[Intl-tobacco] Investigative Report: Major Tobacco Multinational Organized CigaretteSmuggling, Evaded Taxes, Documents Show (fwd)

[Robert Weissman]

Investigative Report: Major Tobacco Multinational Organized
CigaretteSmuggling, Evaded Taxes, Documents Show

by Maud S. Beelman, Maria Teresa Ronderos, and Erik J. Schelzig ; Source:
Center for Public Integrity, Monday, 1/31/00 International Consortium of
Investigative Journalists, the Center for Public Integrity

British American Tobacco, the world=92s second-largest multinational tobacc=
o
company, for decades secretly encouraged tax evasion and cigarette
smuggling in a global effort to secure market share and lure generations
of new smokers, internal corporate documents reveal.

Contrary to tobacco companies=92 long-standing claims that cigarette
smuggling is the work of organized crime or rogue employees beyond their
control, the files show that senior personnel of the parent company and
its subsidiaries sought to control and exploit smuggling as part of a
worldwide marketing strategy to increase revenue.

Note:

Links will open in a new browser window.

 : Link to Adobe PDF file

: Link to footnotes


More than 11,000 pages of documents from BAT and its subsidiaries,
including the U.S. company Brown & Williamson, were analyzed over a
six-month period by the International Consortium of Investigative
Journalists (ICIJ), a project of the Center for Public Integrity in
Washington, D.C. Part of a depository of about 8 million pages, the
documents were selected based on region and subject matter. In some cases,
the complete files on a specific country or individual were reviewed.

The selected documents, covering mostly 1990-1995, do not suggest that BAT
employees themselves transported contraband cigarettes across customs
borders, where taxes would be due. Instead, they show that corporate
executives in Britain, the United States, and other locales controlled the
volumes, brands, marketing campaigns, timing, and price levels throughout
the smuggling distribution networks they exploited. Company officials
worked closely with their local agents =96 giving them perks such as ticket=
s
to Wimbledon =96 and provided incentives to local black-market distributors=
=2E

In response [http://www.public-i.org/BAT.pdf] to a series of detailed
questions prompted by a review of its corporate documents, BAT said: "We
do not intend to answer questions or address allegations apparently based
on highly selective and out-of-context documents, about matters which are
more properly addressed - and in many instances are being addressed with
our full co-operation - by governments and customs authorities around the
world." The company said it knew that some of its products "are handled
other than through official channels," but added that "we cannot control
the distribution chain all the way to the final customer."

But the documents clearly show that BAT and its subsidiaries did attempt
to control the distribution chain all the way to the final customer and
employed a carefully coded language to discuss and plan those operations.
Only occasionally did they use such terms as "smuggled" or "contraband."
The preferred euphemisms of company correspondence were "DNP" (Duty Not
Paid), "transit," or "GT" (general trade), as well as "parallel market,"
"second channel," and "border trade." The euphemisms were used
interchangeably and contrasted repeatedly with references to imports that
were legal and "Duty Paid" (DP).

Since 1997, three BAT managers have either pled guilty to or been
convicted of charges related to tobacco smuggling. Two pled guilty in a
scheme that shipped cigarettes marked "Duty Not Paid" and "Not for Sale in
Canada" back into Canada from Louisiana, where they had been sent
allegedly bound for offshore fishing boats. One of the men left the
company before pleading guilty to the charges; the other retired in
December 1997, six months after pleading guilty. The next year, a BAT
executive in Hong Kong was convicted of taking bribes in connection with a
cigarette smuggling syndicate. The judge in that case, Justice Wally Yeung
Chun-kuen, said in sentencing export manager Jerry Lui, "that management
of BAT (HK) was aware duty-not-paid cigarettes =85 would ultimately be
smuggled in China and other countries. There could be no other explanation
for this enormous quantity of duty-not-paid cigarettes worth billions and
billions [Hong Kong] of dollars." The judge, according to Hong Kong press
reports in June 1998, commented that BAT=92s "irresponsible behaviour
amounted to assisting criminals in transnational crime."

