New Gallaher Documents Reveal Extent of Smuggling Activities

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In February 2013, some 12,000 new Gallaher documents were posted online by the Legacy Tobacco Documents Library, which were related to the bitter 3-year legal fight between Gallaher and its ex-Cypriot distributor, Tlais Enterprises [1]

In April 2008, Gallaher won in the High Court against Tlais, when it was ruled that the tobacco company had lawfully terminated its contract with Tlais due to concerns over smuggling. However, the lawsuit also highlighted Gallaher’s own complicity in tobacco smuggling. [2]

See also:

Background

“Fostering a Smuggling Environment”

The lawsuit between Gallaher and Tlais primarily concerned whether the tobacco giant had been right to cancel its contract with its distributor. However, in its defence Tlais argued that smuggling was condoned by Gallaher, as long as Tlais sold as many cigarettes as possible.

The lawsuit contended “that it was Gallaher International Limited that was responsible for fostering an environment (or permitting it to environment to exist) wherein smuggling at some stage in the distribution chain might be more likely to occur.” [3]

“Deeply suspicious”

The new documents also reveal the steps that Gallaher took to see how whether Customs - known as HMCE in those days - believed that the tobacco manufacturers were to blame for cigarette smuggling. In 2000, Gallaher’s Security Advisor hired a firm of private investigators with “excellent access to senior and middle ranking Customs officials to determine HMC&E's attitude to cigarette smuggling.”

According to the Gallaher document, the report “indicates Customs remain deeply suspicious about the role of cigarette manufacturers which continue to supply to countries where there is little or no consumer market.” [4]

A Telling Change to a Press Release

In April 2002, Customs signed a Memorandum of Understanding with Gallaher to stamp out smuggling. A draft of this press release is included in the documents and shows that Gallaher did not want to be signalled out for reducing its product in the smuggled market.

The original draft had a quote from HMRC saying:

We are pleased to have reached this Understanding with Gallaher to work together to drive down smuggling and minimise presence of Gallaher brands in the smuggled market. We hope this will set a standard which other tobacco manufacturers will want to follow.

In the Gallaher documents, the line “and minimise presence of Gallaher brands in the smuggled market” is crossed out by hand. [5]

Indeed, the subtle change that appeared in the press release from Customs said:

We are pleased to have reached this Understanding with Gallaher to work together to drive down smuggling. We hope this will set a standard which all tobacco manufacturers will want to follow in minimising their brands presence in the smuggled market.[6]

Gallaher clearly did not want to be only company who had to reduce smuggling, without the other companies following suit.

Gallaher Internal Documents

“Trading or Transit”

One presentation document discusses whether to “Trade” or “Transit”. The later term is a euphemism often used by the industry for smuggling. The document states:

To Transit: Selling close to normal market price in the expectation that the product will enter a secondary market without payment of full duties.

The document then says:

Reason to transit:

• To Enter a Closed Market; • To overcome Import Quotas; • To mitigate duties. The document then outlines the “Transit Procedures” and whether “To Transit or not”. [7]

Imperial's Smuggling Activity "Erodes Gallaher's Position in the UK"

One of the main reasons Gallaher had to export so many cigarettes was because it had to try to catch up with its main UK rival, Imperial Tobacco.

One Gallaher presentation, disclosed in the litigation, outlined the international opportunities for the company, admitting that “transit” was already part of Gallaher’s core strategy in certain countries. [8] . It noted that:

Imperial are highly aggressive in this market with 3.3 bn sales in the last year, likely to grow this year.
As a result of stagnating domestic European franchises, Russian crisis and UK decline, Gallaher have significant additional production capacity.
Imperial transit activity further erodes our domestic position in UK.

The document also let slip that smuggling was a core part of the company’s business: “Additionally, some markets have already exploited transit options (Greece) or have -transit as a core part of their strategy (China) ... As a result, these divisions will be closely involved in developing this business in their areas”.

The document finished by saying: “Sell lots of cigarettes”.

