Tobacco industry involvement in cigarette smuggling: The need for a multilateral response

Transcription

1 Tobacco industry involvement in cigarette smuggling: The need for a multilateral response Action on Smoking & Health, Canada Submission to World Health Organization Framework Convention on Tobacco Control Hearings August 2000 Contact: Mr. Les Hagen, Executive Director Box 4500, Stn. S., Edmonton, Alberta, Canada T6E6K2 Tel: Fax: hagen@ash.ca ASH is Western Canada s leading tobacco control organization. For over 20 years, we have provided local, regional, and national leadership on tobacco control from our headquarters in Edmonton, Alberta. During this time, we have come to recognize the critical importance of coordinating tobacco control efforts across borders, particularly when dealing with a global epidemic and a transnational tobacco industry. ASH s mandate includes public education, research, and advocacy on a wide range of tobacco control issues including tobacco control legislation, taxation, counter-marketing, and community mobilization. Our funding is derived from membership contributions, contracts with related health organizations, and government and private grants. None of our funding is derived from tobacco interests. In this submission we wish to concentrate on only one aspect of global tobacco control: the need contain and reduce tobacco smuggling. We are fully supportive of a broad-based Framework Convention on Tobacco Control and related protocols. Smuggling is an area where Canada has had very direct experience. It is also an issue that, by its very nature, transcends borders. The organized smuggling that occurred in Canada was used as part of a successful campaign by the tobacco transnationals to reduce tobacco taxes. But what happened to Canada was because of a lack of effective controls on international shipments. And what happened to Canada is now playing out on a global basis. The FCTC can play a key role in fighting crime, collecting taxes and protecting health. Nature of the tobacco smuggling problem About one-third of internationally traded cigarettes are eventually sold illegally (around 350 billion sticks) 1, equivalent to about six percent of entire world output each year. Through wholesale disclosure of internal tobacco industry documents arising from US litigation and the testimony of tobacco company employees, it has become clear that tobacco companies have been heavily involved in promoting, managing and controlling tobacco smuggling. The problem is not simply one of demand and opportunistic supply, driven by cross-border tax differentials as the companies argue. It is far more systematic, and usually driven by complete avoidance of taxes rather than by cross-border tax differentials. If the whole world harmonised tobacco prices and taxes at the current average level, there would still be large-scale smuggling. The majority of smuggled tobacco has never had duty paid in any jurisdiction it disappears from legal distribution while in transit. A health problem Cigarette smuggling is certainly a serious economic and public order issue, but it has important health consequences and hence is a legitimate matter for the World Health Organisation. These consequences arise because consumption of tobacco is related to its price and therefore to taxation. Typical price elasticities vary from 0.3 to 0.8 and tobacco taxation is advocated by the World Bank as a sound health and economic policy 2. Smuggling undermines tobacco tax policies and hence causes harm to health in

