Canada’s cigarette smuggling corridor

Dino Bravo, a former World Wrestling Federation wrestler and mob enforcer, was sitting in his leather recliner, programming his new VCR on March 12, 1993, when two men walked into his luxury home just north of Montreal and shot him seven times in the head. Police later found in his home stacks of cash and documents related to the cigarette smuggling business. One investigator, who wished to remain anonymous, said in an interview that Bravo was murdered because he was skimming from a mob smuggling network for which he collected the money. A Canadian smuggler, in an interview with the Center for Public Integrity, said the same thing. He added that Bravo had purchased a cigarette relabeling operation in Champlain, New York, that repackaged and relabeled cigarettes, which Canadian-based manufacturers sent to the United States. The cigarettes were then smuggled back into Canada.

In the end, however, Bravo was a bit player in a much bigger game largely controlled and regulated by the major tobacco companies. He was killed at the peak of tobacco smuggling in Canada. Federal and provincial governments had more than doubled their tobacco taxes, driving the cost of a carton of 200 cigarettes to as high as $50 Canadian (US $38). While the manufacturers vigorously lobbied the government to reduce taxes, they fed the smuggling networks through elaborate U.S. and Caribbean routes. Each of the three major Canadian manufacturers — RJR-Macdonald, BAT's Imperial Tobacco Ltd. (working with Philip Morris), and Rothmans Benson & Hedges — exported billions of cigarettes into the United States, from where they were smuggled back into Canada.

In a June 3, 1993, letter to BAT senior executive Ulrich Herter, Imperial Tobacco president and CEO Don Brown stated that smuggling represented 30 percent of total sales in Canada, and "until the smuggling issue is resolved, an increasing volume of our domestic sales in Canada will be exported, then smuggled back for sale here." Noting that Imperial had to pay a royalty to Peter Jackson (Overseas) Ltd. for every du Maurier brand cigarette sold outside Canada, Brown complained that Imperial should not have to pay the royalty for exports to the United States since they were being smuggled back to Canada. "Paying royalty on volume actually sold in Canada . . . not only impacts on earnings but also renders us less competitive," he wrote. He added that the company can "fairly accurately estimate those volumes sold outside Canada and those returning from the total." Brown admitted in an interview that in 1993 the company exported 6 billion Canadian brand cigarettes into the United States, where nobody smokes Canadian cigarettes. BAT subsidiary Brown & Williamson marketed Imperials du Maurier brand in the United States. In 1996, U.S. Customs agents arrested Michael Bernstein, a B&W regional sales manager, Richard Wingate, B&W's sales account manager for the New Orleans area, and six others and charged them with trafficking in cigarette contraband into Canada. All defendants pleaded guilty.

An undercover agent posing as a smuggler recorded a conversation in which Bernstein said that he received permission from Imperial Tobacco to sell to the agent. Bernstein said that Imperial Tobacco threatened to cut off the sales "if and when we get snagged with the packet of stuff anywhere in Canada." Bernstein said Imperial was ready to continue to sell small orders "as long as we don't get snagged." Federal agents also searched B&W's headquarters in Louisville, Kentucky, in January 1995 but found nothing that would connect the company to conspiracy to smuggle into Canada. Agents claimed in the search warrant affidavit that evidence existed that the company had been smuggling into Mexico. The affidavit also states that Wingate told agents that a B&W corporate supervisor told him he had ordered an employee "to destroy the paperwork evidencing recent potentially illegal sales of cigarettes into Mexico." The affidavit states that Wingate and Bernstein said "that the company's organizational structure necessitated new marketing strategies. According to them, these strategies included selling cigarettes to smugglers."

During the undercover investigation, which started in 1993, agents taped Bernstein and Wingate discussing the smuggling and what would happen if they got caught in the Canadian operation, in which the cigarettes were said to be bound for tax-free fishing vessels off the Louisiana coast. "As far as Brown & Williamson is concerned, that product was brought in for consumption on those Vietnamese fishing boats," Bernstein says. He later adds: "Were we personally any part of this? No, we were not. Did anyone ever call you up and say 'I need a hundred cases for Canada'? No." He then related to Wingate a similar case in Boston where he was selling to Portuguese fishing vessels. "It was all being flushed into the Boston market and whatnot. Wherever it can be, wherever anybody can make a buck, I promise you, Dick, they're going to make a buck. Especially on cigarettes." He added: "It's an easy sale. It's only a slap on the wrist if you get caught."

