CIGARETTE SMUGGLING NETWORK

Global reach of tobacco company’s involvement in cigarette smuggling exposed in company papers

WASHINGTON, February 2, 2000 — In its search to maintain and enlarge cigarette markets and corporate revenue, British American Tobacco – the world’s second largest tobacco multinational and parent company of Brown & Williamson – exploited a sophisticated network of smuggling routes throughout Asia.

A review of more than 11,000 corporate documents, conducted over a six-month period by the International Consortium of Investigative Journalists at the Center for Public Integrity, shows that, as with corporate operations in Latin America, BAT managers and executives used a series of euphemisms in corporate correspondence to discuss smuggling operations that helped them gain a greater share of smokers and profits.

But unlike Latin America, where company executives commonly used the euphemism “DNP,” meaning Duty Not Paid, to denote smuggled goods, BAT documents discussing Asian operations most often used the term “GT” or General Trade. The company documents, on Asia, mostly covering the years 1990-1994, repeatedly contrast legal export sales with GT and break down the total trade in particular countries into the categories of legal or “GT.” One plan for Singapore, for example, refers to how “the legal market fell but the shortfall was taken up by GT product.” Another plan for Taiwanshowed “the split between Legal and GT.”

 Difficulty with Closed Borders

Other pointers to the meaning of GT in company documents include references to difficulties with customs or closed borders, indicating that the reason why GT trade was illegal was because it involved smuggling. In relation to moving cigarettes into Myanmar (Burma) from Thailand, a Nov. 30, 1992 fax from BAT’s Singapore subsidiary warned that duty-paid sales to Myanmar had been cut off because of political turmoil. “The closure of the Thai border as the result of the May political upheaval meant that Embassy, legally border traded and duties paid, no longer had a legitimate route into the country.” The same report also noted that “this closure coincided with the monsoon season and the consequent redeployment of security forces from rebel engagements to internal security activities. The GT route thereby became more difficult . . .”

A large part of BAT’s GT sales in Asia were handled by one Singapore distributor, SUTL (Singapura United Trading Limited). According to company papers, SUTL handled both legal and GT products in the region. Its normal market channels were broken down into domestic sales; duty-paid exports, which were legal; duty-free sales in airports and to ships; and GT. A Dec. 10, 1991, document identified risks to the GT business. “SUTL appreciate that dependency on GT leaves them very vulnerable to market liberalisation (Thailand) and market closure (Vietnam), therefore they are seeking to move that core business to long term legal ventures involving ownership interest.”

Other company documents from Latin America and Asia used the phrase “GT” interchangeably with “DNP” and “transit,” internal euphemisms that also appeared on BAT papers in place of direct references to smuggling. This and other similar evidence from the BAT papers lead to the conclusion that, within British American Tobacco, references to GT in the papers of directors and managers were references to smuggled cigarettes.

The reviewed documents, part of a cache of about 8 million pages made public as a result of the 1998 U.S. tobacco settlement, do not suggest that BAT employees themselves ever transported contraband across borders. But they sought to exploit and control to their advantage smuggling markets around the world through a network of agents who, on an annual basis, transferred billions of cigarettes into the hands of smugglers.

So large was the role of GT that, according to the most recent information available, a plan covering the period from 1993 to 1997, more than one-fifth of the output of BAT’s United Kingdom factories was made for this market. From its factory at Southampton, in southern England, more than 60 billion cigarettes are made annually by BAT (UK and Export) Ltd. (BATUKE). On average, about 20 containers of cigarettes leave the port every day.

The information appears in the BATUKE company plan for 1993 to 1997. Marked “SECRET,” the document is noted as having been provided to the then-chairman of the BAT Company Ltd, Barry D. Bramley. BATCo was then the main tobacco manufacturing subsidiary of BAT Industries Plc.

 125 Different Markets

According to the plan, BATUKE operates in 125 different markets, shipping tobacco products to these markets through 360 agents. The markets are broken down into “domestic,” “duty free” and “General Trade (GT).”

During the period covered by the disclosed documents, BAT anticipated that more than one-fifth of its U.K. and Export production would be “GT.” Under the heading “General Trade,” it states that “two key General Trade markets will account for 4.7 billion units or 22% of BATUKE’s total shipments.”

