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 of the Non-Smokers’ Rights Association, as quoted in CBC News , “Tobacco giants to pay up to $1.15B over contraband sales”, posted: Jul 31, 2008 11:30 AM EDT | Last Updated: July 31, 2008. URL: https://www.cbc.ca/news/canada/tobacco-giants-to-pay-up-to-1-15b-over-contraband-sales-1.701089. Accessed February 25, 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. These agreements pertain to their involvement in tobacco smuggling during the late 1980s and early 1990s. The comprehensive settlement includes four key elements:

Guilty PleasThe 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. This charge involves “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.”
Criminal FinesThe companies are required to pay criminal fines to the federal government. The fines are $200 million for ITL and $100 million for RBH.
Civil SettlementsThe companies entered into civil settlements to resolve all potential civil claims. Under these settlements:
- ITL will pay a percentage of its annual net sales revenue 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.
Compliance ProtocolThe companies agreed to implement a compliance protocol to help control the contraband market. This includes establishing internal compliance programs, such as a “Know Your Customer” program, to enhance accountability throughout the tobacco distribution supply chain.

In total, the two companies will pay $1.15 billion in fines and civil settlements to the federal government and 10 provinces. The payments are based on percentages agreed upon by all the governments, with Ontario and Quebec receiving the largest portions due to their significant impact from 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 one reached by the European Union (EU) with Philip Morris International (PMI), though in that case, there was no admittance of guilt. In contrast, both ITL and RBH pled guilty in court to a criminal offense under the federal Excise Act.

Rothmans Inc. stated in a press release: “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 brings both positive and negative news for tobacco control. One major downside is the relatively small sum the governments settled for, especially compared to their demands in a related court case. The federal and provincial governments are currently seeking $10 billion from JTI-Macdonald (JTI-MC), the smallest Canadian company involved in 1990s cigarette smuggling. Assuming JTI-MC was responsible for 20% of the smuggling (likely an overestimate, as its market share has traditionally been between 11-13%), the governments should have demanded the remaining 80% from ITL and RBH, the two larger companies. This would have amounted to $40 billion—36 times more than the $1.1 billion settled for.

CONS of the Agreement

The net profitability of the two companies is unlikely to be impacted or reduced, as they have a history of passing expenses onto customers.
RCMP investigators conducted 275 interviews related to this case, but since it never went to trial, the details from these interviews remain private. Many company documents and insider information would have been revealed had the case proceeded in Civil Court. Now, none of those documents will be made public. (However, some documents used by investigators are available at the Guildford Depository near London, England.)
The victims of the contraband crimes receive nothing. Thousands of people who started smoking cheap cigarettes (either contraband or legal cigarettes after tax cuts) remain addicted and need help to quit.
The companies’ profits from increased youth smoking rates were likely not considered in the plea bargain negotiations, nor were the future healthcare costs governments will incur due to rising tobacco-related diseases and deaths.
The top executives of these companies, who allegedly orchestrated the smuggling, will not face justice. These individuals are essentially off the hook. The corporations can write off the Agreement as a business expense and pass the costs onto consumers through higher prices.
The parent companies of ITL and RBH (British American Tobacco and Philip Morris International, respectively) are also not held accountable, although it appears both were aware of the illegal activities.

PROS of the Agreement

The RCMP states that the fines ($200 million for ITL and $100 million for RBH) are the largest ever levied in Canada.
It is rare for tobacco companies to admit guilt in tobacco smuggling cases; Canadian tobacco companies have typically denied wrongdoing.
The agreements demonstrate to the public that the tobacco industry does not adhere to normal, legitimate business practices, further damaging the manufacturers’ credibility.
For a graph detailing the financial payment schedule.

Further Information:

Canada Revenue Agency, News Release

Comprehensive settlement agreements between federal and provincial governments and Imperial Tobacco Canada Ltd. and Rothmans, Benson & Hedges Inc.

http://www.cra-arc.gc.ca/gncy/tbcc/menu-eng.html

RCMP, News Release

RCMP closes book on historic tobacco investigations

http://www.rcmp.gc.ca/news/2008/2008_07_31_tobacco_e.htm

Imperial Tobacco Canada, News Release

Imperial Tobacco Canada, federal government and provinces reach resolution on contraband tobacco investigation

http://www.newswire.ca/en/releases/archive/July2008/31/c8814.html

Rothmans Inc., News Release

Rothmans Inc. announces resolution of RCMP investigation