Tobacco firms to pay $550M over smuggling

A decade-long legal battle pitting Big Tobacco against the federal and provincial governments drew to a close Tuesday, with two cigarette makers agreeing to pay more than half a billion dollars in connection with a massive smuggling operation set up in the 1990s to dodge taxes.

North-Carolina-based R.J. Reynolds Tobacco Co. will pay the two levels of government a total of $325 million to settle claims related to the smuggling.

A Reynolds subsidiary, Northern Brands International Inc., has been fined $75 million after pleading guilty under the Criminal Code to one count of conspiracy for helping others sell contraband cigarettes.

Canadian tobacco manufacturer JTI-Macdonald Corp. has been fined $150 million after pleading guilty under the Excise Act to helping people sell and possess contraband tobacco.

The governments had previously reached deals with two other tobacco manufacturers, Imperial Tobacco Canada Ltd. and Rothmans Benson & Hedges.

Taking into account those deals and the ones announced Tuesday, cigarette makers have been hit with a total of $1.7 billion in fines and settlements.

"It was litigation that had been going on for more than 10 years now, and simply, that's really what led to the settlement at this time," said R.J. Reynolds spokesman David Howard. "Essentially, it was a business decision that it was time to move on."

Under the terms of the settlement, R.J. Reynolds did not admit any guilt.

Though named in the suit, the company was not directly involved in the alleged smuggling, Howard said. However, its subsidiaries and operating companies "had individuals that were involved in alleged activities during those years," he said.

RCMP called it a massive fraud

The case stems from a contraband operation the RCMP once called the biggest corporate fraud in Canadian history.

From late 1980s to the mid-90s, with tobacco taxes at what were then all-time highs, several cigarette manufacturers shipped cartons of their product to the U.S. labelled "for export," thereby avoiding Canadian excise levies, which apply to domestic product only.

The cigarettes were then smuggled back into the country, many through Akwesasne, an aboriginal reserve that straddles the U.S.-Canadian border near Cornwall, Ont.

Back in Canada, contraband packs sold for as little as half the price of legal ones.

By 1992, an estimated 20 per cent of cigarettes sold across Canada and 50 per cent of those sold in Quebec were smuggled. That figure rose to 60 per cent by 1994. The brands involved included Export A, Player's and du Maurier.

While the smuggling operation was in full swing, tobacco companies were lobbying governments to lower cigarette taxes, pointing to the prevalence of contraband product as all the more reason to grant them tax relief.

Faced with a massive illegal industry and lost tax revenue, Ottawa and various provincial governments relented in 1994 and lowered levies on tobacco. They began raising them again after allegations surfaced in 1999 that the tobacco companies had quarterbacked the entire smuggling operation.

Northern Brands, the R.J. Reynolds subsidiary, was fined $15 million US in 1998 on a tax evasion rap south of the border, but the Canadian government aimed higher, hoping to recoup billions of dollars in lost tax revenue.

The federal government sued major tobacco companies in 1999 in a U.S. court for several billion dollars in damages, but that case was dismissed. In 2003, Ottawa tried again, this time in Canadian courts, suing the tobacco companies for $1.5 billion.

The government also pursued criminal penalties against tobacco companies and their managers, laying charges for fraud and conspiracy in 2003 against Toronto-based JTI-Macdonald, formerly known as RJR-Macdonald, and eight of its former senior executives.

The following year, police raided the Montreal headquarters of Imperial Tobacco, hunting for documents in relation to the smuggling.

'Sweetheart deal'

Anti-smoking advocates say Tuesday's $550-million settlement is "a sweetheart deal" for tobacco-makers.

"The tobacco smuggling in the early 1990s was, at the time, the largest and most destructive fraud in the history of Canadian business and public health," said Garfield Mahood, executive director of the Non-Smokers' Rights Association.

The association said the drop in cigarette prices in the early 1990s made tobacco products more accessible to young people and led to a resurgence of teen puffers after a generation of falling rates of smoking.

It noted that the federal and provincial governments filed claims for nearly $10 billion over contraband smokes. Mahood said that makes the $550-million settlement "a complete sellout."

"Canadian governments led by the feds had an opportunity to play hard ball, to build trust among Canadians in the rule of law related to white-collar crime. Instead, they blew away the opportunity to recoup billions of desperately needed lost tax revenues," Mahood said.