In fact, he was right. Bernstein, who initially agreed to cooperate with authorities, later refused to help after meeting with his B&W-paid lawyers, Reid H. Weingarten and Mark J. Hulkower, both former Justice Department employees. Weingarten once said he was "very, very close at the [Justice] Department" to former Deputy Attorney General Eric Holder. Weingarten and Hulkower wrote a 42-page letter to then-Attorney General Janet Reno on February 9, 1996, arguing that the prosecutor in the case, Peter Strasser, should be removed for prosecutorial misconduct and grand jury abuse. Reno didn't buy their argument but still removed Strasser from the Bernstein case "to be safe," according to a court document filed by the U.S. Attorney's office. Bernstein was later fined $1,000 and sentenced to two years probation. Wingate, who cooperated with authorities in their investigation and refused B&W's offer of legal assistance, was sentenced in 1997 to six months in a halfway house, followed by three years probation, and fined $8,250.

'Tobacco companies knew it all'

Richard Ward directed international sales at Imperial's head office in Montreal and was responsible for sales into the United States. He was the contact with B&W. One Canadian smuggler, who wished to remain anonymous, told the Center that he met Ward in his offices at Imperial's headquarters at least four times to negotiate cigarette shipments into the United States. Did Ward know that he was dealing with a smuggler? "Yes," said the smuggler. "I have spent 30 years hiding my activities from society. Yet Richard Ward knew more about my activities than any policeman ever found out. So I guess what I am telling you is that tobacco companies knew it all. They know where the product is. When they ship from their warehouse (in Montreal) to Miami, they know that it's shipped to Miami but it's actually going to end up on the streets of Montreal and Toronto." The smuggler continued: "In my discussion with Richard Ward it's very clear to me that tobacco companies knew more about smuggling and how it worked and how to improve it than any smugglers on Earth. And to show just how good they were and just how intimate their knowledge was, when the business moved from interprovincial to international, the tobacco companies ended up with more of the provincial and federal taxes than the smugglers did, and they took it not with willful blindness. They were participants without being in the room."

In answer to written questions to Imperial Tobacco, Ward, speaking through the company's public relations department, denied he ever met with smugglers. Imperial also shipped to the United States billions of Players, the most popular brand in Canada. Because Philip Morris has the U.S. rights to Players, Imperial signed a royalty and marketing deal with the company in 1992. They agreed to maintain the Canadian packaging. But health labels had to meet U.S. regulations. So, labels were changed in the United States at places such as Bravo's Champlain relabeling and warehousing operation. The operation had been originally set up by Michel Sylvestre, a convicted cocaine dealer with connections to the Hells Angels. Sylvestre and John Gareau, a local ship chandler currently under indictment in Canada for tobacco smuggling, had guidance from Imperial in locating labeling machines from Britain, the smuggler told the Center. However, it was RJR-Macdonald, RJR's Canadian subsidiary, which set up the most aggressive smuggling network.

In 1992, company president Ed Lang and vice president Stan Smith ordered sales executive Les Thompson to meet with Larry Miller and brothers Lewis and Bob Tavano. Miller and Bob Tavano both had criminal records: Miller for armed robbery in Chicago and Tavano for fraud and bribery. Lewis Tavano was charged in the 1970s with bookmaking. The charges were dropped and he moved to Las Vegas, where he ran a sports bookmaking and loan operation. Police in Buffalo, New York, say the Tavanos were linked to the late Stefano Magaddino, a Buffalo crime boss. Thompson later said in an interview that his bosses at RJR told him to sell as many cigarettes as he could to Pine Partnership, the company set up by Miller and the Tavanos. Thompson met with the two men at a restaurant in Niagara Falls, New York, where a plan was laid out to sell them millions of Export 'A' — RJR's best-selling brand in Canada. The company then set up a corporate structure designed to take the operational aspect of the smuggling business out of Canada. RJR created Northern Brands International, located at RJR's head office in Winston-Salem, North Carolina.

The company had only two employees, Peter McGregor, who was in charge of finance, and Les Thompson, who was responsible for sales. Their sole job was to sell into the Canadian black market, according to Thompson and confidential documents from a 1993 RJR executive meeting in Winston-Salem. RJR-Macdonald also set up separate offices in a building opposite its downtown Toronto headquarters to manage any communications with Northern Brands. The company had its offices swept for bugs, Thompson said. To further distance itself from the operation, RJR-Macdonald transferred equipment from Canada to Puerto Rico, where it began large-scale manufacturing of its Canadian brand cigarettes. The entire output of the plant was sold to smugglers, primarily Pine Partnership. The sales arrangements were made through Northern Brands International, Thompson said.

