Big Tobacco's Next Legal War

For cigarette salesman Leslie Thompson, 1993 was an especially good year. A star employee with Northern Brands International (NBI), a tiny, four-person export outfit owned by the tobacco giant RJR Nabisco, Thompson sold an astonishing 8 billion cigarettes that year, reaping about $60 million in profits. Walking the company's halls, Thompson received a standing ovation from executives who'd gotten hefty bonuses as a result of his work. On his wrist he flashed a Rolex, a gift from grateful wholesalers.

These days, Thompson's name is no longer greeted with applause in the tobacco industry. He and other former executives are soon to be quizzed by federal prosecutors about the shady side of the cigarette business. NEWSWEEK has learned that a federal grand jury in North Carolina is investigating explosive allegations about links between major cigarette makers and global smuggling operations that move vast quantities of cigarettes across borders without paying any taxes. It's a multibillion-dollar-a-year enterprise.

The grand-jury deliberations spotlight a new round of legal troubles for Big Tobacco. (The proceedings are secret and it could not be learned which companies are under scrutiny. The U.S. attorney in Raleigh, N.C., declined to comment.) Cigarette makers are under attack from governments around the world that seek to hold them responsible for the costs of smuggling: billions in lost taxes, soaring violence and weakened efforts to prevent kids from smoking. Last week the European Union announced that it plans to launch a civil suit against U.S. cigarette makers for their alleged involvement in smuggling. In the last eight months, Canada, Colombia and Ecuador have all filed smuggling suits against American tobacco companies using U.S. antiracketeering laws. (The Canadian suit was recently dismissed on jurisdictional grounds, but Canada is considering an appeal.) Britain, Italy and China have also mounted intensive investigations. The Canadian and European investigators are cooperating closely with their U.S. counterparts to build a case against the industry. The Feds have even set up a cigarette-smuggling "war room" in the U.S. Federal Building in Raleigh, N.C., which is now ground zero in the latest battle against Big Tobacco. In addition, NEWSWEEK has learned that next week the World Bank and World Health Organization plan to release the results of a three-year investigation claiming the tobacco industry has deliberately thwarted international efforts to control the tobacco trade.

Cigarette makers can ill afford a new volley of legal problems. The industry was just hit with a $145 billion judgment, which it plans to appeal, in a Florida smoking case. Though tobacco executives acknowledge that cigarette smuggling is a problem, they vehemently deny any involvement in the illegal shipment or sale of their products. R.J. Reynolds executives say their company has been completely reorganized and bears no responsibility for the now-defunct NBI. They also insist they knew nothing about Thompson's illegal operation. He was a rogue smuggler, they say, who fooled them all and brought shame on the industry. Philip Morris also strongly denies any involvement with smugglers. "Our policy is clear and unambiguous," says spokesman Donald Harris. "Philip Morris does not condone, facilitate or support the smuggling of cigarettes and readily cooperates with governments in their efforts to prevent illegal trade in the products we manufacture." The tobacco companies say they shouldn't be held responsible for what happens to their product after they sell it any more than the maker of a television or a hair dryer would be. They argue that cigarette smuggling is such big business because of the high taxes imposed on them, which inevitably lead to a black market. "I don't think it's our responsibility to act as a policeman," Martin Broughton, chairman of British American Tobacco, said in an interview with NEWSWEEK. "High duties create the conditions for smuggling, not tobacco companies."

Once a casual, under-the-table trade, cigarette smuggling has become a sophisticated and often bloody enterprise. In Italy smugglers drive heavily armored SUVs and stockpile their goods in vast hidden warehouses. In some places, including Colombia and China, the vast majority of foreign cigarettes smoked by the public have been smuggled into the country. Last week federal authorities charged 18 people with smuggling cigarettes out of North Carolina, which has low cigarette taxes, and selling them in Michigan, where taxes are higher. The profits were allegedly used to fund the terrorist group Hizbullah. No tobacco companies were implicated in the scheme.

In the United States, Thompson is expected to be an important witness in the grand-jury proceedings. In February, he began serving a six-year sentence in federal prison after pleading guilty to money laundering related to the smuggling case. American and Canadian prosecutors charged that Thompson racked up his impressive sales numbers through his involvement with smugglers who shipped billions of R.J. Reynolds cigarettes into Canada. On the books, everything looked legit. But once over the border, the cigarettes were passed on to black marketers, evading high Canadian cigarette taxes. Investigators believe this soft-spoken, 52-year-old family man was merely a bit player in the global smuggling scene. Before his sentencing and in press interviews before he went to prison, he said that he operated with the knowledge and encouragement of his superiors.

Thompson's case gave prosecutors one road map of how the underground trade works. His company, NBI, was located inside R.J. Reynolds's Winston-Salem, N.C., headquarters. To the public, Thompson's job was to sell Export A's, a leading Reynolds brand in Canada. But the Canadian government charges NBI was nothing more than a shell company that supplied smugglers with cigarettes. According to court documents and Thompson's own testimony, Thompson shipped millions of cartons of Export A's from Canada and Puerto Rico to the United States, where virtually no one smokes them. The crates were then diverted to a Mohawk reservation on the U.S.-Canadian border--the secret staging ground for the operation. Smugglers on the reservation built huge warehouses to stockpile the cigarettes. After dark, a flotilla of speedboats would ferry the cargo across the St. Lawrence River to the Canadian side of the reservation. The cigarettes were then sold on the black market, skirting Canada's steep tobacco taxes.

