InternationalBrand Group (IBG) at BAT’s centralheadquarters in England rather thanfrom anywhere within Bangladesh orAsia. A 1993 memo regarding BAT’sJohn Players Gold Leaf brand says:“Pricing of transit brands are to beadvised by IBG.”94 On the groundwholesale and retail selling prices ofBAT’s smuggled cigarettes, with abrand-by-brand breakdown, werereported to the head office, both forthe point of entry, Chittagong, and inDhaka. In January 1991, BAT’s localmanufacturing company reported toBAT head office on the price of smug-gled cigarettes with prices listed inBangladeshi taka (Tk):

“The market price structure inDecember ‘90 for transit productswas as follows: 95

Wholesale

Chittagong Dhaka

B&H Tk 300/200s 370/200SEFK 280/200s 340/200sPGL 200/200s N.A.CAPSTAN 170/200s N.A.

Retail

Chittagong Dhaka

B&H Tk 35/20s 45/20sSEFK 33/20s 40/20sPGL 30/20s N.A.CAPSTAN 24/20s N.A.

Along with price, BAT apparentlywas also able to shut off the supply ofits contraband brands for Bangladeshat will. In January 1991 R. Duncanfrom BTC (Bangladesh TobaccoCompany) writes:

“Had spoken to Mike Scott ofBATUKE re PGL [Players Gold Leaf]transit in November. Possibly as aresult, no further quantities of PGLseem to have entered the market.” 96

BAT’s AsianSmuggling AllianceThroughout the period described bythe documents, SUTL, a Singapore-based trading company, served as theprimary middleman for the smugglingof BAT brands into Bangladesh:97

“The nature of this [transit] business brings apparently paradoxi-cal requirements of an arm’s lengthapproach and close supervision. [BAT] must be able to disassociateitself from direct involvement in parallel imports. Nevertheless, indis-criminate sourcing can and does leadto potentially embarrassing problems.This conflict can be resolved by maintaining close control over theexport agent.” 98

The BAT/SUTL relationship was decadeslong and included some employeesworking at the two companies at dif-ferent times. In addition, there wereregular meetings and reporting.99 Thecigarette quantities were enormous,with SUTL delivering BAT cigarettesfrom Afghanistan to China. Reportssuggest that 22% of the entire pro-duction of BAT’s export arm, BATUKE,went into just two smuggling chan-nels, including the one run by SUTLout of Singapore.100

According to BAT documents,SUTL ran both legal and contrabanddistribution for BAT in numerous Asiancountries. A 1988 internal BAT docu-ment on a redefinition of marketresponsibilities in Asia describes this

in simple terms: “SUTL, as accreditedagents, have de facto responsibility formost end markets, legal or transit.”101

BAT’s internal documents attestthat these smuggling operations pro-ceeded with the knowledge and oftenthe direct involvement of very seniorexecutives within both BAT and SUTL,including BAT’s regional director forAsia-Pacific, the head of BAT’s market-ing department, senior marketing man-agers, and BAT area managers in theFar East. BAT executives were evenexpressly put in charge of various GT(i.e., smuggling) operations. For exam-ple, BAT’s senior management for Asiaattended a meeting with SUTL repre-sentatives in February 1994 whereSUTL was encouraged to expand theiroverland smuggling routes into China,with BAT China covering duty-paidimports.102 Another BAT memo to BarryBramley, chairman of BAT, discussedthe planned follow-up to a “Far Easttrip” by Sir Patrick Sheehy, chairman ofBAT Industries (BAT’s parent company):

“I detail below a suggested list ofissues for discussion with Sir Patrickand Ulrich Herter [BAT’s ManagingDirector] in April:…

— Follow-up on SPS [Sir PatrickSheehy’s] Far East trip— clarification of manage-

ment responsibility— Indo-China— Duty Free— Transit.” 103

Umbrella Operations:Legal Cover forIllegal SmugglingIn Bangladesh, the smuggling of BATbrands was enhanced by what BATsometimes called “umbrella opera-tions,” whereby small amounts ofsome BAT brands were legallyimported into a country in order tocover for much larger amounts thatwere smuggled in at the same time.Umbrella operations were a typical

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smuggling mechanism in numerouscountries in Asia, and were exploitedby BAT and other major cigarette com-panies throughout the world. In suchoperations, the legal imports serve aslegal cover for legal advertising cam-paigns that actually support the saleof the smuggled version of the brands.Moreover, the simultaneous appear-ance of legal and contraband suppliesmakes it possible for vendors to openlydisplay and sell the contraband ver-sions of various brands while appear-ing to be completely legal sellers.

In many cases, such as in Bangla-desh with BAT, there is little benefit tothe companies from their legal importsexcept as a cover for their illegal sales.As one internal BAT document puts it:

“Legal imports [of BAT brands]would attract high enough duty to

make them difficult to sell, but thereis indication that ‘legal’ imports couldhide large scale transit activity.” 104

BAT’s situation in Bangladesh is abit more complex than in many othercountries owing to the existence of

a local BAT cigarette manufacturingsubsidiary, Bangladesh Tobacco Co.(or BTC), as well as both legal importsand illegally smuggled cigarettes.Accordingly, there is an intimate inter-play of legal and smuggled cigarettesin BAT’s overall marketing and distri-bution plans in Bangladesh. In 1992,BTC reports that it has increased its

legal production of BAT-brand ciga-rettes in anticipation of expecteddeclines in the smuggled supply ofthe same brands due to an anticipatedclosure of the main entry point forsmuggled BAT cigarettes:

“Packing efficiencies were belowtarget and the average for the yeardue, in large part, to the deliberatedelay in maintenance on the HLPs[cigarette production equipment] tobuild up and maintain stocks in prepa-ration for the closure of Chittagongand the clampdown on transit.” 105

“...‘legal’ imports could hide

large scale transit activity.”—BAT doc. 400657565, 1993

INDIA

BANGLADESH

(BURMA) MYANMAR

CALCUTTA

CHITTAGONG

DHAKA

COX’S BAZAR

Main SUTL smugglingroute for SE555, JPS, B&H

originating in Singapore

Later SUTL landroutes created to

avoid port customscrackdown

Likely limited flowof smuggled B&H and SE555

KEY:BAT - British American TobaccoB&H - Benson & HedgesSE555 - State Express 555JPS - John Players Special

Competing (non-BATcontrolled) smuggling from

Poland, Albania, Egypt

BAT,s Smuggling in Bangladesh

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BAT apparently undertook a rathercomplex economic analysis to makethe decision whether to smuggle ornot and to develop the optimal mix ofsmuggled and legal cigarettes. At leastwith respect to Benson & Hedges in1993, BAT concluded that from aneconomic perspective smuggling thebrand into Bangladesh was the bestway to go. However, it also concludedthat political factors outweighed theeconomic advantage of smugglingthat brand. The desire for a consistentsupply uninterrupted by seizures atentry points, as well as various otherfactors, tipped the balance in favourof local, legal manufacture inBangladesh.106

Altering actual production volumesof legal cigarettes, as described above,is an effective, if blunt, method ofchanging the mix of contraband andlegal sales. However, BAT also employedmore artful strategies. For example,senior BAT executive Simon Smithdescribes using a price increase to fine-tune the mix between legal Benson &Hedges and contraband versions beingbrought in to Bangladesh by SUTL:

“As far as I am concerned wecan go ahead as we always have theoption to increase the price [of legalB&H] if SUTL volume drops off toofar. Suggest we review formally every3 months.” 107

Increasing the cost of the legalBenson & Hedges would make thesmuggled Benson & Hedges beingsupplied on BAT’s behalf by SUTL evencheaper, comparatively, which wouldlikely increase their appeal to potentialcustomers.