The two key centers of distribution identified in the report are SUTL and “Unit 1.” SUTL covered countries from Afghanistan to the Philippines, while Unit 1 was involved with Africa. Other centers that can be identified as playing a major role in BAT’s GT trade are the Gulf state of Dubai and Hong Kong.

The Company Plan suggests that BAT then proposed to invest in expanding its use of GT methods to reach its end markets. The company “strategy [focuses] on maximising the GT market opportunities to provide funds to build a stable volume/profit base for the long term via investment in duty free and domestic markets.” It added that “£3.8 [million] [$5.9 million] . . . will be invested to grow our business in the GT markets.”

BAT has refused to comment on the meaning of such terms as “GT,” “DNP” or “transit,” or to discuss the implications of any particular document. In a statement last week, BAT said the 11,000 pages of reviewed documents were taken out of context. However, a year ago, the company’s public affairs director, Michael Prideaux, said in response to smuggling allegations that “if people wish to draw the inference that we are turning a blind eye to smuggling, they are free to do so. Deterring smuggling is a matter for the governments concerned. The only sure way is to cut tobacco taxes.”

 Far From Blind

But the hundreds of documents in BAT’s files on marketing activities in Asia and around the world leave little doubt that some of BAT’s top directors and executives were far from blind to smuggling activities. They received reports about new opportunities in GT trade, as well as regular assessments of sales levels that went through legal and GT channels.

Important markets in the region for “GT” cigarettes, according to a 1992 report prepared by Fred Coombe, BATUKE area manager for the Far East, were Bangladesh, Myanmar, Thailand, Laos, Vietnam, Indonesia, Philippines, North Korea, Afghanistan and Taiwan. The largest potential market of all was mainland China. Evidence from Hong Kong suggests that BAT cigarettes worth more than £490 million ($810 million) were smuggled into China during the 1990s.

In the late 1980s, competition between Hong Kong-based rival traders smuggling BAT cigarettes into China became so intense that bribes were paid to the BAT local director whose job it was to deal with them. After one jilted trader exposed the system to Hong Kong’s anti-corruption commission, former BAT (HK) export director Jerry Lui was extradited from the United States. BAT itself was not charged with any offense.

The case against Lui nearly foundered after the chief witness against him, trader Tommy Chui, was murdered. His body was found floating in Singapore harbor in 1995, stuffed in a garbage bag with tape over his mouth. Another potential witness committed suicide. Nevertheless, in June 1998 Lui was convicted and sentenced to three years and eight months’ imprisonment. He later launched an ultimately unsuccessful appeal and awaits the outcome of a continuing appeal application.

BAT company documents disclosed during Lui’s trial led Justice Wally Yeung Chun-kuen to comment: “The evidence suggests that management of BAT (HK) was aware duty-not-paid cigarettes . . . would ultimately be smuggled in China and other countries. . . . To some extent such irresponsible behaviour amounted to assisting criminals in transnational crime.”

The company claimed at the time that the smuggling was the work of “rogue” employees and replied that “British American Tobacco does not smuggle. It does not condone smuggling and its business is entirely lawful.”

 Exploited Traditional Routes

The documents obtained and reviewed by the Center’s International Consortium of Investigative Journalists show that in many Asian countries BAT did not merely tolerate GT trade channels, but exploited traditional smuggling routes when that would maximize sales. The documents also trace the rise and fall of Lui within BAT ranks.

At first, Lui worked for BAT’s U.S. subsidiary Brown & Williamson. His job was “aiding and abetting our efforts to get U.S. brands well established in export markets,” a BAT document said. At the end of 1991, he was appointed the director of exports for British American Tobacco (Hong Kong) Ltd. His job was to supply export distributors in the region. Many of them transported contraband cigarettes into China.

In internal BAT documents, the job that Lui had held in Hong Kong was described more clearly as “Director of Exports to China.” The same BATCo file also noted company worries about the “dependence of continued transit trade into China.” According to court proceedings in Hong Kong last year, Lui had to report to BAT (HK) executive meetings on the volume of cigarettes being supplied to each distributor.