By 1994, Canadian politicians were so horrified by the brazenness of the lawbreakers that the government rolled back the cigarette taxes to reduce demand for illegal cigarettes. It worked. Less than a year later Thompson's business was drying up. Eventually, a handful of the smugglers who actually transported the cigarettes pleaded guilty. Thompson was the only cigarette-industry executive charged in the scam. In 1998, NBI worked out a plea bargain with U.S. prosecutors and paid $15 million in fines and forfeitures. In a related Canadian proceeding against Thompson, the prosecutor made it clear he believed the tobacco company had hung its former employee out to dry. "Thompson was not on a lark of his own here," he told the court. "He did not commit this crime by himself. His acts were part and parcel of a corporate strategy developed largely by other senior executives who closely monitored and supervised his work."

In Colombia, authorities want to know how much Philip Morris knows about the billions of its Marlboro cigarettes that are smuggled into that country each year. Marlboros are the most popular brand in Colombia and its cities have been plastered with Marlboro Man billboards--even though in most cases Marlboros can be bought legally only at duty-free shops. Police estimate that just 4 percent of the Marlboros smoked in the country got there legally. A complaint filed by Colombian state governments in federal court in New York alleges that Philip Morris executives "embarked upon and pursued a scheme to smuggle cigarettes on a worldwide basis," routing the cigarettes through a network of subsidiary companies in countries with free ports, including Aruba, Switzerland and the Netherlands. A Philip Morris spokesman called the Colombian complaint "reckless and inflammatory," and says though the complaint has been filed in the court, the company has not been served papers and no Philip Morris employee has been questioned by authorities or charged with any crime. Indeed, WHO officials credit Philip Morris with "great willingness" to attack the global smuggling problem.

In Italy, the illegal cigarette trade has become especially violent. Earlier this year smugglers in speedboats with huge cargo holds were bringing in as many as 7.5 million packs of cigarettes a night to the country's shores, mostly in the south. "Smuggling is not like it used to be," says Biaggio DeIacia, an Italian cop who's hunted mafia smugglers in southern Italy for 36 years. In the past, "they'd unload a boat, kick the cases into the bushes." These days the operation is far more sophisticated, and dangerous. Smugglers have built hidden warehouses for the contraband behind fake retaining walls and under olive groves, some large enough to hold half a dozen trucks. To protect their convoys, the smugglers use bulletproofed SUVs with battering rams on the front and back. They stop for no one. In a country with especially stiff penalties for carrying a gun, smugglers often use their trucks as weapons. In February, two Italian police officers were crushed to death when a smuggler smashed into their car. In response, the Italian government sent 2,000 heavily armed reinforcements to the area.

Meanwhile, Britain has been beefing up its own border patrol. In an effort to keep tobacco smugglers at bay, 1,000 new Customs officers have been recruited. At the port of Felixstowe, on England's North Sea coast, officials seized 1.6 billion cigarettes last year. One shipment came in marked as Christmas trees. The inspectors became suspicious when they noticed the crates had come from India--and didn't arrive until New Year's Day.

British press reports have also focused attention on the alleged role of British American Tobacco (BAT) in foreign smuggling operations, drawing on internal company documents recently made public. The House of Commons has recommended that the British government launch a formal investigation into the allegations. One set of documents highlighted by English anti-smoking groups, they say, indicates the company went out of its way to build market share by encouraging smuggling. Those pages, culled from vast archives, suggest that the company was aware of just how many of its own cigarettes were being smuggled. The 1993-97 marketing plan for one of BAT's key subsidiaries included projected profits from "General Trade" cigarettes. The document describes plans to "grow our business" in "General Trade" countries including China and Vietnam, where most foreign-made cigarettes are illegal. Anti-smoking activists say that "General Trade" is industry jargon for smuggled cigarettes. Another BAT document they focus on suggests the company closely monitored the smuggling of its brands. Records show it tracking how cigarettes entered Vietnam. "From sailors: 40%, from fishermen: 25%, from smuggling (by sea): 35%." BAT denies breaking any laws. Kenneth Clarke, a former British minister who sits on BAT's board, seems to take a pragmatic view. "We act, completely within the law, on the basis that our brands will be available alongside those of our competitors in the smuggled as well as the legitimate market," he told the British press.

Cigarette makers are quick to point out that with the exception of Thompson, no tobacco-industry executive has been convicted for any smuggling-related crimes.

Investigators and prosecutors say that they are still building their cases, and that long experience going up against Big Tobacco's army of hard-nosed lawyers has taught them it is better to wait than to jump too soon. Since Thompson's conviction, other former executives have cooperated with Canadian, U.S. and European authorities. Thompson was the first to go to jail, but given all the heavy guns trained on the industry it is doubtful he'll be the last.