Smuggling as aPolitical StrategyOne of the ways cigarette companiesstrategically use cigarette smugglingis to try to persuade governments toreduce cigarette taxes or import duties

or at least not raise them.* At thevery same time that BAT was involvedin the smuggling of its brands intoBangladesh, the company made repre-sentations to the government thatcigarette taxes needed to be reducedin order to protect legal sales fromencroachment by smuggled contra-band, and to prevent an erosion ofgovernment revenues from its taxes onlegal sales. For example, in a 1994 let-ter to the Chairman of the BangladeshNational Board of Revenue, BAT wrote:

“There is a real risk that the salesvolume of [legally sold] STATE EXPRESS555 will continue declining. Thisdecline is directly related to the priceincrease that was necessary after theJune excise increase…The decliningvolumes of [legally sold] STATEEXPRESS 555 will continue to reduceGovernment revenue and if the currenttrend continues, loss of Revenue fromthis one brand is likely to exceed Tk.500 mn in financial year 1994/95…Furthermore our experience of ciga-rette markets around the world showsthat once smuggled cigarettes becomeestablished it is virtually impossible toreverse the trend.” 108

Of course, the letter did notdisclose BAT’s influence over whetherlegal State Express 555 sales wouldcontinue to decline, nor did it explainhow BAT’s own actions and decisionsplayed a key role in the smugglingreality BAT had experienced and wasreporting.†

Without such full disclosure, thecompanies’ anti-tax arguments some-times succeed, as indicated by anearlier report on BAT’s lobbying of theBangladesh government, which stated:“We have now heard that the Govern-ment have agreed to amend the exciserates in line with our proposal.”109

BAT’s related ability to controlthe volume of its legal sales throughits smuggling efforts is reflected in aFebruary 1992 internal note from TrevorBates, BAT statistician, to NormanDavis, BAT territorial director, regard-ing State Express 555 in Bangladesh.Shipments carried by SUTL, describedin the documents as transit, werecarefully tracked by BAT on a month-by-month basis. Not surprisingly, theymove inversely with the legal sales:legal sales go up when contrabandsales go down and vice versa.110

Smuggling Routesinto BangladeshBAT maintains worldwide productionfacilities, and the company’s internaldocuments are replete with analysisregarding where at any given time thesupply of a particular brand for a spe-cific country might be sourced. Inregards to BAT’s smuggled cigarettes,the source country of a particularbrand often switched from one coun-try to another. Overall, however, itseems that a large percentage of BAT’scontraband brands that ended up inBangladesh were originally made inBAT’s Southampton factory, purport-edly for legal export by BAT’s exportgroup, BATUKE.

During the late 1980s and early1990s, these cigarettes—along withothers made in various regional BATfacilities—were shipped by BATUKE toSingapore. From what is known, thelikely route SUTL arranged for theBangladesh-bound contraband BATcigarettes was to go from Singaporeby ship along the Strait of Malaccaand up the east side of the Adaman

* As noted earlier, cigarette taxes increaseboth legal and illegal cigarette prices,which reduces smoking levels and thenumber of packs sold, which reducesthe cigarette companies’ sales revenuesand profits.

† It is also important to note that countriesthat have reduced their cigarette tax ratesin order to reduce smuggling (and at theurging of the cigarette companies)—suchas Sweden and Canada—have actuallyexperienced a net decrease in net tax rev-enues because the tax cut reduces rev-enues more than any increase in legal salesincreases them. [See, e.g., Joossens, et al.,“Issues in the Smuggling of Tobacco Prod-ucts,” in Jha & Chaloupka, Tobacco Controlin Developing countries, 2000.]

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Sea before entering Bangladesh ateither Cox’s Bazaar or Chittagong.SUTL also arranged land routes fromSingapore, apparently via Burma, withdirect BAT concurrence. For instance,BAT’s company plan for 1994 to 1998for the Asia-Pacific region states:

“It is anticipated that supply willcontinue to be a major problem inBangladesh during 1994 as experiencedin both 1992 and 1993. The basic rea-sons continue to be as follows:

(a) Increased customs surveillancein Chittagong/Cox’s Bazaar.

(b) Border confrontation betweenBangladesh and Myanmar overthe Rohinga Muslem refugeecrisis…

“During late 1993 and early 1994,SUTL will strive to improve this situa-tion by developing land routes viaMyanmar and optimizing duty-freeleakage.” 111

The smuggling of BAT brands intoBangladesh was very successful. How-ever, there could be problems betweencompeting smugglers. In 1991, BAT’slocal Bangladesh subsidiary, BTC, facedthis problem and voiced a complaintto other companies in the BAT group:

“During discussions, senior BTCmanagement expressed their viewthat other companies in the Groupshould not be allowed to transit PGL[Player’s Gold Leaf] in Bangladesh asthis would create serious problemsfor them.” 112

What is not known is what thehead office in London did. What isclear from this example, and manyothers, is that high-level executivesin BAT were made aware of the manyplayers involved in the smuggling oftheir brands in Bangladesh andthroughout the region. As the abovequote indicates, BAT had the abilityto decide who would be allowed tosmuggle BAT brands into specificcountries and who would not.

88 Beelman, M., et al., International Consor-tium of Investigative Journalists, Center forPublic Integrity, Global Reach of TobaccoCompany’s Involvement in CigaretteSmuggling Exposed in Company Papers, 2February 2000, www.public-i.org/story_01_020200.htm.

89 BATUKE memo to file, B Davidson to Work-ing office, “India,” 15 May 1991, BAT BatesNo. 301555070.

90 BAT internal memo with appendix,“SE555,” Andrew Suszynski to NormalDavis, BAT Bates No. 500030591.

91 BTC memo, Bangladesh Tobacco Co. to BAT,“Comparison of July ‘91 and August ‘91,PQ Rating for Selected Brands,” author:“MJK,” undated, BAT Bates No. 400093288.

92 BTC “Restricted” memo, RMH Duncan toBAT (stamped received by Trevor Bates),“Monthly Review for December 1991,” 12January 1992, BAT Bates No. 503932405.

93 BTC memo, R Accorda to BAT (likelyreceived by Trevor Bates), “Monthly Reviewfor January 1994,” 20 February 1994, BATBates No. 500081068.

94 BAT memo, MR Barnes to J Lim et al.,“JPGL Multi-Country Research,” 06 Sep-tember 1993, BAT Bates No. 500284545.

95 BTC fax, H Sattar to TM Wilson of BAT, 08January 1991, BAT Bates No. 503914293.

96 BTC fax, RMH Duncan to Tim Wilson ofBAT, either 06 or 04 January 1991, BATBates No. 503914292.

97 Beelman, M., et al., Global Reach ofTobacco Company’s Involvement in Ciga-rette Smuggling Exposed in CompanyPapers, 2 February 2000. Campbell, D., etal., “Paper Trail to Markets of the East,” TheGuardian, 2 February 2000,www.guardian.co.uk/Archive/Article/0,4273,3957775,00.html.