Suspicions about industry involvement in cigarette smuggling have grown
since 1997 when researchers demonstrated, by comparing annual global
exports with global imports, that about one-third of all cigarettes
entering international commerce each year could not be accounted for. The
industry=92s sanguine reaction to apparently losing a third of its inventor=
y
annually only fueled those suspicions.

But proof remained elusive until last year, when millions of pages of
corporate documents, unearthed during numerous health-related lawsuits,
became publicly available as part of the tobacco industry=92s November 1998
settlement with the U.S. states.

The information contained in those documents could prove far more costly
to the companies than the $246 billion U.S. settlement because BAT, as
well as its multinational rival Philip Morris, has focused on expanding
business into international and newly emerging markets =96 precisely the
areas where smuggling seems to have flourished.

BAT reported 1.01 billion pounds ($1.8 billion) in profits in 1998 on its
worldwide cigarette business, according to its latest available annual
report. Of BAT=92s six regional operating groups, its Latin American sales
volumes were the highest. Philip Morris, the world=92s largest internationa=
l
cigarette company, reported tobacco profits of $6.5 billion (3.9 billion
pounds) in 1998 -- $5 billion of that in non-U.S. sales, which represented
a 10% increase over the previous year. Both companies=92 bottom lines were
reduced in 1998 for payouts to the U.S. national tobacco settlement, and
profit margins were expected to be higher for 1999.

 Although tobacco companies now face health-related lawsuits involving
about 20 countries, proof of involvement in tax evasion or smuggling
schemes could trigger a host of new prosecution, civil and criminal. There
are already signs that may be happening.

A majority of Colombia=92s state governors and the mayor of Bogota have
retained U.S. lawyers to prepare lawsuits in the United States against
British American Tobacco and Philip Morris, said Jose Manuel Arias
Carrizosa, executive director of the Federation of Colombian Governors. He
added that the 21 governors and the mayor of Bogota were seeking "an
indemnification for damages caused through contraband of cigarettes into
the country." He would not say exactly how much would be demanded of the
two companies.

"We think there are two markets, one legitimate that pays its duties and
taxes, and the other much bigger, illegal," Arias said in an interview.
"That cannot be happening without the knowledge of the producing
companies." A lawyer hired by the Colombians, who spoke only on condition
that neither he nor his firm be identified, said the governors had "a
viable cause of action" under civil provisions of the Racketeer Influenced
and Corrupt Organizations Act, or RICO.

Canada filed a civil RICO lawsuit against R.J. Reynolds and its related
tobacco companies in New York state in December 1999 for smuggling across
the U.S.-Canadian border. Several people, including a former RJR senior
sales manager, have already been convicted on U.S. criminal charges
stemming from that same smuggling operation.

Speaking of Smuggling

Glossary of acronyms:

DNP: Duty Not Paid

DP: Duty Paid

GT: General Trade

DF: Duty Free

The BAT documents make two points clear =96 ranking executives of BAT and
its subsidiaries

 exploited smuggling as part of their overall strategy to increase market
share, and they employed a series of euphemisms to plan and mask their
activities.

In order to understand the company=92s involvement, its corporate dialect
must first be decoded.

The documents, especially as they relate to company operations in Latin
America, repeatedly identify legal imports as either "Duty Paid" (DP) or
"Duty Free" (DF), for traditional duty-free stores. Those phrases are
consistently used in opposition to terms such as "DNP," "transit," or
"GT," and those contrasting terms appear regularly throughout the memos,
letters, charts, and graphs of import/export data and sales figures.

For example, a memo from the early 1990s, entitled "Venezuelan Market
Definitions and Assumptions," explained that "Duty Paid" goods owed the
government legal excise taxes of 50%. No such requirement was noted for
the "Duty Not Paid" goods, which were identified as cigarettes produced in
Venezuela, exported mainly to the free-trade zone on the nearby island of
Aruba, and then re-entered into the Venezuelan market as "transit." The
memo came from the file of Keith S. Dunt, then BAT=92s regional director fo=
r
Latin America who is now the company=92s chief finance officer.

