CANADA CLAIMS TOBACCO CO. SMUGGLING

SYRACUSE, N.Y. (AP) - The Canadian government sued R.J. Reynolds
Tobacco Holdings Inc (NYSE:RJR - news). today, charging it and related
companies conspired to smuggle tobacco products into Canada to avoid
paying millions of dollars in taxes.

The lawsuit, filed here in U.S. District Court, alleges the companies
set up an elaborate network of smugglers and offshore companies to
ensure an abundant supply of cheap cigarettes in Canada, which doubled
taxes and duties on tobacco in 1991.

The lawsuit, which seeks damages of $1 billion, also names the
Canadian Tobacco Manufacturing Council.

It alleges that RJR-MacDonald Inc., a Canadian subsidiary of Reynolds,
tried to blame organized crime for the smuggling while pretending it
was trying to stop the activity. It also alleges that RJR-MacDonald
set up a shell company in the United States to deceive
investigators.

The suit was filed under the U.S. Racketeer Influenced and Corrupt
Organizations Act. Many of the defendants are U.S.-based.

R.J. Reynolds officials in Winston Salem, N.C., were in a meeting and
did not immediately return calls for comment.

Canadian officials in Ottawa allege that high-level executives were
involved in encouraging and authorizing the smuggling conspiracy.

``The tobacco companies cannot and will not be permitted to frustrate
public policy in Canada, and that in large part is what this lawsuit
is all about,'' said Canadian Health Minister Allan Rock.

He expects to institute tougher cigarette labeling requirements and
wants to increase taxes even more.

The lawsuit was filed a day after a former tobacco company executive
was sentenced to nearly six years in prison for supplying a northern
New York smuggling ring with millions of cigarettes that he knew would
wind up on the black market in Canada.

Leslie Thompson of Tecumseh, Ontario, was sentenced Monday, in
Binghamton, N.Y., to 70 months in prison. Thompson, a top official
with R.J. Reynolds subsidiary Northern Brands International, was the
first tobacco executive to be sentenced to prison in the United States
for his conduct in marketing cigarettes, court officials said.

Authorities said that ring, based in Messina, N.Y., smuggled $687
million worth of cigarettes and alcohol onto the Canadian black market
from 1991 to 1997 through the St. Regis Mohawk Reservation that
straddles the U.S.-Canada border.