2 two clear ways. First, by reducing the average market price, as cheap illegally sold cigarettes take a share of the market. Second, by helping the companies to exert pressure on governments to reverse the policy of having high taxation in the legal market an approach that worked in Canada, with a consequent rise in consumption and drop in government revenue. In both ways demand is increased in both ways the tobacco industry benefits. Why the tobacco companies are involved There is no doubt that the tobacco companies play a critical role in tobacco smuggling. The illegal trade is very profitable because the companies are paid for cigarettes eventually smuggled and smuggling has become an important marketing tactic for brands entering new markets. In addition, cheap cigarettes remove the price incentive to quit or not start, and high levels of smuggling help the tobacco industry to argue for reductions in tobacco taxes, giving a knock-on benefit on demand in the legal market. Furthermore, a company that does not ensure its brands are smuggled risks losing market share to those that do. Once a major market player begins to facilitate smuggling, then other companies have a powerful disincentive not to join in. In no other industry would one-third of internationally traded products go 'missing' if this were not in the manufacturers' interests or to some extent under their control. How the tobacco companies are involved The companies do not generally undertake smuggling with their own personnel. When BAT or Philip Morris argue that they do not smuggle cigarettes, they are probably mostly right at least up to a point. The way the companies are involved is subtler than simply driving trucks over borders or bribing customs officials. The evidence shows that companies treat smuggling as just another distribution channel and they manage it with third parties, which effectively act as their agents in these illegal markets. The evidence shows the illegal channels may be very convoluted, but there is evidence suggesting tobacco companies exert control over the price and availability of their products in the illegal markets. This means they know which wholesalers are selling to smugglers and which consignments will end up on the black market. Where the companies lose control of these channels, and, for instance, counterfeit products start to be sold, the companies can work to close down smuggling activity. Solutions There are a number of options for dealing with smuggling, but many of these need to be implemented multi-laterally and as far as possible include cooperation of all countries. For this reason, a solution will need to be negotiated in an international treaty. The WHO Framework Convention, with appropriate links to the World Customs Organisation and other enforcement bodies, is an important vehicle for beginning to address the problem. The key challenge is to prevent exports and transit movements that are destined to become illegal imports effectively to tackle the problem at source. Measures that should be considered in a smuggling protocol include: Pack markings indicating final market destination and warnings in the national language of the destination market Pack markings allowing tracing and tracking A legal duty on manufacturers to ensure a secure distribution chain A liability regime by which the original manufacturer is held responsible for smuggled products A ban on duty free sales Evidence of tobacco company malpractice Several hundred documents found in the Guildford depository of British America Tobacco reveal the company engaged in business practices that promoted, facilitated or controlled cigarette smuggling. A short selection is presented here, but many more are available on the Internet 3. The lack of revealing post-1994 documents does not imply that smuggling ceased in 1994, it merely reflects the period covered by the disclosure agreement in the litigation settlement that caused the depository to be established and

3 made available to the public. The documents previewed below give a taste of the material and the conduct that the documents describe. Words that refer to smuggling include DNP (Duty not paid), GT (General trade) and transit. The real meaning of such terms can be clarified with reference to the context in which they are frequently used. 1. Building market share in Argentina through smuggling One of the most revealing documents implicates some of the most senior BAT executives in development of marketing strategy based on smuggling. Here is an extract: Memo: 18/5/93 4 Keith Dunt to Ulrich Herter, Barry Bramley [Chairman BAT Co], Pilbeam, Castro SUBJECT: DNP BRAZIL ARGENTINA I am advised by Souza Cruz that the BAT Industries Chairman has endorsed the approach that the Brazilian Operating Group increase its share of the Argentinean market via DNP. The most obvious interpretation of this memo is that Dunt (currently Finance Director of BAT) was notifying Herter (currently Managing Director) and others that the BAT Industries Chairman at the time, Patrick Sheehy, was authorising the Brazilian BAT subsidiary to orchestrate smuggling of BAT brands into Argentina to increase market share. It indicates a deliberate intention to win market share by acting to ensure that BAT s brands were smuggled into Argentina. This goes well beyond simply knowing of (and deploring) the smuggling activities of others. 2. Active and effective management of smuggling business BAT sees active management of the smuggling business as a priority. BATCo Global Five-year Plan In 1993, it is estimated that nearly 6% of the total world cigarette sales of 5.4 trillion were DNP sales. Eastern Europe and the Asia-Pacific region (c85blln each) accounted for the majority of this volume. Though Western Europe (c50blln) was also significant. In relation to total market sales, DNP volumes are largest in Eastern Europe (c13%) and Africa/ M. East (c12%), but are also significant in Latin America (c9%) and Western Europe (c7%). A key issue for BAT is to ensure that the Group s systemwide objectives and performance are given the necessary priority through the active and effective management of such business. This marketing plan suggests that BAT regarded the markets for smuggled products (DNP) as part of its overall business objectives around the entire globe. The plan also makes the active and effective management of the smuggled markets a priority and key issue. Again this is far from simply having knowledge; it represents a much more serious ambition and engagement in illegal activity. It should also be noted that smuggling levels are not the highest in the high tobacco tax regions as would be expected if high taxation were the primary cause. 3. Acting through intermediaries The documents show that BAT acts through intermediaries in this case SOREPEX, a wholesaler and trading company - to ensure that its cigarettes are sold in the illegal markets. There are many other documents indicating a similar pattern in Asia and Latin America. Letter from BAT to SOREPEX, "Our objective now is to preserve the "façade" that SOREPEX represents between us and the sensitive markets of Togo, Benin, Niger (Unit I) and Equatorial Africa (Unit II), but at the same time, enable the BAT field force to take over the management of this important business."