In another memo, a Feb. 16, 1993 fax to BAT headquarters in Britain, its
Venezuelan subsidiary explained: "The fact is that since November 1992 the
transit (DNP) products into Venezuela have been very low due to tighter
border controls."

During a fierce trademark dispute with Philip Morris over which company
had the right to use the Belmont brand name in Colombia, a Feb. 22, 1995
memo outlined contingency options should BAT lose. One was to "launch new
brand in DP and maintain Belmont in GT channel." However, a noted drawback
of keeping Belmont in the GT channel was that the company "cannot support
Belmont in GT via advertising." Advertising for a product that had no
government-registered imports apparently would raise questions.

A January 1993 status report on Peru stated that BAT=92s "basic strategy ha=
s
been to set up a local importer/distributor to handle legal exports rather
than rely on transit sales."

Jon Ferguson, former senior counsel for the Washington state attorney
general=92s office and head of its antitrust division, used BAT corporate
documents in his 1998 prosecution of tobacco companies to recoup state
costs of treating smokers. He said the term "Duty Not Paid," or DNP,
obviously referred to smuggled cigarettes. "That=92s clearly my
understanding of what =91Duty Not Paid=92 means," Ferguson, now in private
practice, said in an interview.

Les Thompson, the RJR senior sales manager who pleaded guilty in 1999 to
money-laundering charges stemming from the U.S.-Canadian smuggling
operation, said that DNP was also a euphemism his company used to talk
about smuggling. "It=92s an industry-wide term," Thompson told the Center.
"It=92s essentially a long-winded term used by senior folks when they=92re
talking around the topic of smuggling." Other euphemisms for smuggled
cigarettes, Thompson said, were "re-entry" goods, the "parallel market,"
and "transit."

Thompson, who is to begin serving a 70-month sentence in mid-February,
said he knew of other tobacco companies involved in smuggling and that he
was cooperating with federal investigations in the United States and
Canada.

In response [http://www.public-i.org/RJR.pdf] to a request for comment on
both the civil and criminal cases, an RJ Reynolds Tobacco Company
spokeswoman said the company was not involved in the "day-to-day business
operations of any international operations," and that the company had not
been implicated in the criminal investigations. But she did not comment on
the allegations in the civil RICO suit.

Ironically, the most glaring exception in the records to BAT=92s carefully
coded language involved its Canadian subsidiary, which was not named in
Canada=92s recently filed smuggling lawsuit. In a June 3, 1993 letter
[http://www.public-i.org/ITL_to_Herter.pdf] to Ulrich Herter, BAT=92s
managing director, Don Brown, the president of Imperial Tobacco Limited,
wrote:

"As you are aware, smuggled cigarettes (due to exorbitant tax levels)
represent nearly 30% percent of total sales in Canada, and the level is
growing. Although we agreed to support the Federal government=92s 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 regain our share of Canadian smokers. To do otherwise would place the
long-term welfare of our trademarks in the home market at great risk.
Until the smuggling issue is resolved, an increasing volume of our
domestic sales in Canada will be exported, then smuggled back for sale
here."

In reply [http://www.public-i.org/ITL.pdf] to questions about that letter,
Brown said, "My comments in my letter to Mr. Herter were simply of the
nature of a factual observation. =85 Our company never knowingly sold
cigarettes to smugglers. We only dealt with legitimate buyers, who had all
of the appropriate government permits to purchase cigarettes from us."

The documents show that BAT executives were aware of the "sensitivity" of
the issue. One of them, Delcio Laux who was then president of C.A.
Cigarrera Bigott, Sucs., BAT=92s Venezuelan subsidiary, wrote in an April
21, 1992, faxed memo to Dunt that "it is clear that Bigott can=92t be seen
as a clean and ethical Company by continuing with DP and DNP in parallel."
Dunt later recommended Laux=92s replacement, noting among other things that
his "exceptional" ethical norms had been exploited by the Philip Morris
competition.

