Examination of witnesses (Questions 1380
- 1399)
WEDNESDAY 16 FEBRUARY 2000
MR M BROUGHTON,
MR K CLARKE,
MR C BATES
and MR D CAMPBELL
1380. If there were some mechanism by which
it was possible to trace the origin and the passage of the cigarettes,
would that be in all of our interests?
(Mr Broughton) Yes, I think it would. I think if there
were a means by which one could trace things through it would
be less difficult—I do not want to make you think for a
minute it would be easy; it would be less difficult—to trace
the mechanism. If it were a straightforward sale from British
American Tobacco or Gallaher or Imperial or anybody else to Tesco
in France and it were smuggled back in, that would be a relatively
easy thing to trace. If, however, it were a sale to a legitimate
dealer in any country in the world, you could also find—and
increasingly it is happening now because the margins are getting
so high in the UK—that stocks are being sold through many
hands and sometimes of course it is counterfeit in the first place,
before being shipped back here in container loads. This may go
through—who knows? - five, ten, 15 different hands before
coming back. The margins are so great in the UK, the duty is so
high, the margin is so attractive, that it can go through many
hands. There, whatever you put on you will not trace it through.
You might find the original, yes, you will find the original distributor,
for example, to whom we or somebody else would have sold, but
you will never trace that through the various layers it might
have gone through.
Chairman
1381. May I come back to The Guardian piece
to which you referred which mentions, "In Colombia, 21 state
governors and the mayor of Bogota have engaged American lawyers
to prepare lawsuits in the US against British American Tobacco
and Philip Morris, said Jose Manuel Arias Carrizosa, executive
director of the federation of Colombian governors. He said they
were seeking `an indemnification for damages caused through contraband
of cigarettes into the country'". Are you aware of that?
(Mr Broughton) It has not been received.
1382. You know nothing about it.
(Mr Broughton) We have not received anything. We know
about it from there.
1383. All you know about is what was in the
newspaper.
(Mr Broughton) We have heard rumours but we have not
received a writ.
(Mr Campbell) It goes beyond that, with respect. We
are told the writ is imminent; it may even be issued today but
I cannot guarantee that. We have certainly been told by a Ms Kerztman,
that over the last year she has been engaged in intensive negotiations
and lobbying by British American Tobacco, part of which has been
intended to try to stay the hand of the governors to delay this
suit. I think, if Mr Broughton is not fully informed, so be it.
Certainly in the country concerned and at regional level, British
American Tobacco, on our information from the Colombian Government,
are extremely well aware of the action which is intended against
them for racketeering.
Mr Hesford
1384. Mr Clarke, I want to be clear about your
position within the company, because in fairness to you we ought
to be clear about it. From what you have said, you seem to be
claiming for yourself specific knowledge about these matters so
that when you tell us positively the company is not involved in
these activities, that is because you yourself have undertaken
enquiries and you are speaking of your own knowledge. Do I understand
your position correctly?
(Mr Clarke) I am a member of the board and I am a
member of the audit committee and I am a non-executive director.
I hold those roles because I am satisfied and I satisfied myself
that the company is a company of integrity. It is an extremely
good corporate citizen. There is a controversy about our product
and it is that which of course encourages campaigners to start
hurling other things at us. Leaving aside the debate, selling
tobacco to adults fully informed of the risk, who choose to smoke,
in every other respect, I, together with my fellow directors,
seek to ensure that the company follows the highest standards
of probity, not just complying with the criminal law in whatever
country we trade, also maintaining what would be regarded as good
ethical standards by a British publicly quoted company. Probably
because of the controversy of our product, I take the view that
we have to be ultra scrupulous about the way in which we comply
with health and safety requirements and environmental standards
and in relationships with our employees because we have a controversy
already, we have everybody trying to sue us, there is a lot of
money to be made out of Latin America and it is therefore quite
important that we are particularly careful in our ethical standards.
I am not an executive director and I have only been connected
with the company at all for two years. I have of course had to
make enquiries.
The Committee suspended from 4.51 pm to4.59
pm for a division in the House.
One of the committees of the board is the audit
committee. It is chaired by Rupert Pennant-Rea[?]. One of the
duties of the audit committee is to make sure that the system
of internal control in the company is in place and that would
include controls over our distribution channels if that became
an issue. As we have already said, smuggling damages our commercial
interests. It is not in the interests of British American Tobacco
to have our product smuggled any more than it would be remotely
acceptable for us to be engaged in the smuggling. When it is carried
out by others it damages us. If we do get a complaint about the
behaviour of the company, then we investigate it. If I get a complaint
about the behaviour of the company, I investigate it. The Guardian
article is one of the things I responded to. I did talk to the
man named in The Guardian article, though I must say my reaction
to The Guardian article was the same as that which I have had
so far to Mr Campbell's evidence to this Committee. There is nothing
there which supports the conclusions which he so freely makes.
(Mr Bates) I have been biting my lip because Mr Clarke
is now claiming he mounted an investigation between 31 January
and 3 February when he published his response to these allegations.
