Tobacco firms hit with $1-billion in penalties

TIMOTHY APPLEBY

From Friday's Globe and Mail

July 31, 2008 at 8:42 PM EDT

TORONTO — Two of Canada's big three tobacco companies will pay more than $1-billion in criminal and civil penalties for orchestrating the wholesale shipment to the United States of cigarettes that were smuggled back to this country and resold at bargain prices.

The admissions of guilt drew only lukewarm praise from anti-smoking activists. Imposed under the federal Excise Act, the fines and settlement costs total $1.15-billion and are the largest ever levied in Canada.

As part of an agreed statement of facts read out in a Toronto courtroom packed with lawyers and investigators, Rothmans Benson Hedges Inc. was fined $100-million.

Simultaneously in Montreal, Imperial Tobacco Canada Ltd. agreed to pay a $200-million fine.

In addition, the two companies will pay $815-million in civil damages to the federal government and to the Ontario and Quebec provincial governments.

The companies both admitted “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.”

However, tobacco foes voiced dismay that the scheme's architects seemed to have evaded punishment.

“We've been involved in this issue for many years and this exposes once again to the public who we've been dealing with,” said François Damphousse, Quebec director of the Non-Smokers' Rights Association. “But when you look at the executives who were behind this fraud, they're getting off scot free, and I think that's despicable.”

Rob Cunningham of the Canadian Cancer Society said much the same.

“It's extremely significant,” he said of the agreement.

“The tobacco companies today have admitted criminal responsibility and I think they recognize they could never get away with this again. At the same time, the penalties are much less than the billions of dollars the federal and provincial governments lost through contraband and through the 1994 tax rollback on tobacco.”

The charges encompass a five-year period that began in 1989.

Tax-free cigarettes poured south by the truckload, most commonly through the porous St. Regis Mohawk Akwesasne reserve, near Cornwall, Ont., which straddles the U.S.-Canadian border.

From there they were distributed to smugglers who brought them back to Canada to be resold on the street and in convenience stores.

The motive appeared to have been to induce smokers to buy particular brands.

“This was done with the intention of maintaining RBH's share of the Canadian tobacco market,” Crown attorney Graeme Cameron told Judge Robert Bigelow of the Ontario Court.

RBH defence lawyer Glenn Hainey said later he was content with the outcome because it ends an eight-year legal battle and “the uncertainty and burden that would have continued if the matter had not been resolved.”

Until Thursday, Toronto-based RBH was 40 per cent owned by Philip Morris International, the U.S. manufacturer of Marlboro cigarettes. However, word of the agreements triggered an announcement that Philip Morris will take over RBH for $2-billion, or $30 a share.

In large part the twin agreements mirror a deal reached in 2004 between the European Commission and Philip Morris.

European Union regulators had long complained that countries with low tobacco taxes were being flooded with a glut of Philip Morris cigarettes. The aim was to encourage the smuggling of cigarettes to such high-tax nations as Germany and Italy, the EU said.

Philip Morris denied that allegation, but after years of skirmishing agreed to pay the commission more than $1-billion that would be used to combat cigarette smuggling.

The accord included no admission of guilt and Philip Morris called the $1-billion penalty a “voluntary payment.”

Thursday's settlements, however, do acknowledge wrongdoing.

Still unresolved is the future of the third big tobacco firm, Mississauga-based JTI-Macdonald Corp., which is under bankruptcy protection and which, along with two of its executives, is facing trial on fraud charges.

The allegations resemble the ones dealt with on Thursday: That the company dispatched billions of tax-free cigarettes to the United States so they could be smuggled back into Canada through the Akwesasne reserve and resold.

The federal government's first effort to crimp the cross-border trade came in February, 1992, when it briefly imposed an $8-a-carton export tax. However, under pressure from the tobacco industry the measure was repealed four months later.

Two years later, Ottawa took the opposite tack by slashing taxes on domestically sold cigarettes by about $25 a carton in efforts to make their sale more profitable.

The tobacco companies were pleased, but their foes were outraged, estimating that along with promoting cigarette use the tax cuts cost Ottawa more than $10-billion in revenue over the next five years.

Since then federal and provincial tobacco taxes have steadily climbed back up, reviving the contraband among a shrinking population of tobacco-users that now comprises less than 20 per cent of Canadian adults aged 15 or older.

The difference these days is that in Ontario and Quebec at least, the bulk of black-market cigarettes being sold on Canadian streets are manufactured on native reserves, notably Akwesasne and the Six Nations reserve near Brantford, west of Toronto.

National Revenue Minister Gordon O'Connor cheered the “historic” settlement, which he says sends a clear message the tobacco tax laws will be enforced.

However, veteran anti-tobacco campaigner Garfield Mahood was unimpressed, saying he welcomed the fines but that “justice escapes us” because nobody 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,” he said.

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