In June 1992, Dunt wrote Eduardo Grant, president of BAT=92s Argentine
subsidiary, Nobleza-Piccardo, about the "DNP market" there. "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," Dunt said.

Notes on the conclusions of a meeting in Colombia in late February, which
Dunt attended, said it had been agreed that "the Bogota office will be
clean by Q3/94 in reference to DNP information. Management of DNP will be
in Caracas." Another memo in Dunt=92s files said "documents dealing with DN=
P
have been separated and should now be forwarded to Caracas. A good quality
safe and shredder are required."

 Setting the Pace

 Aside from the euphemisms, what stands out most in the documents is how
senior management of BAT and its subsidiaries factored smuggling into
their overall market strategy and sought to control where and to what
extent it occurred.

 As far back as 1971, BAT was positioning itself in the "transit" market.
A 1983 memo described the creation of a new office in Hamburg, Germany,
after a BAT study on "transit in Europe" showed that the company "was
years behind the competition in transit." Although BAT already had a
headquarters in Hamburg, a separate office was opened in 1972 in the same
city. "One of the main reasons for establishing this office independent
from a B.A.T. company was, that due to the delicate business the customers
could visit Hamburg-Office without involving a B.A.T. Company directly,"
the memo explained.

 The full extent of BAT's involvement in Latin America was made clear in a
stern note [http://www.public-i.org/BAT_to_Herter.pdf] from Dunt to his
fellow directors questioning the wisdom of allowing BAT=92s wholly owned
Brazilian subsidiary, Souza Cruz, to smuggle cigarettes into Argentina,
where they would cannibalize the sales of BAT=92s majority-owned Argentine
subsidiary, Nobleza-Piccardo.

 "I am advised by Souza Cruz that the BAT Industries Chairman has endorsed
the approach that the Brazilian Operating Group increase its share of the
Argentinean market via DNP," Dunt wrote in the May 18, 1993 memo. "As the
Director entrusted with responsibility for the management of
Nobleza-Piccardo I need to advise you of the likely volume effect on N-P
of this decision and of course the financial impact."

 At the time, Sir Patrick Sheehy was the chairman of BAT Industries, Plc,
then the name of the cigarette group=92s parent company and one of Britain=
=92s
largest multinational concerns, a position he held until 1995.

 Another memo found in Dunt=92s file, summarizing a Feb. 23-24, 1994 visit
to Colombia, indicated that BAT wanted to control the timing and products
it entered into the DNP market. Regarding BAT=92s Kent Super Lights brand,
the memo noted that "DNP product should be launched two weeks after the DP
product has been launched." As for the Lucky Strike brand, it was planned
"to withdraw from the DNP market the 20=92s and 10=92s versions."

 Tobacco companies contend they have little control over the end use of
their product once it=92s legally sold to distributors. But on June 25,
1992, Dunt wrote to the director of BAT=92s Venezuelan subsidiary, saying h=
e
disagreed with plans to limit the number of cigarettes bound for BAT=92s
Aruban distributor and for the Colombian end market. "I notice =85 the
intention to limit Romar=92s sales to Maicao to 18,000 cases per month. I
would not wish for any reason for sales to be limited =85 unless it is a
proven strategic necessity."

 Further examples include a "restricted" note of a Chief Executive=92s
Committee meeting on Feb. 7, 1994, which said that a new marketing unit
for Latin American countries aimed to achieve annual cigarette sales of 50
billion, "including duty not paid." The meeting was chaired by Barry D.
Bramley, then chairman of BAT=92s tobacco operations.  And BAT=92s Latin
American "Marketing Guidelines for Company Plan 1995-1999" instructed
local managers in Colombia that "your plan should cover the launch of
variants on the DP and DNP markets."