I do not believe he can have looked at the same documents we have
looked at and come up with such a complacent and comforting interpretation
of what is written in them. I just thought it would help the Committee
if I drew out a couple of the points in these documents so you
can judge for yourselves what the correct interpretation is. This
is a document written by Keith Dunt—paragraph 8.1 of my
memorandum—who is now the finance director at BAT saying,
"I am advised by Souza Cruz", that is BAT's Brazilian
subsidiary, "that the BAT Industries Chairman", which
is Sir Patrick Sheehy, "has endorsed the approach that the
Brazilian Operating Group increase its share of the Argentinian
market via DNP". In my view, taking all the documents into
account, that is a very clear instruction from the very pinnacle
of BAT to increase market share in Argentina via smuggling. It
is an active order from the top to increase market share by smuggling.
Two quotes down in this paragraph 8.1, again Keith Dunt the current
finance director talking about the DNP market, the duty not paid
market. There is no doubt here about whether this refers to smuggling
or duty free as there is not really in any of the other documents.
"We will be consulting here on the ethical side of whether
we should encourage or ignore the DNP segment. You know my view
is that it is part of your market and to have it exploited
by others is just not acceptable."
Chairman
1385. Mr Broughton, do you want to respond to
those specific points?
(Mr Broughton) Yes. Let us take that second one, "We
will be consulting here on the ethical side of whether we should
encourage or ignore the DNP segment. You know my view is that
it is part of your market". There is no question about
that. DNP is, or then was and I think still is actually, a part
of the Argentine market. Part of the Argentine market is DNP and
for the sake of Messrs Campbell and Bates, in this case that means
smuggled. The fact is that it is part of the market, that is part
of the market dynamics of the country. "To have it exploited
by others is just not acceptable." I have not seen the document.
I have seen that statement. I would say to that, "to have
it exploited by others is just not acceptable", we need a
strategy in place to ensure that DNP does not happen.
1386. What about the first statement in paragraph
8.1 which is even more explicit? The first statement which Mr
Bates read from the memo from Keith Dunt.
(Mr Broughton) I see the statement and again, before
commenting on it I would just comment that all I see is that piece.
I have not traced the document.
1387. Are you implying it could be out of context?
(Mr Broughton) I am implying it could be out of context.
Let me put a context to it.
1388. A possible context.
(Mr Broughton) Yes. I will give you a context which
may or may not be relevant. When Sir Patrick Sheehy was chairman,
as I think is said somewhere else in the papers, the group was
organised on a different basis. It was organised on four separate
tobacco groups plus Imasco, which was an associated company, plus
the financial services interests. The four separate tobacco groups
competed with each other. Souza Cruz in Brazil was one of the
four tobacco groups, Brown & Williamson in the US was another,
BAT Germany was a third and everything else was part of BATCo
which was the fourth. In Latin America Souza Cruz was one operating
group and everything else, including Argentina, was a different
operating group. That was the structure of the group and what
it led to was a situation, for example in Russia, where we had
four offices in Russia, we had the Souza Cruz office in Russia,
we had the Brown & Williamson office in Russia, we had the
BATCo office in Russia and we had the BAT Germany office in Russia.
So these were competing groups within one group. I can read that
simply to say that the BAT Industries chairman has endorsed the
approach that the Brazilian Operating Group operates on its own.
Okay?
1389. Basically your argument is—we could
be here all night arguing this—you are saying these quotes
are taken out of context.
(Mr Broughton) Yes.
1390. That is your argument. Okay.
(Mr Broughton) I am saying I do not have a context
for them.
Dr Brand
1391. So your line is that you regret that there
is an illegal market, but given that there is one, it is legitimate
for you to make sure that your market share within the market
is maintained.
(Mr Broughton) You characterised it a little differently
to the way I would.
1392. Yes, or no. Would you like to put it differently?
(Mr Broughton) I should be pleased to put it differently.
This is an important point to make. Where there is smuggling,
it is not in our interests and it is not in the industry's interests.
1393. It is rude of me to interrupt, but if
smuggling increases your sales dramatically, I do not see why
it is not in your interests. We had a previous bit of evidence
about Andorra which dealt with figures which I can almost understand,
where a population of 63,000 people increased their cigarette
consumption from 13 million in 1993 to 1,520 million four years
later. I would have thought somebody would realise in a country
of that size where there are those imports but no exports officially
that something funny was going on and collectively you cannot
all have been saying that there is this market and you must make
sure you maintain your market share.
(Mr Broughton) I think you went into that at the previous
session and Mr Wilson responded to that and I have to tell you
that I do not think any of that was BAT brands.
1394. That is true; well I am not sure about
total tobacco.
(Mr Broughton) I do not think it was.
1395. The reason why I raise it is that Mr Wilson
specifically said that manufacturers had a responsibility to look
at the end-market, where their product actually ends up and that
his company also worked proactively with Customs and Excise when
they saw that sort of thing. We have not seen evidence for that
and Mr Davies from Philip Morris said that he would terminate
customers, though I think he meant customers' contracts, if he
found evidence of involvement in illegal trade. I suppose in Colombia
the earlier interpretation might be more correct. You, Mr Broughton,
said you agreed with everything that was said and you endorsed
it. The point I am trying to make is that I can accept some of
the arguments you are making about the imports going on in this
country; very difficult to control. When we have the Andorran
example and if we look globally, ASH tells us that one third of
official exports never materialise as official imports, which
is 350 billion cigarettes, we seem to have a discrepancy somewhere.
