Historical

“Very Suspicious” Behaviour

The 1990s saw the number of cigarettes being seized by UK Customs and Excise rocket. In 1995, HM Revenue and Customs seized 32 million cigarettes.¹ By 1999 this had increased to 1.3 billion ² and by 2000-1 it was just under 2 billion, ³ with some 17 billion cigarettes being successfully smuggled into the country.⁴
“It is very suspicious that brands mainly smoked in the UK are transported to several countries apparently with no reason,” a spokesman for the EU Anti-Fraud office said at the time.⁵

Smuggling Via Andorra, then the Balkans, then Cyprus

By 1997, EU investigators became alarmed at what they recognised as a new smuggling route opening up. The EU anti-fraud unit reported a “significant increase in exports to Andorra of brands popular in the United Kingdom”. The EU investigators noted that “importations were far in excess of the amount required for local consumption.” ⁵
When Andorra was closed down, the smuggling route changed. In October 1997 Italian Customs seized what became the first of many Superkings and Regals off the Adriatic Coast, coming from Montenegro and other Balkan countries. “Before 1997, it had never happened. Since then we have seized many cigarettes destined for the UK market,” said an Italian Prosecutor from Bari at the time. By the late 1990s, according to the EU Anti-Fraud Office, over 40 per cent of cigarettes seized on the Adriatic coasts coming from Montenegro by speedboat were British-made. ⁵
The next country to become a “hub” was Cyprus, where the cigarettes were transported in their billions. In 1999, leaked export figures from HM Revenue and Customs revealed that Imperial was on course to ship some five billion cigarettes there in one year alone. ⁵

The UK Becomes the ‘Focal Black Market’ in Europe

In 1999, a review of cigarette smuggling by the World Customs Organisation concluded that the “United Kingdom is the main target country for cigarette smuggling activities and takes the first place of the ‘cigarette black markets’ in Europe”.⁶ The following year, 2000, the same organisation concluded that: “The United Kingdom is still the focal black market in Europe followed by Germany”.⁷
Also in 2000, a new report from HM Customs and Excise confirmed that over half the cigarettes seized in the UK were brands manufactured by Imperial Tobacco. The report confirmed that half the cigarettes seized were Regal and Superkings – both made by Imperial.² Whereas the average return rate for a cigarette made in the UK was 16 per cent; the return rate for Regal and Superkings, two of Imperial brands, was 65 per cent.⁸
At the time, Imperial maintained it was doing everything it could to stamp out smuggling. “What we are doing is legal, but the law is being broken at some point,” says Imperial’s spokesman Paul Sadler. “We have thought long and hard about smuggling within the company, and we don’t believe there is anything more that we can do”.⁵
Also see:

• Gareth Davis

Anti-Smuggling Agreements with the Authorities

In April 2002, in the first agreement of its kind, HM Customs and Excise signed a Memorandum of Understanding (MoU) with Gallaher. The agreement was designed to cement cooperation in tackling tobacco smuggling into the UK, and was subsequently updated in 2006. ^{9 10}
Just over a year later, in July 2003, Imperial Tobacco also signed a Memorandum of Understanding with HM Revenue and Customs “formalising jointly developed protocols to combat the smuggling and counterfeiting of tobacco products” ¹¹, which was also updated in 2006.¹²
The following year, the European Commission and 26 participating Member States of the European Union signed a multi-year agreement with Japan Tobacco International, which had taken over Gallaher, that included an “efficient system to fight against future cigarette smuggling and counterfeiting.” ¹³

• For the results of this joint effort, see the page on current Tobacco Smuggling in the UK.

TobaccoTactics Resources

This page is part of the historical section of Tobacco Smuggling, which also includes:

• Gallaher versus its Cypriot distributor
• BAT Involvement in Tobacco Smuggling
• JTI Involvement in Smuggling

TCRG Research

Visit Peer-Reviewed Research for a full list of our journal articles of tobacco industry influence on health policy.

TCRG Blogs

• Unscrupulous methods used by the tobacco industry revealed over the illicit trade, K.A. Evans-Reeves, A. Rowell, 2015, The Conversation
• Tobacco industry rallies against illicit trade – but have we forgotten its complicity?, K.A. Evans-Reeves, A. Rowell, 2015, The Conversation

References

The post Imperial and Gallaher Involvement in Tobacco Smuggling appeared first on TobaccoTactics.

See also:

• New Gallaher Documents Reveal Extent of Smuggling Activities
• Ocean Traders

Facilitation and “Permitting” of Smuggling

Between 2005 and 2008, a bruising legal battle fought by Gallaher exposed its own facilitation of tobacco smuggling. More than 20,000 internal documents were disclosed in the course of litigation between Gallaher and its former Cypriot distributor, Tlais Enterprises.
A subsequent investigation by The Sunday Times ^{14 15 16} revealed that many of these internal documents “raise serious questions about Gallaher’s own complicity in facilitating worldwide smuggling, sanctions busting in Iraq and the dumping of sub-standard cigarettes in Africa and Afghanistan”.
A witness statement by a former Gallaher director Norman Jack contended that “Gallaher’s board operated a policy of ‘willful blindness’ while instructing him to sell billions of cigarettes, a substantial proportion of which ended up being illegally diverted back into the European Union,” according to the Sunday Times.

