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Philip Morris Target of Smuggling Probe (fwd)
Thursday, December 24, 1998
Second tobacco company
probed for smuggling
Police eye Philip Morris: 'It's an old story,'
says cigarette manufacturer
Rick Ouston
The Vancouver Sun
A second cigarette manufacturer - Philip Morris
-- is also being
investigated for helping smugglers obtain and
sell untaxed Canadian
cigarettes for huge profit, The Vancouver Sun
has learned.
The news comes on the heels of an announcement
that the RJR
Reynolds-Nabisco tobacco company pleaded guilty
in U.S. Federal
Court to charges that one of its subsidiaries,
Northern Brands
International, helped smugglers evade
$2.5-million in U.S. custom
and excise taxes. RJR agreed to pay $15-million
in fines and costs.
It has long been suspected that the cigarette
giants were complicit in
smuggling untaxed Canadian cigarettes from U.S.
border towns into
Canada for resale, but until now, the companies
have denied any
involvement.
The Vancouver Sun determined that a former
Philip Morris
employee maintains that millions of cartons of
Canadian-made
cigarettes were shipped during the early 1990s
to U.S. warehouses
near the Canadian border. The tax-free
cigarettes were shipped to
Bellingham in Washington State and Champlain in
New York State,
to make it easy for smugglers to get them back
across the border
into Canada for resale.
For every duty-free carton smuggled into
Canada, taxpayers in
B.C. lose $22 in uncollected taxes. Smuggled
cigarettes cost the
B.C. government up to $125-million a year in
uncollected tax
revenue.
Matt Herring, a former Philip Morris customs
specialist, maintains in
a letter obtained by the Sun that his company
launched a policy that
assisted smugglers to thwart Canadian taxes.
Philip Morris has refused to comment on the
letter written by Mr.
Herring, saying only that "it's an old story."
Mr. Herring said in his letter that: "Although
some of this Canadian
made product was destined for legitimate
markets . . . there also
was a very large market for these cigarettes on
the Indian
reservations, or 'gray market customers.' The
letter said he was
instructed to find warehouses which could serve
"special market
customers."
Mr. Herring noted that Philip Morris owned the
rights to market
Canadian brands Players and Rothmans in the
U.S., but had leased
those rights to another company since there was
little U.S. demand
for Canadian cigarettes. When taxes rose in
1992, a case of 50
cartons of cigarettes could be purchased for as
little as $250 in
Canada, exported to the U.S., then smuggled
back in for resale for
as much as $2,500. By mid-1992, one-third of
the cigarettes
manufactured in Canada were being exported to
the U.S.
Mr. Herring would not comment when contacted at
his home in
Richmond, Va. But in his letter, he said that
the "special market
sales" was brought up at a Philip Morris
meeting on Feb. 19, 1993.
"That is when we were informed that P.M. Legal
in New York had
'blessed off' on the whole thing," Mr. Herring
wrote.
Meanwhile, Revenue Canada, the RCMP and British
Columbia's
Finance Ministry are looking to see if Canada
can recover billions of
dollars in uncollected tax revenue from
smuggled cigarettes as a
result of the guilty plea by RJR.
The agencies say they are prohibited by law
from revealing whether
they are investigating a person or company, but
spokesmen for both
agencies said yesterday that they were
intimately involved in the
details of the RJR case.
"We've been in close contact with the U.S.
authorities," said Michel
Cleroux, a spokesman for Revenue Canada. "If we
detect anybody
who does not pay their tax obligations, we'll
see to it that they do
pay."
Gilles Moreau, RCMP Corporal, said yesterday
that his force has
been working with U.S. investigators for
several years.
"We can tell you that what happened yesterday
on the U.S. side
was not a surprise to us," he said.
The guilty plea came as a result of a four-year
international
investigation into a ring based in upstate New
York which smuggled
$687-million (US) worth of cigarettes and
liquor into Canada until
being smashed last year. A total of 18 people
charged in the case
have pleaded guilty.
While many details of the investigation have
not been released,
search warrant information obtained by the Sun
shows that the
RCMP infiltrated the ring and helped crack the
Vancouver arm of
the smugglers which started moving black-market
cigarettes through
the Washington border.
As much as 60% of the cigarettes sold in Quebec
in the early 1990s
were contraband, and authorities calculated
that about 40% of the
cigarettes in Atlantic Canada, and about 35% in
Ontario and the
west, were sold without Canadian taxes. In 1994
Quebec and
Ontario reduced the taxes they collected to
combat the smuggling
problem.