New Internationalist

Lost in transit

Issue 369

Billions of exported cigarettes go missing each year – to re-emerge in smugglers' hands. Duncan Campbell on a trade that has Big Tobacco's blessing.

DURING the 1990s, tobacco trade specialist Luk Joossens did some simple homework for the World Health Organization (WHO). The agency was concerned about the explosion of cigarette exports to the South. WHO wanted the lowdown on this deliberate move by Western tobacco giants to replace increasingly healthconscious domestic markets with new smokers in the so-called ‘developing countries'.

When Joossens did the sums, the numbers didn't add up. About a third of cigarettes reported as exported – now about 400 billion cigarettes every year – were going missing. They seemed to have just disappeared off the world trade map. But where were they going?

Finding the answer involved a massive detective effort, years of work by many NGOs and searching through millions of once-secret company records. Researchers uncovered a tangled global network of illegal smuggling, exploited at least in part by tobacco transnationals in a relentless search for newer, larger markets and higher corporate profits.

The victims were not just smokers. National governments in target countries also lost billions of dollars in taxes and duties. Meanwhile, the welfare and health costs of dealing with tobacco-related illness and death rose. In a few cases the victims were indigenous peoples – like the Mohawks, whose Akwesasne reservation straddles the USCanadian border. Hard cash was the lure. Wherever a profitable illicit trade route crossed a border, native peoples were sought out and exploited by tobacco executives and their local agents.

Tobacco smuggling was also linked to drug traffickers. Research showed that the money from selling cocaine and heroin was laundered back to drugs barons through tobacco purchases from the distributors for Western transnationals. The companies knew exactly where the contraband was going and had every reason to suspect who their business partners were. They included the Italian and American Mafia, Eastern European syndicates, Triad gangs in Asia and drug cartels in Colombia. Licensed distributors feed these organized crime syndicates billions of cigarettes worldwide, often with corporate knowledge.

Tax attacked

Tax revenues of wealthier nations were also under attack. Using organized networks of smugglers, directed by specialized sales and distribution teams, the tobacco transnationals targeted Western governments that had raised taxes to protect health.

The Swedish Government imposed substantial tax increases in 1996 and 1997, raising cigarette prices by over 40 per cent. The companies responded with a twintrack strategy. They campaigned, claiming higher taxes encouraged smuggling. Second, they supported a smuggling operation – not by doing it themselves but by finding others to do it – agreeing prices, selecting routes and arranging supplies. The Swedish Government faltered and finally gave in. Smoking taxes were dropped to previous levels a year later.

In the early 1990s national and provincial governments in Canada more than doubled tobacco duties. The companies responded by smuggling their products out of Canada and then straight back in again. Cigarettes branded for ‘export use' left Canada for Caribbean nations and the US, and were then brought in to US warehouses. From there, many were trucked to the protected Akwesasne Indian Reserve which includes land on both the American and Canadian sides of the St Lawrence River. Small boats conveyed the contraband from the US side to the Canadian side. Vast profits were made.

Even larger profits were made by criminal syndicates who supplied transport and arranged repackaging and relabelling in the United States. One syndicate member was Dino Bravo, a mob enforcer and former wrestler who, investigators believe, was involved with a cigarette relabelling operation in New York state. On 12 March 1993, the police found him dead in his luxury Montreal home. He had been shot in the head seven times, a classic mob execution. Police also found stacks of cash and documents related to the cigarette smuggling business he had helped organize.

Another who died savagely was Tommy Chui, a former director of British American Tobacco's (BAT) main distributor in Hong Kong. The distributor ran a secret trade in cigarettes nominally made for Hong Kong but in fact supplied to smuggling teams who transported the cigarettes by junk into remote Chinese inlets under the eyes of the Red Army. Chui had approached Hong Kong's Independent Commission Against Corruption (ICAC) with information on BAT's $1.5-billiondollar a year smuggling operation to China. His testimony was expected to result in prosecutions against former business associates, corrupt customs officers and members of the Chinese Triads.

Chui had also implicated three BAT executives in a bribery scheme. But suddenly he disappeared. Three days later, his body was found floating in Singapore harbour. He had been expected in Singapore for the opening of his wife's downtown boutique, but had failed to turn up. He had been gagged, ritually tortured and then suffocated.

Why cigarettes are smuggled

To increase sales and evade tax. Cheaper cigarettes stimulate consumption and thus increase profits for the producers. Smuggling is widespread even in countries where taxes on tobacco are low and prices of cigarettes cheap. This demonstrates that smuggling is purely supply driven.

To crack open markets. In countries with quotas or where tobacco giants don't have access, smuggling is seen as a good way of ‘softening' the government into letting the companies operate more freely.

Any doubt that tobacco executives were unaware of what was going on in the smuggling underworld was dispelled by the discovery of stacks of incriminating documents in the companies' own files. The disclosure of these files was an unexpected and welcome consequence of a public-health law suit brought by the US state of Minnesota. The BAT archive alone contained eight million pages.

Paper trail

The companies promised public access, but they made it as difficult as possible. Even so, documents and damning revelations dribbled out. One set of BAT files revealed how corporate executives in London and Montreal planned to increase the scale of smuggling – three months after Montreal mobster Bravo died in a hail of bullets. On 3 June 1993, Don Brown, head of the BAT-owned Imperial Tobacco company wrote to Ulrich Herter, managing director of BAT in London. He pointed out that 30 per cent of total sales in Canada were smuggled and added that ‘an increasing volume of our domestic sales in Canada will be exported, then smuggled back for sale here.'

There was one snag for Imperial Tobacco, though. They had to pay royalty to the parent company, BAT, on cigarettes exported from Canada. Brown argued that since the ‘exports' were in reality going to be being smuggled back the royalty charge should be reduced or removed. BAT agreed – a clear suggestion that they knew about the smuggling.

