House of Commons - Health

Select Committee on Health Second Report

IV EXPANDING INTO NEW MARKETS

201. The main focus of the Committee's inquiry has been the health effects of smoking on consumers in the United Kingdom who buy their cigarettes through the legal channels provided by tobacco companies and legitimate retailers. However, during the course of the inquiry evidence was also taken concerning the alleged activities of the tobacco companies in seeking to expand their markets through two methods: by manipulating the market in smuggled tobacco goods, both in the United Kingdom and internationally; and by increasing cigarette consumption in the developing world. Both issues are complex and require further investigation. They raise issues outside the remit of this Committee; however, both activities lead to increased cigarette consumption, especially amongst groups of consumers who otherwise would not have access to cigarettes. The increased incidence of death and illness, domestically and internationally, caused by such consumption is of direct interest to us and is why we proceed to outline the evidence presented to us and our concerns.

Smuggling

202. BAT told us that 25 per cent or more of the tobacco products consumed in this country are smuggled into it.[352] Imperial's evidence stated that "Cross-border trading now comprises at least 80 per cent of handrolling tobaccos smoked in the UK, and at least 20 per cent of cigarettes".[353] As well as the millions of pounds worth of revenue lost to the Government, we were told that the tobacco companies were damaged by this trade, and that they thought it was caused by differential duty rates, with the United Kingdom having higher rates than France and other continental countries. Mr Wilson, of Gallaher told us: "I deplore smuggling and we will do whatever we can in order to bring it to an end. It is not in our interests; it is not in the interests of government; it is certainly not in the interests of the Department of Health. It is making more and more low price cigarettes available in this country. It provides no control over the access of children to cigarettes and it is a direct consequence of the enormous disparity of duty rates".[354] This approach was echoed by the representatives of Philip Morris, BAT, Imperial and R J Reynolds giving evidence alongside Mr Wilson.[355]

Andorra

203. It had been claimed that one route used to smuggle cigarettes into the United Kingdom was through Andorra. In March 1999, a Sunday Times article alleged that "Andorra.... is the hub of Europe's burgeoning smuggling trade ... with no tax, no VAT and almost no excise it is...a smuggler's paradise. Between 1993 and 1997, the number of British-made cigarettes sent to Andorra ... increased 117-fold. The tiny country imported 3.1 billion cigarettes in 1997 - equivalent to every Andorran smoking seven packets a day ... [Smugglers] operate by setting up front companies in the principality or in the neighbouring countries that buy cigarettes from British manufacturers, which are exempt from duty because of their destination. They are then legally exported from Britain, stored in warehouses in Andorra and then smuggled back to the United Kingdom".[356] HM Customs and Excise subsequently told the Home Affairs Committee that in 1996 cigarette exports from the United Kingdom to Andorra had risen very rapidly, but by late 1997 they had "tailed off just as quickly", following work undertaken with the Andorran and Spanish authorities by the European Commission's anti-fraud organization.[357]

204. When it was put to Mr Wilson of Gallaher that his company's annual report had noted the increase in sales to Andorra and that he must have been aware that illegal smuggling had been occurring, he said that "of course" he was aware of that, but that he was "delighted when the authorities.... [stopped] it, but they stopped the smuggling, not us, as we were not doing anything illegal. I was very unhappy about it. I deplore smuggling." He also said that his company had helped the authorities' investigations.[358]

The Amber Leaf Briefing

205. Mr Wilson's robust stance against smuggling is to be welcomed, but it is undermined by the fact that the advertising agency employed on Gallaher's behalf was basing part of its strategy for one product - Amber Leaf hand rolling tobacco - on sales to bootleggers. The "Amber Leaf Briefing" prepared by M&C Saatchi and obtained by the Committee discusses "Trial through bootleggers" and describes "Adoption by bootleggers" as a key issue.[359] In oral evidence Mr Moray MacLennan of M&C Saatchi, told us that "Everyone is concerned about smuggling because it is the chief reason for more young smoking in the last two years".[360] He went on to say that the briefing document suggested that "what is being forced to happen in certain instances, because of the lack of control of smuggling in this country ... is that the tobacco companies, yes, are targeting legal distribution methods, some of which are on the continent. They sell it through legal distribution. Because of the lack of enforcement here in terms of smuggling, a lot of that finds its way back into this country through illegal distribution ... I think that really the onus is on the Government not the tobacco manufacturers".[361]