98 BAT internal document, “Proposed Re-definition of Market Responsibilities”labeled “Secret,” undated but attachedto a 16 December 1988 letter from IanRoss to Ronnie Crichton, BAT Bates Nos.500014652-653.

99 See, e.g., BAT Internal Report, 17 Septem-ber 1992 [“BATUKE commenced supplied toSUTL in 1977 for markets not supplied viaSTC [BAT subsidiary, Singapore TobaccoCo.]: Bangladesh, Laos, Cambodia and Viet-nam.”] BAT Bates No. 500045604.

100 Beelman, M., et al., Global Reach ofTobacco Company’s Involvement in Ciga-rette Smuggling Exposed in CompanyPapers, 2 February 2000.

101 BAT internal document, “Proposed Re-definition of Market Responsibilities”labeled “Secret,” undated but attachedto a 16 December 1988 letter from IanRoss to Ronnie Crichton, BAT Bates No.500014650.

102 BAT memo to file, R Duncan, “Notes ofMeeting with SUTL at SUTL Offices in Sin-gapore, 24th February 1993,” 25 March1993, BAT Bates No. 500045568.

103 BAT internal memo marked “Restricted”,P Adams to B Bramley, Chairman of BATboard, “Visit of Sir Patrick Sheehy,” 11 Feb-ruary 1994, BAT Bates No. 500017305.

104 Greig letter to Fry of BTC with copy toN Davis of BAT, 26 May 1993, BAT BatesNo. 400657565.

105 BTC “Restricted” memo, RMH Duncan toBAT (stamped received by Trevor Bates),“Monthly Review for December 1991,” 12January 1992, BAT Bates No. 500081403.

106 BAT memo to file, “Bangladesh, Imports ofBHSF by BTC,” Bruce Johnston, 17 Decem-ber 1993, BAT Bates No. 301702099.

107 Marginalia note on additional copy of doc-ument from Steve Smith to David Aitken,16 December 1993, BAT Bates No.301702136.

108 BTC letter, R Accorda to Dr. Akbar Ali Khan,Bangladesh National Board of Revenue, 21November 1994, BAT Bates No. 600515551.

109 BTC memo, DS Jones to Ronnie Crichton ofBAT, 16 March 1990, BAT Bates No.503914177, BAT Bates No. 503914177.

110 BAT internal memo with attachment,“State Express: Bangladesh,” TR Bates toNorman Davis, 25 February 1992, BATBates No. 500030586.

111 BAT internal document, “COMPANY PLAN1994-8: Asia Pacific South/ SUT: Domes-tic,” unsigned and undated, BAT Bates No.500282756.

112 BTC memo, Imran Hussain apparently toBAT, likely 08 December 1991, BAT BatesNo. 503914283.

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As stated earlier,cigarette companies

habitually point totaxation as the cause ofcigarette smuggling. R.J.Reynolds Tobacco (RJR)

is no exception.

In an April 1998 address, StevenGoldstone, then chairman and

C.E.O. of RJR Nabisco, said, speakingof a potential national cigarette taxincrease in the United States:

“I will predict flatly…that if the price hike legislation currentlybeing discussed in Congress is actu-ally implemented, a black market…will occur.” 113

But these attempts to blame taxincreases for cigarette smugglingignore the fact that in some parts ofthe world cigarette smuggling is moreextensive in lower tax countries andmore contained in higher tax coun-tries. Spain and the other countriesin Europe provide prime examples.While Spain has a more serious smug-gling problem than most northernEuropean countries, its cigarette taxrates have been among the lowest inthe European Union, as have its ciga-rette prices.114 The extent of Spain’scigarette smuggling is caused moreby the “culture” of smuggling inSpain—which provides both smugglingroutes and consumer willingness topurchase smuggled goods—and bythe cigarette companies’ apparentwillingness to take advantage. Absentthe organization and supplying oftransiteers by RJR and other cigarettecompanies, Spain’s smuggling problemmight have been much smaller.115

RJR’s involvement in smuggling inSpain has been the subject of severalextensive newspaper articles, mostnotably in The New York Times. Inaddition, the European Union recentlyfiled a lawsuit against the cigarette

manufacturers for smuggling ciga-rettes into and through the EU. Thecomplaint in that case states thatRJR was particularly active in thesmuggling of cigarettes into Spain.116

While the lawsuit is based on numer-ous company documents that havealready been made public, its discoveryphase, which has yet to begin, isexpected to yield many more.117

Winston Travels GoodLike a SmuggledCigarette ShouldThe EU case alleges that RJR carriedout a complex plan to smuggle theirWinston brand cigarettes into Spain.The pleadings describe an RJR em-ployee, Richard Larocca, as beingspecifically hired to run RJR’s opera-tions in Spain. Further, the complaintdescribes a Panama-based company,Copaco, as the main middlemanorganizing the smuggling for RJR.RJR’s alleged scheme was to shipcigarettes from the U.S. to Copaco inPanama, which would then ship themonward to Rotterdam in the Nether-lands. The cigarettes would then beillegally trucked from the Netherlandsto Barcelona, with false documenta-tion stating that the cigarettes wereactually being legally sent to theCanary Islands or Eastern Europe.118

The EU pleadings state that transi-teers paid RJR executives to ensurethat they received a continuing supplyof American-made Winston brand cig-arettes because these were preferredby Spanish smokers over Winstonsmade elsewhere.119 According to the

V. Cigarette Smuggling

in Europe:RJR and Spain

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documents filed with the court, RJRwent so far as to specially mark cer-tain Winston cigarette cases and packsdestined for the Spanish transiteers,and redesigned the cardboard shippingcases of the cigarettes destined to besmuggled so that they could bettertolerate the rougher handling inherentin the smuggling routes they wouldtake to Spain.120

The EU court documents andThe New York Times describe PeterHaenggi, operating out of Switzerland,as a longstanding middleman for RJR.Mr. Haenggi has publicly admittedselling many hundreds of millions ofcigarettes to transiteers operating outof Panama and Chile who smuggledRJR cigarettes into Spain.121 Yet RJR

continued to supply Haenggi with cig-arettes long after his smuggling activi-ties were made public.122

Global Smuggling ParallelsThe EU’s description of RJR’s smuggling-related efforts in Spain parallels otherdocumented cigarette companyinvolvement in smuggling. RJR’s use ofa primary middleman placed betweenthe company and the transiteers, forexample, is identical to what BAT andPhilip Morris did in various othercountries and regions. RJR’s reportedalteration of conditions of sale toassist the smuggling, its alleged directoversight over smuggling routes andpricing, and knowledge of the com-pany involvement in smuggling among

top-level executives is all similar tothe activities of BAT and Philip Morrisin Asia, Africa and Latin America.The described use of legal sales of RJRbrands to cover for illegal sales ismuch like the umbrella sales of BATbrands in Bangladesh. The alleged useof false documentation to facilitatesmuggling RJR brands into Spainresembles the false documentationin the smuggling of BAT brands inCameroon. Finally, the link the EUdraws between RJR cigarette smug-gling in Spain and money launderingfrom the narcotics trade in LatinAmerica parallels the similar claimspertaining to the smuggling of PhilipMorris brands in Colombia.123

