Examination of witnesses (Questions 1460
- 1479)
WEDNESDAY 16 FEBRUARY 2000
MR M BROUGHTON,
MR K CLARKE,
MR C BATES
and MR D CAMPBELL
1460. No, I appreciate that; I understand that
perfectly well and the reasons for it. The Chancellor nevertheless
is not simply a lone wolf. You have very individual responsibilities
in relation to the budget but general strategy and strategic thinking
you must at some stages discuss. But you were not successful in
persuading—
(Mr Clarke) I am sure I discussed it with the Prime
Minister because Chancellors do discuss it with the Prime Minister
and sharing the problem. I will not go into the politics of my
budget, though I am quite prepared to do so, but if you remember
the background to my budgets they were quite tight budgets, unlike
my successor at the moment. I was dealing with a large fiscal
deficit which I was getting under control and there were one or
two unpopular tax measures in my budgets usually which were quite
unpopular with my own colleagues and very unpopular with the other
side of the House. In that context it was particularly difficult
to suddenly start telling people that I wanted to put VAT on domestic
fuel but I was no longer going to raise tax on tobacco. I think
at that time you would not have been the only member of your party
to have reacted somewhat vigorously to that, particularly as away
from the responsibilities of office the arguments of ASH are very
tempting, until you actually get face to face with the problem
that you are causing smuggling. I hope the present Chancellor
shares my doubts, though he shows no signs of it. I really do
think he ought to address it. I have not read the Treasury Select
Committee report as I have just been handed it, but I hope they
have been handed it as well.
1461. So you really pin the responsibility onto
governments which does seem a novel approach. I would pin the
responsibility for crime onto the criminals.
(Mr Clarke) That is true of course. The Government
is no more organising or encouraging smuggling, the British Government
does not want to encourage smuggling of course that would be an
absurd argument, neither does British American Tobacco. That is
why in our submission you will see a huge list of governments
with whom we collaborated to try to restrict the trade and traffic
back. We try to work with the Treasury here actually to discuss
strategies by which one might control it. It is unfortunately
the case that the reason people smuggle is to make money out of
the differential in tax. That is the prime reason. In some countries,
not this one, it is made even worse when the Government, for its
own reasons as in China, imposes restrictions on legitimate imports
so you cannot import legitimately sufficient cigarettes to meet
the demand for your product. That just means you have a screaming
demand for the smuggled product which people can make money out
of by taking it into the country.
1462. Perhaps you can explain a little bit of
your own article. You have indicated that you think the Government
should bring down the level of taxation for the reasons you give.
You say, "Where any government is unwilling to act or their
efforts are unsuccessful, we act, completely within the law, on
the basis that our brands will be available alongside those of
our competitors in the smuggled as well as the legitimate market".
Can you tell me what you mean by "we act"?
(Mr Clarke) We sell to licensed distributors in countries
where the tax is paid. We sell into the legitimate trade where
we have chosen legitimate traders. As we have already explained,
Mr Broughton and myself, there are circumstances, France is one,
Paraguay is another, and although BAT are not involved Andorra
sounds certainly like another, where you just know that some of
it is going to be smuggled. We do not deal with Andorra and we
do not deal with any distributor who we think is just a smuggler.
We deal with legitimate licensed distributors.
The Committee suspended from 6.12 pm to6.21
pm for a division in the House.
(Mr Bates) The arguments Mr Clarke was advancing
about tobacco tax are predictable and well rehearsed. Unfortunately
they do not tell the actual real picture. Most cigarette smuggling
in the UK is not cross-border bootlegging driven by cross-border
tax differentials. If a miracle broke out in ECOFIN and European
Finance Ministers decided to harmonise tobacco taxes we would
still have a great deal of smuggling. The reason is that smuggling
is driven by the difference between duty paid and duty not paid
prices and that is the nature of the operation which was going
through Andorra and that is why it is important to understand
the complicity and involvement of the tobacco industry in that
particular trade. If they are supplying wholesalers who are then
transiting the product back into the UK, the margin is not the
difference between the price tax paid in Belgium and the UK, but
the difference between the UK tax paid price and the untaxed price
which is a very substantial margin indeed. That is the prime driver
of smuggling and this why these arguments are diversionary and
incorrect really. That is why in some of the countries which have
the lowest levels of taxation in the European Union such as Spain
and Italy you still have some of the very highest levels of tax
smuggling which is a totally different kind of trade to the one
which is being portrayed there. That is why I think it is important.