Before entering the United States, the Puerto Rico cigarettes were "washed" through offshore tax havens, such as Aruba. R.J. Reynolds International Special Markets in Winston-Salem, run by an Italian-Canadian named Franco Gabriele, signed a deal in March 1992 with International Duty-Free Trading N.V. and its managing partner Bryan Harms, a shipping agent based in Aruba whose family would later be linked to a smuggling operation involving another tobacco multinational. In 1992 and 1993, RJR shipped about US $65 million worth of cigarettes through Harms' company. The shipments, however, were only book entries. According to Harms, the money never actually went through his company accounts. Nor did he have to handle the cigarettes. For his services, Harms charged RJR a total $3 million, he said. The cigarettes were then shipped to U.S. warehouses located in free trade zones close to the border in Buffalo and Champlain, New York. From there, they were shipped into the Ackwesasne American Indian reserve, which straddles the U.S.-Canada border. Indians smuggled the cigarettes across the St. Lawrence River on small boats and into Canada. Other shipments were smuggled through border stations in Quebec, Ontario, and in British Colombia, court records show.

RJR-Macdonald also shipped directly into the United States from its Montreal plant. The shipments went to free trade zones, where ownership was transferred to companies like Pine Partnership. From there, they were trucked to the Indian reserve or smuggled back across the border through customs stations. RJR's Thompson said that at the time, RJR-Macdonald was pouring a little more than 60 percent of its production into the black market and earning more than US $60 million in net profits annually from the smuggling. RJR cemented its relationship with Miller and the Tavanos by wining and dining them at Grand Prix races, professional golf tournaments, baseball games, and at the exclusive Sonora Lodge, a fishing club in British Colombia. It was also a favorite resting place for Hells Angels who, according to Thompson, often shared the fun with the Tavanos and Millers as they schmoozed with RJR executives.

Rogue or company man?

After his arrest, company officials portrayed Thompson as a rogue operator. But when he ran his one-man, direct-to-smugglers sales department at Northern Brands International, it was another story. During those years, his bosses repeatedly commended him for his excellence. They threw a party for him and gave him an Indian headdress in joking recognition of his sales to American Indian smugglers. On June 23, 1993, RJR-Macdonald president Pierre Brunelle wrote to Thompson that his "hard work and dedication to the company have made significant contribution to the success we have realized over the years especially in recent months." Thompson's 1993 performance evaluation applauded him for hitting "every target and objective assigned to him."

As one former RJR senior executive told the Center, NBI and Les Thompson saved RJR-Macdonald from possible bankruptcy. By 1993, Canadian manufacturers were shipping slightly more than 17 billion Canadian brand cigarettes a year to the United States, where, as one police officer later testified, there is "almost absolutely no market for Canadian tobacco products." By 1994, about 35 percent of cigarettes sold in Canada was contraband, with the figure going as high as 75 percent in areas of Quebec. Faced with mounting crime and depleted tax revenues, the Canadian government in 1994 rolled back cigarette taxes. The smuggling slowed but did not stop.

Manufacturers still kept the networks running and, according to court testimony last year from RCMP Sgt. Raymond Blair Lutz, large-scale smuggling continued until 1998. Lutz told a pretrial hearing in Montreal in February 2000 that manufacturers were still sending millions of cigarettes to the J. Stanley Company in New Jersey. In what police call "around the flagpole" smuggling, J. Stanley shipped the cigarettes in bond back to Canada, where they were sold to smugglers, who reshipped them back to the U.S. still in bond. They were then smuggled back into Canada. The process was designed to distance the tobacco companies and J. Stanley from the smuggling. "Millions to billions" of dollars worth of cigarettes were smuggled into Canada from 1995 to 1998 using this process, Lutz said.

After Canadian taxes came down, Thompson said he was put in charge of marketing cigarettes to ship chandlers along the U.S. eastern seaboard for smuggling to Europe. His boss was Richard La Rocca. Thompson said he helped organize huge duty-free shipments from East Coast ports funneled through ship chandlers such as J. Stanley. RJR sent regular container loads of cigarettes on ships bound for Europe, claiming tax-free status by pretending the cigarettes were for on-board crew consumption only, he said. Each container holds about 10 million cigarettes and carries a wholesale value of as much as US $350,000. (J. Stanley, in a plea agreement last year, pleaded guilty in Canada to tobacco smuggling charges and paid $150,000 Canadian in fines and forfeitures. Charges were dropped against its owner, George Mannina. Canadian police have testified that U.S. Customs tried to persuade the RCMP not to charge Mannina because he was cooperating with one of their investigations. Mannina also owns Lamco International, a California warehouse and chandling operation.)

