Examination of Witnesses(Questions 440-459)
MR GARETH
DAVIS, MR
BRUCE DAVIDSON
AND MR
JOHN DIBBLE
WEDNESDAY 19 JUNE 2002
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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