[Intl-tobacco] Global Reach of Tobacco Company's Involvement In Cigarette Smuggling Exposed By company Papers

[Robert Weissman]

Global Reach of Tobacco Company's Involvement In Cigarette Smuggling
Exposed By company Papers
Source: Center for Public Integrity, Wednesday, 2/2/00

"With regard to the definition of transit it is essentially the illegal
import of brands from Hong Kong, Singapore, Japan, etc. upon which no duty
has been paid.

A. George-Perutz, BATUKE


In a second report by the International Consortium of Investigative
Journalists, a project of the Center for Public Integrity in Washington,
D.C., British American Tobacco=92s exploitation of smuggling routes in Asia
and the Third World are examined.

(Washington, Feb. 2) In their search to maintain and enlarge cigarette
markets and corporate revenue, British American Tobacco =96 the world=92s
second largest tobacco multinational and parent company of Brown &
Williamson =96 exploited a sophisticated network of smuggling routes
throughout Asia.

A review of more than 11,000 corporate documents, conducted over a
six-month period by the International Consortium of Investigative
Journalists at the Center for Public Integrity, shows that, as with
corporate operations in Latin America, BAT managers and executives used a
series of euphemisms in corporate correspondence to discuss smuggling
operations that helped them gain a greater share of smokers and profits.

But unlike Latin America, where company executives commonly used the
euphemism =93DNP,=94 meaning Duty Not Paid, to denote smuggled goods, BAT
documents discussing Asian operations most often used the term =93GT=94 or
General Trade. The company documents, on Asia, mostly covering the years
1990-1994, repeatedly contrast legal export sales with GT and break down
the total trade in particular countries into the categories of legal or
=93GT.=94 One plan for Singapore, for example, refers to how =93the legal m=
arket
fell but the shortfall was taken up by GT product." Another plan for
Taiwan showed =93the split between Legal and GT.=94
http://www.public-i.org/bat_to_cotter.pdf

Other pointers to the meaning of GT in company documents include
references to difficulties with customs or closed borders, indicating that
the reason why GT trade was illegal was because it involved smuggling. In
relation to moving cigarettes into Myanmar from Thailand, a Nov. 30, 1992
fax (http://www.public-i.org/Combe_to_Horne.pdf) from BAT's Singapore
subsidiary warned that duty-paid sales to Myanmar had been cut off because
of political turmoil. "The closure of the Thai border as the result of the
May political upheaval meant that Embassy, legally border traded and
duties paid, no longer had a legitimate route into the country." The same
report also noted that "this closure coincided with the monsoon season and
the consequent redeployment of security forces from rebel engagements to
internal security activities. The GT route thereby became more difficult
=2E.."

A large part of BAT=92s GT sales in Asia were handled by one Singapore
distributor, SUTL (Singapura United Trading Limited). According to company
papers, SUTL handled both legal and GT products in the region. Its normal
market channels were broken down into domestic sales; duty paid exports,
which were legal; duty-free sales in airports and to ships; and GT. A Dec.
10, 1991 document identified risks to the GT business. =93SUTL appreciate
that dependency on GT leaves them very vulnerable to market liberalisation
(Thailand) and market closure (Vietnam), therefore they are seeking to
move that core business to long term legal ventures involving ownership
interest.=94

Other company documents from Latin America and Asia used the phrase =93GT=
=94
interchangeably with =93DNP=94 and =93transit,=94 internal euphemisms that =
also
appeared on BAT papers in place of direct references to smuggling. This
and other similar evidence from the BAT papers lead to the conclusion
that, within British American Tobacco, references to GT in the papers of
directors and managers were references to smuggled cigarettes.

The reviewed documents, part of a cache of about 8 million pages made
public as a result of the 1998 U.S. tobacco settlement, do not suggest
that BAT employees themselves ever transported contraband across borders.
But they sought to exploit and control to their advantage smuggling
markets around the world through a network of agents who, on an annual
basis, transferred billions of cigarettes into the hands of smugglers.

So large was the role of GT that, according to the most recent information
available, a plan covering the period from 1993 to 1997, more than
one-fifth of the output of BAT=92s United Kingdom factories was made for
this market. From its factory at Southampton, in southern England, more
than 60 billion cigarettes are made annually by BAT (UK and Export) Ltd
(BATUKE). On average, about 20 containers of cigarettes leave the port
every day.

The information appears in the BATUKE company plan for 1993 to 1997.
Marked =93SECRET,=94 the document is noted as having been provided to the
then-chairman of the BAT Company Ltd, Barry D. Bramley. BATCo was then the
main tobacco manufacturing subsidiary of BAT Industries Plc.

