Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 440-459)



  440. That is helpful. Maybe you could just clarify for me in areas like Afghanistan, and I would have thought that the price would be one of the major determinants unless there is a luxury market there, how do your cigarettes compare in price with the local camel dung or whatever it is, your nearest local competitor?

  (Mr Davidson) Clearly they are more expensive. There is usually a segmented market in these export markets with super-premium brands at the top, premium brands like Marlboro, Dunhill, for example, then lower priced international brands and at the bottom a range of local brands. It is a relatively normal segmented market.

  441. It is just the scale of it all that surprises me. A third of all Superkings and Regals that you manufactured in the UK went to these minor markets. Surely that must represent a substantial share of the segments at which you were aiming. I find it difficult to believe that you were not, as it were, over-absorbed. The premium sections of the market in, say, Afghanistan or Moldova must be relatively small I would have thought but the volumes you are sending there seem to me unreal.
  (Mr Davidson) We were not even competing in the premium segment of the Afghan market. I think the volumes may look large but in market share terms they are not. In overall terms as a company our volumes in world terms are still very small, even as a total company.

  442. Okay. Maybe I can switch on to something else. We have a report telling us that the World Customs Organisation reports for 1999-2000 that Regal and Superkings were the most smuggled brands in Europe, along with West. To some extent you must get some of the credit or blame for that. Would you accept that?
  (Mr Davis) That we get some of the blame for it?

  443. They are your products. To find that they are the most smuggled in Europe, you must have something to do with that surely?
  (Mr Davidson) I think there were two main mitigating factors during this time which perhaps will be helpful in understanding what was going on. Firstly, throughout 1999 was the start of some major consolidation within the industry. BAT got Rothman's, Japan Tobacco got RJ Reynolds International and then in 2000 Tabacalera and Seita joined together to form Altadis. The reason I mention that is that then created a number of displaced distributors so there was an enormous amount of demand for our brands. At the same time prices in the UK went up, in one year there were two increases in taxation.

  444. Can I tell you the EU Anti-Fraud Office says in a report that I have seen "It is very suspicious that Regal and Superkings, mainly smoked in the UK, are transported to several countries for apparently no reason". When I see that your exports to Andorra went up from 13 million cigarettes in 1993 to 1.5 billion in 1997, that is a pretty substantial sales growth, and then it dropped, just plummeted, almost as quickly.
  (Mr Davis) I think John explained that.

  445. There does seem to be something untoward going on in all of this, does there not? Let me just give you another example. You sent huge amounts, according to the EU fraud people, to Montenegro by road. In Montenegro at the time you were sending them there was a war zone and therefore it was unlikely to be attracting large numbers of tourists. Therefore, it is reasonable to assume that a company that was effectively at that stage being run apparently by a section of the Italian Mafia were involved in redistributing these cigarettes. Did that not occur to you, that enormous sales to Montenegro were perhaps slightly dubious?
  (Mr Davis) We were not targeting tourists in Montenegro I can assure you, we were trying to sell to—

  446. Right that's a fair point. Who were you selling to?
  (Mr Davis) We were trying to sell to the smoking population of those countries that exists, which is a perfectly legitimate thing to do.

  447. Do you seek out war zones?
  (Mr Davis) No, we do not seek out war zones at all. The market that is sought out today that is not a war zone in three years' time could be, you cannot help that.

  448. The final point I want to make, and I have had my notice from the Chairman, is when I was involved in the Proceeds of Crimes Bill one of the things that the police raised with us on a number of occasions was the collaboration between apparently legitimate businesses and major criminals, and in particular the overlap between drug dealing, a whole variety of other offences and cigarette smuggling. Can you accept that it certainly seems to me reasonable to identify yourselves as people who are collaborating with major criminals indirectly or directly, knowingly or unknowingly, in boosting their trade which in turn boosts their profits and helps them run drugs into my constituency?
  (Mr Davis) No. On the contrary, we are in no way collaborating directly or indirectly with major criminals. We are legitimately trying to establish export markets and where we have succeeded in that fair enough, in certain countries we have not and it has been demonstrated we have not by the fact they have been smuggled back into this country and we have taken very drastic and serious action to stop it. I do not see what else we can do. We are a company who are trying to grow internationally and we have to try to export to certain markets and acquire international businesses, it is legitimate for us to do that, but when it goes wrong and things have come back from a particular market I think we can demonstrate that we have taken very draconian action.

  Chairman: Thank you, Mr Davidson. Mr Richard Bacon.

Mr Bacon

  449. Thank you, Chairman. Mr Davis, you bought the German manufacturer, Reemtsma. Can you say when the negotiations for that started?
  (Mr Davis) It would be in the autumn of last year.

  450. When exactly?
  (Mr Davis) Early November the process started.

  451. You announced on 16 May you had concluded the purchase?
  (Mr Davis) The 15th I think.

  452. You said earlier you take cigarette smuggling seriously, that is right, is it not?
  (Mr Davis) Yes, indeed.

  453. I am slightly puzzled that in early May you still were not aware that this company, Reemtsma, with whom you were in negotiations to purchase, produced the leading smuggled brand. That was some five or six months on if you started negotiations in November.
  (Mr Davis) If you are talking about West, I was very much aware that they produced West.

  454. You were not aware that West was Europe's leading smuggled brand?
  (Mr Davis) I was told by a journalist that in a report in 2000 it was reported to be Europe's leading smuggled brand. I was not aware of that.

  455. According to the Guardian reports you were saying "I did not know about it until I read it in your paper this morning", that was on 3 May, the previous day he had written the story.
  (Mr Davis) Absolutely. I can only tell the truth.

  456. Yes, indeed. But negotiations started in November, that was six months prior. You say you take smuggling seriously so where in your due diligence, if you take smuggling seriously, was the bit of the due diligence that dealt with smuggling so that you would have known that they produced Europe's leading smuggled brand? How could you be unaware when financial closure was on 16 May?
  (Mr Davis) The due diligence that took place was very extensive. The particular report that I understand that quote emanates from was not a report that I was aware of.

  457. There is my point.
  (Mr Davis) I do not think it was a public report actually.

  458. You said that you took smuggling seriously.
  (Mr Davis) Yes.

  459. The report that I am referring to is the Lasso 2000 Review on Cigarette Smuggling in Europe produced by the World Customs Organisation. You make very substantial profits of some hundreds of million pounds, as you said earlier, I have one researcher and I found this document within about a week. How is it that you, with all your resources, in seven months were unable to come across this document which lists not just West but also Regal and Superkings as the three top smuggled brands? How is it that you with all your resources were not able to find this?
  (Mr Davis) John, would—

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