“We are Not Seeking to Build Brands”

Norman Jack was the director Gallaher appointed to implement a new and undeclared “trading policy”, which was laid out in a memo written by then chief executive Peter Wilson to his senior managers in May 1999. It said: “As a consequence of the disruption to our business in Russia we should be seeking alternative sources of business in the short term in order to provide some compensation and to maintain throughput in our factories”. ¹⁷
In a reflection of the policy to just export cigarettes rather than build market share in host countries, the memo went on to state: “The essence of trading business is that we are not seeking to build brands.” ¹⁸
Such was the mass export of Gallaher brands, predominantly Sovereign and Dorchester, to markets where there was little or no known consumption of them, that by 2004, three-quarters of all genuine British cigarettes seized coming into the UK were rerouted Gallaher brands.
In his ruling, Mr Justice Clarke described Gallaher’s approach as irresponsible and carried out “in the knowledge that a substantial proportion would end up being smuggled”. Clarke’s judgement also blamed Gallaher for the increase in smuggling. ¹⁹

No Due Diligence

The judgement repeated the accusation that the company did not carry out “detailed due diligence” of its supply chain. The Sunday Times alleged that:

Jack said Gallaher tried to ring-fence senior management from possible prosecution. ‘I told Peter Wilson that once we started to go down this road we would not be able to just stop. Gallaher could not bear to be behind (British rival) Imperial (Tobacco) in the stock market. (They) checked with outside barristers what their position was and were told, ‘If you don’t ask you don’t know what the answer is’…They adopted a policy of willful blindness, and I’m being charitable when I say that.’¹⁶

In one statement, seen by the paper, Jack claims he was advised not to leave a paper trail, not to ask searching questions about shipments, or to attend meetings where this was discussed:

We were all aware that we were embarking on business that was potentially extremely risky…By following this course we could never be accused of conspiring to smuggle as no meeting had taken place and it was always possible to deny knowledge of everything and blame the distributor. ¹⁶

According to the Sunday Times:

Jack’s evidence and disclosed internal documents suggest that behind the corporate veil it was business as usual the late nineties: Gallaher continued volume selling its cigarettes, indifferent to the smuggling risks.

The company was even accused of going to elaborate lengths to facilitate smuggling. Another example was from a document, dated 16 May 2003, where Gallaher wrote to a South African distributor which Customs had warned eight months earlier was a major smuggler into the UK. The documents revealed that, rather than pressing the distributor to stop smuggling, Gallaher advised it simply to form “a new company” to receive further cigarette shipments from the UK. Under cross-examination during the trial, Tom Keevil, then Gallaher’s general counsel, described the matter as a “dog’s dinner”.
Other allegations concerning Gallaher, contained in separate legal documents submitted to a Cypriot court, that were reported in the Sunday Times, accused the tobacco company of “colluding with Customs to mislead parliament about alleged complicity in tobacco smuggling”.¹⁵ Gallaher and British Customs denied the charges.

Sanctions Busting

Saddam Hussein

The legal case also uncovered evidence that Gallaher had facilitated the smuggling of cigarettes into Iraq, despite United Nations sanctions. The UN sanctions against Iraq had been in place since the conclusion of the first Gulf war in 1991, and were lifted only after the US invasion in March 2003.
However, disclosed documents show that in 2000 Gallaher manufactured to order 44 million cigarettes with the unique Iraqi health warning on the packet. These were sold to several distributors who moved them into Iraq through Turkey and Jordan.
Tlais Enterprises also alleged that there was a meeting between a senior Gallaher executive and Uday Hussein, Saddam Hussein’s son and that the meeting was to follow up on the supply of cigarettes to Iraq despite United Nations sanctions. Gallaher said in a statement at the time that any “imports were made without (its) knowledge or consent” and it had “no convincing evidence” that its executives were involved. ²⁰
Nevertheless, at the High Court, senior Gallaher management admitted that between 2004 and 2007 the company had made four declarations to Customs under the Proceeds of Crime Act. The Sunday Times¹⁶ wrote that: “These letters are understood to notify Customs of the possibility that Gallaher had traded on illegal profits from Iraq. One of the declarations was from the law firm representing Japan Tobacco, which sent it while carrying out due diligence during its acquisition of Gallaher.”
In a statement made after the hearings, Jack said:

I feel I have been set up by Gallaher to take the blame for the actions of others … My conduct was at all times consistent with company policy and the advice and instructions I received (from board members).

Tlais Enterprises even sent Japan Tobacco International what it called “a buyer beware notice” before the acquisition of Gallaher was agreed, warning the Japanese that there might be issues of due diligence that they should be aware of. ¹⁶

Dealing with Hezbollah

Hezbollah

Documents lodged at the High Court in the acrimonious legal battle between Gallaher and Tlais Enterprises also accused the tobacco giant of agreeing to “enlist” the services of a militant Islamic group, Hezbollah. ²⁰
Tlais claimed that the firm agreed to an approach to Hezbollah to recoup taxes of £1 million that it had paid to the Iranian government, which funds the organisation. If successful, Hezbollah was allegedly promised a “success fee” of up to £287,000. Tlais Enterprises stated in its High Court claim: “Gallaher enlisted the services of a Middle Eastern group (that is proscribed in the US) to negotiate on its behalf, in an attempt to recover the duty.” Gallaher subsequently “denied categorically” that it had entered into any arrangement with Hezbollah, and in any way the duty was not recovered this way.²⁰

“Spotted and Stained” Cigarettes

Another issue that arose during the court case was the repeated problem of spotted and stained cigarettes, which is a by-product of cigarettes being kept in high temperature / humid conditions. ²¹

Relevant TobaccoTactics Resources

• This page is part of the historical section of Tobacco Smuggling, which also includes:
• Imperial And Gallaher Involvement in Tobacco Smuggling
• BAT Involvement in Tobacco Smuggling
• Also see the page on current Tobacco Smuggling in the UK.

References

The post Gallaher Versus its Cypriot Distributor appeared first on TobaccoTactics.