what we’re dealing with is the art of giving cigarettes an invisibility cloak, because the taxman can’t tax what he can’t see.
As you read through the next few chapters on smuggling, it may be useful to remember the anodyne synonyms the industry developed when talking about its smuggling activities (because even the most emboldened of businesses would probably not refer to its ‘smuggling’ business as ‘smuggling’ on paper.) And, so, the industry has developed a set of rather less offensive, somewhat more neutral terms to describe the illicit parts of its strategy.
Smuggling and illicit channels are implied any time you read the following words or acronyms: ‘duty not paid’ (DNP for short);4 ‘transit’; ‘general trade’ (GT for short); ‘border trade’, ‘free markets’ or ‘value for money’ (VFM).5 A few of BAT’s older documents quite neatly explain the terms:
•‘With regard to the definition of transit it is essentially the illegal import of brands upon which duty has not been paid.’6
•‘The DNP market is the volume of cigarettes produced in Venezuela, exported (mainly to Aruba), and re-entering Venezuela as transit.’7
•‘The imported sector in Taiwan has increased each year. This figure includes legal imports plus GT [general trade/smuggled] imports estimated at 7.6 bns.’8
Against that short introduction to smuggling, next we’ll explore how BAT may have made as much as 25% of its profit from smuggling into China and how big tobacco ended up paying more than $1 billion in penalties for the smuggling of its packs.
5. Smuggling: A rogue’s gallery
Some of the examples and case studies included in this book go back some years. It was important to include them, because they highlight a consistent pattern of behaviour spanning both decades and continents, and because it is only by understanding the industry’s consistent history of obfuscation and filibustering and legally dubious behaviour that we can begin to pre-empt the future.
The examples are not meant to be an exhaustive catalogue of smuggling and tax evasion, and of course include only those cases already in the public domain, because most tax and customs agencies are sworn to secrecy. Once you start delving into the industry it becomes something of a rabbit hole. For every example quoted in this book, you can likely find ten others. And while the examples are illustrative only, they do make the point that the illicit trade in tobacco products is not limited to backyard taverns, bootleggers and mobsters, but has very much been the playground of big tobacco.
BAT kindly documented for us in detail some of its forays into China in the 1980s:1 BAT documents note how official imports offered ‘relative poor corporate profitability’2 because of the highly restrictive import quotas and tariffs, leading to large-scale smuggling to access the world’s largest market of smokers, activities foreign tobacco companies were aware of.
BAT’s own records detail how they did it: by setting up BAT Distribution Ltd to manage illicit trade in Asia, which they were advised ‘should be incorporated in a tax haven of choice’3 to ensure that the contraband trade could be carried out ‘on an arms-length basis’.4 It needed to be ‘little more than a brass plate company with very low overheads and the flexibility to establish branch offices wherever the transit traders move’.5 Its activities remained fully controlled by the BAT China Group, and the structure was approved by BAT’s Chairman, to ‘ensure the efficient distribution within the China markets of duty free [illicit] BAT products’.6
BAT invested heavily in its illicit trade stream in China, with one of their vice presidents saying: ‘The best prospects for growth in the Chinese market continues [sic] to be the unofficial channels for the foreseeable future.’7
BAT’s Head of Corporate Planning at the time recognised the contraband trade’s vulnerability given the ‘danger of serious action by the authorities’.8 But that concern was not enough to stop the company from aggressively pursuing a black market for its products: ‘As long as free market sales remain dominant, alternative routes of distribution of unofficial imports [i.e. contraband] need to be examined and maximised. It is recognised that distribution of our product in China is key to BAT’s long-term success.’9
Against this background, BAT’s own records seem to suggest it was physically exporting 53 times more cigarettes to China than it was officially declaring for import.10 So, for every container it declared, 53 others appear not to have been declared to the authorities and were instead smuggled into the country. Little wonder, then, that BAT viewed China as ‘one of the larger profit centres’,11 with an apparent 25% of BAT’s profits coming ‘from transit trade to China’12 (and remember, ‘transit trade’ is an industry euphemism for smuggling).
It seems it wasn’t just BAT plying the black trade – PMI apparently was too, as BAT itself claimed: ‘… the PMI model places an intermediary between PMI Asia and the transit traders. We have two objections. First the transit trade [contraband] still originated with Philip Morris Asia and is controlled by that company. That is similar to the present situation with BAT Hong Kong. The second objection is that the intermediary adds another level of profit absorption and is harder to control. The apparent distancing has little effect since the business is transit [contraband] trade. BAT group can pretend ignorance that its cigarettes are being distributed through the transit trade as much and as justifiably as Philip Morris can.’13
This example from the late eighties may admittedly be relatively old. But it does raise this question: If indeed BAT had managed to secure 25% of its profits ‘from transit [contraband] trade to China’,14 and if one were to give it the benefit of the doubt and assume for a moment it no longer runs a contraband supply chain in China, how has it compensated for the loss of this quite significant chunk of its profits? And if it could do this with some impunity in China, what has it managed to pull off in other countries?
It didn’t end there. Smuggling has proliferated in the industry, decade after decade, country after country.
In the nineties, evidence suggests that BAT and PMI ran smuggling rings in Colombia,15 and paid $1,7 billion in criminal fines and civil restitution for their role in smuggling schemes in Canada;16 11 PMI executives were charged with tax fraud in Italy to the tune of $400 million;17 PMI was accused of smuggling cigarettes into South Africa;18 and a BAT manager was convicted of taking bribes from smugglers in Hong Kong.19
In an interview, Les Thompson, a sales executive who worked for RJ Reynolds, recalled the situation in Canada after the government raised the tax on cigarettes sharply: ‘Really the options were limited. The no-brainer in the equation becomes: We have to enter the black market. We have to enter the black market. We’ve got to pursue this tax-free environment through the illegal smuggling efforts back into Canada.’20
In the 2000s, The Guardian newspaper exposed how BAT benefitted from smuggling practices in both the UK and beyond;21 racketeering charges were filed against BAT in Colombia;22 The Guardian newspaper reported that court documents show that as much as $200 million in smuggling profits allegedly made its way to Geneva in one year alone;23 Imperial was accused of smuggling as much as 65% of their packs onto the UK market;24 Imperial and Rothmans were fined $1,15 billion for smuggling in Canada;25 a BBC documentary exposed how BAT was seemingly breaking the rules in Nigeria, Malawi and Mauritius;26 more than 20 000 internal documents highlighted how PMI’s Gallaher set up a trading ‘environment’ conducive to illegal activity;27 a media report based on internal industry documents attributed extensive smuggling to BAT in West Africa28 and to smuggling in Sudan, Birao, Nigeria,29 as well as under-invoicing in Nigeria.30
According to a BAT Nigeria document: ‘General trade [illicit] movements to this end market will remain a priority throughout the period. Both legal and transit
