RJR SUBSIDIARY PLEADS GUILTY TO SMUGGLING

A unit of the RJR Nabisco Holdings Corp. pleaded guilty on Tuesday to
federal criminal charges stemming from a scheme to smuggle cigarettes into
Canada through an Indian reservation in upstate New York and agreed to pay
$15 million in penalties.

The authorities said the guilty plea, filed in Federal District Court in
Binghamton, N.Y., marked the first time that a tobacco company has been
convicted of complicity in the shadowy and growing world of international
cigarette smuggling.

Experts estimate that nearly one-fourth of the billions of American
cigarettes sold overseas pass through smuggling rings set up to evade taxes
and sell major brands at a discount. Critics have long contended that this
trade could not go on without the industry's knowledge and support.

But while previous criminal investigations have led to charges against
several mid-level managers, top executives at the large, multinational
tobacco companies have always denied allegations that they encouraged or
condoned any dealings with the contraband rings.

In entering the guilty plea, the RJR Nabisco subsidiary, Northern Brands
International Inc., admitted that it helped distributors evade $2.5 million
in U.S. excise taxes on shipments that, the authorities said, were
ultimately smuggled into Canada to avoid high taxes on cigarettes there.

But the company's plea also could have sweeping repercussions in Washington,
where Congress has debated whether to raise the taxes on domestic cigarette
sales to discourage smoking.

Industry executives have argued that any significant increase in the taxes
would immediately create a black market for cigarettes in the United States,
much as it did in Canada.

But the guilty plea "shows that the emperor doesn't have any clothes in
making that argument," said Gregory N. Connoly, the director of the
Commonwealth of Massachusetts' Tobacco Control Program.

"The companies have always said that they are not directly involved, and
they have used the threat of smuggling to dissuade Congress from raising the
taxes," he said. "But now we have evidence that the industry is complicit
with organized criminals when it comes to smuggling."

Thomas J. Maroney, the U.S. attorney in Syracuse, N.Y., said the
four-year-old investigation was continuing. But he declined to say whether
any high-level officials at RJR Nabisco's main tobacco operation, R.J.
Reynolds Tobacco Co., or other tobacco companies were under scrutiny.

Top executives and spokesmen at R.J. Reynolds, based in Winston-Salem, N.C.,
could not be reached for comment on Tuesday night. But Maroney said that the
company had agreed to cooperate with investigators and had taken steps to
insure that similar violations do not happen again.

Bloomberg News quoted a R.J. Reynolds lawyer, C. Stephen Heard Jr., as
saying that the company "regrets this episode." According to the news
service, Heard said that Northern Brands' actions were "inconsistent with
the way Reynolds does business" and that Reynolds had closed Northern
Brands.

The charges against Northern Brands arose from an investigation that has led
to guilty pleas by more than 20 people involved in smuggling hundreds of
millions of dollars worth of alcohol and cigarettes into Canada.

Court documents released during the investigation showed that R.J. Reynolds,
the second-largest American cigarette maker next to the Philip Morris Cos.,
sponsored trips to a luxury Canadian fishing resort for several distributors
who lived in upstate New York and smuggled cigarettes into Canada. One R.J.
Reynolds sales manager even joked with the dealers about the smuggling, the
documents said.

The smuggling took off after Canada raised taxes in the 1980s and the early
1990s to discourage cigarette consumption, one of the first countries to try
this approach. The taxes did not apply to exports, and affiliates of the
three biggest companies -- Philip Morris, R.J. Reynolds and BAT Industries
PLC -- started shipping large amounts of Canadian brands, like Players and
Export A, to the United States even though few Americans smoke them.

Maroney said that without paying either the Canadian or the American taxes,
distributors then moved the cigarettes back into Canada through the St.
Regis Mohawk Indian Reservation in upstate New York, with the help of some
Indian leaders who also have been convicted in the case.

In Tuesday's guilty plea, R.J. Reynolds' Northern Brands unit admitted to
participating in one crucial part of the scheme.

Checked-by: Rolf Ernst