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Philip Morris accused of smuggling, money-laundering conspiracy in racketeering lawsuit

Philip Morris, the world's largest tobacco multinational, has engaged in smuggling and drug-money laundering for years in a scheme to avoid taxes and boost sales of its cigarettes, according to allegations in a new racketeering lawsuit filed in U.S. federal court.

The civil lawsuit - filed by a majority of Colombia's governors - claims that Philip Morris Companies, Inc., and its subsidiaries, including Philip Morris International, Inc., defrauded the Colombian states out of billions of dollars in lost tax revenue over a 10-year period.

Through actions in the United States and abroad, Philip Morris "conceived, directed, controlled, and implemented an international conspiracy to defraud Plaintiffs and deprive them of money and property, in order to increase their profits and market share, enhance the value of their tobacco operations, and expand the worldwide market for contraband cigarettes," the lawsuit claims.

Employees accused of laundering

The lawsuit alleges that, in some cases, Philip Morris employees themselves laundered drug money as part of the smuggling operation. In other instances, the company created a labyrinthine network of third-party payments and Swiss bank accounts in order to mask the illegality of their actions, according to the lawsuit filed Friday in U.S. District Court in New York.

The lawsuit was filed on behalf of the heads of 22 Colombian states, called "departments," as well as the city of Bogota, rather than by the Colombian federal government. The greatest part of Colombia's tax revenue from cigarettes and alcohol goes to the states.

Philip Morris and its named subsidiaries are accused of violating the Racketeer Influenced and Corrupt Organizations Act, as well as negligence, fraud, unjust enrichment, public nuisance, and "acts of conspiracy."

The Colombian governors are seeking actual and punitive damages that could run as high as Philip Morris' total tobacco profits for 1999.

The governors are claiming about $3 billion in damages, which could be trebled under RICO, as well as punitive damages on several of the alleged violations of law, arguing that Philip Morris' "conduct amounts to a fraud on the public."

Philip Morris reported tobacco profits of $9.8 billion in 1999 -- $4.9 billion in international tobacco sales.

Philip Morris asserts lawfulness

Michael York, an attorney for Philip Morris, said he had not yet seen the lawsuit, but added, "We believe Philip Morris has acted lawfully." According to the lawsuit, Philip Morris sent a Jan. 21 letter to the Colombian governors, attempting to block the RICO action.

This is the second civil RICO action to be filed against a major U.S.-headquartered tobacco company within the last six months, but the first to target the world's largest tobacco multinational, whose Marlboro line is the world's most popular brand of cigarettes.

In December, Canada filed a $1 billion civil RICO lawsuit in U.S. District Court against R.J. Reynolds and its related tobacco companies for alleged smuggling across the U.S.-Canadian border. Several people, including a former RJR senior sales manager, have already been convicted on U.S. criminal charges stemming from smuggling across that same border.

Philip Morris is the third major tobacco multinational to be implicated in alleged smuggling, which allows cigarettes to enter a market untaxed, be sold at a lower price and, therefore, reach a greater number of consumers. The British government is considering an investigation into British American Tobacco after a report by the Center for Public Integrity in January showed that company's involvement in global smuggling.

U.S. Customs Commissioner Raymond Kelly told Congress recently that "international cigarette smuggling has grown to a multibillion-dollar-a-year illegal enterprise linked to transnational organized crime and international terrorism. Profits from cigarette smuggling rival those of narcotic trafficking."

According to the Colombian lawsuit, "the Philip Morris defendants have actively engaged in smuggling activities and concealed such conduct through illegal acts, including money laundering, wire fraud, mail fraud, and other violations of United States law. Defendants have collaborated with smugglers, encouraged smugglers, and sold cigarettes to smugglers, either directly or through intermediaries, while at the same time supporting the smugglers' sales through the establishment and maintenance of so-called 'umbrella operations' in the target jurisdictions."

"Umbrella operations" refer to an alleged tobacco company practice of using the presence of a small amount of legal imports into a country to justify an advertising campaign that is really aimed at promoting sales of more numerous black-market cigarettes.

