APPENDIX 25
Supplementary memorandum by British American
Tobacco (TB 28F)
SMUGGLING
ALLEGATIONS
GENERAL OBSERVATIONS
1. British American Tobacco's views on smuggling
and the causes of smuggling were presented to the Committee on
16 February 2000 through the document "Smuggling: Our View"
and by oral evidence given by Mr Martin Broughton, Executive Chairman,
and The Rt Hon Kenneth Clarke, QC, MP, Non-Executive Deputy Chairman.
This was in response to a request from the Committee for further
evidence concerning allegations made by an investigative journalist,
Duncan Campbell, and a campaigning organisation, Action on Smoking
and Health (ASH), inferred from documents selected from the unique
document facility at Guildford, England.
2. Smuggling is a global problem for manufacturers
of many goods, including computers, oil, electrical goods, cars,
watches, wine and spirits, mobile phones, toys, perfumes, even
soaps and detergents. Cigarette smuggling, like all smuggling,
is a fact of life, well-known to governments and tobacco companies
alike. It is caused by high tax differentials between neighbouring
areas, weak border controls and import restrictions and bans on
goods which are in high consumer demand. As smuggling occurs in
all countries, across a vast range of products, and is almost
always conducted under conditions of secrecy, it is (and always
has been) extremely difficult to control. As the ASH submission
correctly states: "the responsibility for tackling smuggling
ultimately lies with governments". Manufacturers are not
policemen. Neither do they create the economic or social conditions,
nor the absence of political will to deal with the problem, which
enables smuggling to occur.
International Trade and Distribution
3. There are many sources of supply around
the world for the cigarettes which are sold in markets where revenue
policies make the market for smuggled product such a lucrative
one. Tobacco is plentiful and is grown in many places. The technology
to make and package cigarettes is widespread and relatively inexpensive.
There is vast manufacturing capacity for the production of both
legitimate and counterfeit product. In addition to the major international
manufacturers, there are more than 200 independent producers.
Located in every corner of the globe, they supply over 50 per
cent of the world market. Many make local versions of international
brands under licence. There is also significant capacity to produce
counterfeit cigarettes in the Far East and globally.
4. The reality is that, in the international
market place, cigarettes are a valuable and easily transportable
commodity which entrepreneurs are looking to obtain from any available
source. To distribute cigarettes efficiently, there are myriad
(and highly competitive) primary networks and channels. There
is a thriving secondary market—involving numerous brokers
around the globe—that, both opportunistically and systematically,
reallocates product from the primary purchasers and networks,
including excess inventories and end of shelf-life product. There
are local spot markets providing instant pricing mechanisms allowing
entrepreneurs to take advantage of price differentials. There
are large numbers of local traders, operating on a small but effective
basis. Where there are sufficient incentives, demand for contraband
cigarettes will overcome any supply side controlling efforts,
much as it did during alcohol prohibition in the United States
during the 1920's and 1930's and the earlier tobacco prohibition
imposed by certain states in the early part of the 20th century.
5. In addition to duty-paid channels for
such goods, duty-free channels also exist. These take many forms,
from sales directly to licensed duty-free retailers (such as ships
chandlers and those which exist at ports and airports), through
sales to licensed duty free wholesalers for onward supply to their
customers, to sales into government-sponsored and managed duty-free
zones, established to encourage economic activity in selected
areas.
6. Along with other manufacturers, British
American Tobacco companies manufacture products around the world
for both domestic and export markets. In those countries where
we do not have domestic manufacturing capacity, we seek to operate
either through our own direct distribution networks, staffed by
our own employees, or through independent distributors and wholesalers.
Where it is necessary for such distributors and wholesalers to
be licensed, we only deal with licensed operators and ensure that
other necessary checks are made upon their status. However, we
are not in a position to control the distribution chain beyond
sales to our direct distributors and wholesalers. Documentation
completed by our operating companies and/or their appointed agents
in connection with the export, import, warehousing or shipping
of our product should comply with applicable laws and regulations
and is audited regularly, both internally and by customs officials.
Terminology
7. Much of the misunderstanding on which
the allegations are based arise from a misunderstanding of the
terminology used. There is no settled categorisation of types
of sales. References are often made to domestic sales, duty paid
sales, duty not paid, duty free sales, general trade, general
exports, combined exports and transit sales amongst others. These
may often overlap and on occasion may be used as synonyms. The
term "general trade" is an industry term which has been
in use since at least the mid-1960's. It is used to refer to sales
where the ultimate destination for the goods sold cannot be identified
at the time of the first sale into the distribution chain. It
is a term normally used to refer to wholesale duty free sales,
ie sales of duty-free products to third party wholesalers and
distributors. No distinction in terminology needs to be made.
Such products may ultimately end up in either legitimate or unofficial
channels. The term would apply to both. The vast majority of general
trade cigarettes are packaged as international duty free product
with US/European health warnings. Product exported to wholesalers
and distributors and on the spot markets is always general trade
product. General trade product, however, is also sold to domestic
markets and in duty free retail outlets where there is no local
packaging requirement.
8. Once it is appreciated that general trade
product is entirely legitimate product to be sold through a number
of legitimate routes, it is unremarkable that British American
Tobacco companies may have information on the proportion of its
exports which may appear in general trade channels. While smuggled
goods can come from any of the legitimate markets in which British
American Tobacco companies operate, it is believed that a significant
proportion of such goods comes from general trade sales.
9. In a similar vein, the word "transit"
may be used in a number of contexts with a number of meanings.