This is a health issue, whatever they say, it is a health issue
and not purely a fiscal matter because the price of cigarettes
affects the consumption of cigarettes which in turn affects health.
The appropriate response to this, again endorsed by the World
Bank, is not to capitulate on what is a well-founded economic
and health policy but is to tackle crime. To give an indication
of the extent to which resources are devoted to this, if you take
the £35 million pledged in the comprehensive spending review
to Customs & Excise for tackling tobacco and alcohol fraud,
that amounts to just five pence in every ten pounds of lost revenue
at 1999 levels. That to me gives an impression of how disproportionate
and how disproportionately small the response has been to try
to tackle this as a proper law and order issue. It is one of those
crimes, a bit like speeding, which is waved through on the nod,
yet it is a massive fraud, the tobacco companies are behind it,
whatever they say. There are so many documents indicating their
control of tobacco smuggling around the world, the patterns are
exactly the same in the UK wholesale market. You can see, for
instance, in section 8.7 of our evidence, BAT were able to control
the price in the smuggled market and the illegal market independently.
That means that they know right down through the distribution
chain who is supplying the legal market and who is supplying the
illegal market. The fact that they could talk with Philip Morris
about how they would vary prices in those two illegal markets
indicates a level of control which suggests they are involved
in this right up to their necks right down to the end-user. It
is not something which is a matter of knowledge and going on behind
their backs which they are unfortunately having to take account
of, it is something they are involved in and controlling. That
is why it is important for here and internationally.
(Mr Campbell) I want to confirm that and just say
that, as we summarised this, clearly the abiding question on the
smuggling issue has been the evidence which has in fact been made
available, it has been around for some time. When we hand over
the evidence we see what happens: it gets torn up. Just yesterday
I went down to the depository and found a file of papers concerned
with smuggling in Africa. I have put a pre«cis, which perhaps
Mr Burns would deplore, in my second note to the Committee which
makes it clear that smuggling is a priority. It makes the illegality
clear. It shows the complicity of the then chairman, Sir Patrick
Sheehy, in what were cover operations of an advertising nature
to increase the smuggling. Yesterday at Guildford I asked the
British American Tobacco staff whether I could have a copy of
that full file to bring with me to the Committee today, something
they said there would be no difficulty in doing. It was only 100
pages; a lot for you to read but at least Mr Burns could have
had the satisfaction of seeing everything in context. It was refused
to me, so I am afraid that at the moment, thanks to BAT, all you
have is that pre«cis. In relation to the issue of the smuggling
through Canada, I have taken the precaution of giving this next
document to the Clerk and not to Mr Broughton. That document which
I have given to the Clerk a few moments ago is an admitted statement
of fact before the US court in Louisiana of the smuggling operations
which two Brown & Williamson executives conducted as part
of this overall operation, dealt with in that other document I
am talking about, to smuggle cigarettes back into Canada. It is
an admitted statement by two employees of Brown & Williamson
who pled guilty to the offences. Brown & Williamson is of
course the BAT subsidiary in the United States, wholly owned.
It states that the way it was done was that the cigarettes were
taken out of Canada to Brown & Williamson then moved into
warehouses in the south of the United States, allegedly sold offshore,
but in fact taken by Vietnamese smuggling gangs into Canada. From
the very top the managing director Mr Herter to the tacky details
of smuggling through ships and warehouses in Louisiana the company's
corporate responsibility is not only established by their own
documents but was proven and admitted by their own employees in
the courts of the United States. My final remark would be to endorse
strongly the part which Audrey Wise picked up in pointing out
the remarks in Mr Clarke's article. What this is really about
is not a fine debate about tax policy, but about tobacco companies
saying in the case of British American Tobacco perhaps not in
Britain but certainly to the rest of the world, if you do not
bring down taxes we will smuggle. I accept that British American
Tobacco by not having major domestic markets in the United Kingdom
is not perhaps in the same way making that threat to the United
Kingdom Government but it is making it everywhere else and it
is not acceptable anywhere.
