Gallaher Versus its Cypriot Distributor

From TobaccoTactics
Share/Save/Bookmark
Jump to: navigation, search

Gallaher Versus Tlais Enterprises

See also:

Facilitation and "Permitting" of Smuggling

Between 2005 and 2008, a bruising legal battle fought by Gallaher exposed its own facilitation of tobacco smuggling. More than 20,000 internal documents were disclosed in the course of litigation between Gallaher and its former Cypriot distributor, Tlais Enterprises.

A subsequent investigation by The Sunday Times [1] [2] [3] revealed that many of these internal documents "raise serious questions about Gallaher's own complicity in facilitating worldwide smuggling, sanctions busting in Iraq and the dumping of sub-standard cigarettes in Africa and Afghanistan".

A witness statement by a former Gallaher director Norman Jack contended that "Gallaher's board operated a policy of 'willful blindness' while instructing him to sell billions of cigarettes, a substantial proportion of which ended up being illegally diverted back into the European Union," according to the Sunday Times.

"We are Not Seeking to Build Brands"

Norman Jack was the director Gallaher appointed to implement a new and undeclared "trading policy", which was laid out in a memo written by then chief executive Peter Wilson to his senior managers in May 1999. It said: "As a consequence of the disruption to our business in Russia we should be seeking alternative sources of business in the short term in order to provide some compensation and to maintain throughput in our factories". [4]

In a reflection of the policy to just export cigarettes rather than build market share in host countries, the memo went on to state: "The essence of trading business is that we are not seeking to build brands." [5]

Such was the mass export of Gallaher brands, predominantly Sovereign and Dorchester, to markets where there was little or no known consumption of them, that by 2004, three-quarters of all genuine British cigarettes seized coming into the UK were rerouted Gallaher brands.

In his ruling, Mr Justice Clarke described Gallaher's approach as irresponsible and carried out "in the knowledge that a substantial proportion would end up being smuggled". Clarke's judgement also blamed Gallaher for the increase in smuggling. [6]

No Due Diligence

The judgement repeated the accusation that the company did not carry out "detailed due diligence" of its supply chain. The Sunday Times alleged that:

Jack said Gallaher tried to ring-fence senior management from possible prosecution. 'I told Peter Wilson that once we started to go down this road we would not be able to just stop. Gallaher could not bear to be behind (British rival) Imperial (Tobacco) in the stock market. (They) checked with outside barristers what their position was and were told, 'If you don't ask you don't know what the answer is'...They adopted a policy of willful blindness, and I'm being charitable when I say that.'[3]

In one statement, seen by the paper, Jack claims he was advised not to leave a paper trail, not to ask searching questions about shipments, or to attend meetings where this was discussed:

We were all aware that we were embarking on business that was potentially extremely risky...By following this course we could never be accused of conspiring to smuggle as no meeting had taken place and it was always possible to deny knowledge of everything and blame the distributor. [3]

According to the Sunday Times:

Jack's evidence and disclosed internal documents suggest that behind the corporate veil it was business as usual [in the late nineties]: Gallaher continued volume selling its cigarettes, indifferent to the smuggling risks.

The company was even accused of going to elaborate lengths to facilitate smuggling. Another example was from a document, dated 16 May 2003, where Gallaher wrote to a South African distributor which Customs had warned eight months earlier was a major smuggler into the UK. The documents revealed that, rather than pressing the distributor to stop smuggling, Gallaher advised it simply to form "a new company" to receive further cigarette shipments from the UK. Under cross-examination during the trial, Tom Keevil, then Gallaher's general counsel, described the matter as a "dog's dinner".

Other allegations concerning Gallaher, contained in separate legal documents submitted to a Cypriot court, that were reported in the Sunday Times, accused the tobacco company of "colluding with Customs to mislead parliament about alleged complicity in tobacco smuggling".[2] Gallaher and British Customs denied the charges.

