Tobacco is one of the most globalized industries on the planet. More cigarettes are traded than any other single product, some trillion “sticks,” as they’re known in the business, passing international borders each year. As a result, American brands have been propelled into every corner of the world, with just four companies controlling 70 percent of the global market. Marlboro, Kool, Kent: They have become as omnipresent around the world as they are here in the United States. With declining sales in this country, foreign markets have become increasingly critical to the tobacco companies’ financial health: The top US tobacco firms now earn more from cigarettes sold abroad than in the United States. How they got there is a tale that leads straight into a global underground of smugglers and money launderers who have played a key role in facilitating the tobacco companies’ entry into foreign markets.
A six-month investigation by The Nation, the Center for Investigative Reporting, and the PBS newsmagazine show NOW With Bill Moyers (which airs its investigative report on April 19), has unpeeled the many layers of a complex distribution system of a multibillion-dollar trade in smuggled cigarettes. Twenty-five percent of exported cigarettes, according to the World Health Organization, are smuggled. Smuggling has enabled multinational tobacco companies to increase sales volume dramatically by evading local tariffs and competing head to head with domestic producers, thereby helping to establish internationally recognizable brands.
The smuggling has landed the tobacco companies in US court. Lawsuits filed by European and Canadian governments and Colombian state governments against Philip Morris and British American Tobacco (BAT, Brown & Williamson’s British-based parent company) have highlighted the companies’ alleged links to smugglers and money launderers. Documents released as a result of the historic $200 billion-plus settlement with US state attorneys general in 1998 also provide a glimpse into the way the companies devised advertising and distribution strategies that helped fuel the market for smuggled cigarettes. The companies stand accused of violating the Racketeer Influenced and Corrupt Organizations Act (RICO), of defrauding governments of hundreds of millions in tax revenues and of hiding and ultimately taking the illicit profits back to the United States, which constitutes money laundering.
As the cases were unfolding just one month after the September 11 terrorist attacks, the tobacco companies–with support from the White House–fought back in the US Congress, where they took advantage of the nation’s distraction to win changes in the USA Patriot Act in a brazen effort to shield themselves from liability. But their headache has not gone away. The cases are still winding through the courts, and the companies’ attempts to evade accountability are the focus of growing international outrage.
Underground in Colombia
I went to Colombia, a country infamous for smuggling exports to the United States, to see how the flip side of that equation–smuggling from the United States to Colombia–worked for more than a decade.
The journey from the main tobacco hubs in the United States to Colombia has been a circuitous one, a route designed for ease of smuggling rather than ease of transport. From the modern, state-of-the-art ports of Wilmington, North Carolina, and Miami, huge cranes lift pastel-colored containers loaded with 10,000 kilos of cigarettes apiece onto cargo ships with the routine rhythms of oversized insects. Transiting through the free zones of Panama and Aruba, by the end of their journey at Colombia’s La Guajira port of Portette, they might as well have traveled back in time. The bawdy port is what one anthropologist who studied the region calls a “phantom town”–it’s not included on maps of the country and has had, until recently, few connections to the official structures of the Colombian government.
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The hot, sparsely populated province of La Guajira, which sticks out of Colombia’s Caribbean coast like a thumb, is home to one of the country’s strongest indigenous tribes, the Way’uu. Last winter, when I visited, torrential rains knocked out the bridge between Santa Marta and Barranquilla, making coastal travel impossible. The road through the Sierra Nevada mountain range between Riohacha–the provincial capital on the coast–and Valledupar, the closest major city in the interior, runs through territory disputed by the ELN guerrilla movement and right-wing paramilitary groups. For parts of the year, the only way into La Guajira is by air or boat.
Colombia’s other Caribbean ports, Santa Marta and Barranquilla, host sophisticated trucking and railroad depots right on the docks that are designed to facilitate the movement of large quantities of duty-paid cargo into the Colombian interior. Portette has no such facilities. It is a port designed, quite literally, for smugglers–and it’s here that the schooners and creaky old ships from throughout the hemisphere pulled into Colombian waters with their crates of Johnnie Walker and Old Parr, and name-brand sound systems and electronic appliances, bales of textiles and those telltale cartons of Philip Morris’s Marlboro and Brown & Williamson’s Kool.
