Examination of Witnesses (Questions 340-359)
MR BEN STEVENS, MR NIGEL NORTHRIDGE, MR GARETH DAVIS AND MR DAVID DAVIES
12 JANUARY 2005
Q340 Mr Beard: Is that tracing done?
Mr Stevens: Yes.
Q341 Mr Beard: Is it being acted on?
Mr Stevens: Yes.
Q342 Mr Beard: According to British American
Tobacco, China is the main source of counterfeit British American
Tobacco products and most counterfeit cigarettes, including many
of those coming into the UK, do originate from China. Do the other
companies represented here share the view that China is the biggest
source of counterfeit cigarettes?
Mr Davies: Certainly it is one
of the largest. The world Customs organisations estimated that
in 2002 there were 190 billion cigarettes counterfeited in China
alone but, having said that, it is true that there is counterfeiting
that occurs in Europe, in other parts of Asia and in Latin America.
The trade in counterfeit cigarettes is huge. The counterfeit cigarette
business is our fourth largest competitor now. China is working
very, very hard to address the problem, and last year the Chinese
Government prosecuted more than 150,000 cases against counterfeiting
operations. By its very nature it is extraordinarily difficult,
it needs the concerted efforts of governments across the world,
of those involved in the trade, our suppliers, our business partners,
and that is why we believe that the agreement that we have entered
into with the European Commission will be a very, very effective
tool because they are committing in that to join with us, not
only within Europe but to reach out to governments across the
world, to fight this problem.
Mr Davis: To echo what Mr Davies
has said, China, Russia and the Balkans seem to have been the
main areas, but China has dominated, I think. Certainly in conjunction
with BAT, with Philip Morris and Japan Tobacco we have participated
in many activities that in the last year have closed down 31 illicit
factories, 11 illicit warehouses, 20 illicit printing factories,
and we have seized around 675 million cigarettes in these types
of activities as well. Much of that, particularly in China, has
been with the full co-operation of the Chinese tobacco monopoly
and Chinese Customs. I think it is a problem that the Chinese
are very aware of and we are all working very hard on it, but
the scale of the problem, as Ben outlined, is so enormous that
it is a bit like painting the Forth Bridge.
Q343 Mr Beard: To tackle this problem
a coalition was established by a number of international cigarette
manufacturers and the Chinese authorities to identify and de-commission
the factories, as you were mentioning. The other companies represented
here, Mr Northridge, are all part of that coalition, but why are
you not?
Mr Northridge: We have not suffered
to the same extent as my competitors over the last two or three
years, but during the last 12 months we have and we have been
contributing informally where there has been product that was
clearly destined for the UK counterfeit from China or elsewhere.
I do not think it will be very long before we formally join and,
in fact, we are in negotiation at the moment.
Q344 Mr McFall: Mr Davis, you mentioned
your anti-counterfeiting operations against criminals with the
UK as the target market and mentioned closing 31 counterfeit factories.
Where were these located?
Mr Davis: The majority were in
China.
Q345 Mr McFall: Were any UK based operations?
Mr Davis: We have had a couple
of occasions when these have not been what I would call illicit
factories but of the back street type in a garage type of counterfeit
operations. We have found some in the UK and obviously we were
straight on to Customs as soon as we were informed.
Q346 Mr McFall: Where in the UK, can
you tell us?
Mr Davis: If my memory serves
me correctly, I think one was in the North East but I do not know
the exact location.
Q347 Mr McFall: If you can send us a
paper on that.[2]
Mr Davis: Certainly our people
will do so. Just to add to this, one of the issues is one of the
resources that we do have is that the component supply industry
to the tobacco industry is actually quite concentrated, there
are not that many printers and suppliers of filter tow, that manufacture
filter tips. More and more manufacturers are engaging with the
supply chain to actually get more control from their point of
view over where their products go because these counterfeiters
do need to source these components from somewhere. I think if
we move down the chain, and we are doing this very much in association
with Customs, this is one significant area where we can make a
lot of progress.
Q348 Mr McFall: Yet Gallaher's and Imperial
Tobacco have mentioned about the need to tackle counterfeit cigarettes
and prevent the materials necessary for cigarette manufacturing
being obtained. Can I ask how practical a proposition that is?
What type of material do you have in mind? How many suppliers
of these are there worldwide? In other words, is it a sophisticated
technology or if you do not destroy your surplus machinery, as
Imperial Tobacco said, can others make it at the drop of a hat?
Mr Northridge: From Gallaher's
perspective I think you have raised two points, Mr McFall. In
terms of trying to bring suppliers of raw materials into the whole
network of trying to prevent counterfeiting I would reiterate
what Mr Davis said, that the tow manufacturers are the most obvious
people because really the components of cigarette packaging are
paper or cardboard, foil, and then when it comes to the cigarette
itself the tobacco, and there are only 6 or 8 worldwide suppliers
of tow, so I think that would be a good source. In terms of machinery,
the Gallaher policy is that if we are not going to use it ourselves
and if we cannot sell it back to the manufacturer then we will
destroy it.
Q349 Mr Walter: What about the tobacco?
Mr Davis: Paradoxically that is
probably the easiest thing for a counterfeiter to obtain. It is
of questionable quality, one would have to say, but that is probably
the easiest of all the components to obtain because a lot of it
is domestically grown.
Q350 Mr McFall: In a sense, the proposition
is not as practical as it would appear.
