Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 288-299)




  288. Welcome to the Committee of Public Accounts. I would like to welcome to the Committee Mr Davis, who is the Chief Executive of Imperial Tobacco Group plc, one of the United Kingdom's largest tobacco manufacturers. Would you like to introduce your team, Mr Davis. Welcome to our Committee. We are grateful you have found time to come and see us.

  (Mr Davis) Thank you very much for inviting me and my colleagues to this meeting of the Committee of Public Accounts. I think it is fair to say we were somewhat surprised—

  289. I should say that the way we normally operate is that if you introduce your colleagues then I will go straight into questions. I will tell you how the system operates if you introduce your two colleagues.
  (Mr Davis) I was going to be very brief but, yes, okay. Immediately next to me is Bruce Davidson, who is Managing Director of our International Division. Bruce joined the company in early 1998. Next to Bruce is John Dibble. John is our General Manager for Economic Affairs and has been with the company about 33 years. For well over 20 years of that time he has been the main point of liaison or contact with Her Majesty's Customs.

  290. Thank you very much for introducing your team. We have also got Mr Wells, who is over there, who is the Director of Law Enforcement Policy with Customs and Excise. Although he is sitting in the back row he is here to assist the Committee and the Committee can ask him questions as well as asking questions of the National Audit Office. In common with many other Members of Parliament I have received hospitality from tobacco companies, including presumably Imperial. It was non-remunerated but I would like to declare that. Other Members may wish to declare or not any hospitality they have received. The Committee would like to discuss today the subject of tobacco smuggling—cigarettes in particular. We understand that an estimated 17 billion cigarettes are smuggled into the United Kingdom each year, representing an annual loss to the Exchequer of £2.8 billion in Duty and VAT. The extent of smuggling is therefore of major concern to the Committee. In April 2002 the Committee took evidence from Richard Broadbent, the Chairman of HM Customs and Excise. He told us of the difficulties his Department apparently face in securing the full co-operation of Imperial Tobacco in combatting cigarette smuggling. You have very kindly submitted a paper and statement to the Committee. We are very grateful for that. We have all seen it and read it, so I will take that statement as read. May I say that all the Members will have a chance to ask some questions. The way we operate is that they all get about ten minutes. Obviously you have not been to a committee like this. It is going to last the best part of two hours so you will have plenty of time to get your argument out. You can relax, you do not need to read out long answers and prepared statements. You know the subject back to front anyway. What they like is brisk answers to brisk questions. That is how we operate. We do not need to have any prepared statements read out. Customs, to introduce this subject, have told us that the share of your company of the legitimate market in the United Kingdom is around 40% compared to a 55% share of the smuggled market, and for two brands in particular the smuggled share is much higher. This is what Mr Wells and Mr Broadbent have told us. How do you explain that situation?
  (Mr Davis) In the first instance, I have to correct the numbers for the sake of accuracy. The actual share of our own owned brands is just over 43% of the UK market. In addition to that, we distribute Philip Morris' brands in the UK market so that, in effect, takes our share to just over 50% of the United Kingdom market. I think also it is fair to say the Customs' estimate of 55% includes brands such as Marlboro which we do not handle on an overseas basis and also includes Embassy Number One which we do not own outside of the EU; it is owned by British American Tobacco. If those brands are taken away or that 55% is adjusted, then it comes to 50% which is broadly in proportion to our UK market share.

  291. That is 50% of the smuggled market?
  (Mr Davis) The Customs' estimate is 55%, I am saying the correctly adjusted figure based on Custom's estimate is 50%.

  292. 50% still very large. How do you explain it?
  (Mr Davis) The main point I would make is that many of our brands and two of the brands in question, Regal and Superkings, are very large brands in the UK and they enjoy considerable consumer franchise. In the case of Regal in particular there is extreme regionality. It is a hugely popular brand in Scotland, the North of England and South Wales which I think the Chairman of Customs in your meeting of 29 April labelled the smuggling "hot spots" in the UK. It is not surprising that those brands should be very sought after in those sort of smuggling hot spots.

  293. We are told that you are exporting billions of cigarettes to small, sometimes very poor countries where the population is either few in number or unable to afford English cigarettes. These seem to be unlikely places to be consuming such quantities of cigarettes and odd places for legitimate distributors to be located—Moldova, Kaliningrad, these sort of places. What is your explanation for that?
  (Mr Davis) They are existing cigarette markets and some of them are very sizeable cigarette markets where international brands are readily available. Certainly part of the strategy of Imperial, particularly since we demerged from the Hanson conglomerate in 1996, has been to grow our international business. That is not a rocket science strategy. Our domestic market has been squeezed very much by the punitive levels of taxation, the highest levels of taxation in the world, so part of our strategy has been to grow internationally. These are markets that exist, they are sizable, they are markets where international brands are available and they are markets obviously we have tried to break into.

