TOBACCO FIRM MEMOS SPEAK OF SMUGGLING

Cigarette giant British-American Tobacco encouraged and relied on smuggling
to boost its sales in Latin America for at least several years, according
to internal company memos in which senior executives discuss the role of
smuggling in building market share and profits.

The documents, dating from the early to mid-1990s, do not prove that
employees of British-American, the world's second-largest tobacco company,
directly took part in smuggling operations. But they suggest that
high-ranking officials could control the clandestine movement of cigarettes
across national boundaries and sought to do so to compete with rivals they
thought were doing the same.

Cigarette smuggling cheats governments of taxes and import fees and experts
say it tends to increase smoking by holding prices down. Some countries
such as Canada have imposed high taxes on cigarettes to discourage smoking,
a policy that is undermined by smuggling.

The disclosures, and other smuggling episodes that governments have sought
to blame on multinational tobacco companies, threaten to open a new front
in the legal assault on the industry.

On Monday, Fanny Kertzman, Colombia's director general for taxes and
customs, said the governors of 20 Columbian states are preparing a lawsuit
against the tobacco industry to recover tax losses due to alleged smuggling.

They would be following the lead of Canada, which in December filed a
$1-billion lawsuit against R.J. Reynolds Tobacco Co., accusing it of
involvement in a smuggling operation that undercut a government program to
discourage smoking through higher taxes.

Tobacco companies have acknowledged that huge volumes of cigarettes are
smuggled in the international market, but they have denied sanctioning the
practice, blaming it instead on organized crime, rogue employees and
governments that invite smuggling by pushing cigarette taxes too high.

Company Plays Down Finding

Michael Prideaux, a spokesman for British-American Tobacco, said Monday
that company officials are still reviewing the documents but believe that
they have been "cherry-picked" from a huge volume of memos and
correspondence to create a damning picture. Prideaux said there may be
other documents that "make it perfectly clear that strenuous efforts were
being made to get out of this business."

The papers were culled from a giant document depository in Guildford,
England, that was established several years ago as part of U.S.
anti-tobacco litigation by the states. The documents were first disclosed
Monday as part of a report by the International Consortium of Investigative
Journalists, part of the Washington-based Center for Public Integrity. The
Times also has obtained some of the documents.

The documents paint "a devastating picture of a rogue industry," revealing
that senior British-American executives "participated in actions which they
knew led to cigarette smuggling in a systematic and massive basis
throughout South America," said Matthew L. Myers, president of the Campaign
for Tobacco-Free Kids.

The memos reflect strategy discussions among high-level company executives
and directors, including the former chairman of British-American, Barry
Bramley. Authors and recipients of the memos include several officials
named in another set of British-American documents that revealed a
systematic effort to cooperate with Philip Morris, the world's biggest
cigarette maker, in fixing prices and dividing Latin American markets.

Those memos, first revealed by The Times in September 1998, were in marked
contrast to the public display of tooth-and-nail competition between the
world's two largest tobacco companies.

At least one of the memos discussing the role of smuggling is addressed to
Nick Brookes, formerly a senior international marketing executive and
currently chairman and chief executive of Brown & Williamson Tobacco Corp.,
British-American's major U.S. subsidiary.

In recent weeks, Brookes has spearheaded an image-building campaign in
which B&W has sought to open a dialogue with customers and critics,
including Internet chats and a speech last month to the National Press
Club. In May, 1998, Brookes wrote an op-ed piece in the Washington Post on
the role of high taxes in creating black markets in cigarettes. Brookes was
unavailable for comment Monday.

Most of the memos avoid words such as "smuggling" and "contraband," but
refer euphemistically to imported cigarettes that are either "DP," for duty
paid, or "DNP," for duty not paid.

Jon Ferguson, former antitrust chief of the Washington state attorney
general's office, who used British-American documents in that state's
lawsuit against the tobacco industry in 1998, said, "The term 'duty not
paid,' in so many words, means smuggled cigarettes."

And in its report, the journalists consortium quoted Les Thompson, a former
R.J. Reynolds executive convicted in a Canadian smuggling scheme, as saying
that "duty not paid" was "an industry-wide term" for smuggling.

In one June 1992 memo, British-American director Keith S. Dunt appeared to
rebuke the head of the firm's Argentine subsidiary for worrying more about
smuggling than sales: "We will be consulting here on the ethical side of
whether we should encourage or ignore the DNP segment. You know my view is
that it is part of your market and to have it exploited by others is just
not acceptable."