From Portette, trucks travel for two hours over a single rutted, mostly dirt, road to the town of Maicao, a dusty outpost of weatherbeaten shop-fronts and mud-splattered stucco buildings. In Maicao, young men are perched on stools along the side of the road amid plastic containers full of gasoline–skimmed from Venezuelan tankers and sold at a tax-free discount. Above them, a sign looms in peeling blue and yellow paint: Welcome to the Commercial Hub of Colombia. Maicao has for decades been the primary transit center in La Guajira for contraband headed for Colombian markets. The sight of brand-name whiskies, stereos, shampoos, car parts and cigarettes provides a jarring contrast to the muddy streets and crumbling kiosks where many of these products are sold.
Maicao’s 70,000 inhabitants are divided between the Way’uu and a population of Middle Eastern immigrants–Colombians who emigrated from Lebanon, Syria and elsewhere in the Middle East. Historically, the Way’uu and the Turkos–as those with Middle Eastern roots are known–have divided the contraband trade between them. The mostly Muslim Turkos trade in textiles, appliances and other consumer products, leaving the vices of alcohol and cigarettes to the Way’uu.
But the Way’uu do not perceive themselves as criminals in any sense of the word. Since Colombia passed a new Constitution in 1991, decentralizing federal power, the tribe has been in charge of most of La Guajira; the bulk of the state is a reserva indigena, in which they enjoy a limited form of autonomy. From the Way’uu perspective, they are merely traders–their main economic activity for centuries.
“Asi es la vida,” says Francisca Sierra, a Way’uu community leader and trader in Maicao, shrugging her shoulders as she explains the tribe’s longtime role as renowned smugglers. That history predates even the formation of modern-day Colombia, which revolted against the Spanish in 1814. It was the Way’uu and ranchers in Santander province who helped spark that rebellion, when they refused to pay taxes on cigarettes and coffee imposed by the Spanish–Colombia’s own Boston Tea Party. For 300 years, the Way’uu have facilitated the entrance of foreign products into Colombia below the noses of the national authorities.
In the last decades of the twentieth century, the Way’uu of La Guajira became a critical link in a chain of commercial relationships stretching from the tobacco farms of the southeast United States to corporate boardrooms in Louisville, New York and London, to tax havens like Aruba and Panama, and on into the interior of Colombia. Maicao itself is part of a special free trade zone, but once goods leave that zone, they become contraband. The Way’uu were the ones who unloaded the ships in Portette and then drove the trucks south out of Maicao into the interior, providing Philip Morris and BAT a detour around the tariffs that once made Colombia one of the more restricted markets in Latin America. The Federation of Colombian Departments, representing the country’s state governments, estimates that the cigarette contraband cost them more than $500 million in tax revenues over ten years–revenues that would have paid for social projects like education and healthcare, including treatment of the health effects of smoking.
Statistics compiled by Roberto Steiner, an economist and director of the Center for the Study of Economic Development at the University of the Andes in Bogotá, indicate how smuggling served the tobacco companies’ long-term interests. The boom in cigarette smuggling into Colombia in the 1990s, according to Steiner, coincided closely with Philip Morris’s emergence as the dominant player in Colombia’s cigarette market. As the companies sold tax-free cigarettes at prices comparable to those of Colombia’s homegrown brands, smokers in Bogotá, Cali, Medellín and elsewhere throughout the country became accustomed to “prestigious” imports like Philip Morris’s Marlboro, Brown & Williamson’s Kool and BAT’s Kent. From 1984 to 1993, says Steiner, the number of cigarettes illegally imported into the country quadrupled. Meanwhile, domestic cigarette producers’ share of total cigarette sales dropped from an 85 percent market share in 1984 to just 30 percent in 1993. Colombia used to have a thriving domestic tobacco industry, but since 1984 the amount of hectares devoted to tobacco crops has plummeted. As the domestic cigarette industry imploded, many tobacco farmers made the shift to Colombia’s far more famous addictive crop, coca.
A comparison of Colombian tobacco imports with US tobacco exports reveals just how many contraband cigarettes were being shipped southward from the United States. According to the US Department of Agriculture’s Economic Research Service, $21.6 million worth of cigarettes–1.06 billion sticks–were exported from the United States to Colombia in 1996. In that same year, the Colombian Department of National Statistics (DANE), officially recorded $10.7 million worth of cigarettes–just over 800 million sticks–as having been legally imported into the country from the United States. That discrepancy between exports and imports appeared through most of the 1990s.