Dr Brand
1463. I was also interested in exactly the same
quote which Audrey Wise used by Mr Clarke. Mr Broughton heard
evidence about the Amber Leaf campaign which Gallaher's ran trying
to influence the market share of bootlegged handrolling tobacco.
The working documents which came from the company to the advertising
company talked about targeting bootleggers, working with bootleggers
to make sure that they carried their product. Is that the sort
of activity you have to indulge in when you are trying to keep
your market share in some of your foreign overseas markets?
(Mr Broughton) I am sorry, I must have got lost somewhere.
Could you repeat the question you want me to answer?
1464. Do you have campaigns running overseas
like the Amber Leaf campaign run by Gallaher's to influence the
bootlegging market into this country?
(Mr Broughton) No, is the crudest answer but it is
not quite as simple as that.
1465. Do you want to qualify your answer?
(Mr Broughton) We do advertise in countries where
some of our products are smuggled. Okay? That is in countries
where you will often find we have a significant or even fairly
small legitimate business share, duty paid share, of the brand
we are trying to promote and there will also be product being
smuggled in. We do advertise brands which would be in that situation
in those countries in an effort to build up the brand on a duty
paid basis, on a fully legitimate, fully legal basis in the hope
that we can get to a situation where the entire smuggling operation
can be cut out, the Government can work to do that and that the
product can still get to the consumer on a duty paid legitimate
basis. So we do advertise. So you will get allegations.
1466. You will advertise generally but you are
saying that you will not run promotions targeted at the distributors
of the non duty paid business.
(Mr Broughton) To the best of my knowledge that is
right.
(Mr Bates) There are several documents which refer
to so-called umbrella operations and there is one at the end of
paragraph 8.4 in our memorandum. This is not entirely at variance
with what Mr Broughton is saying. Again it is Keith Dunt, current
finance director of BAT talking to Barry Bramley. "RECOMMENDATIONS
... It is recommended that BAT operate under `umbrella' operations.
A small volume of Duty Paid exports would permit advertising and
merchandising support in order to establish the brands for the
medium/long term with the market being supplied initially primarily
through the DNP", or smuggled, "channel". What
is happening there is the advertising campaigns—it is quite
right—are to develop the brand knowing that the majority
of the purchases are happening outside duty free or duty paid
but are happening in the smuggled market. They are building up
demand for the product in the illegal distribution channels, maybe
with the hope that in the future that will be converted to legal
business. However, there is absolutely no doubt that the target
of the marketing in there is aimed—and that is what this
document says here—at building up the illegal sales of the
brand.
(Mr Campbell) In the second note I gave to the Committee,
the very short one, at the bottom of the second page is a plan
put to the chairman to develop legal "cover"—the
word is drawn from the documents—for cigarettes which were
sold in the Cameroons in 1991. They were only sold illegally;
that is made very clear in the quotes. It says, "As there
are no legal imports" into this country "... no local
media is used". That is the third paragraph on the final
page. Then it says, "However a major campaign on the Africa
No 1 radio programmes transmitted from Gabon", a neighbouring
country, "is funded from Unit 2 resources". Unit 2 is
a unit of the Staines headquarters of BATCo at that time concerned
with smuggling. There you have it. I hope Mr Broughton will accept,
at least for this example, this is an advertising operation done
from a neighbouring country on radio to support a product in Cameroons
for Cameroons which was wholly illegal in that country.
Chairman
1467. Mr Broughton, do you want to respond to
that point?
