CANADA SAYS RJR SMUGGLES TOBACCO

SYRACUSE, N.Y. - The government accuses the company of conspiring to
avoid millions in taxes.

The Canadian government sued R.J. Reynolds Tobacco Holdings Inc. for
$1 billion Tuesday, charging that it and related companies conspired
to smuggle tobacco products into Canada to avoid millions of dollars
in taxes.

The lawsuit, filed in U.S. District Court in Syracuse, alleges the
companies set up an elaborate network of smugglers and offshore
companies to flood Canada with cheap cigarettes after the government
doubled taxes and duties on tobacco in 1991.

``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,'' Canadian Health Minister Allan Rock said.

The suit alleges that R.J. Reynolds companies set up a shell company
in the United States - Northern Brands International - to protect
itself from charges that it sold to smugglers.

The suit also alleges that a Canadian subsidiary of Reynolds,
RJR-Macdonald Inc., used the Canadian Tobacco Manufacturing Council, a
trade group, to blame organized crime for the smuggling while
pretending it was trying to stop the activity.

The suit was filed under the federal Racketeering Influenced and
Corrupt Organizations Act, known as RICO, a law originally aimed at
mobsters.

Seth Moskowitz, a spokesman for R.J. Reynolds Tobacco in
Winston-Salem, N.C., said company officials could not comment until
they had seen the lawsuit.

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

Leslie Thompson of Tecumseh, Ontario, was sentenced Monday in
Binghamton, N.Y., to nearly six years in prison.

RJR officials have denied that the company played any role in
encouraging the smuggling ring, based in Massena, N.Y. Authorities
said the ring smuggled $687 million worth of cigarettes and alcohol
into Canada from 1991 to 1997 through the St. Regis Mohawk Reservation
that straddles the border in northern New York state.

A top official with Northern Brands, Thompson is the only tobacco
executive to be sentenced to prison in the United States for his
conduct in marketing cigarettes, court officials said.

Canadian government officials allege that high-level executives were
involved in encouraging and authorizing the smuggling conspiracy. No
executives were identified.

Between 1989 and 1992, Canada implemented major tobacco tax increases
to raise revenues, respond to demands by antitobacco and health groups
and encourage Canadians to reduce tobacco con sumption.

By 1993, taxes on a pack of cigarettes in Canada accounted for almost
75 percent of the retail price. They have since been lowered.