206. Mr Wilson told us that "The tragedy and the extraordinary thing about this whole situation is that we are here faced in the United Kingdom with the fact that four out of every five packets of hand rolling tobacco that are consumed in this country are sourced from outside this country. That is 80 per cent of the market sourced from outside the United Kingdom, predominantly Belgium and Holland. This is a direct consequence of the enormously high duty attaching to hand rolling tobacco here compared with Belgium. I think it is five times higher in this country than it is in Belgium. As a consequence, a pouch of hand rolling tobacco in this country which costs close to eight pounds will be available in Belgium for two pounds. That has led to a situation where 80 per cent of the market is sourced from outside this country and it leads to the ridiculous situation where the only way that you can develop distribution for a brand in this country is by making it available in Belgium".[362]

207. It seems that although Mr Wilson thinks it is a "tragedy" that hand rolling tobacco is smuggled into the country, his company works on the basis that it is prepared to sell to markets on the continent, aware of the knowledge that the goods will be smuggled back into this country; indeed not only are they aware, but their advertisers appear to deliberately frame their strategy to appeal to the criminals undertaking the smuggling. Gallaher's stance that they deplore smuggling appears to be contradicted by their advertising which seems to want to court those doing the smuggling. Gallaher noted in its evidence to us that smuggled tobacco gives children access to tobacco. If they genuinely believe that this and the other problems associated with smuggled tobacco are a "tragedy", they should make sure that all their business practices and those of their advertisers work against the illegal trade rather than encourage it.

Allegations regarding BAT and smuggling

208. During our inquiry serious allegations concerning BAT's involvement in international smuggling operations were made in the Guardian newspaper. While it was not claimed that BAT carried out the smuggling itself, it stated that "British American Tobacco condoned tax evasion and exploited the smuggling of billions of cigarettes in a global effort to boost sales and lure generations of new smokers".[363]

209. The article was based on research undertaken by the International Consortium of Investigative

Journalists, based in Washington DC. This research focused on the papers made public as a result of BAT's legal settlement of 1998, and which are now kept at BAT's depository in Guildford, which the Committee visited. The papers concerning smuggling are mainly from the early 1990s. The documents end in 1995. An additional memorandum received from ASH outlined the background to the smuggling claims, and gave examples of the original BAT documents on which the claims were founded. It stated that, against a "pitched battle" with Philip Morris for control of the worldwide cigarette market, evidence in the depository suggested that "manipulation and control of cigarette smuggling is an integral part of company business and expansion. The documents provide compelling evidence to suggest illegal trade is co-ordinated and promoted at the very highest level of the company".[364]

210. ASH's evidence further stated that a third of all internationally traded cigarettes (335 billion in 1996) are smuggled, thereby evading taxes and lowering the black market price. This stimulated demand, with knock-on health effects. They alleged that "cigarettes legitimately move through the 'in-transit' regime without bearing tax until they reach the final end market at which point tax is payable. Most smuggling involves the cigarettes moving out of the untaxed distribution chain and entering the final end market illegally - often through a third country. This can happen by legal export followed by illegal re-import or cigarettes in transit may be diverted from the legal to the illegal distribution chain".[365]

211. ASH claimed that while BAT's internal documents did not refer directly to smuggled goods, the following terms were used as euphemisms: DNP (Duty Not Paid); Transit; or GT (General Trade).[366] A background piece in the Guardian, also published on 31 January, quoted Lee Thompson, an RJR senior sales manager who pleaded guilty in 1999 to money-laundering charges, as saying that DNP is "an industry-wide term... It's essentially a long-winded term used by senior folks when they're talking around the topic of smuggling." Thompson was quoted as saying that "re-entry", "parallel market" and "transit" were similar euphemisms.[367] ASH's evidence quoted a number of BAT documents which it claimed showed the ways in which these euphemisms were used, for example:

368

- "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".[369]

- "I am advised by Souza Cruz [BAT subsidiary] that the BAT Industries Chairman has endorsed the approach that the Brazilian operating Group increase its share of the Argentinian market via DNP".[370]

The claims that the terms 'DNP' 'Transit' and 'GT' were euphemisms for smuggling were vigorously denied by BAT (see below, paragraph 219).