The Namelex Documents

“Spotted Cigarettes” a “Concern”

In the late nineties, Gallaher’s original distributor in Cyprus, Namelex, which was their sole distributor for selling cigarettes outside Europe, started receiving mouldy cigarettes –which are called “spotted” cigarettes in the documents - from Gallaher, causing problems for distributors. Gallaher admitted that this was a “concern”. [9]

“We Have No Concerns About Sales Namelex”

By 2000, Gallaher had been dealing with Namelex for a couple of years and were now supplying in excess of a billion cigarettes a year to the distributor. Between 1999 and 2001, around 3 billion cigarettes were sent to Namelex, with the most exported in 2000. [10]

By the end of that year, Customs were concerned about the amount of product they were seizing from Namelex. In a meeting with Customs, Jeff Jeffery, Gallaher’s PR person, issued a blasé response to their concerns, including saying that the tobacco company “have no concerns about sales to Namelex.”

Gallaher used the results of its own pack swap survey to argue “there was very little of the stock sold to Namelex that was eventually smuggled into UK.” And when asked "Does Gallaher ask Namelex who it trades with", Jeffery replied “that Namelex was the sole distributor in the non-EU markets for these brands and, therefore, this was not an issue.” [11]

Customs Issue Red Card Against Namelex

In October 2001, less than a year after Gallaher said it had “no concerns” over Namelex, the distributor was “red carded” by Customs. The law enforcement agency had developed a “red” and “yellow” card system, where a yellow card was a warning if smuggling was getting worse. But where it was deemed to be out of control, a red card would be issued, forcing the tobacco companies to stop selling to that distributor. [12]

Customs Seizing “Significant Quantities” of Our Cigarettes

Hundreds of millions of cigarettes supplied to Namelex were later smuggled back to the UK. One Gallaher Group “Risk Assurance” document in the summer of 2002 noted that:

HM Customs and European Customs continue to seize significant quantities of our product. Over 25m were seized in July, most were Sovereign Classic exported to Cyprus prior to the new distribution arrangements. In addition there was also some LD made Sovereign Classic. LD Moscow has now de-listed this brand to forestall smuggling out of Russia [13]

By December that year, Gallaher had had to respond to Customs over some 200 seizures of Gallaher product. The documents note that “most relate to the previous Namelex distributor and the new TIais contract.”[14]

In further correspondence in 2003, it is revealed that 360 million cigarettes supplied to Namelex had been seized by Customs. [15]

Tlais Documents

The Tax Haven Distributors

Gallaher was also prepared to deal with distributors based out of tax havens. One such company was called Sunfox, in the British Virgin Isles. By February 2002, Gallaher was asking Tlais to not supply Sunfox[16], but carried on supplying the distributor itself. In July, Gallaher’s subsidiary Liggett Ducat produced 1.8 billion Sovereign cigarettes for Sunfox to sell in Latvian duty free. [17]

Also that year, Gallaher sent 50 million cigarettes to Sunfox from its Ukraine factory for distribution in Latvia.[18] A proportion of these cigarettes would later be seized by UK Customs. [19]

In August 2002, Sunfox was mentioned at a meeting between the tobacco company and Customs. [20] The following month it was listed by Customs as being of “serious concern” [21]

A year later, in August 2003, it was revealed that Gallaher had sold a further 48 million cigarettes to Sunfox, which were “old stock” which Gallaher had supplied to another smuggler from 2000. [22] Therefore they were likely to be mouldy and spotted and therefore more likely to be smuggled.

That month, Gallaher wrote to Customs that “Gallaher will not in future supply directly, or knowingly supply indirectly, to Sunfox Inc either from Russia, Kazakhstan Ukraine, the UK or any other route.”

