Examination of Witnesses (Questions 420-439)
JOHN HEALEY
MP AND
MR PAUL
GERRARD
2 FEBRUARY 2005
Q420 Mr Beard: I did ask them that and
we got no satisfactory answer. We got the answer I have just mentioned
to you.
Mr Gerrard: I am not sure I can
add much to that, with apologies.
Q421 Mr Beard: The other question is
that we, as already has been mentioned, have both the smuggling
of their own brands and counterfeit cigarettes and from their
point of view they are quite different because if their own brands
are smuggled and come back into the United Kingdom they still
make a profit out of it. However, if their own brands are taken
over by counterfeit cigarettes, they do not. It was plain from
the questions we asked them that they are very worried about the
growth of counterfeit cigarettes. Is it not likely they are going
to co-operate like Billy-o on a memorandum to stop counterfeiting
but they will much more relaxed in stopping smuggling of their
own brands?
Mr Gerrard: The memorandum of
understanding has made a great impact on the smuggling of genuine
UK manufactured cigarettes. I am absolutely certain that tobacco
manufacturers are very concerned about counterfeit and they are
certainly keen to work with us on that as well. Our focus always
is on illicit cigarettes. Whether it is counterfeit or whether
it is genuine it is illicit cigarettes and getting that market
down still further, and that is what our focus is.
Q422 Mr Beard: ASH told us that the legal
agreement that exists between Philip Morris, an external manufacturer,
and the European Union on smuggling was "the gold standard"
by which all cigarette manufacturers' attempts to control excise
fraud should be judged from now on. Philip Morris told us that
they were more than happy to have the United Kingdom sign up to
this agreement and it was far more extensive in its provisions,
its scope and extent than the memoranda of understanding that
we are now talking about. How do you react to that?
John Healey: Customs regularly
meets with Philip Morris. The reason that we have given priority
to our three UK manufacturers is that their products were a significantly
greater share of the illicit market in the UK and the seizures
we were making. In the last year, Philip Morris's brands constituted
only 3.5% of the seizures we made and the vast majority of those
were counterfeit, not actually produced by Philip Morris. I would
not rule out looking for a memorandum of understanding with Philip
Morris and we are considering that but the imperative was to get
a proper arrangement in place with our own manufacturers based
in the UK.
Q423 Mr Beard: That was not my point.
My point was this memorandum of understanding between the European
Union and Philip Morris, of which we have got a summary here,
is far tougher than memoranda of understanding that have been
entered into by Customs and Excise and the UK manufacturers. For
instance, the first part agrees a comprehensive set of rules.
The second part agrees tracking and tracing procedures. The third
part says that despite these things, when Philip Morris cigarettes
are confiscated Philip Morris will pay five times the normal Customs
duty on them, and it is legally binding. You can understand what
ASH and indeed the European Anti-Fraud Office are saying. They
are saying that is a great deal tougher than the memoranda that
are applying to the UK manufacturers that we are discussing.
John Healey: Can I say to you
three things, Mr Beard. First of all, there are similarities.
The memorandum of understanding between the EU 10 Member States
and Philip Morris does have similarities with our own three. In
each case the manufacturer agrees to help the customs authority
identify who they are selling genuine tobacco to. They undertake
to stop supplies where these are clearly being fraudulently then
sold on. They also agree to provide information that will help
customers. The second thing is that the basis of the Philip Morris
memorandum is very different from our own. The Philip Morris memorandum
is a legal document. In large part it was designed as part of
a deal to drop litigation in the European Union against the company.
We are not in those circumstances here. Thirdly, whilst there
are some features that we do not have in our own memoranda of
understanding, there are two significant ways in which I would
say to you that the memorandum of understanding with Philip Morris
is weaker in law enforcement terms than our own. The first is,
and Paul Gerrard mentioned this earlier on, in our one we have
an agreement that the companies will stop supplying to customers
where we issue a warning, where we have not got a conviction in
place, which is a requirement under the Philip Morris memorandum
but we have good grounds and we say to the company we have serious
concerns about supplying to this consumer. The second is and you
mentioned the track and trace—
Q424 Chairman: Is that the red and yellow
card system?
John Healey: That is our red and
yellow card system.
Q425 Chairman: You have also said in
your memorandum to us that Customs has not issued any red and
yellow card in the last two years.
Mr Gerrard: We have the ability
to do that.
Q426 Chairman: But you have not issued
any.
Mr Gerrard: I will need to check
the detail of this but certainly we have been in discussion with
one tobacco manufacturer about a supplier.
Q427 Chairman: This is 17 December, your
supplementary memorandum says that you have not issued any cards
in the last two years.