212. ASH also claimed that BAT engaged in 'umbrella operations' whereby a small trade in legitimate, duty paid exports could justify a large-scale marketing campaign to bolster sales in the much larger DNP sector. They claimed that the following extract provided evidence of such operations:

371

The author of the three documents quoted above, Keith Dunt, was at that time BAT's regional director for Latin America. He now sits on BAT's board as finance director.

213. ASH claimed that the evidence demonstrated that BAT did not merely acknowledge the existence of smuggled cigarettes, but that it deliberately stimulated the market, not just by 'umbrella operations', but by:

372

214. Some of the most serious allegations made concerned Colombia. The Guardian reported that "BAT records show that billions of cigarettes were shipped from BAT subsidiaries in the US, Venezuela and Brazil to distributors in the free trade zone of Aruba, an island in the Caribbean just off the coast of Colombia".[373] It was claimed that they were then moved to Maicao or to Turbo - two special customs zones - and from there that they were smuggled into the country's black market. Two BAT subsidiaries supply Colombia - Souza Cruz and Cigarrera Bigott. A fax from Keith Dunt to Laux, of Cigarerra Bigott in April 1992 stated that "I do need to clearly understand the answers to the following:

374

215. The Guardian stated that "in 1993 corporate records show that BAT subsidiaries imported a total of 3.98bn cigarettes into Colombia. However, 3.89bn of those cigarettes entered as duty not paid goods." However, it further stated that "since the mid 1990s legal imports of cigarettes have risen exponentially in Colombia. Official figures show that while only $4.6m in cigarette imports were registered in 1994, that number had leapt to $39.9m by November 1999. In August 1999 BAT signed a letter of commitment with the customs and tax department promising "....that if they have any evidence that distributors to whom they sell their products are, in turn, selling to smugglers, they will stop selling to those distributors." It also stated that "21 state governors and the mayor of Bogota have engaged American lawyers to prepare lawsuits in the US against British American Tobacco and Phillip Morris". It quoted Jose Manuel Arias Carrizosa, executive director of the federation of Colombian governors as saying that they were seeking "an indemnification for damages caused through contraband of cigarettes into the country ... We think there are two markets, one legitimate that pays its duties and taxes, and the other much bigger, illegal. That cannot be happening without the knowledge of the producing companies".[375]

216. The Guardian published a response to the allegations by Kenneth Clarke MP, BAT's deputy chairman, on 3 February. It stated that "BAT is a good corporate citizen which maintains high ethical standards. We reject allegations that we have 'condoned tax evasion and exploited smuggling'. We seek to work with governments around the world to find solutions to the problem of smuggling ... It is caused by high tax levels, different levels of tax on two sides of a border and the imposition of notional trade barriers to legal imports." It went on to state that "where governments are not prepared to address the underlying causes of the problem, businesses such as ours who are engaged in international trade are faced with a dilemma. If the demand for our brands is not met, consumers will either switch to our competitors' brands or there will be the kind of dramatic growth in counterfeit products that we have recently seen in our Asian markets. 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". The article concluded by stating that "When governments and health campaigners are prepared to accept policies to reduce and control smuggling, we will always welcome such policies and co-operate with them".[376]

217. We thought that the allegations made against BAT were serious enough to merit further questioning of the company, and so we invited Mr Broughton and Mr Clarke to give evidence on its behalf, alongside ASH and Mr Duncan Campbell, one of the authors of the Guardian articles. Dismissing the general allegations about BAT's involvement with smuggling, Mr Broughton said that the documents cited demonstrated that BAT was aware that smuggling went on, but that it was not involved with that smuggling in the way suggested by ASH and Mr Campbell. He told the Committee that "an assumption seems to be being made by Mr Campbell that knowledge of what happens in a market is a criminal offence. I would say to you that we do understand pretty well what happens in various markets ... You would expect that of a consumer goods company like British American Tobacco. So knowing what happens in a market....and knowing [that there are] some smuggled goods in there is hardly a surprise ... Knowledge of what is happening in a market is not, as far as I have understood, a criminal offence".[377] Mr Broughton also made the point that in some markets the distribution chain was extremely complex, the inference being that it was difficult to trace the movement of goods from beginning to end of that chain.[378]

218. Mr Kenneth Clarke MP, the Deputy Chairman of British American Tobacco, supported Mr Broughton's assertion that, while it was widely known that smuggling occurred, no evidence had been produced which proved that BAT was the "originator, the organiser, [or] a participant in that smuggling". Indeed, he went on to say that BAT was "the victim of smuggling ... We seek to minimise smuggling".[379] Mr Clarke later said that "I satisfied myself that [BAT] is a company of integrity. It is an extremely good corporate citizen".[380]

