Smuggling fine was a bargain

Tobacco executive who devised ways to bypass excise taxes and supply black market cigarette dealers says the penalty paid by Imperial was a tiny fraction of its profits from breaking the law for years

The Gazette

Saturday, September 06, 2008

A former executive with the holding company that once owned Imperial Tobacco says the agreement reached in July to settle federal and provincial claims on smuggling was little more than "chump change" compared with what the company earned during the smuggling era in the late 1980s and early 1990s.

Paul Finlayson, who for 16 years was an executive at Imasco, which once owned Imperial, said the government basically caved in to tobacco interests when it made what he claimed was a token settlement with Imperial and Rothmans Inc.

Finlayson said Imperial earned $600 million to $700 million a year during the smuggling era when the company "lubricated" a system that defrauded Canadian governments of billions of dollars in unpaid taxes.

Now retired, he said in an interview that the $600-million settlement with Imperial represented a small fraction of the profits Imperial earned during that period and an even smaller fraction of the taxes and duties governments lost to smuggling.

The Canada Revenue Agency refused to comment on Finlayson's statements.

Imperial spokesperson Catherine Doyle said: "We paid huge fines and all the parties agreed that that is what should be paid." She added that both the government and Imperial executives "knew what was going on, that the shipments were going down into the U.S. and that they were imported back into Canada through whatever means and Imperial told that to the government." The government required Imperial at the time to file with Canada Customs records of all its tax-free exports, which the company did.

Finlayson said, however, that the company set up shipments to warehouses in the U.S. so that its cigarettes could be easily sold to smugglers.

He said in 1988 Imperial began to see a dip in profits because its competitors were winning market share by feeding the smuggling market. So, he said, Imperial decided to jump in.

"The voice on the horizon was 'Get creative,' " he said.

He said Imperial competitor RJR Macdonald was "dumping the shit (their cigarettes) across the border, so what could Imperial do?" Finlayson, who managed operational systems at Imasco, said he prepared the operational plans for sending Imperial cigarettes tax-free into the United States, where they were later sold to smugglers who brought them back into Canada through the Akwesasne Six Nations reserve near Cornwall, Ont.

He said the documents he prepared in the early 1990s were "confidential mathematical planning documents" for the "flow of goods" into the U.S.

Asked if these were the company's models for supplying the smugglers, he replied: "Correct." He said the RCMP seized the planning documents when police raided Imperial's Montreal head office in November 2004.

The documents showed that not only could Imperial regain its market share by feeding the smugglers, the company could also save money by not having to pay retailers to promote their product.

He said the company was simply "lubricating what was already happening" in the smuggling networks.

But, he said, the company had to be careful. It had to balance the huge demand for Imperial's popular brands, which sold for a premium on the black market, against the possibility it could "piss off Revenue Canada." "We played together in a delicate symphony," he said.

"We didn't think the government would have the balls to come after us," he added.

"A lot of wealth was built up (by the smugglers) because of this. So the Canadian governments were losers. Imperial Tobacco never lost a cent. They still made their asking price." He said his planning document basically proved that Imperial was intentionally sending cigarettes into the U.S. to be sold into the black market.

"The RCMP knows all about this. They could have walked in and just handcuffed everybody at Imperial," he said, adding that the government did "not have the guts of a field mouse to go after the executives of the company." He admitted that this group could have included him.

He said he was speaking out because he believes Imperial crossed the line. "The envelope was being pushed a little bit beyond what I could tolerate it being pushed." He said he left Imasco during this period.

Imperial's Doyle said that "Mr. Finlayson is entitled to his opinion but for us the case is closed." No executives at Imperial or Rothmans have ever been charged with the smuggling. The agreement signed last month settled all claims.

The federal government, however, in 2003 charged eight former executives at RJR Macdonald (now called JTI Macdonald) and an affiliate called Northern Brands International with smuggling offences. One executive pleaded guilty in 2006, as did one of his salesmen. The former president of RJR Macdonald is awaiting trial and six other executives, most of whom live outside Canada, are awaiting a final decision on whether their cases will be ordered to trial.

Claims against JTI Macdonald by Canadian governments for unpaid duties and taxes on cigarettes funneled into the black market during the 1990s total about $10 billion. In 2004 the company filed for bankruptcy protection after Quebec filed a $1.34-billion tax assessment against it.

Imperial Tobacco, as part of last month's settlement with the government, pleaded guilty to one charge of violating the Excise Act and paid a fine of $200 million. Imperial also agreed to pay $50 million by the end of this year plus a percentage of its net sales revenue over the next 15 years up to a maximum $350 million.

Rothmans Inc. made a similar settlement of claims.

The government has never explained why it has charged only executives at JTI Macdonald.

Although the two settlements represent record fines, Finlayson called them "chump change" and referred to the settlement as "insane." He said he was interviewed by the RCMP soon after the raid on Imperial and was questioned about his operational plans.

He said the investigation dragged on for so long that he concluded it "was just a sham" and the governments didn't want to disrupt the company by laying criminal charges or imposing heavier fines because such action would disrupt the huge revenue flow in taxes.

Imperial controls about 65 per cent of the Canadian cigarette market with such brands as Players, du Maurier, Matinée, Cameo and Peter Jackson.

Each year the company remits about $6 billion in duties and taxes to the federal and provincial governments, depending on sales and tax rates. The industry as a whole remits more than $8 billion, according to Imperial's website.

He said Imperial's system of supplying smugglers was essentially a kind of "artistic warehousing." He said it was legal to ship across the border tax-free and legal to sell to Indians.

"What you do with that product is kind of between you and the God of your understanding," he said, referring to the people who bought the cigarettes out of warehouses in the U.S.

He said the attitude was sort of "Oh, shoot, we forgot to lock the back door to the warehouse. Fire the guy who did that." He said the RCMP could easily have audited the company concerning its shipments into the U.S. and would have seen the abnormal amount of exports. Together with the papers they uncovered during the 2004 raid "they had Imperial cold, on the ground screaming. (But) they reached down and gave it a hand and pulled them up and said, 'Ah, give us 50 million bucks and we'll forgive and forget.' " Imasco is a holding company created in 1970 by Imperial Tobacco to invest its enormous tobacco profits. The company expanded into pharmacies, financial services, restaurants and real estate. In 2000, Imperial Tobacco was sold to British American Tobacco Group.