*SMUGGLING: OUR VIEW* Smuggling is a major global problem for manufacturers of many goods, including computers, electrical goods, cars, watches, wines and spirits, perfumes and tobacco. It is caused by tax differentials, weak border controls, and import restrictions and bans, and only governments can tackle it effectively. Smuggling damages our business, and we would like every market to be entirely rid of it. British American Tobacco companies do not smuggle and we do not condone smuggling. We work actively with governments and customs & excise authorities around the world to help them eliminate smuggling and ensure we can compete fairly and openly. The British American Tobacco Group enables governments worldwide to gather over £14 billion a year in taxes, including excise duties on our products, more than 10 times the Group's profits after tax. The vast majority of the markets where we operate are orderly. However, smuggling is a major global problem for manufacturers of many goods, including computers, electrical goods, cars, watches, wines and spirits, mobile phones, toys, perfumes, soaps and detergents. Tobacco is no exception. Smuggling is caused by tax differentials, weak border controls, and import restrictions and bans - often to protect state monopolies - on goods which are in high consumer demand. Where governments are not prepared to address the causes of smuggling, it can rapidly spiral to overwhelm an orderly market and will frequently be penetrated by organised crime. In the UK, where tobacco duties are far higher than in many neighbouring European countries, Her Majesty's Customs & Excise estimates for the year 2001-2002 put smuggled tobacco goods at some 21 per cent of the market, causing losses of tax revenue to the UK Government of more than £3.5 billion a year. The Tobacco Alliance, representing 19,000 UK retailers, estimates that many of its members are losing up to £1,000 per week to tobacco smugglers. *Smuggling damages our business* British American Tobacco companies manufacture around the world for domestic markets and for export. In various markets, we sell on standard terms and conditions to wholesalers who often also re-sell many other companies? products. In many of our principal markets, we invest in company distribution networks staffed by our own employees, delivering direct to retail outlets, as in Argentina, Australia, Brazil, Chile, Colombia, Mexico and Venezuela. In countries where local restrictions prevent company distribution, we engage distributors under contract to provide the same service, for example in large parts of the Middle East. Developing well-managed distribution networks requires major investment, which is undermined by smuggling. Smuggling also corrodes market share and destroys the reputation and profitability of our brands - among any company's most important assets. It also facilitates the equally damaging problem of counterfeiting. Smuggling and counterfeiting damage our business. We would like every market to be entirely rid of them. In October 2000, the UK Secretary of State for Trade and Industry announced a confidential investigation under Section 447 of the Companies Act 1985 into ?allegations of BAT?s involvement in smuggling?. We stated at that time we would be cooperating fully with the investigators but would be making no further comments during the course of their work. *Diversity of supply* Tobacco is widely grown, the technology to make and package cigarettes is widespread and relatively inexpensive, and there is vast available manufacturing capacity. Alongside the major international manufacturers, who supply just over 40 per cent of the world market, there are more than 200 producers in various countries, supplying some 60 per cent. There are multiple supply chains for tobacco products, including an active secondary market involving hundreds of brokers globally, and local spot markets in several countries which also involve the trade of hundreds of other commodities. Where a market involves myriad and diverse secondary transactions, it is impossible for any manufacturer, however prudent in managing its primary distributors, to control all aspects of supply. Efforts to do so would not only be impractical but, from the point of view of competition and the efficient working of markets, almost certainly undesirable and in some markets illegal. Smuggling and counterfeiting typically involve several separate buyers between an initial purchase and its eventual dispersal and disappearance from legitimate circulation. Intermediate changes of hands can take place almost simultaneously in diverse global locations, making identification of the buyers virtually impossible. *Only governments can tackle smuggling effectively* Global businesses are not global law enforcement agencies. Only governments can tackle smuggling effectively, through border controls and excise strategies to ensure orderly markets. No international business operating through distributors can control every subsequent link in diverse and myriad secondary supply-chains. If a company withdraws entirely from a market damaged by smuggling, consumers will either switch to its competitors' brands, or there will be a dramatic increase in counterfeiting. Where governments are not prepared to address the causes of smuggling, businesses such as ours, producing highly taxed consumer goods, will inevitably find their goods are being smuggled or there is a noticeable increase in counterfeiting. *Company standards* British American Tobacco employees are required to operate in accordance with our Standards of Business Conduct. These stipulate all employees must observe the laws and regulations of any country where they operate, must act with integrity in conducting business, and must not sacrifice business integrity to results. Our global Export Guidelines require all exports to comply with the law of the exporting country and to be fully and accurately documented. Export managers are trained in a wide range of compliance issues including trade embargoes and avoiding third party money laundering and fraud, as well as in conducting co-operative day to day liaison with customs authorities. We operate rigorous selection procedures for distributors. Only a small number of the many applying to us are accepted. We will, and have, terminated contracts with distributors who have not complied with our own requirements or with legal requirements.