The memos show that the cheaper DNP cigarettes accounted for a large share
of imported cigarettes in several South American countries, including
Colombia and Argentina. But company officials faced the challenge of
maintaining the right supply of smuggled cigarettes to avoid undercutting
their other brands and bringing increased government attention.

In a May 1993 memo, for example, Dunt complained that British American's
Brazilian subsidiary, Souza Cruz, was shipping such huge volumes of
duty-not-paid cigarettes through Paraguay to Argentina that it was stealing
sales away from its Argentine subsidiary, Nobleza-Piccardo, "rather than
[the] competition."

Nobleza-Piccardo had forecast a decline in profits and market share, due in
part to the "increasing volume being 'pumped' " by Souza Cruz "through the
northern border," Dunt wrote.

Other documents cited the need to maintain enough duty-paid imports to
avoid casting suspicions on advertising campaigns that could not be
justified for brands available only through smuggling. For example, an
August 1992 memo to Bramley noted that "a small volume of duty-paid exports
would permit advertising and merchandising support in order to establish
the brands, with the market being supplied initially primarily through the
DNP channel."

And a February 1994 memo on marketing options in Colombia included a
proposal to sell a new brand by shipping in "DP product" followed by "DNP
product . . . two weeks after" the brand's launch.

Another document suggested British-American was concerned that its reliance
on DNP cigarettes not be exposed. The 1994 memo said the firm's office in
Bogota, Colombia, "will be clean by Q3/94 (third quarter of 1994) in
reference to DNP information." Henceforth, "management of DNP will be in
Caracas."

In 1996, two former mid-level sales executives with British-American's B&W
unit were indicted in New Orleans on charges stemming from a scheme to
smuggle cigarettes into Canada. The men pleaded guilty.

One of the documents released Monday--a 1993 letter from the chairman and
chief executive of British-American's Canadian subsidiary, Imperial Tobacco
Ltd.--stated bluntly that Imperial knew it was benefiting from cigarettes
that were exported duty free to the U.S. and then smuggled back to Canada.

"As you are aware, smuggled cigarettes . . . represent nearly 30% of total
sales in Canada, and the level is growing," R. Don Brown wrote to
British-American director Ulrich Herter. "Although we agreed to support the
federal government's effort to reduce smuggling by limiting our exports to
the U.S.A., our competitors did not.

"Subsequently, we have decided to remove the limits on our exports to
retain our share of Canadian smokers. To do otherwise would place the
long-term welfare of our trademarks in the home market at great risk."

Queried about the letter by the Center for Public Integrity, Brown said his
comments in the letter "were simply of the nature of a factual
observation," according to a response appended to the CPI report.

"We knew (along with the Canadian government, the media and the Canadian
public) that a large portion of Canadian cigarettes exported to the United
States were being brought back illegally into Canada, mostly by organized
crime. As we have said countless times before, and as I am happy to repeat
here, our company never knowingly sold cigarettes to smugglers."

Cigarette Tax Hike Scaled Back in 1994

The Canadian smuggling problem grew so serious that the government in
Ottawa in 1994 scaled back a big cigarette tax increase that had been
designed to raise revenue and promote health by curbing smoking.

In 1998, a subsidiary of R.J. Reynolds, Northern Brands Inc., pleaded
guilty to involvement in a smuggling scheme in which Canadian cigarettes
were exported to the U.S. and then shipped back into Canada through Mohawk
Indian tribal lands straddling the border in upstate New York.

Les Thompson, a veteran RJR marketing executive, last year pleaded guilty
in the case, received a six-year prison sentence, and now is cooperating
with the Canadian government.

RJR has said that Thompson acted alone. But "nothing could be further from
the truth," Thompson recently told CBS' "60 Minutes II."

Responding to the civil suit filed by Canada in December against RJR and
its former Canadian subsidiary, RJR-MacDonald Inc., RJR officials said the
company did nothing wrong.

The issue of cigarette smuggling arose in June at a Senate hearing, where
Kertzman, the Colombian official, testified that 90% of the cigarettes
imported into that country were contraband.

Sen. Charles E. Grassley (R-Iowa) said that "some Colombians have gone so
far as to threaten to sue Philip Morris, arguing that the volume of
advertising that Philip Morris chooses to have in Colombia is not justified
by levels of legitimate sales."

Responding Monday to an inquiry by The Times, a spokeswoman for Philip
Morris International said, "We believe the amount our Colombian affiliate
spent on advertising was not out of line with the scale of its business
there."