Brown publicly acknowledged in 1993 that his company had ‘exported' six billion Canadian cigarettes to America. He didn't mention that Americans don't smoke Canadian-made cigarettes. But the smuggling scheme worked. Canada caved in, slashing tobacco taxes back to 1980s levels. One sales manager working for BAT's US operations was arrested by the FBI and jailed, along with a few minor smugglers. Publicly, the companies blamed the smuggling on dishonest rogue traders.

In a 2001 hearing before Britain's Parliamentary Health Committee, I produced copies of the Canadian letters and asked BAT executives to explain how their actions differed from organized crime. Martin Broughton, BAT's Managing Director, angrily seized the letters and tore them to shreds. The pieces fluttered to the thick green carpet under TV cameras and the eyes of astonished committee members.

Broughton's tantrum was indicative of the greed and arrogance of Big Tobacco. A detailed search of company papers revealed that BAT and its competitors had evolved a specialized vocabulary to avoid acknowledging that what they were doing was unlawful. Smuggling was euphemistically referred to as ‘DNP' meaning ‘Duty Not Paid'. This was not the same as Duty Free, which meant legitimate tax-free sales on ships and at airports. Or they would call it ‘General Trade' (GT) or ‘parallel [ie illegal] markets'.

An early euphemism was ‘transit'. Contraband cigarettes were ‘transited' into countries like Nigeria, Senegal, Vietnam, Thailand, China, Brazil, Argentina, Peru and Colombia. One BAT marketer wrote to agents in Thailand in 1989 to explain that the ‘definition of transit [was]… essentially the illegal import of brands from Hong Kong, Singapore, Japan, etc upon which no duty has been paid.'

Money from selling cocaine and heroin was laundered back to drugs barons through tobacco

Another document contained a revealing briefing for new sales staff. The question: ‘What is transit trade?' was answered: ‘Transit is the movement of goods from one country to another without payment of taxes and tariffs. It is more commonly known as smuggling.'

When their smuggling schemes were exposed in the late 1990s the companies invented a new euphemism – ‘Wholesale Duty Free'.

In public, companies like Philip Morris and BAT claimed that they were doing their best to stop smuggling, alleging that it harmed them too. Or they claimed that since their competitors smuggled, no-one could stop it (and that they should not have to try). However, they knew all too well that smuggling increased their total sales volumes and thus profits. Documents have shown that executives from the large companies met secretly to agree market shares in both legal and illegal markets in target countries.

It appears that the companies supervised and managed smuggling with the same skill and sophistication as they used in legal markets. Locally employed staff routinely visited smuggling outlets and reported on prices. They would check on supply arrangements and stocks. In Colombia, for example, a weekly report on prices and supplies in the illegal street markets called ‘Sanandresitos' was compiled and sent back to regional BAT managers.

The companies also operated umbrella schemes. Small supplies of cigarettes were legally imported and sold at tax-paid prices. These could lawfully be advertised even though the real targets were the buyers of cheap, smuggled cigarettes. The legal cigarettes were the ‘umbrella' sheltering and promoting the contraband trade.

Until September 1999, the directors of British tobacco companies were able to encourage smuggling overseas with impunity, knowing that they could not be prosecuted in Britain. But the 1998 Criminal Justice (Terrorism and Conspiracy) Act made it an offence to conspire ‘to commit offences outside the UK'.

These legal moves and sustained public exposure have resulted in some changes. Although a Government enquiry in April 2004 found that BAT had not broken British law at the time (up to 1999), the company had already undergone an internal debate on smuggling. BAT finance director Keith Dunt, who had overseen ‘Duty Not Paid' operations into countries like Colombia, took early retirement. In December 2001, the company warned its shareholders that profits were going to be lower than forecast because it had cut back on ‘Wholesale Duty Free' trading.

Also in April 2004, Philip Morris, the makers of Marlboro, agreed to pay $1 billion to the European Union to fight smuggling, as a settlement to a legal case against the company.

Lately, the transnationals have been moving into less detectable forms of smuggling, exploiting the resources of the internet. The torrent of spam trying to sell cheap tobacco has been one of the results. Like the rest of the contraband tobacco trade, it would not exist if the companies were not making cigarettes available to the smugglers to sell.

Franesco Cito / Panos
Contraband: selling smuggled cigarettes in Naples. Franesco Cito / Panos

Duncan Campbell, formerly of New Statesman magazine, was a member of the team from the International Consortium of Investigative Journalists (ICIJ) which conducted an international investigation into tobacco smuggling in 1999 and 2000. ICIJ is a project of the Center for Public Integrity (http://www.publicintegrity.org), a Washington-based public interest research group. The detailed ICIJ investigative report can be read at http://www.publicintegrity.org/dtaweb/report.asp?ReportID=62&L1=10&L2=10&L3=0&L4=0&L5=0

BAT responds: When contacted by NI, BAT responded by categorically denying any involvement in or sanction for smuggling. ‘We work actively with governments and customs & excise authorities globally, to help eliminate smuggling and ensure we can compete fairly and openly… Only governments can tackle it [smuggling] effectively. Smuggling damages our business and we would like every market to be entirely rid of it… It is not the manufacturers who are smuggling or who are failing to enforce the laws against smuggling and the sale of smuggled and counterfeit products, nor is it the manufacturers who are creating the conditions under which contraband/counterfeit flourish. The idea that we can prevent smuggling is also misguided, as we cannot control every stage in the supply and distribution of our products to consumers around the world… We have over recent years significantly reduced the volumes of products that we are selling, especially to the duty free trade, to try to restrict the likelihood of our products being smuggled further down the supply chain.' You can read the entire response on our website at http://www.newint.org/issue369/bat.htm

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