Internal company documents dating back to 1991, made available as a result of the 1998 states’ settlement and introduced as evidence in the Colombian lawsuit, reveal how Philip Morris and BAT were battling for market share during this time–the same period in which the overwhelming bulk of cigarette smuggling to Colombia occurred. The record, for example, of a January 14, 1992, meeting in Miami held by BAT executives representing the company’s wholly owned subsidiaries in the United States (Brown & Williamson), Brazil (Souza Cruz) and Venezuela (Bigott), under the heading “Colombian Group Meeting Minutes,” shows officials discussing cigarette marketing in Colombia, indicating the per-pack, no-tax price in pesos in 1991, a year in which the company had negligible legal cigarette exports to the country. The minutes noted that the company would begin selling “duty paid”–i.e., legally imported cigarettes on which taxes are paid–in the coming year, 1992.
A document covering roughly the same period from the Philip Morris International division, titled “latin america region Strategic Plan,” provides a listing of prices for its “duty-free” customers in La Guajira and Aruba for the years 1991-93. During this time and into the late 1990s, Philip Morris was advertising heavily and maintaining an office in Bogotá, while the company’s legal imports amounted to, as Steiner put it, “close to zero.”
In fact, both BAT and Philip Morris were deploying mass advertising and discount marketing, and were providing favorable financing terms to their distributors in the battle for market share, when their sales were almost entirely illegal. Documents from both companies reveal the intense competition and propose measures such as discounts to wholesalers, contests and free gifts to outflank each other. “Plans for 1992,” Brown & Williamson minutes from a 1991 meeting state, “are to offer a 5% free goods incentive in Maicao and in the San Andresitos to expand distribution in Bogotá and Medellín.” (“San Andresitos” is a colloquial reference to the kiosks that abound in Colombian cities selling smuggled goods; the name came originally from the Colombian island of San Andres, located off the east coast of Nicaragua, which itself has served as a key smuggling center.)
Until recently, few tobacco-industry insiders were willing to talk about the companies’ role in smuggling. But in February, Alex Solagnier, a twenty-year veteran with BAT’s primary Colombian distributor for cigarettes, an Aruba-based company called ROMAR, went public. Solagnier worked as a marketing and finance manager and finally as the company’s chief financial officer, until he was fired after a business dispute with his superior in 1999; his chief responsibility had been selling BAT brands in Colombia. My NOW co-producer Oriana Zill and I were the first American journalists to speak with Solagnier, whom we filmed at his home in Aruba.
Solagnier says that BAT was integrally involved in setting the pricing, organizing distribution routes and marketing of cigarettes to the company’s distributors at a time when, he says, “95 percent of it [BAT’s cigarettes] was contraband.” ROMAR itself, Solagnier explained, was set up with financing from BAT, in partnership with an Aruban businessman, Roy Harms, specifically to sell to the Colombian market when the bulk of BAT imports were smuggled into the country. (After a lengthy legal battle in which Solagnier and Harms traded accusations about financial mismanagement, an Aruban court ordered Harms to pay Solagnier more than $400,000 in severance pay, a figure for which Harms was reimbursed by BAT’s London headquarters.)
Solagnier explained that during the years 1994-96, most of BAT’s cigarettes were sold by ROMAR in Maicao “on consignment,” meaning that while ROMAR handled the distribution, the cigarettes were owned by BAT when they were sold in Maicao. He recalls going on trips with BAT officials to assess the placement of the cigarettes, to determine their credit needs and to assess local demand. After studying the preferences of Colombian smokers, Solagnier says that BAT even designed a special cigarette package for its Belmont brand, which was produced by the company’s Venezuelan subsidiary, Bigott, with a hinge lid on a hard-box pack, distinguished from the soft packs sold in Venezuela. BAT was promoting Belmont as competition for Philip Morris products. “They knew that all these cigarettes were being smuggled,” he says.
Solagnier also explains that in the early 1990s, BAT and Philip Morris discovered the benefits of selling at least a small portion of their cigarettes legally, with full duties paid. Thus, reference to distinctions between “DP” (Duty Paid) and “DNP” (Duty Not Paid) begin to appear in both companies’ internal documents. On April 16, 1992, a fax sent from BAT’s British headquarters to its branch office in Venezuela indicated the company’s growing sensitivity to attention being paid to contraband. In the memo, the executive asks whether the company could continue “with DP and DNP in parallel and be seen as a clean and ethical company at the same time.” [underline in original] “Can we really do all this and continue DNP,” he adds.