“It was because the market in China was the largest source of profit for BAT (HK) Ltd that the post of director of exports was so important within the BAT organisation,” according to the Hong Kong Court of Appeal. At the time, only the Chinese Tobacco Import and Export Corporation was legally allowed to import cigarettes and charged heavy duties to do so.

When officers from the Hong Kong Independent Commission Against Corruption raided the offices of BAT’s largest Hong Kong distributor in 1994, they found accounts showing that $5.36 billion [HK] dollars worth of cigarettes had been purchased – about 50 billion cigarettes.

In Vietnam and other nations, where the documents note that all cigarette imports were illegal in the early 1990s, files held by BAT Asia-Pacific Regional Director Paul Adams show that the company monitored, encouraged and facilitated “GT” or “transit” sales imports when these suited corporate needs. It is clear from the documents, many of which are marked “SECRET,” that the senior directors and staff who handled such sales understood what they were doing. One company document referred to “transit” as “essentially the illegal import of brands … upon which no duty has been paid.”

Another report noted that transit sales created “apparently paradoxical requirements of an arm’s length approach and close supervision.”

Getting into Bangladesh

In 1992 and 1993, for example, smugglers about whose activities the company were informed faced particular difficulties in getting cigarettes into Bangladesh through adjacent Myanmar because of “(a) Increased customs surveillance in Chittagong/Cox’s Bazaar; (b) border confrontation between Bangladesh and Myanmar over the Rohinga Moslem refugee crisis.”

The same report also promised that SUTL would “strive to improve this situation by developing land routes via Myanmar and optimising duty free leakage.” Another problem encountered was that BAT representatives were unable to visit countries such as Vietnam, Bangladesh and Pakistan because of “legal or political sensitivities.”

SUTL was a Singapore company, Singapura United Trading Ltd (SUTL), and is characterized in BAT files as a family dynasty run by Chinese patriarch Tay Choon Hye. During a decades-long relationship, Tay and SUTL had developed an intimate working partnership with BAT. BAT staff oversaw many aspects of company activities while others were seconded to work inside SUTL. SUTL’s significance to BAT’s trading was such that Tay, its boss, was felt by some BAT staff to have access to the highest levels of BAT Industries Plc.

SUTL was responsible for serving four duty-paid markets, 20 duty-free markets, and 11 “GT” markets, according to a 1993 BAT “Asia-Pacfic study.” SUTL was not itself involved in smuggling cigarettes across national borders, according to the reviewed documents, but sold them on to other distributors or wholesalers. Attempts to reach SUTL for comment before publication were unsuccessful.

Company executives examined which mix of these channels would serve BAT best. In August 1994, Asia-Pacific Regional Director Paul Adams received a lengthy report on BAT’s plans for SUTL from 1995 until 1999. The report defined the company’s responsibilities as “to maximize BAT’s market and profit shares in South-East Asia / Indian Sub-Continent export business through the most efficient distribution of our international and regional brands, irrespective of sub-channel (Domestic, Duty Free, GT).”

While other BAT companies took responsibility for sales channels into China, SUTL focused on developing new markets such as Vietnam. This plum Asian market had a population of 71 million and was viewed as a strong prospect for new business.

In the years since the war had ended, Vietnam had fought a seemingly losing battle against smugglers.  Until 1990, the “transit” market into Vietnam was estimated by BAT to be 12-18 billion cigarettes a year. Then, following a clampdown that September, “smuggling was virtually eliminated for 18 months,” according to a report to Adams. The hiatus did not last long. As border conditions relaxed, contraband routes again appeared, particularly coming through Cambodia. In 1992, the company’s “Cambodia Business Plan” referred to this situation as, apparently, a temporary contingency: “Cambodia will continue to service the Vietnamese market until the [Vietnamese cigarette import] ban is lifted.”

Contraband to Vietnam Climbs

Soon, contraband into Vietnam was climbing toward pre-1990 levels. In 1992, Adams was told that BAT’s State Express 555 brand of cigarettes was the “major smuggled brand in the area… there is no doubt it has a tremendous image and sales potential.” Sales of smuggled State Express 555s were then estimated to be about 1 billion cigarettes, worth roughly £10 million ($16 million) a year.