Thompson said that in 1998, La Rocca, who was general manager of RJR's Latin American office in Miami, told him to curtail shipments because of the increased numbers of seizures and negative media reports in Europe about tobacco smuggling. "He (La Rocca) said it's important that we back off from the noise that's happening in Western Europe," Thompson said. "Dick was very clear to me: Do not totally stop selling to . . . the ship chandlers. Reduce the volume. Instead of giving them a load every week, give them a load once a month or so. Just to keep the distribution channels alive. Dick said: I've got experience with that. Dick worked in Spain, the Canaries. He was the general manager there." Thompson said La Rocca once told him he knew Michael Haenggi, who bragged to the press in 1998 that he sold millions of RJR's Winstons to smugglers who smuggled them into Spain. Thompson said that La Rocca had been instructed to warn Haenggi that if he didn't "zip his lips," he would be cut off by RJR. "I understood from Dick that that statement was coming to him indirectly from (CEO of RJR Nabisco) Steven Goldstone," Thompson said.

A lawsuit filed last November by the European Union against R.J. Reynolds and Philip Morris alleges that RJR specifically recruited La Rocca because of his knowledge of the Spanish market. The lawsuit says RJR urged La Rocca to help set up a network "by which RJR cigarettes . . . were smuggled into the European Community and, more particularly, into Spain." La Rocca has been working for Japan Tobacco, Inc., since it bought RJR's international operations in March 1999. He remains general manager of the company's Latin American operations and works out of the same Miami office. Contacted by telephone at his Miami office, La Rocca hung up as soon as a reporter mentioned he was researching a story on tobacco smuggling.

The EU lawsuit also alleges that RJR dealt with a distributor in Spain who the company knew, or should have known, was involved in drug trafficking. The suit does not name the distributor but states that he has had "several publicized bouts with the law enforcement agencies in Spain in regard to his alleged narcotics trafficking." On June 10, 1998, an agent at the U.S. Bureau of Alcohol, Tobacco, and Firearms informed Thompson that he was the target of a smuggling investigation and advised him to get a lawyer. At the same time, a grand jury in Syracuse, New York, charged Miller, the Tavano brothers, Northern Brands International, and 16 other people with money laundering, smuggling, and fraud. They all pleaded guilty. Miller was sentenced to 17 years, and Bob Tavano got four years plus a $1 million fine. Lewis Tavano is dying of cancer and is to be sentenced in early March.

When RJR learned that Thompson was a target of a criminal investigation, it immediately set up meetings between Thompson and Steven Heard, the company's New York lawyer, and Washington, D.C., lawyers Weingarten and Hulkower, the same former Justice Department lawyers Brown & Williamson used in the New Orleans smuggling case. Heard, a gruff, gravelly voiced veteran of tobacco court battles, traveled to RJR-Macdonalds headquarters in Toronto and started interviewing employees and senior executives. Thompson said documents dealing with Ed Lang and pre-NBI days suddenly went missing. Top executives were transferred to Switzerland and Asia. Stan Smith, who was second in command of the company, left RJR and later moved to England.

Former RJR employee Franco Gabriele agreed to testify before the Syracuse grand jury in return for immunity. When Heard learned that Gabriele had made a deal with the government, he threatened to "publicly destroy his reputation." Thompson said he asked Hulkower, the RJR-hired attorney, if that was also a warning to him. Hulkower said it was. In a deal negotiated by Heard, NBI pleaded guilty in December 1998 to a customs violation and agreed to pay $16 million in fines and forfeitures — only a fraction of the money it earned from smuggling into Canada. As part of the plea bargain, the U.S. government agreed not to pursue RJR any further in the Northern District of New York. Thompson said the company lawyers told him, "The government is just saber rattling, stand tall, don't get scared with this thing. We'll get through it." But standing tall didn't help Thompson.

Three months after the NBI deal, Customs agents arrested Thompson at the Detroit border with Canada and charged him with fraud and laundering the proceeds of crime. Hulkower told Thompson that RJR would not back him and advised him to plead guilty. Facing a possible 20 years in prison, Thompson pleaded guilty to laundering $72 million and got six years in prison and a $100,000 fine. He also pleaded guilty in Canada to conspiracy to defraud the Canadian government and got a three-year suspended sentence and agreed to cooperate in ongoing investigations. Upon his arrest, RJR publicly stated that Thompson was a rogue operator in the company. No other RJR executive was ever charged in the case. The Canadian government sued RJR and Northern Brands International in 1999 in U.S. federal court for racketeering and fraud. The government's lawyer, Fred Bartlit, told a U.S. federal court judge in Syracuse last year, "This is a case of legitimate business that hooked up with organized crime." The international smuggling world is small, and the names of Harms, Gabriele, and Aruba would surface again in other smuggling investigations. One of them is in Italy.

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