4 4. Knowingly engaging in concealment Documents show that BAT personnel were aware that their distributors would be concealing cigarettes and apparently regarded this as normal business practice. Meeting of BAT and SOREPEX, "Niger: Discussion was held concerning direct imports to Nigeria through Mr. Adji [who] would disguise the cigarette importations by calling the shipment something else, e.g. matches. And a further example. SOREPEX to BAT (translated from French) T 8 "For the first time, Bogno will buy 300 cartons: this is the capacity of his truck, taking into account the other merchandise which will 'hide' the cigarettes. 5. Collusion with Philip Morris manipulating the smuggled market One of the most damning documents is a note of a meeting between senior BAT and Philip Morris executives with responsibility for Latin America. The document shows extensive cartel behaviour in seeking market share agreements, price fixing and attempts to limit market support expenditures. It shows that BAT (with Philip Morris) can determine the price in the smuggled and legal market independently. The only way that this is possible is if they know which wholesalers are selling to smugglers and can vary the price specifically for them. FILE NOTE: marked Secret 05/08/92 9 MEETING WITH PHILIP MORRIS REPRESENTATIVES At Pennyhill Park, Bagshot BATCo suggested an aggressive price increase to be negotiated at a local level for DNP to be implemented if possible by the end of August. Following action on DNP PMI suggested we should pursue a DP price increase. PMI wanted linkage between the DNP increase. This was not supported by us. 6. Launching products on the smuggled market The following document shows a high degree of control over the smuggled market so that BAT s marketing planners were treating it as just another channel. Columbia Trip notes 10 File Note, 9 March 1994, Mark Waterfield: Colombia Trip Notes, 23/ Kent Super Lights... DNP product should be launched two weeks after the DP product has been launched." Lucky Strike... withdraw from the DNP market the 20 s and 10 s versions. This shows that BAT could decide exactly when and where to have its products smuggled by supplying the wholesalers and feeding products into the transit routes that the company knows supply the smugglers. This quote and many others show that BAT treated smuggling as a regular marketing channel in which it can control price and availability of its products. In Africa, other documents show that BAT invested in illegal marketing as if it is a normal business channel and found a way to advertise in illegal markets, despite national legislation.

5 BAT (UK and Export) limited, BHSF [Benson & Hedges Special Filter] has 80% share of imports which it has dominated for several years and enjoys country-wide distribution. The Unit II [Equatorial Africa] market produced a valuable contribution and it is intended to continue investment in order to protect it from further erosion. As there are no legal imports [] no local media is used. However, a major campaign on the Africa No 1 Radio programmes transmitted from Gabon is funded from Unit II resources. (Emphasis added) 7. The use of Umbrella operations It is quite clear from the documents that BAT has used a small legal operation as cover for advertising aimed at stimulating sales in the illegal market - so-called 'umbrella operations'. The document below shows BAT's furtive discussion of the real nature of its business. Internal document from Andrew O Regan to ADG Pereira dated Trip Notes India 29 Nov to 2 Dec 93 The Available in Duty Free cover for extensive media coverage needs to be very carefully used, as it can easily become antagonistic and will draw attention to the source of market supply, which we would rather did not come under scrutiny. Legitimate imports through various hotel groups is defensible and provides another source of cover for our brand building plans, and a promotional platform. Conclusion Cigarette smuggling is a problem to a large extent driven and promoted by international tobacco companies in their own commercial interests and for competitive reasons. A strategic and comprehensive response to smuggling cannot be effective without removing the supply-side pressure created by active management and control of smuggling by tobacco companies. It is necessary therefore to develop a secure distribution chain in which the tobacco companies remain liable for excise fraud as far as possible all the way to the final consumer. References and links to scanned originals 1 Luk Joossens, Martin Raw Cigarette smuggling in Europe: who really benefits? Tobacco Control 1998;7: Chaloupka, Frank J. et al Curbing the Epidemic: governments and the economics of tobacco control. The World Bank, Washington DC