219. Relating to terminology , Mr Broughton denied that terms such as 'DNP', 'general trade', or 'transit' were "specifically euphemisms for 'smuggled'. That is not to say that there are not times where DNP would be the same as smuggled in one market".[381] Mr Broughton said that to look at individual documents, or to quote small parts of individual documents was to risk taking them out of context.[382] Mr Clarke went further: he told the Committee that "any case which depends on taking sentences out of eight million pages ... is absurd".[383]

220. Given the severity of the charges made against them, and their robustness in denying them, the Committee asked whether BAT were intending to take legal action against the Guardian. Mr Clarke said that "we did not contemplate legal action, there has been no question of legal action"[384] and that to bring such action would give the investigative journalists involved credibility.[385]

221. Mr Bates of ASH said that the concerns raised merited an investigation into BAT's conduct by the Department of Trade and Industry (DTI). Asked whether he would welcome such an inquiry, Mr Broughton said he would not, but that the appropriate thing would be to have BAT's own audit committee, chaired by Mr Rupert Pennant-Rea, a non-executive director, to look into the allegations and to "review all of our current trading practices and ensure they are all entirely legal and that we are entirely comfortable with those practices and that there are no conspiracies going on between people within the company, the company, our distributors and other people".[386] Mr Bates subsequently called this an "important and welcome development".[387]

222. The allegations made against BAT in regard to smuggling are extremely serious and merit careful investigation. This Committee is not the appropriate body to conduct such investigations and would be going beyond its remit were it to do so. We welcome the fact that BAT's audit committee will look into this matter and we will be calling for its findings when they are available. But this is not enough. The allegations need to be looked at independently and we therefore call on the DTI to investigate them. If they prove to be substantiated, the case for criminal proceedings against BAT should be considered; if they prove to be false, then those perpetrating them should publicly apologise to BAT for what will have amounted to a malicious slur on the company's name.

Expanding markets in developing countries

223. The Government's tobacco White Paper notes that there are over a billion smokers across the world, with nearly one third of those in China. It states that worldwide deaths from smoking - currently standing at 3 million annually - will rise to 10 million in about 30 years' time. It further notes that "smoking is fast increasing in third world countries and in Eastern Europe ... Many of the countries in which smoking is increasing fast have limited regulation of tobacco or health education and health care systems which are ill-equipped to handle the consequences. In parts of Africa tobacco companies are using advertising and marketing campaigns, sponsorship of events and price wars to promote cut-priced cigarettes".[388]

224. The World Health Organisation (WHO) told us that "we cannot simply stand by and count the dead. Internationally, the WHO is taking the lead in the United Nations in heading the development of the Framework Convention on Tobacco Control. The Convention would address transnational aspects of tobacco control",[389] although the WHO makes it clear that there will still be a need for national and regional action. Dr Derek Yach told us that while the incidence of smoking in western countries was declining, smoking prevalence was rapidly increasing elsewhere. He said that over the past 20 years there had been a decline of "about 1.6 per cent of adult consumption per capita per year - compared to increases ... of 8 per cent per year for 20 years in China, 6.8 per cent in Indonesia, almost 5 per cent in Syria ... By the 2020s we estimate that there will be around 10 million deaths [caused by smoking] and 70 per cent of those will occur in developing countries ...which means we are going to face one of the largest, if not the largest, public health challenges in the 2020s and 2030s ... This eclipses the sum total of deaths from malaria and tuberculosis and many other causes of deaths worldwide".[390]

225. The Framework Convention on Tobacco Control mentioned by Dr Yach is a new legal instrument that will circumscribe the global spread of tobacco and tobacco products. The Framework Convention will establish legal parameters; separate protocols will make up the substantive part of the agreement. It is expected that the Convention and possible related protocols should be adopted by the World Health Assembly no later than May 2003. The Government has welcomed the Framework Convention and its White Paper states that "we will do everything we can to help, drawing on our experience of tackling tobacco, and will be discussing with the WHO how we can most effectively be involved in this landmark initiative".[391]

