Tobacco Firms to Pay $550M Over Smuggling

Source from:  The Canadian Press 04/14/2010

Two tobacco companies will pay more than half a billion dollars over their alleged role in a contraband smokes operation that the RCMP once called the largest corporate fraud in Canadian history. Anti-smoking advocates are condemning the settlement as a sellout. North-Carolina-based R.J. Reynolds Tobacco Co. will pay the Canadian, provincial and territorial governments $325 million to deal with claims related to cigarette smuggling during the 1990s. A Reynolds subsidiary, Northern Brands International Inc., has been fined $75 million after pleading guilty under the Criminal Code to one count of conspiracy for helping others sell contraband smokes. Canadian tobacco manufacturer JTI-Macdonald Corp. has been fined $150 million after pleading guilty under the Excise Act to helping people sell and possess contraband tobacco. "It was litigation that had been going on for more than 10 years now and simply that's really what led to the settlement at this time," said R.J. Reynolds spokesman David Howard. "Essentially it was a business decision that it was time to move on and take care of this matter so that we can focus on what we need to be focusing on, that's our core business moving forward." R.J. Reynolds, though named in the suit, was not directly involved, but subsidiaries and operating companies "had individuals that were involved in alleged activities during those years," he said. The federal government sued major tobacco companies in 1999 but that case was dismissed by a U.S. court. In 2003, Ottawa sued the tobacco companies again for $1.5 billion, alleging they avoided paying taxes while conspiring in what police called the largest corporate fraud in Canadian history. Smuggled through native reserves The operation was alleged to have worked as follows: Canadian companies shipped crates of cigarettes to American subsidiaries, and avoided paying excise taxes because the smokes were for export; the cigarettes were then sold to smugglers and brought illegally into Canada through aboriginal reserves and border checkpoints; once back in the country, the cigarettes were sold to consumers at a big discount - sometimes for about half the price of legally purchased smokes. While the alleged smuggling operation was in full-swing, tobacco companies were lobbying governments to lower cigarette taxes, using the smuggling bonanza as an argument for tax relief. Faced with a massive illegal industry and lost tax revenue, Ottawa and various provincial governments relented in 1994 and lowered tobacco taxes. They began raising them again after the allegations in 1999 that the entire smuggling operation was quarterbacked by the tobacco companies. Tuesday's development brings to $1.7 billion the amount that tobacco-makers have paid governments in fines or to settle claims. Settlements were already reached in 2008 with Imperial Tobacco Canada Ltd. and Rothmans Benson & Hedges. Anti-smoking advocates say the tobacco-makers got "a sweetheart deal." "The tobacco smuggling in the early 1990s was, at the time, the largest and most destructive fraud in the history of Canadian business and public health," said Garfield Mahood, executive director of the Non-Smokers' Rights Association. The association said the drop in cigarette prices in the early 1990s made tobacco products more accessible to young people and led to a resurgence of teen smokers after a generation of reduced smoking rates. It noted that the federal and provincial governments filed claims for nearly $10 billion over contraband smokes. Mahood said that makes the $550-million settlement "a complete sellout." Enditem