Do you not as a company look into that discrepancy or do you take
the line that Mr Clarke has, that obviously smuggling is a very
socially benevolent occupation and should be encouraged, which
is an argument which the people on the south of the Isle of Wight
used to make when they were done and they used to be hanged by
the revenue men.
(Mr Clarke) I do not remember saying that, I might
say. It is a very loose parody of the view I said the Colombian
authorities appeared to me to be taking of the situation on their
border.
(Mr Broughton) First of all, we do cooperate a lot
with government, we have a paper here called Smuggling: Our View.
I am not sure whether that has yet been handed to you but I am
happy to hand it to you now for the record and that includes in
it, amongst other things, a number of extensive examples—they
are only examples—of how we cooperate with various authorities.
If you wish to read that I should like you to read that. I think
you will be satisfied that there is a lot of evidence to suggest
that we do cooperate strongly with government. Yes, we do look
at end-markets. The point I am making to you about suffering from
the smuggling is overall, taken across the world 350 billion cigarettes—whether
it is an accurate figure or not I do not know but let us take
it for the purpose of this discussion—if there were no smuggling
anywhere in the world we believe we would sell a lot more cigarettes
than we do today.
1396. I am sorry but the evidence seems to suggest
that one third of your output is consumed through an illegal market.
(Mr Broughton) In the first place, you are making
a completely wrong assumption that that is all beneficial in the
first place. First of all let me say to you that there is not
a single export from the UK or from any other country which we
make which disappears as seems to be—
1397. They did in Andorra.
(Mr Broughton) No, they are entirely, every single
one, properly registered, properly carried for, registered with
the customs from the country which exits those; the process is
an entirely transparent one from the exporters' side.
1398. Are you suggesting that the Andorran population
and the visitors increased their cigarette consumption a hundredfold
in four years?
(Mr Broughton) No, I am not saying that at all. I
am saying—and I am working here on an assumption of what
Gallaher were doing because this was largely Gallaher, as I understand
it—exports would go to Andorra, they would go to Andorra,
they did not stay in Andorra. The export was a registered export,
registered with UK Customs and Excise as an export to Andorra
and I would be very surprised if it did not go to Andorra. I am
not telling you that it was consumed in Andorra, because it is
very evident that it was not consumed there.
1399. No, clearly, but it got in there nominally
but it did not come out.
(Mr Bates) There are very interesting parallels between
what happens in BAT's operations in Latin America and what was
happening in Andorra. No-one is saying—I am certainly not
saying it—that BAT employees drive trucks over borders or
bribe customs officials or do the substantive smuggling acts themselves.
For them to say they do not smuggle is something we would agree
with but it is actually irrelevant. The way it works is that companies
like BAT and the British companies are operating in illegal distribution
channels through intermediaries. The control they exert is through
those intermediaries. Again, I do think it helps to refer to specific
documents so that we are not all just evading the real questions
here. In my paragraph 8.6 in our evidence this company SUTL, Singapura
United Tobacco Limited, is a very important agent for BAT in South
East Asia. There is a meeting note between SUTL and BATCo from
1993 headed "CHINA; SUTL are encouraged to expand overland
routes through Indochina. Enquiries for duty paid should be referred
to BAT China". In other words, SUTL will do the dirty business
and BAT will handle the legal trade. Okay? Then, "... P.N.
Adams agreed that SUTL should be able to pursue any enquiries
from the USSR provided that goods were shipped through Eastern
Siberia and not through Europe or the Baltic ports". What
is happening here is that both in Aruba, the Latin American node,
and in Singapore in SUTL, these key intermediaries are managing
the illegal distribution channels on behalf of BAT. The parallel
with Andorra which had a very similar operation for Gallaher where
Gallaher were shipping millions and millions, very dramatically
increasing volumes of cigarettes to a company called Tabacand
who were a wholesale distribution company. Gallaher and Imperial
between them increased cigarette exports to Andorra from 13 million
to 1,500 million in a space of about three years and they knew,
they cannot have known anything else, that those cigarettes were
not being re-exported legally, they were being transited illegally.
That essentially is the nature of these operations: the tobacco
companies themselves controlling the channels through intermediaries.
Again, documentary evidence here. Mr Broughton's response was
that he has not seen the actual documents. If he has not seen
them, I cannot believe Mr Clarke has, yet they are all sounding
the all-clear. In terms of having declared that BAT is completely
clean and exonerated, with enough confidence that Mr Clarke can
go to press in The Guardian with reassuring and rather bland statements
about what a good corporate citizen it is, I do not believe they
can say that because they have not looked at the same documents
that we have been looking at and they have not got to the bottom
of what these documents actually mean. We could go on; the evidence
over and over again remorselessly indicating that they are exercising
control in the illegal channels. It is not a matter of simple
knowledge and taking account of it, it is a matter of manipulating
it, using those channels to progress their markets.
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