Translation: The company was interested in whether it would be beneficial to pursue legal imports along with its existing illegal imports. The answer, as shown by company documents and import statistics, was: yes. Both BAT and Philip Morris gradually began increasing the number of legitimately imported cigarettes–while the flood of smuggled cigarettes continued. Solagnier says that this dual system came to be known as the “umbrella”–a system of providing legal cover for advertising and marketing a product the bulk of which continued to be smuggled.
And the advertising was, by the mid-1990s, everywhere. In magazines, at sporting events, on billboards, ads for American cigarettes seemed more abundant than they are here in the United States, where ever-tighter restrictions have been placed on the tobacco companies’ ability to advertise. At the same time, the companies launched a particularly cynical ploy–pressuring Colombian government officials to lower taxes on cigarettes as a means of reducing the incentive for smuggling. José Manuel Arias, director of the Colombian Federation of Departments, says that representatives of Philip Morris and BAT lobbied the state and national governments to lower Colombia’s relatively hefty taxes on cigarette imports.
Their efforts paid off. According to Dr. Diego Roselli, a professor of pediatrics at Javieriana University in Bogotá and former chairman of the Colombian Council Against Cancer, the country saw a drop in cigarette tariffs from 125 percent to 45 percent in the mid-1990s. But the dramatic tax cut had a negligible impact on smuggling. Cigarettes continued to pour through the smuggling pipeline, selling for a little over a dollar a pack, just a quarter more than cigarettes produced in Colombia. At the same time, the tobacco companies gradually increased the amount of legal imports, where the margins were slimmer, but where they now enjoyed a lower tax rate and still obtained critical cover for advertising and other marketing activities.
Turning Off the Tap
The week in late November when I arrived in La Guajira, trouble was brewing. The government had initiated a crackdown on contraband: The previous weekend, Maicao traders attacked the warehouse of Colombian customs (DIAN) in the town, looting it of all the goods that the DIAN had confiscated in the previous weeks, including cartons of cigarettes. The director of DIAN, Ricardo Ramirez Acuna, would later explain that an “arrangement” had been struck in which the companies agreed to assist the customs service in insuring that their cigarettes traveled through legal channels.
While Colombian officials see this as good news, they also say that it is a strong indication of how deeply the companies have been involved in the smuggling enterprise. When they decided to turn off the tap, off it went.
As a result, however, the Way’uu, long accustomed to being the transport mules of the contraband business, now feel betrayed by Philip Morris. For the first time, they were willing to speak publicly about the longtime relationship they had with Philip Morris during more than a decade of boom times, fueled partly by the cigarette company’s nicotine contraband.
“We feel betrayed by Philip Morris because the Way’uu were the ones to bring the Marlboro cigarettes from the Caribbean islands into Colombia,” asserts Alvaro Iguaran, a Way’uu lawyer and legal adviser. “Philip Morris sent their cigarettes through Maicao…. The Way’uu’s were the ones who distributed the cigarettes and showed them to the rest of the country. Once the market was established, now they leave us and go elsewhere.”
With the crackdown on smuggling, unemployment among the Way’uu in La Guajira has jumped 20 percent. “Philip Morris should build us a hospital and some schools,” argues Iguaran, who doesn’t want to wait for the lawsuit to be resolved. “They should do this on their own, and not just because of this legal case!”
Iguaran’s plea is echoed in the comments of Ingrid Betancourt, a former congresswoman and senator running as an independent for president on an anticorruption platform. “Philip Morris pushed enormous quantities of cigarettes through Maicao into all of Latin America,” she told me last November in Bogotá. (Betancourt was kidnapped by the FARC guerrillas in February and remains in custody.) “If the Way’uu don’t do contraband, they starve…. Philip Morris has poured millions of dollars into a new NGO they created to promote the culture, dances, folklore of Colombia. Fine. But what about the Way’uu?”
Reflecting on BAT and Philip Morris’s deal with the Colombian authorities, Alex Solagnier comments: “They know they got caught…. Now they want to cooperate to combat something they initiated and organized. They invented it. And the question is not what they’re going to do now, but what did they do to create this problem?”
Drug-Money Laundromat
In addition to cultivating the dependence of the Way’uu, the tobacco companies helped lubricate corrupt political and financial empires in Colombia. “You could say that Philip Morris has been influencing the political parties in La Guajira and Colombia for decades,” comments Lucho Gomez, former mayor of Riohacha, the La Guajira state capital. Gomez has been the nemesis of an entrenched political machine run by a former senator from the state, Santo Lopesierra, a veteran political boss notorious for his connection to smugglers and commonly known in Colombia as “the Marlboro Man.”