According to the plan, BATUKE operates in 125 different markets, shipping
tobacco products to these markets through 360 agents. The markets are
broken down into =93domestic,=94 =93duty free,=94 and =93General Trade (GT)=
=2E=94

During the period covered by the disclosed documents, BAT anticipated that
more than one-fifth of its UK and Export production would be =93GT.=94

Under the heading =93General Trade,=94 it states that =93two key General Tr=
ade
markets will account for 4.7 billion units or 22% of BATUKE=92s total
shipments.=94

The two key centers of distribution identified in the report are SUTL and
=93Unit 1.=94 SUTL covered countries from Afghanistan to the Philippines,
while Unit 1 was involved with Africa. Other centers that can be
identified as playing a major role in BAT=92s GT trade are the Gulf state o=
f
Dubai and Hong Kong.

The Company Plan suggests that BAT then proposed to invest in expanding
its utilization of GT methods to reach its end markets. The company
=93strategy [focuses] on maximising the GT market opportunities to provide
funds to build a stable volume/profit base for the long term via
investment in duty free and domestic markets.=94 It added that =93=A33.8
[million]. . . will be invested to grow our business in the GT markets.=94

BAT has refused to comment on the meaning of such terms as =93GT,=94 =93DNP=
=94 or
=93transit,=94 or to discuss the implications of any particular document. I=
n a
statement last week, BAT said the 11,000 pages of reviewed documents were
taken out of context.

However, a year ago, the company=92s public affairs director, Michael
Prideaux, said in response to smuggling allegations that "if people wish
to draw the inference that we are turning a blind eye to smuggling, they
are free to do so. Deterring smuggling is a matter for the governments
concerned. The only sure way is to cut tobacco taxes.=94

But the hundreds of documents in BAT=92s files on marketing activities in
Asia and around the world leave little doubt that some of BAT=92s top
directors and executives were far from blind to smuggling activities. They
received reports about new opportunities in GT trade, as well as regular
assessments of sales levels that went through legal and GT channels.

Important markets in the region for =93GT=94 cigarettes, according to a 199=
2
report prepared by Fred Coombe, BATUKE Area Manager for Far East, were
Bangladesh, Myanmar, Thailand, Laos, Vietnam, Indonesia, Philippines,
North Korea, Afghanistan and Taiwan. The largest potential market of all
was mainland China. Evidence from Hong Kong suggests that BAT cigarettes
worth more than =A3490 million ($810 million) were smuggled into China
during the 1990s.

In the late 1980s, competition between Hong Kong-based rival traders
smuggling BAT cigarettes into China became so intense that bribes were
paid to the BAT local director whose job it was to deal with them. After
one jilted trader exposed the system to Hong Kong=92s anti-corruption
commission, former BAT (HK) export director Jerry Lui was extradited from
the United States. BAT itself was not charged with any offense.

The case against Lui nearly foundered after the chief witness against him,
trader Tommy Chui, was murdered. His body was found floating in Singapore
harbor in 1995, stuffed in a garbage bag with tape over his mouth. Another
potential witness committed suicide. Nevertheless, in June 1998 Lui was
convicted and sentenced to three years and eight months=92 imprisonment. He
later launched an ultimately unsuccessful appeal and awaits the outcome of
a continuing appeal application.

BAT company documents disclosed during Lui=92s trial led Justice Wally Yeun=
g
Chun-kuen to comment: =93The evidence suggests that management of BAT (HK)
was aware duty-not-paid cigarettes . . . would ultimately be smuggled in
China and other countries. . . . To some extent such irresponsible
behaviour amounted to assisting criminals in transnational crime.=94

The company claimed at the time that the smuggling was the work of =93rogue=
=94
employees and replied that

=93British American Tobacco does not smuggle. It does not condone smuggling
and its business is entirely lawful.=94

The documents obtained and reviewed by the Center=92s international
consortium of investigative reporters show that in many Asian countries
BAT did not merely tolerate GT trade channels, but exploited traditional
smuggling routes when that would maximize sales. The documents also trace
the rise and fall of Lui within BAT ranks.
http://www.public-i.org/bat_to_korfhage.pdf

At first, Lui worked for BAT=92s U.S. subsidiary Brown & Williamson. His jo=
b
was =93aiding and abetting our efforts to get U.S. brands well established
in export markets,=94 a BAT document said. At the end of 1991, he was
appointed the director of exports for British American Tobacco (Hong Kong)
Ltd. His job was to supply export distributors in the region. Many of them
transported contraband cigarettes into China.

In internal BAT documents, the job that Lui had held in Hong Kong was
described more clearly as =93Director of Exports to China." The same BATCo
file also noted company worries about the =93dependence of continued transi=
t
trade into China.=94 According to court proceedings in Hong Kong last year,
Lui had to report to BAT (HK) executive meetings on the volume of
cigarettes being supplied to each distributor.