NorthSea

ATLANTIC OCEAN

B a l t i cS

ea

EH

ROTTERDAM

ANDORRA

BARCELONA

To Canary Islands

RJR’s Alleged Smuggling in Spain

Winston cigarettesshipped from RJR in Miami to Copaco Co.in Panama

False transit documentssuggest onward shipmentto the Canary Islands

Trucks exchangeWinston cigarettes for other cargoin Barcelona

SeparateAndorraChannel

Other cargotrucked toYugoslavia

Falsified documents saythe Winston cigarettes were

received in Yugoslavia

Trucking ofcontraband

Winstonsto Spain

Later, fake transit documentssuggest shipment of the Winston cigarettesto Yugoslavia

Shipment from Panama to the Netherlands

F

YU

GO

SL

AV

IA

B

A

D

GC FRANCE

SPAIN

ITALY

M e d i t e r r a n e a n

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Andorra: A Heavily UsedBack Door to Spain(and Europe)Andorra is a very small European prin-cipality with limited resources. ThoughAndorra lacks a significant industrialbase or an abundance of agriculturalterrain, it does occupy a very strategiclocation wedged between Spain andFrance high in the Pyrenees Moun-tains. For decades, perhaps centuries,Andorra has been a well-known centrefor smuggling of all kinds of goods.Lately, Andorra has been associatedwith significant cigarette smugglingthroughout Europe including itsneighbor, Spain.124

With smuggled brands from eachof the major cigarette companiesoften directly competing for smuggledsales, it is not surprising that thedisclosed industry documents showthat the companies monitored notonly their own but the others’ smug-gled sales. For example, BAT-brandswere comparatively late entering theAndorran smuggling route into Spain,and an internal 1992 BAT documentdiscussed the need to exploit thischannel based on the activities oftheir competition:

“Smuggling is a traditional andhighly lucrative trade in Andorra.The growth in transit of cigaretteshas increased rapidly in recent yearsas Andorran supply has replaced thatwhich used to enter Spain by sea…In order to exploit the significantvolume opportunities presented bythe above trade, all major competitivebrands (Marlboro, Winston, Camel,Rothmans etc.) are manufacturedunder license in Andorra.” 125

As this BAT quote indicates, BATbelieved that brands from RJR, PhilipMorris and Rothmans were also beingsmuggled through Andorra.

Other BAT documents describe aBAT-proposed operation that wouldhave involved a sophisticated smuggling

operation from Andorra into Spain,with BAT contracting with MITSA, anAndorra-based company, to manufac-ture the BAT group brands needed forthe smuggling.* MITSA was owned bythe prominent Mas family fromAndorra in partnership with the localAndorran distributor for Seita, theFrench national cigarette company.The document describes the BAT ciga-rette brands to be made by MITSAexpressly for smuggling included LuckyStrike, owned by BAT’s American sub-sidiary, Brown & Williamson. The docu-ment indicates BAT was pleased withthe involvement of Seita technicalstaff for they felt that would ensurehigh product quality.126 According tothe document, BAT planned to ship allthe necessary raw materials to MITSA,free of charge, from a BAT factory inthe Canary Islands.127

According to BAT’s plans, afterbeing manufactured in Andorra byMITSA their cigarette brands would besmuggled from Andorra into Spain bya local transiteer company known asCaves Andorranas.128 The documentindicates BAT also planned to run thenow familiar joint legal/illegal importoperation. In addition, the documentstates the MITSA manufacturing facil-ity was to produce about 200 millioncigarettes each year operating withjust one shift. The BAT document,speaking for its Spanish subsidiaryBAT España, describes the intendedsubsequent distribution in remarkablyfrank terms:

“It is essential that BAT Espanabrands, and in particular LSF [LuckyStrike Filter], are competitively mar-keted in Andorra to local Spanishtourist visitors…This legitimate busi-ness is estimated at approximately50 mns p.a….There is also significantvolume (approximately 30 mns p.a.)of small scale transit (via taxis, dailyworkers from the Peninsula etc.)…

“It is desirable that the option tobulk transit LSF ex-Andorra is keptopen for the following reasons: …

b) With the forecasted increasein Peninsular tobacco duty itmay become more profitableto transit ex-Andorra.

c) One option that BAT Espanahas to control the entry ofcontraband ex-USA (and othersources) is to compete directlyby permitting contrabandex-Andorra. In this way thesales and profit are at leastkept within the company.” 129

It is possible that the remainingproduction, some 120 million BATcigarettes annually, or 60% of theplanned production, would have beendestined for what BAT terms “bulktransit” to Spain.

As with the situation in Cameroondiscussed previously, senior BAT employ-ees appeared to have been aware of thisAndorran smuggling plan. The plan asviewed was found in a BAT companydocument composed of a 1992 fax sentfrom Winter J.R.V. Rose, a BAT market-ing executive, to Jimmi Rembiszewski,the head of BAT’s marketing depart-ment. The plan was copied to PhilippaCasingena, a BAT lawyer.130

113 Prepared Remarks of Steven F. GoldstoneChairman and CEO, RJR Nabisco toFinancial Analysts, 24 April 1998,www.rjrnabisco.com/news/042498g.htm.

114 Joossens, L. & M. Raw, “Cigarette Smug-gling in Europe: Who Really Benefits?”Tobacco Control, July 1998, http://tc.bmjjournals.com/cgi/content/full/7/1/66.

115 Joossens & Raw, July 1998; Merriman, D.,et al., “How Big is the Worldwide Ciga-rette-Smuggling Problem,” in Jha, P. & F.Chaloupka, Tobacco Control in DevelopingCountries, Oxford University Press, 2000;Joossens, et al., “Issues in the Smugglingof Tobacco Products,” in Jha, & Chaloupka,2000; Joossens, L., Smuggling and Cross-Border Shopping of Tobacco Products inthe European Union, UK National HealthService Health Development Authority &International Union Against Cancer, 2000.

116 European Union v. RJR Nabisco Inc. et al.,United States District Court, EasternDistrict of New York, Docket No. 1-00-06617-NGG, www.tobacco.org/Documents/001103euvpm,rjr.html [hereafter EUComplaint].

* There is no indication in the documentsdiscovered to date whether this operationactually occurred.

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117 Bonner, R. & C. Drew, “Cigarette MakersAre Seen as Aiding Rise in Smuggling,” TheNew York Times, 25 August 1997; BonnerR., “Europe Inquiry on Smuggled CigarettesSeeks U.S. Aid,” The New York Times, 08May 1998.

118 EU complaint, 32(d).119 EU complaint, 32(c).120 EU complaint, 32 (g).121 Bonner, R. & C. Drew, “Cigarette Makers

are Seen as Aiding rise in Smuggling,” TheNew York Times, 25 August 1997; EU complaint, 32(t).

122 Bonner R., “Europe Turning to U.S. toFight Illicit Cigarettes,” The New YorkTimes, 08 May 1998; EU complaint, 32(t).

123 EU complaint; Bonner articles; supranote 3; Colombian Governors Lawsuit vs.Philip Morris et al.

124 See, e.g., Marsden, W., et al., InternationalConsortium of Investigative Journalists,Center for Public Integrity, Tobacco Com-panies Linked To Criminal OrganizationsIn Lucrative Cigarette Smuggling, 3 March2001, www.public-i.org/story_01_030301_txt.htm.