The Colombian newsmagazine Semana reported that representatives of Philip Morris’s Colombian distributors, the Aruba-based Mansur family, met with Ernesto Samper during his 1994 presidential campaign and gave him more than $500,000. The Conservative Party of current President Andres Pastrana has ties to the industry too: Among several top officials with links to Philip Morris is the company’s longtime lobbyist and attorney, Martha Lucia Ramirez, now minister of foreign trade.
Despite strong opposition from many in the Colombian political and economic elite, in the late 1990s the DIAN conducted an investigation and concluded that the boom in smuggling was tied to vast amounts of cash being generated by drug sales in the United States. The US Drug Enforcement Administration shared the Colombians’ concern, as did other US law enforcement agencies. “In our undercover operations,” Edward Guillen, chief of financial operations at the DEA’s Washington headquarters, told us at NOW, “we started to find that what we initially might have thought were straw corporations…were actually involved in genuine commerce, actually buying goods, be they television sets or cigarettes…and then those goods were ultimately smuggled into Colombia.”
Carlos Ronderos was minister of foreign trade from 1994 to 1998, during Samper’s presidency. At a time when the US government was launching an offensive against the Colombian government for the smuggling northward of cocaine, Ronderos began pressuring the US government to rein in Philip Morris’s southbound smuggling enterprise. Ronderos, interviewed in Bogotá, recalled a meeting in 1998 that he arranged with then-US Ambassador Myles Frechette, the US front man on the drug war: “I told him that you can’t ask Colombia to stop the flow of cocaine if you are not willing to stop the flow of cigarettes and other goods used to launder the money from the sale of that cocaine.” Frechette, according to Ronderos, rejected his plea, responding that “‘it was purely a customs problem for Colombia.’ And I felt like saying, ‘OK, well drugs are just a customs problem for the United States.'”
He didn’t say that, but after Frechette’s rebuff, Ronderos went straight to Washington with his complaint. The Washington representative for the Colombian Trade Office, Carlos Acevedo–who is now working as one of the lead attorneys on the Colombian lawsuit–invited US money-laundering experts to review the government’s files in Bogotá. In February 1998–at the height of the Clinton Administration’s efforts to isolate the Samper government–a five-person team, including specialists in money laundering from the Treasury Department’s Financial Crimes Enforcement unit (FinCen), the IRS and Customs came to Bogotá to investigate the allegations.
Al James, a top FinCen agent at the time in charge of money-laundering investigations and chief organizer of the US inquiry, has fond memories of that trip. “Ronderos was a real gentleman,” he commented in a telephone interview. “He opened up everything to us, both the good and the bad stuff. We worked real well together.” The joint investigation began to put into high relief a critical aspect of the narcotics trade: the means by which narco-dollars from the United States were channeled into the purchase of US goods such as cigarettes. Those goods were transferred through Caribbean tax havens and ultimately sold to Colombian consumers for pesos as part of a complex money-laundering chain that came to be known as the Black Market Peso Exchange. James became chairman of a multiagency task force known as the Black Market Peso Exchange Working Group. “We began to understand,” says James, “that what they were calling contraband smuggling was actually the other side of narcotics money laundering.”
During his trip to Bogotá, James met with top Philip Morris executives to express his concerns about money laundering. “I warned them when we were in Colombia,” he says. The officials told him that they had nothing to do with the cigarettes once they reached Colombian shores. James had similar meetings with other companies back in the States, informing them of the potential use of their products for drug-money-laundering purposes. Most, he says, responded by taking precautionary measures and instituting tighter surveillance of their sales operations. But not, says James, Philip Morris: “The evidence [of smuggling] started to seem pretty clear to me. Philip Morris had a ‘legitimate’ sales office in Bogotá. But they were losing millions of dollars if you looked at their legal sales. They spent more on advertising than they were making out of legitimate cigarette sales. They told me they were spending the ad money to sustain the legitimate sales. Bullshit!” Phillip Morris refused to respond to these allegations directly, but in an e-mailed statement declared, “Philip Morris does not condone money laundering; nor do our business practices facilitate it.” The company states that it has instituted “know your customer” policies suggested by US law enforcement and has stopped accepting cash or third party check payments, which could be used for laundering drug money.