=93It was because the market in China was the largest source of profit for
BAT (HK) Ltd that the post of director of exports was so important within
the BAT organisation,=94 according to the Hong Kong Court of Appeal. At the
time, only the Chinese Tobacco Import and Export Corporation was legally
allowed to import cigarettes and charged heavy duties to do so.

When officers from the Hong Kong Independent Commission Against Corruption
raided the offices of BAT=92s largest Hong Kong distributor in 1994, they
found accounts showing that $5.36 billion [HK] dollars worth of cigarettes
had been purchased =96 about 50 billion cigarettes.

In Vietnam and other nations, where the documents note that all cigarette
imports were illegal in the early 1990s, files held by BAT Asia-Pacific
Regional Director Paul Adams show that the company monitored, encouraged
and facilitated =93GT=94 or =93transit=94 sales imports when these suited
corporate needs. It is clear from the documents, many of which are marked
=93SECRET,=94 that the senior directors and staff who handled such sales
understood what they were doing. One company document referred to
=93transit=94 as =93essentially the illegal import of brands =85 upon which=
 no
duty has been paid.=94 http://www.public-i.org/bat_to_syta.pdf


Marketing Intelligence

Another report noted that transit sales created =93apparently paradoxical
requirements of an arm's length approach and close supervision.=94

In 1992 and 1993, for example, smugglers about whose activities the
company were informed faced particular difficulties in getting cigarettes
into Bangladesh through adjacent Myanmar because of =93(a) Increased custom=
s
surveillance in Chittagong/Cox's Bazaar; (b) border confrontation between
Bangladesh and Myanmar over the Rohinga Moslem refugee crisis.=94

The same report also promised that SUTL would =93strive to improve this
situation by developing land routes via Myanmar and optimising duty free
leakage." Another problem encountered was that BAT representatives were
unable to visit countries such as Vietnam, Bangladesh, and Pakistan
because of =93legal or political sensitivities.=94

SUTL was a Singapore company, Singapura United Trading Ltd (SUTL), and is
characterized in BAT files as a family dynasty run by Chinese patriarch
Tay Choon Hye. During a decades-long relationship, Tay and SUTL had
developed an intimate working partnership with BAT. BAT staff oversaw many
aspects of company activities while others were seconded to work inside
SUTL. SUTL=92s significance to BAT=92s trading was such that Tay, its boss,
was felt by some BAT staff to have access to the highest levels of BAT
Industries Plc.

SUTL was responsible for serving four duty-paid markets, 20 duty-free
markets, and 11 =93GT=94 markets, according to a 1993 BAT =93Asia-Pacfic st=
udy.=94
SUTL was not itself involved in smuggling cigarettes across national
borders, according to the reviewed documents, but sold them on to other
distributors or wholesalers. Attempts to reach SUTL for comment before
publication were unsuccessful.

Company executives examined which mix of these channels would serve BAT
best. In August 1994, Asia-Pacific Regional Director Paul Adams received a
lengthy report on BAT=92s plans for SUTL from 1995 until 1999. The report
defined the company=92s responsibilities as =93to maximize BAT=92s market a=
nd
profit shares in South-East Asia / Indian Sub-Continent export business
through the most efficient distribution of our international and regional
brands, irrespective of sub-channel (Domestic, Duty Free, GT).=94

While other BAT companies took responsibility for sales channels into
China, SUTL focused on developing new markets such as Vietnam. This plum
Asian market had a population of 71 million and was viewed as a strong
prospect for new business.

In the years since the war had ended, Vietnam had fought a seemingly
losing battle against smugglers.

Until 1990, the =93transit=94 market into Vietnam was estimated by BAT to b=
e
12-18 billion cigarettes a year. Then, following a clampdown that
September, =93smuggling was virtually eliminated for 18 months,=94 accordin=
g
to a report to Adams. The hiatus did not last long.

As border conditions relaxed, contraband routes again appeared,
particularly coming through Cambodia. In 1992, the company=92s =93Cambodia
Business Plan=94 referred to this situation as, apparently, a temporary
contingency: =93Cambodia will continue to service the Vietnamese market
until the [Vietnamese cigarette import] ban is lifted.=94

Soon, contraband into Vietnam was climbing toward pre-1990 levels. In
1992, Adams was told that BAT=92s =93State Express 555=94 brand of cigarett=
es
was the =93major smuggled brand in the area . . . there is no doubt it has =
a
tremendous image and sales potential.=94 Sales of smuggled SE555 were then
estimated to be about 1 billion cigarettes, worth roughly =A310 million ($1=
6
million) a year.