Mr Davis: No, I think there is
a lot of mileage and a lot of merit in it because a cigarette
without a filter is not going to be terribly attractive for anyone
to buy given the tobacco types that they are using. I think the
issue with counterfeit is that a lot of the punters who buy counterfeit
tobacco are not sure when they buy the carton. The printing looks
very good, it looks to be a bona fide carton, but it is
when you open it and smoke it that you realise you have been had,
or doubly had.
Q351 Mr McFall: A last one from me. ASH
has sent us a briefing on this, no doubt friends of yours. How
many of you smoke, by the way? Three out of four. It is three
gold ambassadors for your companies. You are the odd man out,
Mr Stevens. ASH has referred to the legal agreement between Philip
Morris and the EU on smuggling as the gold standard by which all
cigarette manufacturers attempting to control excise tax frauds
should be judged from now on. What they are asking us to do is
to urge Customs and Excise to renegotiate the Memorandum of Understanding
that it has with tobacco companies up to the Philip Morris standard
and to sign up to the PMI agreement. Would you be happy to enter
into negotiations with Customs and Excise to do that?
Mr Northridge: Do you mean to
the extent of paying a fine? In what sense? We are not a signatory
to the Philip Morris agreement.
Q352 Mr McFall: Mr Davies is the expert
on this. What should your competitors sign up to here?
Mr Davies: I think that is a question
that really is better addressed to them.
Q353 Mr McFall: What you are doing that
they are not doing?
Mr Davies: We believe that the
measures that are embedded in that agreement are going to be extraordinarily
effective in addressing the illegal trade, particularly this growing
counterfeit trade. To the extent that anyone who is involved in
the cigarette business chooses to take the same approach, I think
we would all benefit. Whether they should sign up to it is a question
that has to be addressed to them and not to me.
Q354 Mr McFall: I understand. Would you
be willing to enter into negotiations? Customs and Excise are
sometimes behind the curve, we find, and we have got to prepare
the ground carefully for them. If you say that you would be willing
to enter into negotiations today, maybe in our submission we will
ask Customs and Excise to have a little chat with you on it.
Mr Northridge: I am very happy
to talk to Customs and Excise on any subject as we see them so
regularly.
Q355 Mr McFall: You must know what this
agreement is about yourselves.
Mr Northridge: The background
to the agreement is to clear up an historic litigation issue,
to which we were not a party.
Q356 Norman Lamb: Can you summarise what
the litigation issue was so we understand what we are talking
about?
Mr Davies: Several years ago,
the European Commission filed a lawsuit in the United States of
America in a federal courthouse in Brooklyn. Principally it was
brought against three entities: Philip Morris, Japan Tobacco and
RJ Reynolds. The essence of the claim that was being made was
that the defendants had facilitated the smuggling of cigarettes
leading to lost revenues within the European Union. The lawsuit
was dismissed by that court. An appeal was taken by the European
Commission, which was unsuccessful. It was following the conclusion
of that appeal, flowing out of the discussions we had been
having with them, that we began the negotiations towards this
agreement. This agreement as we characterise it and, indeed, as
the European Union characterise it, is a commitment to co-operate.
It makes sense because what we came to realise, both we—
Philip Morris International—and the European Commission
and the 10 member countries involved, was that we had a shared
problem. We had a shared problem of illegal trade that was causing
damage to government revenues, causing damage to our revenues,
harming our consumers, harming society in Europe as a whole, and
we realised that the best way to address this shared problem was
to have a shared solution and by working together we could accomplish
more than we could working separately. That is why it is called
a co-operation agreement and that is why it is focused on measures
on their side and measures on our side that we believe will be
effective in fighting illegal trade.
Q357 Mr McFall: Given that is the gold
standard then, and the legal case is in the past, in a sense would
you all be willing to enter into negotiations with Customs and
Excise to get to this gold standard? Mr Stevens first. Just quick
answers.
Mr Stevens: As far as I understood
it the billion was the cost for settling the cost of the court
case with the EU and we do not have a court case with the EU.
Q358 Mr McFall: As Mr Davies said, this
illegal trade is harming consumers and it is harming society.
On the basis of that criteria, are you willing to enter into negotiations?
Mr Stevens: I think there are
bits of the agreement that we would support and there are bits
that we would not support. The bits that we would not support
would be voluntarily paying the excise on product that other people
had smuggled, frankly I think that would be ridiculous. I think
some of the tracking and tracing bits in the Philip Morris agreement
are, to quote HMC, "missing the point" in terms of controlling
smuggling because Philip Morris has talked about being able to
identify the first customer and where there is a problem with
the second customer, but by the time the product gets smuggled
it has probably gone through 10 or 12 customers, so I do not think
that is going to create a great benefit either. I can understand
why Philip Morris would like this to become an industry standard
because they have spent a lot of money putting it together but
I do not think it is going to solve the problems. I think bits
of it we would support, but not all of it.
Mr McFall: But you would be willing
to negotiate that.
Norman Lamb: Mr Northridge's body
language is that it is not that simple.
Q359 Mr McFall: We will come to him.
Mr Davis?
Mr Davis: I would take issue that
it is actually the gold standard because I do not think it is
at all. I can understand ASH saying it is the gold standard because
anything that increases the cost of our licence to operate they
would support, but they would, would they not? I do not think
it is the gold standard, I think the gold standard is the sort
of things that we are currently doing.
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