A series of company papers showed that, from 1991, BAT then pursued a twin-track strategy to maximize its earning from Vietnam. One track was to negotiate with the Vietnamese government and its tobacco monopoly, Vintaba, in order to produce international brand cigarettes locally.

The other was track was monitored from BAT’s UK-based “Asia-Pacific Regional Business Unit,” where a 1994 marketing plan for Vietnam noted that “the high margins on illegal product are justified on grounds of risk… The amount of handling associated with imported distribution coupled with the requirement of frequent concealment has produced a standard of visual presentation that is inferior to local manufacture.” Both tracks went ahead. By mid-1993, BAT State Express 555 brand cigarettes were being sold as “Made in Vietnam.” Meanwhile, back in Britain, executives in BAT’s “Far East Support Unit” (FESU) juggled complex calculations to assess what balance-of-trade channels would deliver maximum profit.

A memorandum found in the file of then-New Business Development Manager Nick Brookes – now CEO of Brown & Williamson – set out BAT’s pricing strategy, which attempted to predict the final consumer price of BAT cigarettes smuggled into Vietnam.

In a document suggesting clarity and precision of BAT’s understanding of pricing in the GT trade, the document noted: “Ex factory price should be such that retail price falls at parity with GT (not fully controllable). GT price structure is: BATUKE to SUTL, $245, SUTL to importer, $290, Importer to Wholesaler, $348, Wholesaler to Trader (Cambodian border) $350.” In other words (and recognizing the independence of smugglers), BAT staff seemed to wish to adjust the sale price of their cigarettes to their agent so as to set the final smuggled end-market price in Vietnam.

BAT’s records suggest that Vietnamese officials treated the company’s conduct with suspicion and told them so. Company executives had a series of meetings with Le Dinh Thuy, director general of the Vietnamese Vintaba tobacco company. A letter from Singapore to BAT’s then-headquarters in Staines, England, reported that at a June 1991 meeting, “Mr Thuy . . . was obviously fully aware of both BATUKE’s and SUTL’s activities in Vietnam, stating – ‘what are these people doing visiting Vietnam when the import of cigarettes is banned?’ It is a point I think should be taken very seriously.”

Similar enterprises took place across Asia. In Taiwan, BAT reckoned in the early 1990s that it had about a 1 billion share of the 4-billion-a-year “transit” market. In Thailand, the market was over 555 million a year. In Vietnam, it was 1 billion a year.

In 1993, BAT employed a single senior executive to take charge of GT sales around the globe. The post of “senior regional export manager” was based at BATCo in Staines. Although ostensibly the job was to coordinate sales in Asia and the Pacific, the executive’s second task was “Co-ordinator of GT worldwide.”

In this capacity, the manager was made “responsible to all five Regional Directors for the co-ordination of all BATCo general trade sales worldwide.” He was charged with the “maintenance of profiles of all main dealers, and monitoring of supply routes; negotiation of trans-regional accounts, e.g. SUTL … .”

But there was a special warning. “Due to the nature of Export General Trade business, the Distributors handling this are not easy to manage and difficult to motivate. Their loyalty is sometimes questionable. Due to the type of business and sums involved, bribery attempts are frequent … [The person appointed] must be permanently alert to the confidentiality needed in some areas of the business.” He had to be on continual lookout for new smuggling routes, by conducting a “proactive search for new GT business.”

The report concluded, without apparent irony, that “integrity is an absolute must.”

The disclosed BAT documents indicate that “GT,” “Transit,” or, more plainly, smuggling seemed to be seen by BAT Industries in the early 1990s as a necessary and indeed substantial part of being competitive and successful in the international tobacco business. BAT Industries directors were told in a 1993 paper: “A significant proportion of the world export trade is transit. It exists wherever there are widely different excise rates and trade restrictions, and is expected to continue where these conditions exist.” But, as with their Singapore agent SUTL, they also had a long-term desire to move, when and if advantageous, to legal markets – provided always that national taxes were low and that current and future smokers were easy to reach.

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