(Mr Broughton) Several points which you have stored
up for me to respond to. May I respond to several of them at the
same time, please? Let us take Mr Bates's Keith Dunt memo because
that is one we have all had in front of us for some time. "It
is recommended that BAT operate under `umbrella' operations. A
small volume of Duty Paid exports would permit advertising and
merchandising support in order to establish the brands for the
medium/long term". I am utterly amazed that anybody can be
surprised at that part of the strategy. If I stop there I can't
see anybody saying, well what else would you do except to advertise
and merchandise in order to establish, build up the brands for
the medium/long term? It recognises that the brands are currently
going through DNP channels, so there is a demand for them, so
it is better to advertise to build up for the long term on a duty
paid basis because that is the way the market needs to be run
in the long term. We have to work together with governments to
get the markets on a fully duty paid basis. That seems to me a
perfectly rational, sensible strategy, to advertise and merchandise,
to support what is at the outset a small volume but nevertheless
you want to build a small volume into a big volume; you want it
to be established for the medium/long term is what it says. I
find it incomprehensible that that is a damning document. May
I go back to the B&W employees in Louisiana? I am not going
to say to you that there is nobody within the British American
Tobacco group of companies who has ever broken a law. To say that
nobody in the company has ever broken the law would be an absurd
thing for me to tell you, not just over the 98-year history of
the company that clearly there have been, over the 29 years I
have been in the company clearly there have been. When individuals
break the law, if we discover they are breaking the law, we would
normally be the one to bring prosecution. We might just fire them
depending on how small an infringement it is, but we would normally
prosecute such actions. That case which was quoted there, yes,
I think the two B&W employees were indicted, they certainly
made an admission. What is interesting of course, the part which
Mr Campbell did not say, is that nobody brought a case against
Brown & Williamson. There was no indication, despite the admission
that these people were obviously involved as individuals, no case
ever brought against Brown & Williamson because Brown &
Williamson was not involved. These were two individuals who, it
was subsequently discovered, were doing it on their own account.
The allegation is right, yes. I am afraid all companies from time
to time find that they do have employees who are not necessarily
100 per cent honest. Those are not the only two; I could give
you other examples of the same. It does not mean Brown & Williamson
were involved. May I go back? A little while ago you were talking
about the Treasury Select Committee. I notice that despite ASH's
submission making much of the orchestration of smuggling by tobacco
companies that was not the conclusion that the Treasury Select
Committee came to. They would seem to me to be a perfectly appropriate
committee to judge that, whereas this Committee seems to me to
be meant to be here for the health issues relating to this. I
was rather hoping we would get round to some of those. I would
just say one other thing. You indicated before the last break
that you wanted to wrap up fairly soon. I certainly endorse that.
However, Mr Campbell made three other serious allegations against
us: money laundering, that I misled this Committee and collaboration
in fixed prices. I do hope you are going to allow us to refute
each of those categorically.
1468. I should be happy for you to do that now.
If you feel there are things you wish to comment on, if you could
do that briefly I would appreciate it. We have a number of areas
we want to cover before we conclude. Feel free, if you can, briefly,
to respond to those points. We should be very grateful.
(Mr Broughton) May I go to the involvement in money
laundering? At the bottom of page 11 and top of page 12 of the
Public Eye Investigative Report, the document which was sent to
everybody. Mr Campbell talks at length there about money laundering
and money laundering in Colombia. He then goes on to use extrapolated
conclusions that we are great supporters of narcotics as a result
of this. Money laundering, as I understand it and I think he understands
it the same way, consists of Colombians exporting drugs to America,
getting dollars which would be—I think the term is—dirty
dollars. They then have to find products and I accept entirely
that the smuggling route is a means of finding products to convert
those dirty dollars into clean pesos. His whole case is based
on a letter which is quoted in this document. On 8 March Keith
Dunt received an e-mail about the difficulty of obtaining clean
dollars for BAT's Venezuelan subsidiary in January. It was necessary
in December to reduce the selling price from $125 to $96 per case,
that is in line with Belmont, such that Romar, the distributor
could then sell through at $106 per case and receive clean dollars.
That statement that he is using to substantiate the money laundering
is exactly what substantiates that they do not. That statement
is quite clear. He is having to drop the price in order to receive
clean dollars. Dirty dollars are available. He could sell it at
a higher price for dirty dollars, which is what is available.
To get clean dollars is very difficult so he had to drop the price
because he is only prepared to accept clean dollars not the dirty
dollars involved in money laundering. That is what that statement
says. There is a whole long thing in there about Mansur, which
is a Philip Morris distributor, who was indicted for money laundering.