Mr Gerrard: That would suggest
therefore that the steps that we require under the MOU to be taken
by tobacco manufacturers are being taken.
John Healey: My point, Chairman,
is the grounds and the evidence on which Customs can go under
our three agreements to companies and say stop supplying this
customer are different and easier and better for Customs in this
country than they are under the Philip Morris agreement, which
is based on secured convictions. The fact of issuing red or yellow
cards means that we have found that the companies by and large
and to that extent have responded when we have asked them to do
that.
Q428 Norman Lamb: You are saying they
are stopping supply before having to serve a card on them?
John Healey: Yes.
Mr Gerrard: Or they are not making
the supply to begin with because they know those circumstances
are not legitimate.
Q429 Mr Beard: But under the conditions
we have got it includes strict criteria concerning the "know
your customer" rules and regulating the ways in which a company
can receive payment for cigarettes to eliminate money laundering.
It goes on. These are not "bolting the door with a boiled
carrot"; these are substantial principles which are involved.
John Healey: Forgive me; I am
not suggesting that there are not some very substantial elements
of the Philip Morris memorandum. I am simply making at this point
the argument there are some features of our own memoranda that
are more useful to Customs than the details of the Philip Morris
one. You mentioned track and trace and we have under our memoranda
and our working relationship with the three companies in this
country an ability to track and trace a customer on a packet of
20 if we find that is part of a contraband consignment. If you
check the Philip Morris memoranda, you will find they have to
have a case of 10,000 cigarettes before they will institute the
track and trace procedure with customs. In those circumstances
I am just saying to you that is one feature in which our
own memorandum of understanding compares with very well with the
one for Philip Morris and the European Union.
Q430 Mr Beard: But the management of
British American Tobacco have come up with and written to us with
their proposal for an export bond which makes reasonable sense,
but it would have to be done by a number of countries together
and the ten who have signed up to the European arrangement would
be ten such countries that could apply this. Why are we inventing
our own solutions through these memoranda that stand on their
own which, as the industry told us, do not seem to have made that
much difference anyway? That is their viewpoint. Why are we not
signing up to the European agreement?
John Healey: We have three agreements
in place with the principal sources of the cigarettes that we
have a problem with that are working well. We certainly are ready
to consider reinforcing those agreements and, as I have said to
you, we are ready to consider whether or not we should be reaching
some sort of memorandum of understanding with other tobacco companies
as well, but with Philip Morris in particular their branded cigarettes
are really a relatively small part—
Q431 Mr Beard: —no, Philip Morris
is not the issue here. The issue is that we have got the European
agreement that Philip Morris happen to have signed up to but anybody
else can sign up to too, but we have not signed up to it and I
have asked why have we not and why should we not?
John Healey: Because the relative
advantage to us in dealing with the smuggled cigarettes that we
face in the UK is much greater by taking action with the three
UK manufacturers than it is with some of these companies like
Philip Morris, which in this case is a party to the European agreement
but will not to any significant amount make a direct difference
to the smuggled product that we have in this country.
Q432 Mr Cousins: Under the Philip Morris
agreement with the European Union, Philip Morris undertakes to
make a series of payments totalling $1.25 billion over a period
of years to the European Union for counter-smuggling and counter-counterfeiting
work. How much of that money are you aiming to get to come to
Britain to assist our work and your work?
John Healey: I think you will
find, Mr Cousins, that none of that money is available to us in
the UK. We are not a party to the—
Q433 Mr Cousins: But you could be a party
to the agreement.
John Healey: We are not a party
to the agreement.
Q434 Mr Cousins: You could be.
John Healey: I think you will
find that if we become a party to the agreement then we may be
able to take advantage of some of the operational features of
the memorandum, but I believe we would not stand to gain from
any of the payments that Philip Morris may make under it.
Q435 Norman Lamb: Could you clarify that
for us?
John Healey: Yes.[2]
Q436 Mr Cousins: So of this $1.25 billion
that is going to the European Union none of it is going to come
to Britain?
John Healey: As things stand at
the moment, none of it will.
Q437 Mr Cousins: None of it will come
to Britain.
John Healey: As I did explain
earlier on, this memorandum was a way of settling—
Q438 Mr Cousins: —The origins of
it are understood—
John Healey: —some litigation
that we are not a part of with Philip Morris.
Mr Beard: That is how it began but it
stands on its own now, surely?
Q439 Mr Cousins: Do any of your memoranda
of understanding with British manufacturers give any contribution
to counter-counterfeiting work or anti-smuggling work?
John Healey: They do not contain
a financial contribution at present.
2 See Ev 138 Back
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