Examination of Witnesses(Questions 460-479)
MR GARETH
DAVIS, MR
BRUCE DAVIDSON
AND MR
JOHN DIBBLE
WEDNESDAY 19 JUNE 2002
460. No, Mr Davis, I am asking you.
(Mr Davis) Well, I am deferring it, if I may, to John.
461. I would like you to answer, you are the
Chief Executive of this company.
(Mr Davis) As I say, I was not aware of that report.
I can say that I was not made aware of that report in the due
diligence process. The due diligence process did concentrate very
much on discontinued customers that Reemtsma had actioned, they
had discontinued certain distributors.
462. Does due diligence not cover all aspects?
(Mr Davis) Due diligence covers main aspects—
463. Smuggling is an important aspect, is it
not?
(Mr Davis) Of course it is. I do not think there is
a due diligence exercise in the world that covers 100% of everything,
it is just not practical, you do not get that access.
464. Smuggling is a very important proportion
of the total cigarette market.
(Mr Davis) Of course.
465. This report refers to 1,074 interceptions
in 2000 by 27 Member States of this World Customs Organisation
and 250 of those interceptions were for West, 200 for Regal and
150 for Superkings, making a total of 650, which was 55% of all
interceptions. Your two brands, Regal and Superkings, represented
32% of all interceptions during the period and you add on West
and it comes to 55%, three-fifths of all the interceptions of
these cigarettes. You had seven months to do a due diligence on
this company before you bought it and you were not aware that
they were producing one of the leading smuggled brands. I find
it astonishing.
(Mr Davis) No, I was aware that West had been smuggled
in the past. I do not deny that. But in the due diligence process
it was not an issue, it does not appear to be an issue at the
moment.
466. What about the German Customs Authority
raiding Reemtsma last March 2001? Were you aware of that?
(Mr Davis) Yes, indeed.
467. So you know there was criminal activity
going on in relation to this company?
(Mr Davis) No, I was aware they had had a raid by
the German Customs Police. I did not know there was criminal activity
going on, I was aware of the raid.
468. I refer again to my point earlier about
you having considerable resources. This is in the public domain,
it came out of the German magazine Der Spiegel on 24 March
last year. It refers to the raid, it refers to the fact that people
were arrested, it refers to the fact it was the biggest action
by Customs against organised smuggling in Germany. That is March
2001. You were going to buy this company.
(Mr Davis) Yes.
469. Did it not cross your mind that if this
company was having these sorts of things written about it, there
should be a pretty big heading in the due diligence called "Smuggling"?
(Mr Davis) And that was looked at.
470. But not by you?
(Mr Davis) I do not do everything in the company.
We had a due diligence team on it of external and internal advisers,
and the smuggling issue was covered.
471. Could you say how many sticks of Regal
and Superkings you manufacture each year in total?
(Mr Davis) About 16Ö billion in 2001.
472. How many of those do you understand to
be imported illegally, smuggled, into the UK market?
(Mr Davis) I think our best estimate was, from those
sensitive markets where it seems to have come back out, about
3 billion.
473. 3 billion. Customs' figure—Mr Wells,
you will confirm—is about 8 billion, is that right?
(Mr Wells) Yes. We seize about 50% of what we have
seized in the years 1999-2000 and 2000-01 for the brands Regal
and Superkings. If that is extrapolated as if it applies to all
smuggled product, it would represent about 8 billion cigarettes.
474. So there is quite a big difference between
you basically. Mr Davis, and this comes back to what Mr Steinberg
was asking you about earlier, you said you believed you sold to
legitimate consumers in Latvia, and in Latvia you sold 1.7 billion
cigarettes in the year 1999-2000, and then the following year
1.4 billion cigarettes. Do you know the population of Latvia?
(Mr Davis) I do not know the precise figure.
475. It is 2.3 million, which means each person,
man, woman and child, including non-smokers, would have had to
have smoked 722 cigarettes, which is 36 packets a year. When you
were selling Regal and Superkings to this market, given it is
a brand mainly sold in the UK, what did you think you were doing?
Who did you think was buying these things and why did you think
they were legitimate?
(Mr Davis) I think you should understand that Latvia
is a hub market, so the cigarettes were not just consumed in Latvia
but in other markets in Eastern Europe. So I understand your arithmetic
but the fact remains—
476. What I find puzzling is, if it is a hub
market why did it suddenly completely collapse down to 1,290,000
which is the equivalent of 722 cigarettes per person, that is
a drop from 1999 to 2001 from 722 cigarettes per person to half
a cigarette per person, that is a fairly precipitous fall in the
market. What happened?
(Mr Davis) We discontinued supply.
477. Why?
(Mr Davis) Because product was coming back into the
UK. We made efforts to identify how that was happening and we
could not guarantee that it conformed to our supply policy because
product was coming back, so we ceased supply.
478. But in the year before you sold 1.4 billion
and in the year before that 1.7 billion, so even though you could
see you were supplying well in excess of the local demand and
the stuff was coming back, you still carried on for another year?
(Mr Davis) As I say and it has been pointed out, we
did not get seizure data until 2000.
479. Were you asked to stop exporting to Moldova
and Afghanistan?
(Mr Davis) Indeed, I think we were asked.
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