He makes allegations that the BAT distributor there was investigated.
Yes, they were investigated but they were not charged whereas
Mansur were charged. I think I can say to you categorically that
the whole of that piece proves rather that we were not involved
in money laundering rather than proves that we were involved in
money laundering. I think you subsequently have had discussions
with the Colombian Government and perhaps have something to add
on that.
(Mr Clarke) Yes, about 12 months ago, because my contacts
in Latin America are quite good, I picked up that there were allegations
about in Colombia that we were involved in money laundering which
came back to the company. I actually did in the first place go
to see Mr Broughton and went to the company to ensure that we
investigated this suggestion and that our distributors—clearly
no-one identified who was supposed to be involved—that our
subsidiary in Colombia was not involved in money laundering. Firstly,
it is not our policy to get involved in money laundering, indeed
it is our policy definitely to avoid it. It was investigated,
it was not substantiated, we have never been charged, as far as
I am aware none of our subsidiaries has been charged. Indeed in
Colombia now we have developed our own distribution network in
the country so things have moved on. So the moment there was any
suggestion that any of the people we were selling to were involved
in money laundering we did in fact make sure that was not the
case. Of course we have so many subsidiaries throughout the world
in 180 countries that the problem is we cannot be sure, we cannot
just say off the cuff that our locals are all doing what they
are supposed to be doing. In Colombia there are plenty of temptations
for people to get involved in money laundering. We investigated
the complaint and discovered it to be ill-founded. We would do
that again.
1469. Do you have any further points you want
to respond to before we move on?
(Mr Broughton) I take very seriously the allegations
that I misled this Committee and I imagine this Committee takes
those very seriously too. Frankly there is a page, from paragraphs
29 to 35, of almost total garbage of how I misled this Committee.
I did say one thing wrong where I could be reasonably accused
of having unfortunately and not deliberately misled the Committee
and that was that I said to you—it is really covered in
paragraph 34—that apart from material sent to Minnesota
other documents are not scanned. What I should have said, and
I understand Mr Lewis did explain to you Chairman, so you did
get the facts but you got them all from Mr Lewis down at the depository,
that the 350,000 have been scanned, in other words all of those
which have been taken out for use. Seven and three quarter million
have not been scanned. What I indicated to you was that of the
350,000 those which had gone to Minnesota had been scanned and
I apologise to you because in fact it was the whole of the 350,000.
I am aware that you had been informed of that by Mr Lewis. He
also says that the Committee were not invited to see the separate
BAT building behind the depository where scanning of company files
had been under way for many months. The heavy implication is that
there is something sinister in that. You will recall that the
depository is in our archive, it is a piece of a larger piece
and in the archive, yes, we are doing some scanning, not of any
of the documents in the depository, for completely different reasons.
For example all trademark management is going on an electronic
basis, so we are going backwards in time to update the historic
trademark business. Yes, we have a scanner looking at certain
other documents from the archives but nothing to do with the depository.
There is absolutely nothing misleading in what I said there. On
paragraph 33 there are other remarks such as "nobody has
shown any interest in it despite all the people who have been
there". The "it" was the seven and three quarter
million which nobody has picked out. I cannot say I promise you
that is not misleading and I cannot see how I can be said to be
misleading. I am also supposed to have said that most of the material
which is of any relevance can be found on the internet already.
I did say that. We were talking, if you recall, about the material
which is of relevance to smoking and health and that is all mainly
on the internet. I have to say to you that with one minor exception
and I apologise for that minor exception I did not mislead this
Committee.
Chairman: We have heard what you have said,
Mr Broughton.
Dr Stoate
1470. May I start very briefly by saying that
we have heard from Mr Campbell that he was refused a document
which he felt was very important from the BAT depository yesterday,
a 100-page document which he considered to be vital and he would
have liked to bring to this Committee today. Why was he refused
and what is the company's attitude towards that?
(Mr Broughton) Did you go there?