'Sophisticated and clandestine smuggling enterprise'

The 74-page lawsuit charges that Philip Morris "created and exploited a sophisticated and clandestine smuggling enterprise that operates throughout the world and within the Departments of the Republic of Colombia. This international scheme has harmed, and continues to harm, the economic interests of many governments, including the Departments of the Republic of Colombia."

Suspicions about industry involvement in cigarette smuggling have grown since 1997, when researchers demonstrated, by comparing annual global exports with global imports, that about one-third of all cigarettes entering international commerce each year could not be accounted for. But proof remained elusive until last year, when millions of pages of corporate documents, unearthed during numerous health-related lawsuits, became publicly available as part of the tobacco industry's November 1998 settlement with the U.S. states. An investigation by the Center's International Consortium of Investigative Journalists showed that British American Tobacco, the world's second-largest multinational tobacco company, had been involved in cigarette smuggling and tax evasion for years in a global effort to secure market share and lure generations of new smokers. The report was based on an analysis of more than 11,000 pages of internal corporate documents.

That report also cited documents showing that senior executives of BAT and Philip Morris had met on at least two occasions, in New York and in England, to discuss fixing prices on legal and smuggled cigarettes - an allegation repeated in the Colombian RICO filing.

Top tobacco executives said to be involved

"The Philip Morris defendants created a circuitous and clandestine distribution chain for the sale of cigarettes in order to facilitate smuggling within the Departments of the Republic of Colombia," the lawsuit says. "The decision to establish and maintain this distribution chain was made at the highest executive levels of the Philip Morris defendants."

As part of what they termed the "PM Smuggling Enterprise," the Colombian governors accused Philip Morris of earning hundreds of millions of dollars in illegal profits through:

  • Selling cigarettes directly to smugglers or to distributors known to sell to smugglers;
  • Labeling, mislabeling, or failing to label their cigarettes in such a way so as to facilitate the activities of smugglers;
  • Providing marketing information to distributors and smugglers in order to have the most in-demand cigarettes in the market;
  • Generating false or misleading invoices, bills of lading, shipping documents, and other documents that expedite the smuggling process;
  • Shipping cigarettes designated for one port knowing that the cigarettes will be diverted to another port and then smuggled;
  • Making arrangements for the cigarettes to be paid for in a virtually untraceable way, including using Swiss corporations and/or Swiss bank accounts "in an attempt to improperly utilize Swiss banking and privacy laws as a shield to protect the smugglers from government investigations."

 The Colombian lawsuit also contends that Philip Morris "knew that the currency provided to them represented the proceeds of unlawful activity, including trafficking in narcotics and controlled substances and that, by accepting such payments, aided the efforts of the drug traffickers to launder their ill-gotten gains."

In some instances, "employees of the Philip Morris defendants were personally involved in the laundering of the proceeds of illicit narcotics sales," the lawsuit alleges, claiming that Philip Morris employees would bribe Colombian officials not to stamp their passports, so there would be no record of them entering or leaving the country.

"These employees on multiple occasions received large volumes of cash that they took into their personal possession or these employees would be present when large volumes of cash were turned over to the distributors with whom the Philip Morris employees were traveling. These individuals would then smuggle the cash out of Colombia and into Venezuela, with the cash ultimately being deposited in banks and transferred into the coffers of the Philip Morris defendants," according to the lawsuit.

'Laundered drug money'

The suit also contends that Miami bank accounts of various Philip Morris cigarette distributors were frozen in the early 1990s by U.S. law-enforcement officials "because funds credited to those accounts were laundered drug money. The freezing of these accounts was well known to Philip Morris."

The lawsuit - plans for which were first reported by the Center in January - accuses Philip Morris of furthering criminality in Colombia through its business practices. A Colombian border-guard station, erected in a main smuggling area in an attempt to halt the contraband, was destroyed by smugglers firing an anti-tank weapon, and several of the station's personnel were killed in the attack, the lawsuit says.

The Colombian governors also accuse Philip Morris of having "falsely denied their complicity in smuggling activities," citing a company response to the Center for Public Integrity in January.

Additionally, the lawsuit alleges that Philip Morris used the existence of smuggling to successfully argue against higher government taxes, on the grounds that would encourage more smuggling. "The Defendants conduct this public relations and lobbying campaign without disclosing to the public or Plaintiffs their continuing complicity in smuggling."

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