Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 460-479)



  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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