Tobacco Firm Memos Speak of Smuggling

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

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

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

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

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

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

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

Company Plays Down Finding

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“As you are aware, smuggled cigarettes . . . represent nearly 30% of total sales in Canada, and the level is growing,” R. Don Brown wrote to British-American director Ulrich Herter. “Although we agreed to support the federal government’s effort to reduce smuggling by limiting our exports to the U.S.A., our competitors did not.

“Subsequently, we have decided to remove the limits on our exports to retain our share of Canadian smokers. To do otherwise would place the long-term welfare of our trademarks in the home market at great risk.”

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

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

Cigarette Tax Hike Scaled Back in 1994

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

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

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

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

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

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

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

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