In 2003, some of the cigarettes were seized by British Customs entering the UK.[23]

More Mouldy Cigarettes

When Tlais Enterprises took over the distributorship from Namelex in March 2002, the distributor also experienced problems with mouldy cigarettes. Some of this “deteriorated product” was deemed suitable for sale by Gallaher in non-core markets, increasing the risk it would be smuggled. One document noted:

Goods coded (J) or before are not suitable for sale in the Iranian market due to some deterioration of the product, these goods are, however suitable for sale in non-core markets and it is important to identify the quantity as soon as possible. [24]

It goes without saying that deteriorated product, sold at cheaper prices, would be more likely to be smuggled.

Gallaher Selling to Banned Companies

In June 2004, Tlais wrote to Nigel Northridge, the CEO of Gallaher. In the letter he alleged: ::You are aware of other specific problems involving Gallaher staff who were encouraging the smuggling of the brand and making sales behind my back to my own customer and to individuals who were fronting for people who were on the Customs black list.[25]

The Customs “Black List” was companies that the UK companies were banned from supplying due to involvement in smuggling.

“We have a Smuggling Issue”

Johannes Lumesberger from Gallaher’s subsidiary Austria Tobak wrote to two of the company’s top officials, Tom Keevil and Nigel Espin in 2004, after Sovereign Classic had been seized in Athens. “Now it seems that we have a smuggling issue”, he wrote. [26]

Hundreds of Millions of Gallaher Genuine Cigarettes Being Seized

Another Gallaher document, dated November 2004, showed just how large Gallaher’s smuggling problem had become, and listed the amount of genuine Gallaher cigarettes that had been seized. Although the timescale of the seizures is ambiguous it reveals the extent of smuggling.

• Worldwide over 134 million Dorchester and 68 million Sovereign had been seized. • UK it was 35 million Dorchester and 32 million Sovereign.

According to Customs, they seize about 10 per cent of what is smuggled, [27], so this suggests billions of Gallaher’s cigarettes were being smuggled worldwide.

Countries where its genuine products had been seized included Spain, the UK, France, Latvia, Belgium, Greece, Ireland, Cyprus, Poland, The Netherlands, Sweden, Portugal, Malta, Austria, Italy and Germany.[28]

Gallaher’s Sovereign is Top Smuggled Brand

In a letter in June 2004, Mike Wells from the Policy Department at Customs wrote to Gallaher concerning the fact that Gallaher’s brand, Sovereign was for the second year running the top brand of cigarette being seized by Customs:

At our meeting Terry was able to confirm that the Sovereign brand has in 2003/04, for the second year running, been the predominant genuine brand seized by Customs. We had previously raised concerns with you about this position at our meeting in March and in particular about the large proportion of Sovereign seizures originating from supplies made to Tlais Enterprises Limited.[29]

Sovereign Accounts for 2/3 of Seizures

A further letter from Mike Wells outlined the scale of the problem:

Gallaher's Sovereign brand accounted for 58% of cigarettes seized that were genuine. In addition, another Gallaher brand, Dorchester, accounted for a further 19% of these seizures. From the information given by you, a significant proportion of these seizures arose from product supplied to Tlais Enterprises Limited (TEL).[30]

In June, Gallaher’s chief lawyer, Tom Keevil wrote to Tlais saying that:

Between January 2004 and April 2004 the trend had worsened, with Sovereign accounting for 65% of all genuine seizures, with other brand seizures in aggregate only accounting for 35%.

By now Gallaher was under serious pressure from Customs to act:

Unless we take radical action immediately there is a real prospect that our trading relationship with TEL will become the subject of official regulatory intervention or prohibition and/or political process with consequent restrictions on our ability to trade.[31]

Gallaher’s own documents reveal 120 different incidences of Gallaher product that was shipped to Tlais being seized that year.

