Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 540-559)



  540. Established smuggling—
  (Mr Davis)—with a very high—

  541. Established smuggling locations. If you had to list the five places—I do not know about Latvia but certainly Kaliningrad, Afghanistan, Moldova and Andorra—they are all notorious places where smuggling takes place.
  (Mr Davis) They all have a high presence of international brands and smoking. Those are quite legitimate target markets for us to go to.

  542. If they are quite legitimate target markets to which to go, how come you do not sell cigarettes to any of them now?
  (Mr Davis) Because, in the light of experience, as we have gone through many times this afternoon—

  543. You have just said it is a legitimate market.
  (Mr Davidson) It is.

  544. So you do not sell any now? You sold 1 million to Andorra, 1 million to Latvia, where you previously last year sold 1.4 billion. If they are a legitimate market, why do you not sell to them?
  (Mr Davidson) Because our distributor's distribution chain was clearly breaking down so we—

  545. "Was breaking down"? What do you mean?
  (Mr Davidson) Sales were being diverted somewhere in the distribution chain because the seizures were indicating they were coming back to the UK.

  546. So they are not legitimate markets?
  (Mr Davidson) They are legitimate markets but some of our product was leaking from those markets. We have legitimate sales, we have consumer franchises in these markets, so we were having success in these markets, but we had to sacrifice—

  547. You certainly were having success in these markets.
  (Mr Davidson)—we had to sacrifice some markets because stock was being diverted back.

  548. So you suddenly abandoned a third of your export market in these so-called legitimate markets?
  (Mr Davidson) Yes, as there was increased pressure on many markets—as the prices had been going up in the UK there was more and more demand and it is more and more difficult for people to secure some of these markets—we sacrificed them, yes.

  549. Sorry, go through that again?
  (Mr Davidson) As the prices in the UK escalated, so did demand and therefore the profit which was available for anyone who was going to smuggle, and with the pressure on some markets we decided we would forgo those markets because we did not want to be part of the process whereby stock was coming back to the UK.

  550. One comes to the conclusion that you are either crooks or you are stupid, and you do not look very stupid. How can you possibly have sold cigarettes to Latvia, Kaliningrad, Afghanistan and Moldova in the expectation that those were just going to be used by the indigenous population or exported legitimately to neighbouring countries, and not in the expectation they would be smuggled? You must know—you only have to read a newspaper every day, a member of the public could tell you—these are places which are linked to organised crime, that the drugs trade passes through all of these countries, that prostitution passes through all these countries. Did you not know that? Have you ever been to Kaliningrad?
  (Mr Davidson) I personally have not been, no.

  551. Have you ever been there?
  (Mr Davis) No.

  552. Mr Dibble?
  (Mr Dibble) No.

  553. I suggest you all go. You are telling me that you naively thought there was a huge population out there in Kaliningrad which wanted to smoke your cigarettes?
  (Mr Davidson) A lot of the cigarettes have Russian tax stamps and they are sold in Russia. We know they were sold because I have visited Russia and I have seen them on sale in the Russian markets.
  (Mr Davis) We advertised and promoted in the Russian market. These are some markets of a vast range of markets that we trade in.

  554. Obviously the Afghanistan market closed because of events beyond your control, but are you looking to open up in Afghanistan again?
  (Mr Davis) At the present time, no.

  555. You probably do have a legitimate market there now since there are some Western soldiers out there now.
  (Mr Davis) Maybe we should be looking.

  556. There is some dispute about the number of smuggled cigarettes or your product coming back to the UK. In your business calculations for your business, in your estimates and internal business strategy, do you make any projections for smuggle cigarettes?
  (Mr Davis) Not at all.

  557. So even though, according to Customs, you only sell 3 billion Superkings legally in this country and 4.4 billion are sold illegally in this country, you do not take that into account at all when developing a strategy?
  (Mr Davis) I do not think those figures are quite right actually. I do not want to get into a tit for tat on numbers but there are certainly numbers which are not correct.
  (Mr Dibble) The numbers do not square with Customs' own document. We should point out that Customs say there are 16 billion cigarettes smuggled, of which 50% are Regal and Superkings. That is one figure.

  558. What do you say?
  (Mr Dibble) I would go to Customs' next figures which are the countries from where smuggling occurs, and our peak sales, if you tot them up for those countries total just over 3 billion, so we find it hard to accept that we only sell 3 billion but 8 billion come back. Therefore even Customs' own estimate—

  559. What are your estimates?
  (Mr Dibble) We do not know.

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