125 BAT internal document, Winter Rose toJimmi Rembiszewski, “Secret AndorraContract Manufacture Proposal,” 22 May1992, BAT Bates No. 503095358-365,see www.ash.org.uk/html/smuggling/html/andorra.html.

126 Ibid., BAT Bates No. 503095361-362.127 Ibid., BAT Bates No. 503095362.128 Ibid., BAT Bates No. 503095363.129 Ibid., BAT Bates No. 503095363.130 Ibid., BAT Bates Nos. 503095357-365.

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Because most of theavailable evidence of

cigarette companyinvolvement comes from

documents obtainedthrough lawsuits

against the cigarettecompanies in the

United States. . .

the previous sections of this reporthave focused on those multinationalcigarette companies sued in thoseU.S. lawsuits, namely Philip Morris,RJR, and BAT, with some referencesto BAT’s U.S. subsidiary, Brown &Williamson, which was also in a law-suit. It would be impossible to presentall the other documented evidenceof the smuggling activities of thesecompanies. Instead, this section ofthe report offers a list of illustrativeexamples, some of which have notpreviously been published. Followingthat are some examples of documentreferences regarding smuggling-related activities by other cigarettecompanies.

Philip Morris & BATin VenezuelaAs widely reported, cigarette companydocuments show that Philip Morrisand BAT each took steps to increasethe smuggling of their brands intoVenezuela as part of a price war thatbegan when their prior price-fixingagreement broke down.131

BAT in IndiaThe Indian government seeks to gainrevenue by reselling some of thesmuggled cigarettes it seizes throughits enforcement efforts in special“custom notified shops.” However, a1994 BAT document reveals that thecigarette company views these shopsas a new marketing opportunity forgetting its otherwise-restricted brandssold in India. In fact, rather than

simply wait for smuggled cigarettesto be seized by enforcement officialsand sent to the custom notified shopsfor resale, cigarettes were beingsmuggled directly to the shops, wherethey could be illegally sold under thecover of the shops’ legal sales ofsmuggled cigarettes that had actuallybeen seized.132

RJR (and Others)in CanadaIn the early 1990s, when Canadiancigarette prices were much higher thancigarette prices right over the border inthe United States, a large contrabandcigarette market developed based onCanadian brands manufactured inCanada, exported to the U.S., and thensmuggled back into Canada.133 Initially,the Canadian cigarette companies—including affiliates, subsidiaries andlicensees of RJR, Philip Morris andBAT—said they would not supply smug-glers, but they soon began shippingbillions of Canadian brands to cross-border locations in the U.S. to supplythe black market. A June 1993 letterfrom BAT’s Canadian affiliate ImperialTobacco to Ulrich Herter, BAT’s manag-ing director, states:

“As you are aware, smuggledcigarettes…represent nearly 30% per-cent of total sales in Canada, and thelevel is growing. Although we agreedto support the Federal government’seffort to reduce smuggling by limitingour exports to the U.S.A., our com-petitors did not. Subsequently, wehave decided to remove the limitson our exports to regain our share

VI. Additional

Smuggling Highlights

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of Canadian smokers.…Until thesmuggling issue is resolved, anincreasing volume of our domesticsales in Canada will be exported, thensmuggled back for sale here.” 134

Some Canadian companies evenchanged how they shipped their ciga-rettes to the U.S. to make them harderfor enforcement officials to trace, andchanged how they packaged the ciga-rettes to make it harder to distinguishsmuggled packs from legal ones.135

In fact, an RJR company, NorthernBrands International, and its formerpresident, Les Thompson, have eachpleaded guilty to charges of beingdirectly involved in the illegal smug-gling. In an interview with the U.S.television news show 60 Minutes II,Thompson (who has been imprisoned)stated that RJR set up NorthernBrands expressly for the purpose ofsmuggling Canadian brands back intoCanada and was fully aware of itsefforts to encourage and support thesmuggling.136 Beyond RJR, in 1997two former Brown & Williamson salesmanagers pleaded guilty to the chargeof providing smugglers who were ille-gally bringing cigarettes into Canadawith untaxed cigarettes from abonded B&W warehouse in Alabama.137

Investigations by the MontrealGazette and others have also pre-sented evidence that the Canadiancigarette companies Rothmans Benson& Hedges (owned by Rothmans andPhilip Morris) and Imperial Tobacco(an affiliate of BAT) were also involvedwith the Canadian smuggling.138

Brown & Williamsonin NigeriaIn 1990, Brown & Williamson sent itsexecutives to Nigeria to evaluate themechanics of launching one of itsleading brands, Kool, in that market.Pricing and “volume-related offshorepayments” were considered to encour-age what B&W called “push” in thecontraband trade market.139

BAT in IsraelOne major avenue for cigarettesmuggling is the illegal diversion ofcigarettes purportedly destined forduty-free sales outlets. A 1994 BATdocument shows that BAT cigarettes,ostensibly for duty-free sale in Israel,ended up in Nepal. This diversion didnot trouble BAT, which was more con-cerned about keeping its bookkeepingstraight. As the document states:

“We record SE 555 as a shipmentinto Israel Duty Free and then also asa Domestic Sale in Nepal by yourselves.We believe it is the same brand andtherefore we are counting in twice,oce [sic] in Israel and once in Nepal.”140

Philip Morrisin South AfricaIn 1997, South African tobacco con-glomerate Rembrandt Group, Ltd. suedPhilip Morris, charging that PhilipMorris was supporting the illegalsmuggling of Marlboro cigarettes intoSouth Africa, thereby violating alicensing agreement between PhillipMorris and Rembrandt.141

BAT in Hong Kongand ChinaIn Hong Kong in 1998, an executiveof British American Tobacco (BAT) wasconvicted of accepting bribes from asmuggling syndicate. The judge in thatcase lambasted the cigarette companyfor its involvement in cigarette smug-gling into China.142 Various BAT docu-ments refer to China smuggling. Forexample, a 1993 memo to PaulAdams, who ran BAT’s Asian Opera-tions, from Ernie Peeples, a vice presi-dent at BAT’s Brown & Williamsonsubsidiary notes that no more than 30percent of all imports into China arelegal and states:

“The best prospects for growthin the Chinese market continues [sic]

to be the unofficial channels for theforeseeable future.” 143

Other CigaretteCompanies Implicatedin Cigarette SmugglingBecause smuggling can be promptedby competition between the compa-nies, company documents often con-tain internal reports on the smugglingactivities of their competition. Mostoften this is BAT commenting on theactivities of Philip Morris, or vice versa,but occasionally cigarette smugglingby other cigarette companies notyet mentioned in this report is alsodiscussed. Here are some examples:

Japan Tobacco International

A January 1995 BAT document oncigarette markets in the Asia-Pacificregion reviewed the situation inTaiwan, stating:

“The gap between legal andGT imports narrowed in 1993 asJTI (which has used the GT route tocircumvent an embargo on importsex-Japan) began importing legallyfrom UK and Switzerland.” 144

As noted earlier, in 1999 JapanTobacco purchased the non-U.S. oper-ations of RJR, including the exclusiverights to sell formerly RJR brandsoutside of the United States. Conse-quently, Japan Tobacco has greatlyincreased its presence in some ofthe markets where smuggling hasflourished and now produces forinternational sale former-RJR brandsthat have historically been smuggled.