 The documents also show that BAT sought to use the presence of legal
imports, however small, as an "umbrella," or cover, to advertise its brand
of cigarettes, which would reach the market in far larger quantities via
DNP.

 "It is recommended that BAT operate under =91Umbrella=92 operations," Dunt
wrote in August 1992 to Bramley. "A small volume of Duty Paid exports
would permit advertising and merchandising support in order to establish
the brands for the medium/long term, with the market being supplied
initially primarily through the DNP channel."

 One year later, in a Sept. 1, 1993, memo to Nick Brookes, then a director
of New Business Development at B.A.T. Industries, Dunt said in an industry
analysis of the Colombian market, "DNP now represents =B150% of the local
cigarette industry (vs. =B135% in 1989). DP imported product now possible
due to freeing up of import restrictions, however although tariffs reduced
from 63% to 5% this only constitutes 1.5% of market share, it being
apparent that multinationals are using the DP route for imports as an
umbrella operation to facilitate publicity campaigns etc."

 Brookes, now chairman and CEO of Brown & Williamson, told reporters in
Washington, D.C., on Jan. 11, that B&W wanted to host a forum on "the
growing risk of black market cigarettes and illegal sales across state
lines. We don=92t believe government officials, legislators and others have
focused enough attention on this critical issue, and we hope to change
that."

 Brookes did not respond to a request for comment.

 Smuggled cigarettes, by evading import, sales, and other forms of taxes,
usually are sold more cheaply than legally imported cigarettes. That makes
them affordable to a greater number of people, increases corporate
profits, and secures future markets. But because smuggling puts cigarettes
in more hands, especially younger ones, it=92s not just an issue for
government tax collectors. The World Bank last year predicted that by 2030
smoking would kill one in six adults to become the single leading cause of
death in the world. With smoking rates in the United States and other
Western countries declining, the Bank warned that smoking deaths
increasingly would occur in low- and middle-income countries, least able
to afford the costs of treating smoking-related illnesses.

 The Bank recommended raising taxes on tobacco, and therefore the price of
cigarettes, as a way to reduce consumption.

The Aruba-Colombian Connection

Colombia =96 a country wracked by decades of civil war and cocaine trade,
with a long history as a crossroads of contraband =96 proved to be fertile
ground for cigarette smuggling.

 The BAT records show that millions of cigarettes were shipped from BAT
subsidiaries in the United States, Venezuela, and Brazil to BAT=92s
distributor in the free-trade zone of Aruba, an island in the Caribbean
just off the coast of Colombia that historically had been a mecca for
contraband. From Aruba, the cigarettes would be sold to dealers who would
bring them by boat to Colombia=92s La Guajira region, an isolated and
lawless haven along the Caribbean coastline. The Guajira peninsula, which
straddles the northern border of Colombia and Venezuela, has itself been a
smugglers=92 paradise since colonial times.

 Maicao is a town in La Guajira that was given special customs status in
1991 in order to spur job growth. The government=92s intent was to allow ra=
w
materials to enter the zone untaxed, have workers there turn them into
finished product, and then re-export the finished goods outside Colombia.
The law allowed for a certain amount of goods to pass from Maicao into the
Colombian interior, but only if they were declared to customs officials
and duty was paid on them.

 BAT records indicate, however, that its cigarettes moved outside the
Maicao special customs zone "duty not paid" and from there into the black
market. A "DNP Distribution" diagram in Dunt=92s files showed DNP cigarette=
s
traveling from Aruba to Maicao and from there westward to the "consumer"
in Barranquilla.

 Another document in the files [http://www.public-i.org/COL_GrMeeting.pdf]
showed that officials from BAT and its subsidiaries supplying Colombia =96
Brown & Williamson, Souza Cruz, Cigarrera Bigott =96 agreed at a Miami
meeting in January 1992 that Souza Cruz would give a 5% "free goods
incentive in Maicao and in the San Andresitos to expand distribution in
Bogota and Medellin."  The term "sanandresitos" =96 from the Colombian
island of San Andres that has been a tax-free port since the early 1950s =
=96
refers to the clusters of small stalls found in many Colombian cities that
for decades have been widely known as locations that sell mostly
contraband goods. An attachment to those minutes gives a detailed
breakdown of prices per brand for cigarettes as they left Aruba, as they
left Maicao, and in the "sanandresitos."

