Big tobacco gets smoked for $1.15 billion over contraband cigarettes

Thu Jul 31, 5:33 PM

By Julian Beltrame, The Canadian Press

OTTAWA - Two of Canada's biggest tobacco companies will pay a whopping $1.15 billion in criminal and civil penalties after pleading guilty to charges related to cross-border smuggling of cigarettes in the early 1990s.

Under separate court settlements in Montreal and Toronto on Thursday, Imperial Tobacco Canada Ltd. was fined $200 million and Rothmans Benson & Hedges (TSX:ROC) $100 million as part of the criminal charges.

The companies will shell out another $815 million in civil damages to the federal and provincial governments over the next 15 years.

In total, Ottawa will receive $575 million, with the provinces getting the rest of the $1.15 billion.

The companies pleaded guilty to "aiding persons to sell and be in possession of tobacco manufactured in Canada that was not packed and was not stamped in conformity with the Excise Act," the RCMP said.

Revenue Minister Gordon O'Connor hailed the settlement and the RCMP said the fines are the largest ever levied in Canada.

"Today's announcement sends a clear message that governments right across Canada are united in their efforts to enforce Canada's tobacco tax laws . . . and fight contraband tobacco in this country," O'Connor said.

"Together the civil and criminal payments effectively ensure that no monetary benefit was realized as a result of these activities."

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."

The companies, he added, will profit for years.

"Over time the companies will financially benefit. And literally thousands of people will die in the future as a result of this crime."

Almost immediately following the announcement, Rothmans announced it will be acquired by Philip Morris International Inc. for $2 billion, or $30 per share in cash.

Both companies said they were pleased to be able to turn the page on the matter.

"We are pleased to have resolved this issue," said Imperial Tobacco president Benjamin Kemball. "Today's events give our business the stability it needs to move forward."

In a statement, RCMP assistant commissioner Mike Cabana said the guilty pleas bring to an end more than eight years of investigation by the force and the excise sections in Ontario and Quebec.

The charges involved the shipment of contraband tobacco in Canada to locations in the U.S. and near the Canada-U.S. border between 1989 and 1994.

From there, it was distributed to smugglers or black-market distributors who brought it back into Canada for further illegal distribution.

The smuggling operations became so pervasive that it caused governments to roll back tobacco taxes, reducing the price of cigarettes to similar levels that existed in the U.S.

That brought an end to smuggling, but it made "cheap" cigarettes available throughout Canada, said Rob Cunningham, an anti-smoking activist and author with the Canadian Cancer Society.

As well, it set the stage for today's black marketing in cheap cigarettes. He said since taxes were hiked after 1999, independent manufacturers have taken up shop in several native reserves, most notably in Akwesasne, near Cornwall, Ont., and the Six Nations reserve near Brantford.

"We now have a different problem today, and it's very significant and growing," he said. "But the actions of the tobacco companies 15 years ago did fuel a capacity for contraband networks to exist."

The resolution of the federal charges does not end all the legal difficulties faced by tobacco companies in Canada. British Columbia is pursuing an action to recoup health costs caused by the sale of tobacco and several other provinces are in varying stages of similar legal action, said Mahood.