Bollore Tobacco

BAT documents frequently discusssmuggling in Africa by the Frenchcigarette company Bollore Tobacco(BT). Sometimes the discussion seemsto suggest cooperative, or potentiallycooperative, smuggling operationsbetween BT and BAT. In this 1990document referring to Niger, senior

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BAT executive John Ticehurst opposesa joint manufacturing operation withBT on the grounds that it will hurtBAT’s transit business:

“Salem and Hadjis are our maincustomers for the transit trade. Byallying ourselves with BT [Bollore]we would effectively be allyingourselves with the major threat toour customer’s business. Thus ratherthan attempt to safeguard our transitbusiness, we would be underminingany goodwill we still enjoy…” 145

Rothmans Tobacco

BAT’s African documents also includewhat BAT describes as smugglingvia Niger by TEI, Rothmans’ localsubsidiary.146 Just after the periodcaptured by the documents, BATpurchased Rothmans, including TEI.

Gallaher & ImperialTobacco Companies

In the fall of 2000, the Action onSmoking and Health organizationbased in London (ASH-UK) and twoUK publications each issued majorreports charging that since roughly1993 the UK-based Gallaher andImperial tobacco companies havebeen actively exporting British-brandcigarettes (e.g., Regals and Superkings)to countries where the brands arerarely smoked (e.g., Andorra, originally,and now Cyprus) to facilitate theillegal, large-scale importation of thebrands back into the UK for black-market sale.147 This process directlyparallels the smuggling activitiesin Canada in the early 1990s, asdescribed above. While the companiesclaim they have no control over theircigarettes once they export them,there is evidence of Gallaher andother cigarette companies givingbonuses and other benefits to knownsmugglers.148 Gallaher’s longstandingwillingness to support smuggling isalso evidenced by earlier Inter-Office

Correspondence regarding “Transitto U.A.E.” and “Transit Stock in SaudiArabia.”149

131 See, e.g., Levin, “Tobacco Memos ShowOverseas Price Fixing,” Los Angeles Times,17 September 1998.

132 BAT internal report, “India Domestic Mar-kets,” 31 March 1994. See, also, BAT BatesNo. 503964700, BAT Bates No. 503964664.

133 See, e.g., Non-Smokers’ Rights Associationand The Smoking and Health Action Foun-dation (Canada), The Smuggling of TobaccoProducts: Lessons from Canada, August1994; Wyckham, “Regulating the Market-ing of Tobacco Products and ControllingSmoking in Canada,” Canadian Journalof Administrative Sciences, June 1997;Marsden, W., “Tobacco Insider Talks: MajorFirms Were Deeply Involved in Cross-Border Smuggling, Former Executive Says,”Montreal Gazette, 18 December 1999;Marsden, W., et al., International Consor-tium of Investigative Journalists, Centerfor Public Integrity, Tobacco CompaniesLinked To Criminal Organizations InLucrative Cigarette Smuggling, 3 March2001, www.public-i.org/story_01_030301_txt.htm.

134 BAT Bates No. 5000281453 June 1993,available at www.public-i.org/ITL_to_Herter.pdf.

135 See, e.g., Non-Smokers’ Rights Association,August 1994; Wyckham, June 1997;Marsden, 18 December 1999; Marsden,3 March 2001; Beelman, M., et al., Inter-national Consortium of InvestigativeJournalists, Center for Public Integrity,Major Tobacco Multinational Implicatedin Cigarette Smuggling, Tax Evasion,Documents Show, 31 January 2000,www.public-i.org/story_01_013100.htm.

136 CBS, 60 Minutes II, “Tobacco’s OtherSecret,” 18 January 2000). Marsden(December 18, 1999).

137 See, e.g., Dow Jones News Service,“Ex-Brown and Williamson Manager GetsProbation for Smuggling” (October 15,1997); Marsden, W., et al., 3 March 2001.

138 Marsden, 18 December 1999; Marsden,3 March 2001; Thompson, F., “ImperialTobacco, Imasco, and the Smuggling ofCigarettes into Canada,” Non-Smokers’Rights Association (Canada) (January 28,2000), http://www.nsra-adnf.ca/english/imptob/Imperial%20Tobacco%20smuggling.html.

139 B&W internal document, P. Richardson,“Nigeria Trip Report, October 2-7, 1990,”undated, BAT Bates No. 301777465.

140 BAT letter, 15 June 1994, BAT BatesNo. 500200164.

141 Bonner, R., “Rival Asserts Philip MorrisSmuggles in South Africa,” The New YorkTimes (November 22, 1997); Turner,“Smuggling Benefits Tobacco Firms,”Business Day (Johannesburg), 5 May 1998.

142 Dow Jones News Service, “Hong KongTobacco Exec Gets 3-Year Jail Termfor Bribery,” 25 June 1998; Reuters,“HK Top Court Restores Ex-TobaccoExec’s Conviction,” 14 December 1999.

143 B&W internal document, Peeples toAdams, 19 November 1993.BAT Bates No. 500014760.

144 BAT internal document, BAT MarketingIntelligence Department, “Review ofAsia-Pacific Market,” January 1995,BAT Bates No. 502628801.

145 BAT memo Ticehurst to Joe Green, BATBates No. 301612457, 14 June 1990.

146 B&W internal document, P. Richardson,“Nigeria Trip Report, October 2-7, 1990,”undated, BAT Bates No. 301777465.

147 Rowell, A. & C. Bates, Tobacco Smugglingin the UK, ASH-UK, October 2000,www.ash.org.uk/html/smuggling/html/uksmuggling.html; Rowell, A. & R.Cookson, “No Smoke Without Fire, TheBig Issue South West, 2 October 2000,www.ash.org.uk/html/top.html; Abrams, F& A. Rowell, “It Just Fell Off the Back of aWhite Van: Its all Very Odd: British TobaccoCompanies Export Billions of CigarettesWhere They Know They Have No Market:Why?,” The Independent, 24 September2000, www.ash.org.uk/html/smuggling/html/indypiece.html.

148 See, e.g., Abrams & Rowell, 24 September2000; Rowell & Bates, October 2000.

149 Borek, A. to A.J. Williams, 1 June 1983,www.ash.org.uk/html/smuggling/html/uksmuggling_files/image004.jpg; Borek, A.to A.J. Williams, 4th June 1983,www.ash.org.uk/html/smuggling/html/uksmuggling_files/image002.jpg.

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This report adds to theenormous amount of

still-growing evidenceabout the cigarettecompanies’ role in

large-scale cigarettesmuggling over

international borders.The companies publiclydeny their involvement.

Yet, as the industry’s own docu-ments show, the companies often

know what happens to their cigarettesafter they sell them to wholesalers,distributors and importer-exporters.They can and often do exercise controlover their cigarettes after they aresold. And as some documents show,they do support, participate in andprofit from cigarette smuggling.Repeatedly, their public statementsare contradicted by established facts.

The world’s nations should notaccept the cigarette companies’ disre-spect for national laws and borders.Nor should they accept the enormousharms caused by international cigarettesmuggling. Aside from its fundamentalillegality and the corruption it spawns,cigarette smuggling also promotessmoking by lowering cigarette prices,creates unfair competition for legalcigarette sellers and local manufactur-ers, and reduces national tax revenuesand import duty collections.150

The fact that internationalcigarette smuggling often occurswith the knowledge of the majorcigarette companies and their supportand complicity also suggests effectiveways to sharply curtail it.