 Asked if a company doing business in Colombia might not know about
"sanandresitos," Fanny Kertzman, the director of the country=92s tax and
customs office, responded, "This question is ridiculous. It is obvious, so
evident, that if you distribute goods through sanandresitos you know most
of the merchandise sold there is smuggled."

 In 1993, corporate records show that BAT subsidiaries imported a total of
3.98 billion cigarettes into Colombia. However, 3.89 billion of those
cigarettes entered as Duty Not Paid goods. By BAT=92s own estimate, its Dut=
y
Paid imports accounted for only 2% of its in-country business that year. =
=20
BAT=92s 1993 figures, showing that across all local and imported brands
there was a total of 13.9 billion cigarettes on Colombia=92s Duty Not Paid
market, match almost exactly a Colombia government report on the
contraband cigarette problem.

 In 1998, the Federation of Colombian governors circulated a detailed and
confidential report to several public officials to draw attention to
cigarette smuggling and the underpricing of legal imports. The report
estimated that in 1993 there were 13.4 billion cigarettes on the black
market. The report further said that by 1997 smuggling accounted for 44%
of Colombia=92s total cigarette market and 93% of all foreign brands coming
into the country. Kertzman echoed that in her June 1999 testimony before
the U.S. Congress, saying that 90% of all cigarettes entering Colombia
were doing so illegally.

 An internal 1999 document from Colombia=92s DIAN office, the country=92s
customs and tax authority, calculated the value of contraband cigarettes
coming from Aruba into Colombia to be around $400 million dollars per
year.

 The BAT documents show that cigarettes also moved from Aruba to Panama=92s
free-trade zone of Colon as a staging point into nearby Turbo, another
special customs zone in Colombia. In addition, some of the cigarettes
shipped from Venezuela to Aruba and on to Maicao went back into Venezuela.
(The Caracas daily El Nacional estimated in 1998 that Venezuela=92s annual
loss from cigarette smuggling was around $35.4 million dollars.)

 Similar operations went on farther south, too, with cigarettes from BAT=92=
s
Brazilian subsidiary Souza Cruz being shipped through Paraguay into
Argentina.

 Notes from a visit to Paraguay in July 1994 show that "excellent work has
been done in the border town, which is the main supply point of DNP
product for the Argentinean market." Another notes that BAT=92s Brazilian
and Argentine subsidiaries "recycle product through Paraguay and back into
their respective markets making use of the lower excise rates in
Paraguay."

 BAT=92s main distributor in Latin America was Romar Free-Zone Trading Co.
N.V. of Aruba, run by Roy Milton Harms, Jr., the documents show. BAT=92s
three wholly owned subsidiaries in the region "use Romar in Aruba as their
transit agent into Colombia. =85 Romar also sells Belmont 70 mm and Consul
70 mm into Colombia with Venezuela as the end market," Mark Waterfield,
then an executive at BAT=92s Venezuelan subsidiary Bigott, wrote in a Feb.
12, 1992 memo [http://www.public-i.org/BAT_Proposal.pdf].

 The documents paint a close relationship between BAT and its distributor.

 In the same letter where Dunt halted attempts to limit Romar=92s sales to
Maicao, he noted that the issue "was mentioned to me by Harmes [sic]
yesterday on his U.K. visit =96 and with some forcefulness =96 as you can
imagine."

 Harms and his father, Roy Harms Sr., were in London at BAT=92s invitation
[http://www.public-i.org/BAT_to_Harms.pdf]. They were booked into the
Carlton Tower Hotel in Knightsbridge, near Harrods, and given two tickets
to Wimbledon.

