Imperial and Rothmans Admit Guilt in 1990s Cigarette Smuggling Crimes
“Garfield Mahood of the Non-Smokers Rights Association said while he welcomed the fines, ‘justice escapes us’ because none of the executives who presided over the operation went to jail….”
“‘There’s no winners in this because the industry has addicted a whole bunch of young people who then became lifetime annuities for these companies…. Over time the companies will financially benefit. And literally thousands of people will die in the future as a result of this crime.’”
Garfield Mahood, Executive Director, Non-Smokers’ Rights Association, as quoted in The Canadian Press, “Big tobacco gets smoked for $1.15 billion over contraband cigarettes,” 31 July 2008. URL: http://www.ash.org.uk/ash_1yxnj6so.htm#6036. Accessed 25 February 2009.
The federal and provincial governments reached plea agreements with Canada’s two largest tobacco companies, Imperial Tobacco Canada Ltd. (ITL) and Rothmans, Benson & Hedges (RBH), on July 31, 2008, related to their involvement in tobacco smuggling in the late 1980s and early 1990s. The comprehensive settlement agreements include four elements:
- The companies entered guilty pleas.
The companies signed an Agreed Statement of Facts with the Crown and pled guilty to a single count of violating section 240(1)(a) of the federal Excise Act: “aiding persons to sell or be in possession of tobacco products manufactured in Canada that were not packaged and were not stamped in conformity with the Excise Act and its amendments and the Ministerial regulations.”
- The companies have to pay criminal fines to the federal government.
The criminal fines are $200 million for ITL and $100 million for RBH.
- The companies entered into civil settlements to resolve all potential civil claims.
Under the civil settlements, ITL will pay a percentage of annual net sales revenue going forward for 15 years up to a maximum of $350 million. RBH will pay $400 million over a 10-year period. Both companies will also pay $50 million each before the end of 2008 to help fund the federal government’s new Contraband Tobacco Enforcement Strategy.
- The companies agreed to a compliance protocol to help control the contraband market.
The companies will establish internal compliance programs, including a “Know Your Customer” program to enhance accountability for the distribution of tobacco throughout the supply chain.
In total, the two companies will pay $1.15 billion in fines and civil settlements to the federal government and 10 provinces, with the payments based on percentages agreed upon by all the governments. Ontario and Quebec will take the largest portions, because they were most impacted by the smuggling in the 1990s. (For more information, see http://www.cra-arc.gc.ca/nwsrm/rlss/2008/m07/nr080731b-eng.html.)
The binding Settlement Agreements were negotiated by the Canada Revenue Agency, and are available on its website: www.cra-arc.gc.ca/gncy/tbcc/menu-eng.html. These Agreements are similar to the agreement reached by the European Union (EU) with Philip Morris International (PMI), although in that case there was no admittance of guilt. In this Canadian case, both ITL and RBH pled guilty in court to a criminal offense, a violation of the federal Excise Act.
Rothmans Inc. indicated in a press release that: “The resolution of the RCMP investigation was a condition of an agreement, also announced today, by Philip Morris International Inc. to make an offer to purchase all outstanding shares of Rothmans Inc. at a price of $30 per share.”
The settlement is both good and bad news for tobacco control. One of the worst outcomes is the paltry sum governments settled for, compared to what they are seeking in a related court case. The federal and provincial governments are currently seeking $10 billion from JTI-Macdonald (JTI-MC), the smallest of the Canadian companies involved in cigarette smuggling in the 1990s. Assuming JTI-MC was 20% of the smuggling problem (likely an overestimate, as its market share has traditionally been between only 11-13%), then the governments should have demanded the other 80% from ITL and RBH, the two larger companies. This would have amounted to $40 billion— 36 times more than the $1.1 billion for which the governments settled.
CONS of the Agreement
- The net profitability of the two companies will not likely be impacted or reduced, because the companies have a long history of simply passing expenses onto their customers.
- RCMP investigators conducted 275 interviews related to this case, but because it never went to trial, what was said in those interviews will never be made public. Many company documents and insider secrets would have been discovered if the case had proceeded in Civil Court. Now, none of those documents will be made public. (However, some of the documents used by investigators are available at the Guildford Depository, located near London, England.)
- The victims of the contraband crimes get nothing. The thousands of people who started smoking cheap cigarettes (either contraband or legal cigarettes after the tax cuts) are still stuck with their addiction today, and they need helpto quit.
- The profit the companies made due to the increase in youth smoking rates were not likely factored into the equations when this plea bargain was being negotiated; neither were the health care costs that will be incurred by governments in the future, due to the increases in tobacco-related diseases and deaths from the increased smoking rates.
- The individuals at the highest levels of these two companies, who allegedly orchestrated the smuggling, will not face justice. These individuals are essentially off the hook. The corporations can simply write off the Agreement as the cost of doing business and pass the costs onto consumers through product price increases.
- The parent companies of ITL and RBH (British American Tobacco and Philip Morris International, respectively) are also off the hook, although it appears that both parent companies were aware of the illegal activity.
PROS of the Agreement
- The RCMP says the fines (ITL’s $200 million and RBH’s $100 million) are the largest fines ever levied in Canada.
- It is rare for tobacco companies to admit guilt in tobacco smuggling; Canadian tobacco companies have always denied wrongdoing.
- The agreements show the public that the tobacco industry does not operate within the confines of normal, legitimate business practices, and further erodes the manufacturers’ credibility.
For a graph which details the financial payment schedule, click here.
Canada Revenue Agency, News Release
Comprehensive settlement agreements between federal and provincial governments and Imperial Tobacco Canada Ltd. and Rothmans, Benson & Hedges Inc.
RCMP, News Release
RCMP closes book on historic tobacco investigations
Imperial Tobacco Canada, News Release
Imperial Tobacco Canada, federal government and provinces reach resolution on contraband tobacco investigation
Rothmans Inc., News Release
Rothmans Inc. announces resolution of RCMP investigation
Philip Morris International Inc., News Release
Philip Morris International Inc. (PMI) Announces Agreement to Acquire Rothmans Inc.
The Globe and Mail
Tobacco firms pay $1-billion in fines, settlement
Tobacco firms cough up
Rothmans to be inhaled by Philip Morris in $2-billion deal: $30 per share