The Role of theFramework Conventionon Tobacco ControlBecause it is a problem that cannotbe adequately addressed by any singlecountry, cigarette smuggling is an idealsubject for international cooperationthrough the Framework Convention on

Tobacco Control (FCTC), which is cur-rently being negotiated by the world’snations. Building on the strong tradi-tion of international agreements toreduce trafficking in contraband goodssuch as firearms, pharmaceutical prod-ucts, alcohol and illegal drugs, theFCTC could apply the well-establishedpolicy tools for reducing smuggling inthese other goods, for the very firsttime, to cigarettes, as well.151

Initial drafts of the FCTC and aproposed anti-smuggling protocolhave already offered many constructiveprovisions, including:

• Establishing a comprehensivesystem of marking cigarettesto allow better tracking andidentification of smuggledproducts, including prominenthard-to-counterfeit tax-paidand country-of-origin markings.

• Establishing mandatory licensingof all parties involved in cigarettedistribution.

• Requiring chain-of-custodyrecord-keeping by all partiesinvolved in the movement ofcigarettes from the factoryto the final country of sale.

• Significantly increasing the rela-tive priority and sophistication ofanti-cigarette-smuggling efforts,including use of better trackingsystems, new scanning technology,state-of-the-art risk managementtechniques, improved cooperationbetween relevant governmentagencies, and increased training

VII. Ways to Stop Cigarette

Company Smuggling

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and staffing for tobacco taxenforcement units.

• Creating an international techni-cal body, funded by countries inproportion to their funding of theWorld Health Organization, thatwould assist signatories to theConvention in sharing informa-tion, training, technical assistance,research and resources, withspecial attention to the fundingneeds of developing nations.

• Eliminating duty-free sales,which often serves as a majorsource of smuggled cigarettes.152

Additional EffectiveMeasures for ReducingCigarette SmugglingAdditional measures that should beconsidered for any final anti-smugglingprotocol include the following:

• Reforming the system for trans-porting cigarette products ininternational commerce, includinga requirement that the countryof destination, and all countriesthrough which a shipment passes,issue specific permits, licenses orauthorization before a shipmentis released into internationalcommerce.

• Establishing a system wherebyapplicable destination-countrycigarette taxes, or an equivalentbond, would be collected atthe original factory where thecigarettes are manufactured orbefore shipments are releasedinto international commerce—with destination-country taxstamps attached (ideally, underthe cellophane) at the factoryto indicate tax collection.

• Holding the major cigarette com-panies strictly liable for any of thebrands they manufacture endingup as smuggled contraband, withrelated penalties and the destruc-tion of all seized cigarettes. Suchstrict liability would follow theexample of the Basel Conventionon Transboundary Movement ofHazardous Waste.153

• Agreement by all parties to thetreaty to exercise the maximumjurisdiction allowed under inter-national law over their nationals(corporations and individuals)involved in cigarette smugglingoutside of their territory.

• Agreement by all parties to thetreaty to implement a system ofrewards for information leadingto convictions of those involved

in international cigarettesmuggling.154

An anti-smuggling protocol tothe Framework Convention on TobaccoControl that included provisions suchas those described here would notonly substantially reduce internationalcigarette smuggling and its attendantharms but also directly promote publichealth. Without such a protocol, it’slikely to be business as usual for thebig cigarette companies, and the enor-mous problems caused by large-scaleinternational cigarette smuggling willcontinue.

150 On the public health impact of cigarettesmuggling, see, e.g., Non-Smokers’ RightsAssociation of Canada, Cigarette Smuggling:A Global Weapon against Public HealthMeasures, 5 April 2001, www.nsra-adnf.ca/english/smuggling.html.

151 Joossens, L., Technical Elements of a Proto-col on the Elimination of Tobacco Smug-gling: Questions and Answers, FrameworkConvention on Tobacco Control, April 2000.

152 See, also, Joossens, L., Technical Elementsof a Protocol on the Elimination ofTobacco Smuggling: Questions andAnswers, Framework Convention onTobacco Control, April 2000.

153 United Nations Environment Programme(UNEP) News Release, Compensationand Liability Protocol Adopted by BaselConvention on Hazardous Wastes,15 December 1999.

154 For more on how to stop cigarettesmuggling, see Joossens, L. & M. Raw,“How Can Cigarette Smuggling BeReduced?,” British Medical Journal321:947-950, 14 October 2000, http://bmj.com/cgi/content/full/321/7266/947.

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Major Publications andWebsites re CigaretteCompanies & Smuggling

International Consortium of Investi-gative Journalists, Center forPublic Integrity, series on cigarettecompanies and smuggling:

Beelman, M., et al., Major TobaccoMultinational Implicated inCigarette Smuggling, Tax Evasion,Documents Show, 31 January2000, www.public-i.org/story_01_013100.htm.

Beelman, M., et al., Global Reach ofTobacco Company’s Involvementin Cigarette Smuggling Exposedin Company Papers, 2 February2000, www.public-i.org/story_01_020200.htm.

Marsden, W., et al., Tobacco CompaniesLinked To Criminal OrganizationsIn Lucrative Cigarette Smuggling,3 March 2001, www.public-i.org/story_01_030301.htm.

Bonner series in

Bonner R. & C. Drew, “Cigarette Mak-ers are Seen as Aiding Risein Smuggling,” 25 August 1997.

Bonner, R., “Two Cases Shed Lighton Cigarette Smuggling in Italy,”2 September 1997.

Bonner, R., “Europe Inquiry onSmuggled Cigarettes SeeksU.S. Aid,” 8 May 1998.

articles on cigarettesmuggling, including:

Maguire, K. & D. Campbell, “TobaccoGiant Implicated in Global Smug-gling Schemes,” 31, January 2000,www.guardian.co.uk/Archive/Article/0,4273,3956951,00.html.

Beelman, M., et al., “How SmugglingHelps Lure Generations of NewSmokers,” 31 January 2000,www.guardian.co.uk/Archive/Article/0,4273,3956952,00.html.

Bates, C., “Revealed: The UgliestSecret of Britain’s CigaretteGiant,” 31 January 2000,www.guardian.co.uk/Archive/Article/0,4273,3956913,00.html.

Campbell, D., et al., “Paper Trail toMarkets of the East,” 2 February2000, www.guardian.co.uk/Archive/Article/0,4273,3957775,00.html.

Bates, C., “Rogue Multinational,”1 November 2000,www.guardian.co.uk/Archive/Article/0,4273,4084424,00.html.

ASH-UK website on BAT andsmuggling, www.ash.org.uk/html/smuggling/html/smuggling.html.

CBS, “Tobacco’s Other Secret,” 60 Minutes II, U.S. television show,18 January 2000.

Dickey, C. & R. Nordland, “Big Tobacco’sNext Legal War: Cigarette MakersAre Coming Under Fire As Govern-ments Attack Global Smuggling,”Newsweek, 31 July 2000.

Marsden, W., “The Mob and Big Tobacco,”Montreal Gazette, 4 March 2001,www.montrealgazette.com/news/pages/010303/5033773.html.