 Cousin Bryan Harms said in a March 5, 1998, letter to Colombian
authorities that he "personally gave windsurf lessons to Mr. Pat Sheahy
[sic], top director of BAT when there was a great meeting of BAT and
Bigott in Aruba in those times."

 "Those times" refer to the period before the Harms family split into two
factions in 1988, with one side taking the exclusive BAT business.

 That family feud prompted Bryan Harms to contact Colombian and Venezuelan
authorities in 1998 with allegations that BAT and Romar were in the
cigarette smuggling business. Before the family business split, Harms told
authorities he had accompanied officials of BAT and its Venezuelan
subsidiary several times for "marketing work to Maicao," the special
customs zone in northern Colombia.

 Romar did not respond to faxed questions and several calls requesting
comment. In BAT's faxed statement, it refused to respond to a list of
specific questions, including about Romar.

 Bryan Harms confirmed he told Colombian and Venezuelan authorities that
he had witnessed high-ranking BAT officials coordinating the shipment of
cigarettes from Aruba to the Colombian and Venezuelan coasts. But he
refused to elaborate.

 Harms Brothers Limited of Aruba, started by Bryan=92s father, Lionel, and
I.D.F. International Duty Free Trading N.V., which Bryan Harms directed
from 1996-1998, were identified in last December=92s Canadian RICO lawsuit
as being part of RJR=92s smuggling operation but were not named as
defendants.

Competitors or Bedfellows?

Fierce competition for market share drove many of BAT=92s actions in Latin
America, the documents suggest. However, they also show that company
executives had discussions with representatives of Philip Morris
International about "DNP" and "transit."

At a meeting on Feb. 14, 1992, at John F. Kennedy airport in New York,
Philip Morris=92 then president for the Latin American region, Peter Schree=
r
and his deputy Fred Hauser met with BAT=92s Keith Dunt and David Etchells.
"Transit business from Paraguay into Argentina needs to be watched,
particularly bearing in mind Industry agreement on quantum level of
excise," said a file memo written by Etchells, summarizing the
discussions. The two sides agreed to have "more regular meetings," and in
August 1992, the BAT and PMI representatives met again, this time at the
posh Pennyhill Park country club near BAT headquarters outside London,
according to a "SECRET" document summarizing their talks
[http://www.public-i.org/Meeting_w_PhilipMorris.pdf]. "PMI raised the
=91contraband from Honduras=92 issue which was counteracted by BATCo=92s ra=
ising
the price gap argument. No ground conceded on either side," the notes
said.

"BATCo suggested an aggressive price increase to be negotiated at a local
level for DNP to be implemented if possible by the end of August," the
notes later said, referring to Venezuela. "Following action on DNP PMI
suggested we should pursue a DP price increase. PMI wanted linkage between
the DNP increase. This was not supported by us."

Philip Morris confirmed there were meetings between Schreer and Dunt in
1992 "to discuss general industry issues in Latin America," but was unable
to say "what precisely was discussed."

Beyond the issues of smuggling, tax evasion, and undermining governments=92
attempts to set health policy, there have been allegations that the
activities of tobacco multinationals have complemented drug money
laundering. The 1998 Colombian governors=92 report and two other independen=
t
studies said that smuggled cigarettes had become a vehicle for money
laundering, and the subject was the focus of a U.S. congressional hearing
last summer.

The nexus of cigarette smuggling and drug money laundering in Latin
America is known as the black market peso exchange, in which "peso
brokers" convert U.S. dollars from drug lords into clean pesos. Their
sources of clean pesos are smugglers who need U.S. dollars in order to
purchase international goods. James Johnson of the U.S. Treasury
Department has called the system "primarily an exchange of currencies" but
one that is "perhaps the most dangerous and damaging form of money
laundering that we have ever encountered."