A series of company papers showed that from 1991 BAT then pursued a
twin-track strategy to maximize its earning from Vietnam. One track was to
negotiate with the Vietnamese government and its tobacco monopoly,
Vintaba, in order to produce international brand cigarettes locally.

The other was track was monitored from BAT=92s UK-based =93Asia-Pacific
Regional Business Unit,=94 where one executive noted that =93the high margi=
ns
on illegal product are justified on grounds of risk. The amount of
handling associated with imported distribution [is] coupled with the
requirement of frequent concealment.=94

Both tracks went ahead. By mid-1993, BAT State Express 555 brand
cigarettes were being sold as =93Made in Vietnam.=94 Meanwhile, back in
Britain, executives in BAT=92s =93Far East Support Unit=94 (FESU) juggled
complex calculations to assess what balance of trade channels would
deliver maximum profit.

A memorandum found in the file of then-New Business Development Manager
Nick Brookes =96 now CEO of Brown & Williamson =96 set out BAT=92s pricing
strategy, which attempted to predict the final consumer price of BAT
cigarettes smuggled into Vietnam.

In a document suggesting clarity and precision of BAT=92s understanding of
pricing in the GT trade, the document noted: =93Ex factory price should be
such that retail price falls at parity with GT (not fully controllable).
GT price structure is: BATUKE to SUTL, $245, SUTL to importer, $290,
Importer to Wholesaler, $348, Wholesaler to Trader (Cambodian border)
$350.=94 (http://www.public-i.org/McPhail_to_Millbank.pdf) In other words
(and recognizing the independence of smugglers), BAT staff seemed to wish
to adjust the sale price of their cigarettes to their agent so as to set
the final smuggled end-market price in Vietnam.

BAT=92s records suggest that Vietnamese officials treated the company=92s
conduct with suspicion and told them so. Company executives had a series
of meetings with Le Dinh Thuy, director general of the Vietnamese Vintaba
tobacco company. A letter from Singapore to BAT=92s then- headquarters in
Staines, England, reported that at a June 1991 meeting, =93Mr Thuy . . . wa=
s
obviously fully aware of both BATUKE=92s and SUTL=92s activities in Vietnam=
,
stating =96 =91what are these people doing visiting Vietnam when the import=
 of
cigarettes is banned?=92 It is a point I think should be taken very
seriously.=94 http://www.public-i.org/bat_to_watterton.pdf

Similar enterprises took place across Asia. In Taiwan, BAT reckoned in the
early 1990s that it had about a 1 billion share of the 4 billion a year
=93transit=94 market. In Thailand, the market was over 555 million a year. =
In
Vietnam, it was 1 billion a year.

In 1993, BAT employed a single senior executive to take charge of GT sales
around the globe.

The post of =93senior regional export manager=94 was based at BATCo in
Staines. Although ostensibly the job was to coordinate sales in Asia and
the Pacific, the executive=92s second task was

=93Co-ordinator of GT worldwide.=94

In this capacity, the manager was made =93responsible to all five Regional
Directors for the co-ordination of all BATCo general trade sales
worldwide.=94 He was charged with the =93maintenance of profiles of all mai=
n
dealers, and monitoring of supply routes; negotiation of trans-regional
accounts, e.g. SUTL =85 .=94

But there was a special warning. =93Due to the nature of Export General
Trade business, the Distributors handling this are not easy to manage and
difficult to motivate. Their loyalty is sometimes questionable.

Due to the type of business and sums involved, bribery attempts are
frequent . . . [The person appointed] must be permanently alert to the
confidentiality needed in some areas of the business.=94 He had to be on
continual lookout for new smuggling routes, by conducting a =93proactive
search for new GT business.=94

The report concluded, without apparent irony, that =93integrity is an
absolute must.=94

The disclosed BAT documents indicate that =93GT,=94 =93Transit,=94 or, more
plainly, smuggling seemed to be seen by BAT Industries in the early 1990s
as a necessary and indeed substantial part of being competitive and
successful in the international tobacco business. BAT Industries directors
were told in a 1993 paper: =93A significant proportion of the world export
trade is transit. It exists wherever there are widely different excise
rates and trade restrictions, and is expected to continue where these
conditions exist.=94 But, as with their Singapore agent SUTL, they also had
a long-term desire to move, when and if advantageous, to legal markets =96
provided always that national taxes were low and that current and future
smokers were easy to reach.

Brown & Williamson Brands: American, Barclay, Belair, Capri, Carlton,
GPC, Herbert Tareyton, Kool, Lucky Strike, Misty, Pall Mall, Prime,=20
Private Stock, Raleigh, Richland, Silva Thins, Summit, Tall,
Tareyton, Viceroy