TOBACCO GIANT SUED FOR $1 BILLION

Ottawa's move accuses company of smuggling cigarettes

OTTAWA - The federal government has launched a $1 billion (U.S.) lawsuit
against one of the country's tobacco giants, alleging it smuggled cigarettes
into Canada.

The lawsuit, believed to be one of the largest ever launched by Ottawa,
alleges RJR-Macdonald Inc. and its related holding companies, defrauded
Ottawa by smuggling the smokes into Canada, ultimately forcing the federal
government to roll back taxes on cigarettes.

The cigarette manufacturer, which controlled about 20 per cent of the market
in the mid-1990s through its flagship brand Export `A,' was involved in an
``elaborate scheme to defraud, corrupt, cheat, steal and conceal'' when it
snuck its product back into Canada, all the while blaming the smuggling
problem on organized crime, court documents say.

In so doing, Ottawa alleges it lost tax revenues, was forced to spend money
combating smuggling, and had to give up its most potent weapon against youth
smoking - prohibitive pricing - according to the complaint filed in U.S.
Federal Court in Syracuse, N.Y.

The complaint for damages filed by the federal government contains
allegations that have not been proven in court.

``The defendant's goal of making money conflicted with Canada's goal of
protecting young people from smoking,'' Justice Minister Anne McLellan said.

``So they set out to undermine Canada's policy.''

Health Minister Allan Rock said the rate of smoking among youths aged 15 to
19 had jumped from 21 per cent in 1991 to 31 per cent five years later,
after taxes were chopped to combat smuggling.

``This rise is due, in large part, to the roll-back on cigarette taxes which
was forced on us by the rise in the smuggling in the 1990s,'' Rock said.

``This massive increase in smuggling did not just happen.''

Tobacco companies, Rock said, will ``not be allowed to frustrate public
policy in Canada.''

The government lawsuit alleges RJR and its related companies ``used an
elaborate network of smugglers and off-shore shell companies to ensure an
abundant supply of cheap cigarettes to the Canadian market.

``In so doing, they undermined our policy of cutting tobacco usage.''

The lawsuit seeks:

* To restrain the defendants and their alleged co-conspirators from engaging
further in smuggling and other unlawful conduct.

* To compel the defendants to surrender the profits of their unlawful
conduct.

* To recover substantial damages suffered by Canada.

Guy Cote, a spokesperson for the company now known as JTI Macdonald-Corp., a
subsidiary of Tokyo-based Japan Tobacco, called the allegations ``a new
twist on an old story.''

But Cote said the company would withhold further comment until its lawyers
had thoroughly studied the court documents filed by Ottawa.

``We welcome a court appearance to allow us to tell our side of the story,''
he said.

Cote could not say whether the tobacco company would seek an out-of-court
settlement.

McLellan, however, ruled that out as an option.

``We have no intention of settling,'' she said.

The federal ministers said the $1 billion figure is conservative. It
involves the smuggling of more than 2 billion cigarettes.

The civil action was filed in the United States because of the amount of
evidence already heard there in U.S. legal action, officials said. There
have already been 21 guilty pleas entered in New York state.

One man identified as a smuggling ringleader was sentenced to 17 years in
prison Monday.

McLellan said criminal charges would be up to the RCMP.

``It's very significant when the justice minister accuses the tobacco
industry of being involved in criminal conspiracy,'' said Rob Cunningham of
the Canadian Cancer Society.

Even though Ottawa filed a civil action, he said, it could eventually lead
to criminal charges. A civil action demonstrates political will, he said.

``I hope this will lead to the recognition that tobacco taxes can be raised
substantially and quickly without contraband resulting,'' he said.

``I don't think this is the end of it.''

Ottawa moved under the U.S. statute known as the Racketeer Influenced and
Corrupt Organizations Act (RICO). Under its terms, a judge can triple
damages, says Fred Bartlit, the Chicago-based lawyer who will be
representing the government.

Ontario is taking advantage of the statute in its $59 billion lawsuit
against U.S. tobacco companies to recover the health-related costs of
smoking. But the province's lawsuit is stalled in the courts because a
separate U.S. court case involving the government of Guatemala is
challenging that legal avenue.

The Canadian Tobacco Manufacturers Council, the organization which speaks
for the country's cigarette manufacturers, is also named in the federal
government's lawsuit.

The CTMC, according to Revenue Minister Martin Cauchon, was used by
RJR-Macdonald to ``throw the government off the smuggling trail.''

Specifically, according to the government complaint, the CTMC, headed by
well-known Ottawa lobbyist Rob Parker, contended that cross-border smuggling
was controlled by diverse groups such as the Italian Mafia, Asian and
Russian organized crime and motorcycle gangs.

While it was making these charges, RJR was setting up a shell company in the
U.S., the government complaint states.

Yesterday, a spokesperson for the CTMC said it would not immediately
respond.

Reform health critic Keith Martin (Esquimalt-Juan de Fuca) said Ottawa
should back their civil action with a move to raise cigarette prices in
central Canada back to the same levels as those in neighbouring American
states.

NDP health critic Judy Wasylycia-Leis (Winnipeg North Centre) said the suit
was a ``half measure.

``Why didn't the government take action to recoup health care costs.

``Any measure like this should go hand-in-hand with a substantial tax
increase as quickly as possible.''