Transit products are those which are initially shipped to a country
other than the country of retail sale. Again, while non-transit
goods may, and do, become smuggled goods, the majority of smuggled
goods are goods which have been "in transit". Goods
on-sold from one distributor to another, elsewhere in the distribution
chain, will have been "in transit". Again, therefore,
there may have been occasions on which the word "transit"
has been used as a shorthand for goods which may have become smuggled
goods although this is not its only meaning.
10. Goods referred to as "Duty Not
Paid" or "DNP" refer to goods entering the distribution
chain without duty having been paid. Goods which are duty-free
are also referred to as "duty not paid". The majority
of such goods remain thereafter in the duty free channel but,
at some point in the chain, such product may end up being smuggled—sometimes,
in certain markets, in large quantities. Again, therefore, there
may have been occasions on which "DNP" may have been
used to refer to smuggled product but such a meaning is, most
certainly, not its only meaning.
11. Similarly, the terms "parallel
imports" and "parallel exports" usually refer to
manufacturers' own products which appear in a market other than
through manufacturers' own authorised distribution channels in
that market.
12. The desire to suggest that basically
everything which was not sold, duty paid, through our own established
distribution network must be smuggled is best illustrated by ASH's
assertion that the term "VFM" or "Value for Money"
is used as a descriptor for illegal tobacco markets. The term
"value for money" is a well-recognised descriptor (for
example, in the US domestic market) for cigarette products sold
generally at the lower price points where applicable excise duties
and taxes have already been paid.
13. It is against this misunderstanding
(wilful or otherwise) of the terminology of the business that
the allegations made against us must be read. It is certainly
true that there is no consistency of usage of these terms—neither
is there any "secret code".
Knowledge and Use of Information
14. We accept, and have never sought to
deny, that our companies have knowledge of the fact that some
of our brands have been, and continue to be, smuggled. Indeed,
we have frequently brought such information to the attention of
the authorities ourselves. We take serious issue with any allegation
that our operating companies or their officers orchestrated, managed
and controlled smuggling. As a major international business, we
have obligations to many stakeholders, including governments and
their revenue authorities, but also to consumers, customers, suppliers,
employees and shareholders. We have an obligation to manage our
business properly, to high business standards. Of course, ASH
and others question the ethics of the very existence of the tobacco
industry. To debate this issue on ethics grounds is to step onto
dangerously shifting sands.
15. In order for us to manage our business
properly, we need to have good market information. Such information
as is available is inherently uncertain, can only be estimated
and comes from a variety of sources, eg external and internal
consumer research, government estimates and estimates of total
size of market. This information is, to a great extent, gathered
up by us, market by market, from available sources in each country.
It is used to understand our business in order to best protect
it for the benefit of all our stakeholders, including governments.
Our business is brand-driven and our brand equity is of fundamental
importance to the continued viability of our enterprise. Smuggled
and counterfeit product damage brand equity. The information which
we collect is used to understand what is happening to our brands
in any given market, eg how much of our sales are being lost to
smuggled or counterfeit products. This information is frequently
used for discussions with governments to enable them (as well
as ourselves) to better understand the dynamics operating in their
market and provides the basis for our active co-operation with
them to help to eliminate smuggling. Examples of notable successes
in this regard are contained in "Smuggling: Our View".
Other Allegations
16. In addition to the observations set
out above, we absolutely and unequivocally deny the allegations
that we might have had any involvement in either money laundering
or encouraging the growth of the international narcotics trade.
Further, broad allegations of price fixing and market sharing,
based on quotations taken from selected documents, are not substantiated
in any way by evidence concerning the circumstances, whether political,
legal or commercial, present in those markets over the periods
alleged. Discussions with competitors are not, of themselves,
unlawful. In countries suffering severe economic difficulties,
such discussions are often initiated by governments.
Conclusion
17. We reiterate that smuggling is neither
welcomed nor condoned by British American Tobacco because it is
inimical to our long-term business interests. We would gladly
be rid of smuggling altogether and we devote considerable effort,
with others, to its elimination. It is invidious to single out
the tobacco sector, or one tobacco company, as if to suggest that
no other industry or company faces equally difficult issues.
18. As indicated to the Committee on 16
February 2000, well-established and regulated corporate governance
mechanisms operate within British American Tobacco and will be
utilised appropriately. As the Committee is also aware, however,
the people and organisations making allegations against us spent
some six months reviewing selected documents in order to present
their conclusions. It is axiomatic that selected documents (or
portions thereof) do not, and cannot, in themselves, present the
full context to any given issue. Journalists and campaigners have
the freedom to express their views in broad terms, being largely
unaccountable, whereas the targets of such allegations have to
proceed with considerable care in formulating their responses
since they are, necessarily, more concerned with precision for
reputational and legal reasons. In such circumstances, not least
for reasons of fairness and natural justice and given the sheer
scale, detail and number of years of history covered in the Guildford
depository papers, we do not consider it to be appropriate to
answer each and every innuendo and sensational allegation raised
against us on a document by document basis. To do otherwise would
be to encourage a never-ending stream of similar allegations,
with all that entails.
19. No evidence has been submitted by anyone
which shows that British American Tobacco companies or their employees
have been smuggling tobacco products. What has been alleged, in
fact, is that knowledge of a widely known phenomenon (ie smuggling)
and the use of that knowledge for legitimate business purposes
equals guilt in some way. This only has to be stated in order
for any reasonable and objective observer to see that the allegation
is fundamentally misconceived. It also shows the dangerous area
which investigative journalists and other campaigners enter into
when they put "two and two together to make five".
8 March 2000
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