226. Given the huge scale of the problem, it is alarming to note the reaction of some tobacco companies to the WHO's actions. Mr Broughton of BAT told his company's AGM on 29 April 1999 that "driven by the western agenda, [WHO's] priorities are different from those of health ministers in the developing world, for whom issues like malnutrition, lack of sanitation, infant mortality and AIDS loom much larger ... Regrettably, the WHO has got the smoking issue completely out of proportion with its Tobacco Free Initiative ... Indeed the WHO seems to have been hijacked by zealots in its desire to set itself up as some sort of 'super-nanny'."[392] This approach seems to belie the claim made in BAT's written evidence to the Committee that it seeks "to co-operate with the Government and public health authorities to the fullest extent reasonably possible. The reason for this is simple. We take the view that the most effective way of developing rational smoking and health policies is for the industry, the Government and public health bodies to work with each other and to engage in a free and frank exchange of views".[393]

227. The idea that developing countries were uninterested in tobacco control was rebutted by Dr Yach. He said that the WHO represented the will of its 192 member states and that "there is virtually no other area of public health where there has been so much international consensus." He went on to state that, although it was sometimes said that African ministers accorded tobacco control a low priority, at a conference of African health ministers held in October 1999, a range of tobacco control options were discussed and that "in their discussions on tobacco they acknowledged the need for action on all the areas being discussed in western countries ... This was a relatively short meeting with a massive public health agenda. They selected to highlight the importance of tobacco as a public health problem because they know that somewhere down the line they are going to face the problem and addressing it early and vigorously is going to save enormous public resources. The truth is that wherever we go there is not a single country where increasingly the ministries of health and the ministries of finance are not beginning to recognise that tobacco control makes sound public health sense and sound economic sense".[394]

228. Mr Broughton's comments were further undermined by Zhang Wenkang, Minister for Public Health, People's Republic of China, who stated in correspondence to the Committee that "The Ministry of Health of China has recognized that the effect of tobacco on health is an important public health issue. In order to protect the health of the public, Chinese governments at all levels have been actively facilitating the tobacco control programme in the last twenty years ... We think that tobacco control ... [requires the] joint efforts of all countries in the world. Therefore, we support the Framework Convention on Tobacco Control of the World Health Organisation".[395]

229. There are also concerns that the tobacco industry's negative attitude towards the WHO's tobacco control objectives might go beyond words to deeds. Dr Yach quoted a senior Philip Morris official speaking at a Philip Morris sponsored conference in 1988, where there were also representatives from other tobacco companies, as saying that the WHO "'has an extraordinary influence on government and consumers and we must find a way to defuse this and reorientate the activities to their prescribed mandate'". Dr Yach also said that a document emerging from the conference "discussed 'countermeasures designed to contain, neutralise, reorientate ... WHO' and stated 'the necessary resources should be allocated to stop WHO in their tracks'".[396] Such was the level of concern felt by the WHO at the activities of the tobacco industry, that it established an inquiry into "the way in which WHO and the UN systems have had their policies thwarted by the industry ... This is unprecedented ..." The World Bank has also joined the inquiry and has nominated a top anti-corruption expert to assist the inquiry.[397]

230. We welcome the Framework Convention proposed by the World Health Organisation and the Government's support for it. However, any success will be dependent on a responsible approach being taken by the tobacco companies. Depressingly, there is little sign of that in the cheap jibes made at the WHO's expense by BAT. To call an organisation committed to improving global health 'zealots' and a 'super-nanny' because of its concern about the 10 million deaths which will be caused by tobacco each year by the late 2020s seems to us bizarre. We hope that the other companies - and, belatedly, BAT - will work constructively with the WHO. On a national level, we recommend that the Government requires the British tobacco companies to provide an annual summary of the action they have taken to co-operate with the WHO, to which the WHO should be invited to respond. If the action taken by the companies is not satisfactory, further action, including legislative and fiscal approaches, should be considered. It would be a hollow victory if, as a result of more stringent action taken on tobacco control in the developed world, smoking related deaths were merely exported to the world's poorer nations.

352 Q1376. Back

353 Ev., p.223. Back

354 Q1064. Back

355 QQ1065-66. Back

356 Sunday Times, 'Bootleg Britain', 7.3.99, p.12. Back

357 Home Affairs Committee, Minutes of Evidence, 25 May 1999, The Work of HM Customs & Excise: Matters Relating to Crime, HC478, QQ131- 32. Back

358 QQ1059-1060. Back

359 Ev. p.309. Back

360 Q775. Back

361 QQ776-77. Back

362 Q1054. Back

363 The Guardian, 31.1.2000, p.1. Back