Taking It to Court
US law enforcement has little leverage over US corporations overseas, and no legal action was taken against the cigarette companies. In May 2000, frustrated by the continuing flow of smuggled cigarettes into the country, twenty-two Colombian states and the city of Bogotá filed a lawsuit against Philip Morris and BAT in New York federal court, alleging various violations of US law, including fraud, smuggling, money laundering and contraventions of the RICO act. The suit accuses the companies of “orchestrating and profiting from” the smuggling of cigarettes on a massive scale. It alleges that the companies were involved in shipping and distributing cigarettes that evaded customs duties and other taxes; that they disguised and moved the ill-gotten profits back to the United States, which constituted money laundering; and that cigarette smuggling was used in the laundering of Colombian drug profits. It was, says José Manuel Arias and other Colombian officials, the publicity from the lawsuit that prompted the cigarette companies to strike the deal with DIAN and stanch the flow of cigarettes passing illegally into Maicao. (Putting further pressure on the companies, last year the Colombian Congress passed a law mandating that their advertising expenditures cannot exceed the amount of their legal imports.)
According to Arias, Philip Morris lobbied every Colombian governor against signing on to the lawsuit, to little avail. But the company’s lobbying of the national government did bear fruit: President Pastrana refused to sign on the national government, even though millions of dollars yearly in customs duties were allegedly diverted from the national treasury. (As it happened, back in Washington, Philip Morris emerged as one of the few nonmilitary companies to lobby heavily on behalf of Plan Colombia when it was winding its way through Congress.)
Six months after the Colombian filing, the European Union and ten European governments sued Philip Morris and RJ Reynolds on essentially the same grounds. Last August, after a federal court judge ruled that the EU was an inappropriate body to bring the suit, it was refiled by the ten European countries, including France, Germany, Spain, Belgium, the Netherlands, Greece and Italy.
While technically distinct, the Colombian and European cases are being argued in parallel. The cases are the first in which a phalanx of foreign governments are pitted against a trio of corporate powerhouses, and will be a significant test of whether US corporations can be held accountable when they run afoul of US and foreign law in their overseas operations. At a time when the fates of national economies are ever more intertwined, the cases promise to establish important precedents in the realm of international law governing corporations. “We are looking,” says attorney Carlos Acevedo, “for the legal system to embrace the challenges of the modern globalized economy, in which production and distribution facilities have been flung far and wide across the globe.”
In the long run, the companies could face repercussions from this legal offensive that are even more severe than the historic $200 billion-plus settlement with the US states of four years ago. That legal crusade hinged on the companies’ knowledge of the harmful effects of cigarettes. This time, the companies could face not only hundreds of millions in damages but criminal charges for smuggling and money laundering.
Thus far, the plaintiffs have suffered some setbacks. On February 19 a district court judge found in favor of the companies’ argument that a common-law precedent dating from the eighteenth century, known as the “revenue rule,” prevents US courts from adjudicating disputes over uncollected foreign taxes. On March 25 the Europeans and Colombians announced their intention to appeal that decision. The judge didn’t block them from pursuing the case on the money-laundering allegations, which they intend to do in a separate filing. But the plaintiffs’ prospects would now be considerably brighter if the tobacco companies had not engineered an audacious reshaping of the USA Patriot Act to prevent them from acquiring a potent new legal tool.
Patriot Games
Roused into action by the terrorist attacks on September 11, Congress rushed to tighten US laws governing money laundering and smuggling and to require transparency among financial institutions in order to strike at the means by which terrorists generate funds through illicit financial enterprises. In the original House version of the Patriot Act, introduced on October 3, and then known as the Financial Anti-Terrorism Act, Section 107(b) expanded the definition of money laundering to include “fraud or any scheme to defraud against a foreign government or foreign government entity, if such conduct would constitute a violation of this title if it were committed in interstate commerce in the United States.” The Justice Department had asked for that section to strengthen its hand in pursuing legal prosecutions for money laundering–but the section would also have established the jurisdiction of US courts over precisely the sort of activity of which the tobacco companies now stand accused.
At the time, the tobacco companies were facing legal assaults on several fronts. The government of Canada was preparing to appeal a lower-court decision that threw out its case accusing RJ Reynolds of evading $1 billion in taxes by smuggling cigarettes into Canada. And the Colombian and European RICO cases were on the docket at federal district court in New York. The provision would have provided clear legal standing to the plaintiffs in those lawsuits. But on October 11, with the country still reeling from the attacks one month before, GOP Representative Michael Oxley of Ohio, chairman of the House Financial Services Committee, undermined the Justice Department’s original request and removed the provision before the committee hearing. He undertook that maneuver at the behest of the White House, according to a Congressional source close to the negotiations.
