[Intl-tobacco] EU Will Sue U.S. Tobacco Groups In Response to Alleged Smuggling

Fri, 21 Jul 2000 13:50:19 -0400 (EDT)

EU Will Sue U.S. Tobacco Groups In Response to Alleged Smuggling
by THANASSIS CAMBANIS  / Staff Reporter of THE WALL STREET JOURNAL
Source: The Wall Street Journal Interactive Edition, Friday, 7/21/00

BRUSSELS -- The European Commission said it plans to file its first-ever
civil suit in a U.S. court against at least two American cigarette makers
in an effort to recover "billions" of euros in taxes lost to smuggling. It
suspects the companies of complicity in circumventing European customs
duties and value-added tax.

A spokesman for OLAF, the European Anti-Fraud Office, said the European
Union lost a potential 4.7 billion euros ($4.39 billion) in tax revenue in
1998 as the result of bootlegged cigarettes. "Cigarette smuggling is one
of the most important international crimes at this moment," said the
spokesman, Alessandro Buttice.

The commission plans to file a suit within "several weeks" in U.S. courts
asking cigarette manufacturers to compensate the EU for lost tax revenue.
"We want our money back," said Luc Veron, a commission spokesman. "The
commission is determined to defend the financial interests of the European
community. So we want money."

'Recovering Our Money'

OLAF has been investigating cigarette smuggling for two years, in close
cooperation the Italian Anti-Mafia Directorate, other European national
authorities, and the U.S. justice department. The commission decided to
announce its impending lawsuit because it only now acquired sufficient
evidence for "a good case for recovering our money," Mr. Veron said.

1EU Backs Tighter Control on Cigarette Labeling (June 30)

2Colombian Officials Sue Philip Morris Over Alleged Cigarette-Smuggling
Plot (May 25)

Mark Transon, a spokesman for Philip Morris Europe SA, said the company
had no comment on the commission's announcement. "We don't know what
they're looking for," he said.

A spokeswoman for R.J. Reynolds Tobacco Co. also wouldn't comment on the
potential lawsuit, but said "to suggest that Reynolds Tobacco has been
involved in smuggling activity -- in Europe or elsewhere -- is
unsupportable and untrue."

Philip Morris and R.J. Reynolds are the leading American cigarette
companies in Europe. People close to the investigation said both companies
are likely be defendants in the civil action. "If you sell cigarettes, you
must know who the buyers are," Mr. Buttice said, adding that to determine
the likely defendants in a civil suit "the biggest companies are the ones
you should look at."

Looking to Wholesalers, Too

EU Budget Commissioner Michaele Schreyer didn't preclude extending legal
action to wholesalers engaged in the illegal cigarette trade. "We're
adopting a radical approach," she said. "We have to get to the root of the
problem."

Mr. Veron said that recently uncovered evidence showed smuggling was on
the rise. "Cigarette smuggling is the single-biggest fraud against the
community budget," he said. Illegal cigarette sales are most prevalent in
Italy, Spain, the U.K., and Germany; by some estimates, 10% of the market
in those countries consists of untaxed contraband.

A single container, or truckload, of cigarettes is valued at 1 million
euros in tax revenue to the EU and its member states. Such high margins
have spawned a vibrant and inventive black market trade for cigarettes.
Italian financial police regularly battle smugglers along Italy's
southeast coast, where two officers were killed in a clash this February.
Italy confiscated 1,673 tons of cigarettes in 1999.

Puglia a Key Entry Point

According to Mr. Buttice, the antifraud spokesman, the major European
point of entry for bootlegged cigarettes is the Puglia region of Italy,
which lies just across the Adriatic Sea from Montenegro and Albania.

Italian authorities said international crime organizations had taken over
the high-stakes cigarette smuggling trade from local syndicates in recent
years.  Investigators have seized loads bound for Spain and the U.K., but
estimate that they only seize 10% of the total illegal traffic.

Philip Morris signed an agreement with Italy last year to track the
movement of contraband cigarettes.

Antitobacco lobbyists have pushed hard for government prosecution of what
they believe is open cooperation between smugglers and cigarette
companies. Clive Bates, president of the U.K.-based organization Action on
Smoking and Health, said one-third of all internationally traded
cigarettes, or about 350 billion smokes, disappear into the illegal
distribution chain every year.

Tobacco companies sell large amounts of their duty-free cigarettes to
dubious wholesalers, Mr. Bates said. And internal documents from tobacco
companies show that industry officials are aware of and often indirectly
manage the illegal market, he added.

The governments of Colombia and Ecuador have both filed civil suits in
U.S.  courts this year demanding damages from cigarette companies accused
of cooperating with smugglers. A similar suit by Canada was dismissed in
May.

Luk Joossens, an expert on contraband tobacco who consults for the Union
of International Cancer Leagues and the World Bank, said many of the
cigarettes smuggled through Montenegro originally reach Europe as transit
parcels shipped to Antwerp. From there, Mr. Joossens said, the cigarettes
are usually driven overland to Montenegro before eventually re-entering
the EU.

Finding the Proof

Secondary smuggling routes that pose major headaches include shipments
from Africa to the southern coast of Spain and cigarettes flown to central
Europe and Russia and then brought into the EU overland, Mr. Joossens
said.

Increased information sharing between EU and U.S. customs officials, along
with reams of documents obtained during U.S. tobacco litigation, has made
it far easier for investigators to examine links between major cigarette
companies and smuggling. "The problem always has been to prove it," Mr.
Joossens said. "It's not possible that they export 70 billion cigarettes
to Antwerp and don't know what is happening to it afterward."

OLAF is coordinating an international task force, originally requested by
Italy and the U.K., to combat cigarette smuggling in cooperation with all
Group of Eight leading industrialized countries.

-- Staff writer Tomaso Eridani in Milan and Jochen Hoenig of Handelsblatt
contributed to this article.

Write to Thanassis Cambanis at athanasios.cambanis@dowjones.com3

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