Citizens for Clean Air in Apartments

RJR Subsidiary Pleads Guilty To Cigarette Smuggling


A unit of the RJR Nabisco Holdings Corp. pleaded guilty on Tuesday to federal criminal charges stemming from a scheme to smuggle cigarettes into Canada through an Indian reservation in upstate New York and agreed to pay $15 million in penalties.

The authorities said the guilty plea, filed in Federal District Court in Binghamton, N.Y., marked the first time that a tobacco company has been convicted of complicity in the shadowy and growing world of international cigarette smuggling.

Experts estimate that nearly one-fourth of the billions of American cigarettes sold overseas pass through smuggling rings set up to evade taxes and sell major brands at a discount. Critics have long contended that this trade could not go on without the industry's knowledge and support.

But while previous criminal investigations have led to charges against several mid-level managers, top executives at the large, multinational tobacco companies have always denied allegations that they encouraged or condoned any dealings with the contraband rings.

In entering the guilty plea, the RJR Nabisco subsidiary, Northern Brands International Inc., admitted that it helped distributors evade $2.5 million in U.S. excise taxes on shipments that, the authorities said, were ultimately smuggled into Canada to avoid high taxes on cigarettes there.

But the company's plea also could have sweeping repercussions in Washington, where Congress has debated whether to raise the taxes on domestic cigarette sales to discourage smoking.

Industry executives have argued that any significant increase in the taxes would immediately create a black market for cigarettes in the United States, much as it did in Canada.

But the guilty plea "shows that the emperor doesn't have any clothes in making that argument," said Gregory N. Connoly, the director of the Commonwealth of Massachusetts' Tobacco Control Program.

"The companies have always said that they are not directly involved, and they have used the threat of smuggling to dissuade Congress from raising the taxes," he said. "But now we have evidence that the industry is complicit with organized criminals when it comes to smuggling."

Thomas J. Maroney, the U.S. attorney in Syracuse, N.Y., said the four-year-old investigation was continuing. But he declined to say whether any high-level officials at RJR Nabisco's main tobacco operation, R.J. Reynolds Tobacco Co., or other tobacco companies were under scrutiny.

Top executives and spokesmen at R.J. Reynolds, based in Winston-Salem, N.C., could not be reached for comment on Tuesday night. But Maroney said that the company had agreed to cooperate with investigators and had taken steps to insure that similar violations do not happen again.

Bloomberg News quoted a R.J. Reynolds lawyer, C. Stephen Heard Jr., as saying that the company "regrets this episode." According to the news service, Heard said that Northern Brands' actions were "inconsistent with the way Reynolds does business" and that Reynolds had closed Northern Brands.

The charges against Northern Brands arose from an investigation that has led to guilty pleas by more than 20 people involved in smuggling hundreds of millions of dollars worth of alcohol and cigarettes into Canada.

Court documents released during the investigation showed that R.J. Reynolds, the second-largest American cigarette maker next to the Philip Morris Cos., sponsored trips to a luxury Canadian fishing resort for several distributors who lived in upstate New York and smuggled cigarettes into Canada. One R.J. Reynolds sales manager even joked with the dealers about the smuggling, the documents said.

The smuggling took off after Canada raised taxes in the 1980s and the early 1990s to discourage cigarette consumption, one of the first countries to try this approach. The taxes did not apply to exports, and affiliates of the three biggest companies -- Philip Morris, R.J. Reynolds and BAT Industries PLC -- started shipping large amounts of Canadian brands, like Players and Export A, to the United States even though few Americans smoke them.

Maroney said that without paying either the Canadian or the American taxes, distributors then moved the cigarettes back into Canada through the St. Regis Mohawk Indian Reservation in upstate New York, with the help of some Indian leaders who also have been convicted in the case.

In Tuesday's guilty plea, R.J. Reynolds' Northern Brands unit admitted to participating in one crucial part of the scheme.

NEW YORK TIMES, (12/23/98)"RJR Subsidiary Pleads Guilty To Smuggling", Christopher Drew, p. A1

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