1471. Yes.
(Mr Broughton) Mr Campbell, along with everybody else
agrees when they go there to the conditions of going there and
those conditions of going there were explained to you by Mr Lewis
and I have to tell you that Mr Lewis knows these conditions a
great deal better than I do. As I understand those conditions
they include a process through which we go when you ask for a
copy which includes privilege and confidential records checking
etcetera. I do not want to bore you with the whole process all
over again. He signed up to that process, he has been there before,
he knows the process, he is going there again for three weeks
in a couple of weeks' time. He knows the process and we simply
followed the process, a process which he accepted before he went
there.
1472. So he will get those documents.
(Mr Broughton) He will get those documents.
1473. That is obviously very important. I want
just to look briefly at the crux of this whole investigation this
afternoon. It is clear that smuggling is going on on a very large
scale across the world. It is clear that BAT products are being
smuggled in large quantities across the world. There is no argument
about that. The argument as far as we are concerned is how much
BAT know and how much they are complying with this smuggling process
in one way or another. That is what it is all about. You are saying
that BAT has nothing to do with the process although they understand
it is going on. Mr Campbell and Mr Bates clearly say that you
are involved in the process. I think it is fair therefore for
us just to tease a bit more out about this. I should like to start
very briefly with some of the operations of Mr Dunt, who is currently
your finance director and therefore a very senior person in the
BAT machine, certainly not a junior employee, certainly not somebody
who is out of control in the company, a very senior member of
your team. Yet you are happy to say that when he says "It
is recommended that BAT operate under `umbrella' operations"
you think that is a perfectly innocuous thing to say.
(Mr Broughton) Yes. The way that is written there
an umbrella operation recognises—
1474. What is an umbrella operation?
(Mr Broughton) An umbrella operation recognises that
in a certain market there are both duty paid legitimate stock
and smuggled goods coming in.
1475. He is recommending that they operate under
umbrella operations.
(Mr Broughton) No, an umbrella operation relates to
advertising. It is not managing the business, it is advertising.
Let me just make sure you understand that.
1476. I understand that but at the end of this
very same quotation, "... with the market being supplied
initially primarily through the DNP channel".
(Mr Broughton) Yes, it recognises that the market
is—
1477. It is recommending that.
(Mr Broughton) No it is not recommending that. That
is a statement of fact.
(Mr Clarke) I am interested in the ethics of this.
Both you and Mr Campbell, Dr Stoate, seem to think this is unethical.
It has not occurred in quite this way in my time, and I suppose
in a way it did in China until recently although there has been
considerable change in China, but some countries restrict imports.
My understanding—and we are going back to before my time
in the company with most of this stuff—is that Vietnam at
the time did not allow any legal imports and Colombia at the time
did not allow imports. Let us take Vietnam. What happens, because
of the conditions in some of these places, is that actually there
is a very thriving tobacco market, all of it imported and you
can go there at such times and find you can measure your market
share compared to Philip Morris and everybody else because you
can see. The pressure from the company, the proper representation
from the company, is to stop restricting imports and let us operate
legitimately. We will come in, we will distribute, we will pay
tax. What happens whilst the market is raging in this informal
way—not that I know about Vietnam—is that sometimes
it causes complicity with half the people in authority in the
countries you are dealing with. Whilst you are trying to persuade
them to open up a legitimate trade, advertising firstly protects
your market share in what is going on in Vietnam, but, more importantly,
prepares demand for your product when you can get the right to
import it. I personally do not see what is unethical about that.
We advertise in such markets. Vietnam is an extreme example and
I do not know whether we advertise there. In other markets where
there is a lot of smuggling, of course we advertise because we
want to keep our market share of the legitimate trade, we want
to develop our brand if the legitimate trade takes over from the
smuggled trade and so on. It is hurled at us that that is unethical.
My guess is that the makers of Johnny Walker whisky and lots of
other products do exactly the same thing. What on earth are they
meant to do?
1478. Whisky is quite a different matter because
whisky does not actually kill 50 per cent of all those who drink
it.
(Mr Clarke) No, whisky is not a different matter,
but I want to go on.
(Mr Broughton) Neither does tobacco.
1479. We are talking about the ethics. Let me
just pursue one more thing.
(Mr Clarke) In smuggling it is the same.
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