National Post

Wednesday, December 22, 1999

Ottawa sues big tobacco for $1-billion
'Conspiring to smuggle': Suit in U.S. says firms undermined anti-smoking efforts

Joel-Denis Bellavance

OTTAWA - The Canadian government launched an unprecedented $1-billion (U.S.) lawsuit yesterday against several multinational tobacco companies for allegedly conspiring to smuggle cigarettes into Canada from 1991 to 1997.

The lawsuit, filed in the United States Federal Court against tobacco-giant RJR-Macdonald Inc., RJ Reynolds Tobacco Holdings Inc. and several related companies, alleges that the companies defrauded the Canadian people by working with known distributors and smugglers to illegally import their tobacco products into Canada to be sold on the black market.

It also alleges that the companies undermined Canada's policy of using high taxes to restrict tobacco use, especially among young Canadians, by forcing the federal government to reduce cigarette taxes to combat smuggling.

Anne McLellan, the Justice Minister, announced the details of the court action at a press conference along with Allan Rock, the Health Minister, and Martin Cauchon, the Revenue Minister.

"The government ... intends to prove that various RJ Reynolds tobacco companies and others defrauded the Canadian people by conspiring to smuggle tobacco into Canada," Ms. McLellan said. "[The companies] used an elaborate network of smugglers and off-shore shell companies to ensure an abundant supply of cheap cigarettes to the Canadian market.

"In so doing, they undermined our policy of cutting tobacco usage," she added.

In its case summary, the government claims that the companies sold "enormous amounts of Canadian tobacco" to a small group of distributors in the United States. The distributors then allegedly resold the products primarily to customers on the St. Regis/Akwesasne Reserve, which straddles the border between the Canada and the United States.

As part of the scheme, customers on the reserve smuggled the tobacco back into Canada for sale on the black market.

The Canadian Tobacco Manufacturers Council (CTMC) is also named in the lawsuit -- the largest one ever filed by the Canadian government in a foreign country -- because it allegedly acted as an agent in the scheme.

"In so doing, they undermined our policy of cutting tobacco usage," she added.

In its case summary, the government claims that the companies sold "enormous amounts of Canadian tobacco" to a small group of distributors in the United States. The distributors then allegedly resold the products primarily to customers on the St. Regis/Akwesasne Reserve, which straddles the border between the Canada and the United States.

As part of the scheme, customers on the reserve smuggled the tobacco back into Canada for sale on the black market.

The Canadian Tobacco Manufacturers Council (CTMC) is also named in the lawsuit -- the largest one ever filed by the Canadian government in a foreign country -- because it allegedly acted as an agent in the scheme.

The Canadian government claims the CTMC was used by RJR-Macdonald to blame organized crime while pretending it was trying to stop smuggling.

The CTMC yesterday refused to comment on the lawsuit, filed in Syracuse, N.Y., under the Racketeer Influenced and Corrupt Organizations Act. It could take up to three years for the lawsuit to reach the trial stage.

Ms. McLellan said the Canadian government is launching the court action in the United States because many of the defendants involved are based there, much of the alleged activity took place there and many of the witnesses and documents relating to the case are in the United States.

Moreover, more than a dozen individuals and one of the corporate defendants in this action have already pleaded guilty in Syracuse to criminal charges under U.S. laws stemming from illegal tobacco smuggling into Canada.

Ms. McLellan said Ottawa did not have enough evidence to file the lawsuit until charges were dealt with in the United States.

Fred Bartlit, of the Chicago law firm Bartlit Beck, has been hired by the Canadian government to represent its interests in the lawsuit. Mr. Bartlit, a veteran litigator who has won several high-profile cases throughout the United States, refused to divulge how much he will be paid for carrying out the lawsuit.

Mr. Cauchon said the Canadian government lost millions of dollars in tax revenue in addition to incurring significant enforcement costs to combat tobacco smuggling.

He said the Canadian government may seek more than $1-billion (US) once lawyers gain access to the defendants' records during the discovery process.

"We are taking this unprecedented measure today to tell Canadians that we are determined to do everything that we can to put an end to these kinds of illegal activities to safeguard the integrity of the system," Mr. Cauchon said.

Mr. Rock blamed the increase in the number of young smokers on the tobacco companies' alleged scheme.

The minister said the rate of smoking among 15- to 19-year-olds increased to 31% in 1995-96 from 21% in 1991.

"The government of Canada and public health advocates believe that this rise in the rate of youth smoking is due in large part to the rollback on cigarette taxes that was forced upon us by the rise in smuggling in the early 1990s," Mr. Rock said.

"High cigarette taxes are the single biggest obstacle in the efforts by the tobacco companies to hook new smokers and increase their profits. Ninety percent of addicted smokers are lured into the habit before their 18th birthday. Young smokers are the most price sensitive," he added.

Mr. Rock said he plans to introduce tougher cigarette labelling requirements and will lobby Paul Martin, the Finance Minister, to increase taxes in his next budget, expected in February.

A senior government source also said the minister is seeking $130-million per year to finance a new national strategy to combat tobacco consumption.

The province of British Columbia has already filed a lawsuit against some tobacco companies to recover the costs of health care arising from tobacco use.

Mr. Rock suggested yesterday that the federal government may launch its own lawsuit to recover some of those health costs.

The federal government doubled taxes and duties on tobacco in February, 1991, as part of a national strategy to combat tobacco use. However, it was forced to reduce them significantly in 1994 because of massive cross-border smuggling.