With access to U.S. dollars regulated by Colombian law and administered by
banks, requiring proof of legal import, the peso broker "offers a
businessman a choice and the drug trafficker an opportunity," Bonni
Tischler, U.S. Customs Service Assistant Commissioner for Investigations,
told the June 1999 congressional hearing. She said the cigarette industry
was one of the "most affected" by the black market peso exchange.

"Some American companies, and I would give Philip Morris as an example,
have been accused of implicitly supporting the black market peso exchange
in order to increase their market share in Colombia and avoid paying hefty
Colombian taxes," noted the hearing=92s chairman, Sen. Charles Grassley
(R-IA). "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."

For over 50 years, Philip Morris=92 main distributor in Latin America was
the Mansur Free Zone Trading Company, N.V., run by a rich and politically
powerful family in Aruba.

Cousins Eric and Alex Mansur were indicted on federal money-laundering
charges in August 1994 for allegedly being part of a network that
laundered proceeds from the Colombian drug trade. In a Dec. 2, 1996 letter
to Congress, President Clinton identified Aruba "as a major drug-transit
country," and took the unusual step of publicly identifying the family,
saying that "a substantial portion of the free-zone=92s businesses in Aruba
are owned and operated by members of the Mansur family, who have been
indicted in the United States on charges of conspiracy to launder
trafficking proceeds."

Philip Morris International broke its contract with the Mansurs at the end
of 1998 "for business reasons," company spokeswoman Elizabeth Cho said in
an interview. She refused to elaborate. But a source close to the family
said the two sides agreed to a $22 million settlement and that the Mansurs
continue to work with Philip Morris=92 non-tobacco product lines. The Mansu=
r
company changed its name last year to Glossco Freezone N.V. following six
years of unwelcome scrutiny.

Eric and Alex Mansur, meanwhile, have yet to go on trial, their case
initially delayed by years of extradition battles between the United
States and Aruba. Now they are in Miami, where U.S. and Colombian sources
say they have been offered a plea bargain by U.S. prosecutors that would
greatly reduce or eliminate any jail time in return for cooperation with
investigations into cigarette smuggling and money laundering. Their
lawyer, Robert Josefsberg, refused to comment.

"We will not condone, facilitate or support contraband or money
laundering," Philip Morris International said in its statement
[http://www.public-i.org/PMII.pdf]. Twice in the last two years, the
company has defeated shareholder resolutions that have suggested corporate
complicity in smuggling and called for an internal review.

The BAT documents suggest that its officials were aware of the linkage
between cigarette smuggling and money laundering, and they discussed how
black market money flows in Aruba affected their business.

On March 8, 1995, Keith Dunt received an e-mail
[http://www.public-i.org/BAT_to_Dunt1.pdf] about the "difficulty of
obtaining =91clean=92 $" that BAT=92s Venezuelan subsidiary had in January.=
 "It
was necessary, in December, to reduce the selling price from US $125.00 to
US $96.00 per case, ie in line with Belmont HL price (such that Romar
could then sell through at US $106.00 per case and receive =91clean=92 US$)=
=2E"

 Epilogue

The publicly available BAT documents end, for the most part, in 1995.

 Since the mid-1990s, legal imports of cigarettes have risen exponentially
in Colombia. DIAN figures show that while only $4.6 million in cigarette
imports were registered in 1994, that number had leapt to $39.9 million by
November 1999.  In August 1999, BAT signed a letter of commitment with the
DIAN promising, according to director Fanny Kertzman, "that if they have
any evidence that distributors to whom they sell their products are, in
turn, selling to smugglers, they will stop selling to these distributors."

In a final desperate attempt to crack down on its contraband problem,
Colombia two weeks ago (Jan. 18) announced a new ban on bringing
cigarettes, liquor, or home appliances =96 the three most common types of
contraband goods =96 from Maicao and Turbo into the rest of the country,
effective July 1. Despite street protests, President Andres Pastrana
vowed, "The government has already bit into contraband and is not going to
let go until this scourge is eradicated."

Researcher Kathryn Wallace contributed to this report.