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EU lights up cigarette suit
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November 6, 2000: 10:48 a.m. ET
In U.S. court, Commission accuses Philip Morris, RJR of smuggling tobacco
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LONDON (CNNfn) - The European Union filed Monday a U.S. lawsuit against the two biggest American cigarette makers Philip Morris Cos. and R.J. Reynolds Tobacco Holdings, accusing them of smuggling tobacco into Europe, in what amounts to the latest attack on an embattled industry.
The European Commission, the executive arm of the EU, filed a suit in New York alleging the two companies were involved on cigarette smuggling, violating the U.S. Racketeer Influenced and Corrupt Organizations (RICO) Act. The commission also called for an injunction to prevent further illicit transport of cigarettes.
While the tobacco industry is under attack from government and private litigants in the U.S. on health grounds, the EU's suit is a financial one. It says  cigarette smuggling deprives member governments of the revenue they would raise from taxing legal trade in tobacco products.
"The protection of the financial interests of the European Union is a high priority of the European Commission," EU Budget Commissioner Michaele Schreyer said in a statement Monday. "The present case is a new step in our strategy to fight against fraud and financial irregularities."
The commission said it decided four months ago to bring legal action against a number of U.S. tobacco companies, leading to Monday's lawsuit. Philip Morris, the owner of the world-leading Marlboro cigarette brand, pledged to cooperate to combat any illegal trade, but said it was surprised that the EU sought to have its suit heard in the U.S.
"Philip Morris does not understand why, either as a matter of law or practice, the European Commission has chosen to address this issue in a U.S. court rather than through regulatory and cooperative actions within the framework of the European Union," Philip Morris's European spokesman David Davies said in a statement. He said the company couldn't comment on the EU's allegation against Morris, as it hadn't seen the complaint.
Shares of Philip Morris (MO: Research, Estimates) fell 62 cents to $34.38 on the New York Stock Exchange Monday. R.J. Reynolds (RJR: Research, Estimates) fell 69 cents to $34.31.
"We fully support the commission's desire, and the member states' efforts, to address the illegal trade in cigarettes, including the growing international trade in counterfeit cigarettes," Davies said. "We will readily cooperate with  all interested parties to continue to develop sensible solutions, appropriate to prevent illegal trade in our products... However, we will vigorously contest the commission's unprecedented attempt to utilize American courts to impose liability upon us."
R.J. Reynolds, which makes Camel and Winston brand cigarettes, could not immediately be reached.
The governments of Canada, Columbia and Ecuador have also recently brought lawsuits against tobacco companies for alleged smuggling, attorneys and industry experts said. But they said plaintiffs have so far had little success, in part because U.S. judges have been hesitant to rule in favor of other governments in what amounts to a tax issue.
Still, the stakes are high for Big Tobacco. A violation of RICO rules carries with it an automatic fine of three times the damages incurred over a four-year period. Although the EU didn't immediately state how much its governments claim to have lost as a result of the illicit trade, a study last year showed that in Britain alone the loss to tax coffers was £2.4 billion ($3.5 billion) in 1999.
Last week, Britain's Department of Trade and Industry said it opened an investigation into claims that British American Tobacco engaged in tobacco smuggling. The company said it was "disappointed" about the investigation but pledged to cooperate with officials.
"Kitchen towels to dog food"
Smuggling has become endemic to the global tobacco business, industry experts said. While the companies themselves do not appear to engage in smuggling, they are suspected of supplying their wares to third parties with the knowledge that the cigarettes will be passed through countries with lower or no tax rates - and then channeled into other countries with bigger tax bites.
Ultimately the companies should be able to curb the trade, experts said.
"Nobody argues that the companies do this themselves," said Clive Bates, director of the UK-based anti-tobacco group Action on Smoking and Health, or ASH. "They're not driving trucks across borders during the night or bribing customs officials."
The process of smuggling is a simple one: shipments of cigarettes are fed through a distribution network that takes the contraband through nations where it's possible to avoid stiff scrutiny - experts cite places such as Andorra or Cyprus. The traffic then "turns black" as the tobacco products are falsely and illegally re-labeled as "anything from kitchen towels to dog food," and imported under this guise into countries where tax duties are high, said Bates.
An industry lawyer said cigarette cartons might even be stuffed into Christmas trees.
Experts said smuggling has become a slippery slope for tobacco companies. While the short-term benefit of such activities may not be apparent for the firms, smuggling can allow them to launch new products at cheaper prices, can reinforce demand, or even bolster the industry's argument that high taxes are to blame for fostering the illicit trade, they said.
If one company unilaterally decides to abandon its connections with smuggling, the others that continue to do engage in the illegal trade will gain market advantage, industry experts said. 
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