Sanctions Busting

Saddam Hussein

The legal case also uncovered evidence that Gallaher had facilitated the smuggling of cigarettes into Iraq, despite United Nations sanctions. The UN sanctions against Iraq had been in place since the conclusion of the first Gulf war in 1991, and were lifted only after the US invasion in March 2003.

However, disclosed documents show that in 2000 Gallaher manufactured to order 44 million cigarettes with the unique Iraqi health warning on the packet. These were sold to several distributors who moved them into Iraq through Turkey and Jordan.

Tlais Enterprises also alleged that there was a meeting between a senior Gallaher executive and Uday Hussein, Saddam Hussein's son and that the meeting was to follow up on the supply of cigarettes to Iraq despite United Nations sanctions. Gallaher said in a statement at the time that any "imports were made without (its) knowledge or consent" and it had "no convincing evidence" that its executives were involved. [7]

Nevertheless, at the High Court, senior Gallaher management admitted that between 2004 and 2007 the company had made four declarations to Customs under the Proceeds of Crime Act. The Sunday Times[3] wrote that: "These letters are understood to notify Customs of the possibility that Gallaher had traded on illegal profits from Iraq. One of the declarations was from the law firm representing Japan Tobacco, which sent it while carrying out due diligence during its acquisition of Gallaher."

In a statement made after the hearings, Jack said:

I feel I have been set up by Gallaher to take the blame for the actions of others ... My conduct was at all times consistent with company policy and the advice and instructions I received (from board members).

Tlais Enterprises even sent Japan Tobacco International what it called "a buyer beware notice" before the acquisition of Gallaher was agreed, warning the Japanese that there might be issues of due diligence that they should be aware of. [3]

Dealing with Hezbollah

Hezbollah

Documents lodged at the High Court in the acrimonious legal battle between Gallaher and Tlais Enterprises also accused the tobacco giant of agreeing to "enlist" the services of a militant Islamic group, Hezbollah. [7]

Tlais claimed that the firm agreed to an approach to Hezbollah to recoup taxes of £1 million that it had paid to the Iranian government, which funds the organisation. If successful, Hezbollah was allegedly promised a "success fee" of up to £287,000. Tlais Enterprises stated in its High Court claim: "Gallaher enlisted the services of a Middle Eastern group (that is proscribed in the US) to negotiate on its behalf, in an attempt to recover the duty." Gallaher subsequently "denied categorically" that it had entered into any arrangement with Hezbollah, and in any way the duty was not recovered this way.[7]

"Spotted and Stained" Cigarettes

Another issue that arose during the court case was the repeated problem of spotted and stained cigarettes, which is a by-product of cigarettes being kept in high temperature / humid conditions. [8]

Relevant TobaccoTactics Resources

  • This page is part of the historical section of Tobacco Smuggling, which also includes:

Notes

  1. Holy Watt and Robert Winnett, "Tobacco giant 'aided smuggling of cigarettes'", The Sunday Times], 4 December 2005, p10
  2. 2.0 2.1 Michael Gillard and Andrew Rowell, "Gallaher 'smuggling' claim", The Sunday Times, 14 January, 2007, Business, p3
  3. 3.0 3.1 3.2 3.3 3.4 Michael Gillard and Andrew Rowell, "Court Case Smokes out Gallaher", Sunday Times, Business, 27 April 2008, p11
  4. Peter Wilson, Memo to Nigel Simon, 14 May 1999
  5. Peter Wilson, Trading Business - Gallaher Policy, 14 May 1999
  6. Mr Justice Christopher Clarke, Between: Gallaher International and Tlais Enterprises and Between Gallaher International Limited and Ptolomoes Tlais, In the High Court of Justice, 18 April 2008
  7. 7.0 7.1 7.2 Jonathan Calvert, Michael Gillard, Andrew Rowell, Robert Winnett and Holly Watt, "Tobacco giant accused of Hezbollah deal", The Sunday Times, 26 February, 2006, p10
  8. Mr Justice Christopher Clarke, Between: Gallaher International and Tlais Enterprises and Between Gallaher International Limited and Ptolomoes Tlais, In the High Court of Justice, 18 April 2008