  294. Do you know where your smuggled products come from—which countries and which distributors—and, if so, what are you doing to stop the supply of them?
  (Mr Davis) We very much know that. This is information that we share with Customs on a regular basis. We have total divulgence of that information to them on a regular basis. Certainly they receive a disk every month. They know where all the sales are, they have all the invoice information. Could you repeat the question because I have lost my thread.

  295. We now know that you know where these smuggled cigarettes are coming from because the packets are coded.
  (Mr Davis) Indeed.

  296. If we know where these cigarettes are coming from and they are apparently coming from these poor countries that could not possibly consume all these cigarettes, why do you not stop it? Why are you still distributing to these countries?
  (Mr Davis) Again, I have to correct you. Having read the minutes of the Committee of Public Accounts of 29 April, going back to what I wanted to say at the start, we were very surprised, disappointed and concerned to see some of the comments there about the lack of co-operation with Customs, particularly reference to the fact that information was not provided beyond May 2001, which is quite incorrect, and also that we continue to trade with customers who had been red carded. This is clearly not the case. Since 1999 we have discontinued business or ceased supply to over 30 distributors. That is having an effect, one has to say. In the first part of the calendar year seizures of our brands compared with the same period last year are down 40%. We are doing very little trade, if any at all, in many of these areas today. I would have to argue that we have taken very strenuous and drastic measures to stop this.

  297. I think that is quite a key point. My colleagues will have to investigate that further. We have been briefed, of course, as you know, that you have been less co-operative than other tobacco manufacturers and it is for that reason that Customs have not felt able to enter into a Memorandum of Understanding. There is one point I can give to you and maybe you can answer this question. According to Customs, 15 red and four yellow cards have been issued in respect of your customers. You say you have received 13 and four yellow. Let us not argue about that. The fact is that the total number of cards issued in respect of the other two UK manufacturers is only two. We have a picture of you from Customs and Excise of you receiving many more red and yellow cards and of you being less co-operative than other tobacco manufacturers. For example, speed and completeness of response to the tracking and tracing requests of seized goods has been significantly slower than other manufacturers. You will have an opportunity to develop your case this afternoon, but you deny that, do you?
  (Mr Davis) In terms of red cards I did not say that we had been issued with 30 red cards; I think we have been issued with 13 red cards. We have discontinued business with 30 customers and most of those were before red cards were ever issued by Customs. We have been extremely responsive to (a) eight of those red cards and (b) before they were even thought of, or before it was a mechanism that was used by Customs. The observation that was made by Customs to me and really the first I knew of it in any great detail was when I was invited to a meeting with the Director of Law Enforcement on 16 April who said at that meeting that we were compliant but not as co-operative as we might be. At that meeting I expressed surprise and disappointment because I believe our track record of co-operation with Her Majesty's Customs over many years stands up to the closest scrutiny. We were very frustrated.

  298. Other Members can investigate that further. Reading your own Executive Summary you say, page 2, bullet 5, and I think these words are very carefully chosen by you: "Imperial has never deliberately supplied overseas' markets with the intention that smugglers will obtain its cigarettes and divert them to the UK illegally." To sum up the first part of this hearing, what this Committee wants is a stronger degree of assurance from you—because you also say that you strongly disapprove of the smuggled market, you had to say that, and it damages your business. What your statement leaves us wondering, if I can speak for my Committee for a moment, is whether your company whilst doing nothing illegal is, in effect, turning a blind eye. What is your response to that?
  (Mr Davis) Chairman, I will answer that in as short and crisp a way as I can. The discontinuation or cessation of trade with 30 major distributors around the world is a very drastic and serious reaction to that problem. It is evidence of the significant co-operation we have with Customs and the seriousness with which we view smuggling. It does us no good whatsoever. It undermines our position in this market. It is double whammy and probably a triple whammy for us. I would prefer us to be judged by our deeds.

  Chairman: Thank you, Mr Davis. Mr Frank Field?

Mr Field

  299. I have two questions. We have to declare our interests. As smoking cigarettes is closely allied to developing lung cancer, I am going to ask our three witnesses whether they smoke.
  (Mr Davis) I do.
  (Mr Davidson) I do not.
  (Mr Dibble) I do not.

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