Tobacco Firms Know: Where There's Smoke, There's Smuggling
Billions of Dollars Involved in Black Markets
By Raymond Bonner and Chrstopher Drew
New York Tirnes Service

NEW YORKThe largest tobacco companies are selling
billions of dollars of cigarettes each year to traders and dealers who
funnel them into black markets in many countries, say law enforcement
officials and participants in the trade.

In the last decade, the volume of cigarette smuggling around the
world has nearly tripled, according to a leading tobacco research
organization. This reflects a general surge in cigarette sales
abroad, especially for U.S. brands. And industry of ficials
acknowledge that a sizable share theresearchers say
onefourthof the cigarettes sold overseas pass through smuggling
rings set up to evadeR foreign taxes and sell major brands at a discount.

The companies say they do nothing to encourage the
smuggling and do not condone it.

But recent criminal investigations in several countries show that
people in the tobacco industry have played a significant role at times in
stimulating and fueling it.

In one case, two sales rnanagers for Brown & Williamson
Tobacco Corp. have pleaded guilty to aiding smugglers. But what law
enforcement agents say is far more common is for the compa
nies to sell huge quantities of top brands to traders and dealers who are
little more than pipelines to the smugglers.

For instance, newly available court documents show that R.J.
Reynolds Tobacco Co., the secondlargest U.S. cigarene maker,
sponsored trips to a posh Canadian fishing resort for several dealers
who have since been charged with conspiring to smuggle cigarettes into
Canada. On onefishing trip in 1995, aReynolds salesman even joked
with the dealers about the smuggling.

Some of the dealers admit that they pour huge volumes of
cigarenes into the smuggling networks.

One of Europe's biggest cigarette traders Michael Haenggi, said in an
interview that he had been buying Winstons from Reynolds for 15 years
and had resold many of them to smugglers in Spain. Mr. Haenggi said
his threeperson trading company in Switzerland had handled $100
million in sales last year.

"Of course I know where the cigarenes are going," he said.
"But is that my problem?"

Other inquiries show that two organizedcrime groups in Italy
take in $500 million a year by smuggling in Marlboros they buy from
Swiss dealers selling products made by Philip Morris Cos., America's
largest cigarette maker.

Hong Kong prosecutors plan to place a former marketing manager for
BritishAmerican Tobacca Corp., a subsidiary of BAT In dustries PLC
and a British affiliate of Brown & Williamson, on trial this year on
charges that he took more than $3 million in bribes from dealers
involved in smuggling cigarettes into China.

Spokesmen for the three cigarette companies said they did not
knowingly sell to dealers who supply smugglers and refused to discuss
any of the criminal .cases. But they said that while a few salesmen
might have been too aggressive, their executives had done nothing
wrong and that the companies should not be held accountable for what
happens once they sell their products.

The smuggling costs foreign governments an estimated $16
billion a year in lost revenue. But more important, health experts say it
threatens to undermine initiatives in many nations to discourage
smoking, particularly among teenagers.

That is because young people tend to smoke more when they
can buy cigarettes cheaply, and smuggled brands often sell for about a
third less than ones on which taxes and customs duties have been paid.

The sheer scope of the smuggling also could force changes in
the $368.5 billion settlement being negotiated with the U.S. tobacco
industry. The proposed agreement says that before the government
could order the companies to lower the nicotine in cigarettes, it would
have to guarantee that smugglers would not bring in more potent
substitutes. But given how easily smuggling can take place, President Bill
Clinton said last month that this provision was unreasonable and should
be changed.

The recent surge in blackmarket sales has many causes, from
the relaxation of customs inspections in Europe to the opening of vast
new markets in Russia and Eastern Europe.

Market Tracking International Ltd., a research firm in London
that provides data to tobacco industry publications, estimates that 280
billion of the 1 trillion cigarettes exported each year by all producing
nations pass through the hands of smugglers, up from 100 billion in
1989.

The rise in smuggling also has coincided with a massive push by
U.S. cornpanies to expand overseas, which they see as a way to offset a
decline in sales at home. American cigarettes are regarded as top
quality and are seen as chic in many countries.

But as popular as American and other Western brands are, the
companies also run into various sales barriers, including high taxes,
limits on imports and countries where cigarette distribution is corrupt.

The smugglers, though, have increasingly maneuvered around
such limits.

To be sure in cities from Naples to Bogota, the image of street
peddlers hawking contraband cigarettes has been an enduring one.

The manufacturers benefit in that they normally receive the
same price for cigarettes whether they end up in contraband markets or
not. And despite markups by dealers, smugglers and salespeople,
contraband cigarettes can still be sold cheaply and profitably because
the savings from evading taxes can be so great.

Law enforcement officials say that the dealers usually provide
such a distance between the companies and the smugglers that it would
be hard to consider charging the companies with doing anything illegal.
Yet, even some dealers say that they and the companies sell the
cigarettes so indiscriminately that they both know certain sales are
headed for the black market.

If the companies say they do not, "it's a lie," said Corrado
Bianchi, who said he had sold PhiliD Morris cizarettes as a dealer in
Switzerland before retiring two years ago. "Of course they know."

Mt. Bianchi said he had sold large quantities of Philip Morris
brands "to 200 people maybe, and they come from all over, Dutch
people, Germans, Spanish, Greeks, Italians." But, he said, he never
asked the buyers what they were going to do with the cigarettes. "In
our work you can't ask what they do with the cigarettes."

One result is that Mr. Bianchi ended up selling Philip Morris
products to an organizedcrime figure now on trial in Italy, prosecutors
there say. Mr. Bianchi himself is not a defendant, and he has denied
that he did anything wrong.

Andre Reiman, a senior vice president for a Philip Morris
subsidiary in Europe, questioned whether the company had sold
cigarettes directly to Mr. Bianchi. "As far as we can determine, he has
never been a customer," he said.

"I am not going to sit here and tell you there is not contraband
in cigarettes," Mr. Reirnan added. "It's there. The causes are just a
little more complicated than people believe."

Philip Morris executives in New York said smugglers competed with the
company's distribution system and jeopardized investments in overseas factories.

Adam BryanBrown, a spokesman for Reynolds's international
tobacco subsidiary in Geneva, said governments were responsible. "The
root causes of eontraband are well knownthe high duties and taxes
imposed on cigarettes," he said.

But Per Brix Knudsen, the director of an antifraud unit for the
European Union, said: "It's astonishing that these big producers are not
more concerned that such a large quantity of their nroduct is arriving
on the illegal market. How is it that such a trade can take place?"

Much of Europe's tobacco trade takes place in Switzerland,
where the law basically does not view selling cigarettes to people who
smuggle them into another country as a crime. Investigators in the rest
of Europe say that Swiss authoriticsand tobacco companies
themselvesare rarely willing to cooperate.