Marsden, W., “Tobacco Insider Talks:Major Firms Were Deeply Involvedin Cross-Border Smuggling, FormerExecutive Says,” Montreal Gazette, 18December 1999, www.nsra-adnf.ca/english/gazinsider1.html.

Rowell, A. & C. Bates, Tobacco Smuggling in the UK, October 2000,http://www.ash.org.uk/html/smuggling/html/uksmuggling.html.

Thompson, F., Non-Smokers’ RightsAssociation of Canada, ImperialTobacco, Imasco, and the Smug-gling of Cigarettes into Canada,5 March 2001, www.nsra-adnf.ca/english/imptob/Imperial%20Tobacco%20smuggling.html.

Other Publications andWebsites on CigaretteSmuggling Issues

Chaloupka, F., et al., “The Taxationof Tobacco Products,” in Jha, P.& F., Chaloupka, Tobacco Controlin Developing Countries, OxfordUniversity Press, 2000, http://tigger.uic.edu/~fjc/

Joossens, et al., “Issues in theSmuggling of Tobacco Products,”in Jha, & Chaloupka, 2000, http://tigger.uic.edu/~fjc/

Appendix One:Sources of Additional Information

The Guardian

The New York Times:

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Joossens, L. & M. Raw, “How cancigarette smuggling be reduced?,”British Medical Journal 321:947-950, 14 October 2000, http://bmj.com/cgi/content/full/321/7266/947.

Joossens, L. & M. Raw, “CigaretteSmuggling in Europe: Who ReallyBenefits?” Tobacco Control, July1998, http://tc.bmjjournals.com/cgi/content/full/7/1/66

Joossens, L., Smuggling and Cross-Border Shopping of TobaccoProducts in the European Union,UK National Health Service HealthDevelopment Authority & Interna-tional Union Against Cancer, 2000.

Joossens, L., Technical Elements ofa Protocol on the Elimination ofTobacco Smuggling: Questions andAnswers, Framework Conventionon Tobacco Control, April 2000.

Merriman, D., et al., “How Big is theWorldwide Cigarette-SmugglingProblem,” in Jha, P. & F. Chaloupka,Tobacco Control in DevelopingCountries, Oxford University Press,2000, http://tigger.uic.edu/~fjc/

Non-Smokers’ Rights Associationof Canada, Cigarette Smuggling:A Global Weapon against PublicHealth Measures, 5 April 2001,www.nsra-adnf.ca/english/smuggling.html.

Townsend, J., “The Role of TaxationPolicy in Tobacco Control,“ inAbedian, I., et al., The Economicsof Tobacco Control, Applied FiscalResearch Centre, University ofCapetown, 1998.

World Bank Report, Curbing theEpidemic: Economics of TobaccoControl, June 1999.

Tobacco CompanyDocument Websites

Philip Morris, www.pmdocs.com

British American Tobacco does nothave a company document website.But some BAT documents are availableat the following websites:

• University of Californiaat San Francisco TobaccoDocument Collection,www.library.ucsf.edu/tobacco

• Canadian Council for TobaccoControl, www.cctc.ca

• Centers for Disease Controland Prevention GuildfordDocument search, http://outside.cdc.gov:8080/BASIS/ncctld/web/guildford/sf

• British Colombia (Canada)Guildford Documents,www.hlth.gov.bc.ca/guildford

R.J. Reynolds Tobacco Company,www.rjrtdocs.com

Brown & Williamson (U.S. subsidiaryof British American Tobacco),www.bw.aalatg.com

Lorillard Tobacco Company,www.lorillarddocs.com

Council for Tobacco Research,www.ctr-usa.org/ctr

Tobacco Institute,www.tobaccoinstitute.com

Other Document Websites

U.S. Centers for Disease Control (CDC),www.cdc.gov/tobacco/industrydocs/docsites.htm

Tobacco Documents Online,www.tobaccodocuments.org

University of California at SanFrancisco Document Collection,http://galen.library.ucsf.edu/tobacco

Tobacco Detectives,www.tobaccodetectives.com

Minnesota Blue Cross/Blue ShieldTobacco Litigation documents,www.mnbluecrosstobacco.com/toblit/trialnews/docs/search.asp

Document DepositoriesGuildford Document DepositoryFor appointments: Ms. Melanie ThomasBritish American Tobacco, Globe House4 Temple Place, London, WC2R 2PGUnited KingdomFax: 44-20-7845-2783Minnesota Tobacco Depository1021—10th Avenue, S.E.Hennepin Business CenterMinneapolis, MN 55414 USA1-612-378-5707 1-800-526-8886E-mail address: [email protected]/docbasic.html

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Global Problem, GlobalCulprits

500028732 .............................................. 36

BAT internal memo, 18 May 1993,from Keith Dunt (at the time, BAT ter-ritorial director for Latin America) toUlrich Herter (BAT managing director),Tony de Castro (Souza Cruz chairman),Barry Bramley (BATCO chairman), andRichard Pilbeam (BAT finance director).BAT Industries Plc. was then the parentcompany of British American Tobacco(BAT). The BAT Industries chairmanat this date was Sir Patrick Sheehy.Souza Cruz is BAT's Brazilian sub-sidiary. The document indicates notonly Patrick Sheehy's granting ofapproval with respect to a specificsmuggling operation but also theknowledge of this by a significantcross-section of the highest rung inBAT's organization.

Cigarette Smuggling inAfrica

301773703 .............................................. 37

BAT internal memo, 01 November1991, from Joe Green (senior BATmarketing executive) to AnthonyPereira (senior BAT executive) withcopies to Nick Brookes (at the time,director of BAT's New Business Devel-opment group) and Susan Osborne(BAT marketing executive). BATUKEis a BAT subsidiary involved in theexport business.

301627642................................................ 38

BAT document consisting of handwrit-ten flows of contraband BAT cigarettesthroughout West Africa in 1987 of thebrands Benson & Hedges (BH) andState Express 555 (SE). Undated andunsigned, though apparently from thefiles of Dick Howe, BATUKE executive.

Cigarette Smuggling inLatin America

500151875................................................ 39

BAT internal document, “CountryCompetitive Report, Colombia, 1994,”unsigned and undated, but faxed on06 May 1994 from BAT's Venezuelasubsidiary, Cigarerra Bigott.

Cigarette Smuggling inAsia

500045603 .............................................. 40

Reproduction of extract from a BATinternal report, “BAT Singapore, SUTL,Other Established Business, Far EastOthers, Singapore Group,” 17 Septem-ber 1992, Fred Combe (BATUKE areamanager, Far East South).

500030587................................................ 41

BAT internal document, sales chart forState Express 555 in Bangladesh show-ing both legal and contraband market.From Trevor Bates (BAT, marketingintelligence manager) to Norman Davis(BAT territorial director), 25 February1992. Note that BAT knows the exacttotals of both legal and illegal sales oftheir brand into Bangladesh on amonth-by-month basis.

Cigarette Smuggling inEurope

503095358 .............................................. 42

BAT Espana document, "Andorra Con-tract Manufacture Proposal," 22 May1992, from Winter Rose (BAT Espana)to Jimmi Rembiszewski (BAT marketingdirector) with copies to PhilippaCasingena (BAT company solicitor)and O Grasbeck (BAT finance).

Appendix Two:Copies of Some of the Key

Company-Smuggling Documents

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