“The tobacco companies didn’t care that in striking that provision they might have opened the American people to greater risk of a terrorist attack and funding terrorist groups that might attack our own people,” comments Congressman Henry Waxman, a leading antagonist of the tobacco industry in Congress. “They wanted to make sure that that provision would not have been interpreted to give standing to these foreign countries.” Philip Morris does not dispute the latter point, but in a letter insisted the changes were supported by “the business community at large,” which has long been concerned with such matters of foreign liability, and vigorously denied that the change would hamper “the government’s ability to bring suits to combat terrorism.”
According to one Waxman staffer, in Congress the tobacco companies took a “belt and suspender” approach to the Patriot Act in an effort to insulate their international operations from legal challenges in US courts. The “belt”–Section 107(b)–was what Oxley removed from the act. The “suspenders” came late at night on October 16, when Chairman Oxley inserted a provision in the bill after it had been debated and approved by the full committee. Oxley’s addendum specifically blocked any expansion of jurisdiction for US courts to hear civil claims for damages from foreign nations seeking compensation for violations by US corporations of foreign tax laws. The measure had the support of the White House and the top Republican leadership, including House majority leader Tom DeLay, according to a report by the Center for Public Integrity’s International Consortium of Investigative Journalists. On the morning of the 17th–an infamous day, as the anthrax scare jumped from the Senate to the House, where members prepared to evacuate–the Financial Anti-Terrorist Act passed overwhelmingly in the House, including the new provision that would get the companies off the hook.
But staff aides to Waxman and Massachusetts Democrat Martin Meehan caught wind of the change. They alerted the Campaign for Tobacco Free Kids, which concluded in a memo that the only relevance of the provision was to “the…currently pending lawsuits…brought by Canada, the European Union and several Latin American countries…against major U.S. cigarette companies…. And the only future lawsuits likely to be affected would be similar lawsuits directed at the U.S. cigarette companies’ involvement with international cigarette smuggling.”
When the bill reached the Senate, there was outrage at what Senator Patrick Leahy described as the attempted “carve-out of tobacco companies from RICO liability for foreign excise taxes.” Senator Paul Sarbanes, chairman of the Banking Committee, removed the offending passage from the bill. On the day it passed the Senate, Massachusetts Senator John Kerry, a longtime advocate of tighter money-laundering laws, introduced a statement into the Congressional Record clarifying that the law could be used to pursue the sort of legal challenges now faced by the tobacco companies: “It is the intent of the legislature that our allies will have unimpeded access to our courts and the use of our laws if they are the victims of smuggling, fraud, money laundering or terrorism.” On October 26, the Patriot Act was signed by President Bush without Oxley’s language.
While the “suspenders” in the tobacco industry’s offensive were gone, however, the “belt” remained–a narrowed definition of money laundering that denied future and current plaintiffs against the tobacco industry an important legal instrument. “What was left out,” says an infuriated Waxman aide, “was far more important than what was not put in.” As Richard Daynard, director of the Tobacco Litigation Center at Northeastern University, says, “The bill as originally drafted would have made the tobacco companies a lot more vulnerable to the [money laundering] charges.”
As in Colombia, those who argued on behalf of the tobacco industry were also major recipients of the industry’s largesse: A report by the Campaign for Tobacco Free Kids reveals that Republicans received 82 percent of the more than $18 million that the tobacco industry has poured into political campaigns since 1997. Oxley himself has received $34,300 from the tobacco industry since 1999, both for his political campaigns and his PAC, Leadership 2000, and he held a party at the 2000 Republican convention that was paid for partly by Philip Morris.
The Globalization of Smuggling
With an annual turnover of some $400 billion, tobacco is one of the world’s largest industries. Across the globe, there are stories similar to that of the Way’uu and Philip Morris: “mules” who have helped put four tobacco companies in control of 70 percent of the world market. Smuggling insulates the companies from national controls to limit cigarette consumption–which the World Health Organization warns will cause another 10 million deaths by 2030. Wherever smuggling occurs, the pattern, says Luk Joossens, a consultant to the International Union Against Cancer and member of the Belgian delegation to the WHO, is the same: “If you have high tariffs or a state [tobacco] monopoly, they smuggle to get into the market, weaken the state monopolies, and lead the market into the hands of the multinationals.”
Smuggling has also become a big-time criminal activity. The European Union’s Anti-Fraud Office, which has investigated cigarette smuggling in conjunction with the national police forces of Spain, Italy, the Netherlands and elsewhere, claims that organized crime is increasingly a major player in what has become a multibillion-dollar business. In Montenegro last December, the Parliament held a series of explosive hearings on allegations raised by a Croatian newsweekly, Nacional, that Montenegro’s President, Milo Djukanovic, has ties to cigarette smugglers linked to the Italian Mafia. In August the Iranian health ministry released statistics indicating that up to two-thirds of all cigarettes in the country had been smuggled. As part of its legal complaint, the European Union introduced evidence in February indicating that the profits from smuggling have gone to finance terrorist groups in Iraq and elsewhere. Here in the United States, four Arab immigrants confessed in early March to sending the profits from cigarette smuggling back to Hezbollah contacts in Lebanon; another fourteen people will be going on trial in Charlotte, North Carolina, this spring on the same charges, which now, according to the FBI, include “aiding and abetting a terrorist organization.”
The World Health Organization has come to see smuggling as a major public health issue, asserting that it incapacitates one of government’s best weapons for lowering tobacco consumption: high taxes. The WHO puts forth a simple calculation: More smuggling equals cheaper cigarettes equals more smokers, which means more smoking-related illnesses and deaths. According to the World Bank, if the price of cigarettes were to increase just 10 percent–which could be mandated through taxation–an estimated 40 million people would quit smoking worldwide.
At a meeting in Geneva March 18-23, representatives from WHO’s 191 member states began finalizing plans for a Framework Convention on Tobacco Control, which would become the first international public health treaty. Proposals include measures to combat smuggling by requiring that tobacco companies mark each cigarette pack with a clear electronic code identifying its origins and destination; licensing all parties involved in cigarette distribution; and eliminating duty-free sales, which is a primary means of skimming off tax-free cigarettes into national markets.
The tobacco industry has been fighting those provisions, as well as others proposed by the WHO. Representative Waxman charges that the Bush Administration’s delegation has been trying to weaken the organization’s effort to limit tobacco consumption and contraband. In a letter to President Bush last November, Waxman accused his negotiators of embracing ten out of eleven changes to the convention proposed by Philip Morris, which had expressed opposition to the strongest of the anti-smuggling measures as well as controls on cigarette advertising, and even a proposal insuring that health warning labels appear in the language of the country of destination. A follow-up meeting on the issues raised in Geneva will be held in New York in July under the aegis of the Bureau of Alcohol, Tobacco and Firearms.
The tobacco companies refused repeatedly to be interviewed for this article. A spokesman for BAT, David Betteridge in London, said that the company would not comment on anything relating to smuggling, due to an ongoing investigation by the British Department of Trade and Industry. In December the company stated publicly that it would “apply even more stringent criteria” to its international distribution system to counter smuggling, and shortly thereafter BAT issued a statement that it was revising its projected earnings downward for the coming year. Philip Morris’s director for public communication, John Sorrells, e-mailed me a statement on March 22, which reads, in part, that “Philip Morris does not condone, facilitate or support the smuggling of cigarettes and cooperates with governments in their efforts to prevent an illegal trade in the products we manufacture. We have taken significant steps, both internally and in cooperation with foreign governments, to prevent the smuggling of our products.” The company also indicated that it now agrees with several measures proposed by the World Health Organization and foreign governments “to prevent cigarette smuggling,” including “licensing of distribution chains” and “marking of duty-free products” intended to make it easier to track contraband cigarettes.
Clearly, the companies are uneasy about the lawsuits still winding their way through the US court system. At a court hearing on the case last January, Philip Morris’s attorney, Irvin Nathan of Arnold & Porter, expressed the company’s dismay. “We are a public corporation,” Nathan stated to the court. “It is unfair to us to have to be engaged in discussions about terrorism and money laundering. To have to put that in our disclosure documents is misleading to our shareholders.”
As for the Way’uu, Alvaro Iguaran says: “The biggest social debt Philip Morris has is with us, the Way’uu. We showed Colombia and Venezuela that Marlboros existed…they used us because we opened their markets. And after their markets were opened, they didn’t need us anymore. They owe us a lot of money.”