Smuggling so Bad, Gallaher told to take action

By January 2005, the smuggling had reached such epidemic levels that Gallaher wrote to Tlais:

You should be aware that in the light of the on-going serious smuggling problems relating to supplies of both Sovereign and Dorchester provided to TEL, we have now received a letter from HM Customs requiring us to take action in respect of our business relationship with TEL. [32]

Two months later, under pressure from Customs, Gallaher terminated its distribution agreement with Tlais and commenced court proceedings against the distributor.[33]

Legal Action

On 1 July 2005, TEL's lawyers filed a counterclaim with the court. Nearly three years later Gallaher won its case against Tlais.[34]

Notes

  1. Legacy Tobacco Documents Library, Gallaher Collection
  2. Michael Gillard & Andrew Rowell, "Court case smokes out Gallaher", The Sunday Times, 27 April 2008, Business section, p11
  3. Rosenblatts Solicitors, Gallaher International Limited -v- Tlais Enterprises Limited Case Management Conference, 11 October 2005
  4. PRG Redshaw, Letter to Nigel Simon regarding HMC&E attitudes to the industry, 13 January 2000
  5. Draft Press Notice, Undated
  6. HMRC, Gallaher – First Tobacco Manufacturer to Sign Memorandum, 23 April 2002
  7. Gallaher, Trading and Transit
  8. Gallaher, International Trading - opportunities for Gallaher, undated
  9. Gallaher, New Business Development
  10. Norman Jack, Email to Jeff Jeffery regarding the value for Sovereign Classic sold to Namelex, CT and associated companies, 21 May 2003
  11. Gallaher, JJ's recollection of meeting with HMC&E at Weybridge on 20001205, 16 December 2000
  12. Duncan McCallum, Letter to Jeff Jeffery, 1 October 2001
  13. Stephen Perks, Revised Ac Papers, Letter to Mark Rolfe, 21 August 2002
  14. Gallaher Group, Minutes of an Audit Committee Meeting held at Weybridge at 9.00am on Thursday 12 December 2002
  15. Mike Wells, Letter to Jeff Jeffery, 12 May 2003
  16. Norman Jack, Letter to P Tlais and Abu Hameed regarding productive set of meeting, 28 February, 2002
  17. Sue Fordham, Email to Nigel Espin, Carol Martin, Robert Vaudrey, Victory Bonsu regarding request for Information, 14 July 2004
  18. Gallaher, Sovereign sales/export volumes in CIS for 2002-sticks, Undated
  19. Norman Jack, Letter to Lee Flannagan regarding a witness statement and copy of the spreadsheet relating to seizure, 1 December, 2004
  20. Duncan McCallum, Email to Julia Kershaw regarding the matters to be discussed during the meeting on Friday, 15 August 2002
  21. Jeff Jeffery, Memo regarding Companies and individuals to whom Gallaher will not sell its products, 6 September 2002
  22. Jeff Jeffery, Letter to Duncan McCallum regarding partnership meeting held at Weybridge, 19 August, 2002
  23. Nigel Espin, Letter to Alan Evans regarding witness statement, 2 February 2004
  24. Gallaher, Letter to P. Tlais, 12 June 2003
  25. P. Tlais, Letter to Nigel Northridge regarding the withdrawal of Sovereign from the portfolio, 16 June 2004
  26. Johannes Lumesberger, WG: Sovereign Classic- Athens, Email to Tom Keevil and Nigel Espin, 15 September 2004
  27. Fran Abrams & Andy Rowell, "It Just Fell Off the Back off the Back of a White Van", The Independent on Sunday, 24 September 2000
  28. Gallaher, Note on Anti-Counterfeit and Anti-Smuggling, November 2004
  29. Mike Wells, Letter to Tom Keevil regarding Sovereign brand cigarette, 18 June 2004
  30. Wing Edmundson, Letter to Jeff Jeffery regarding letter from Mike Wells, 23 December 2004
  31. Tom Keevil, Letter from Tom Keevil to P Tlais and Abu Hameed regarding the serious concerns on HM customs and Excise (HMCE), 8 June 2004
  32. Tom Keevil,Letter to Abu Hameed regarding difficulties existing in ongoing business relationships, 11 January 2005
  33. Jeff Jeffery, Letter to Nigel Simon regarding Tlais court proceedings response, 18 October 2005
  34. Michael Gillard and Andrew Rowell, “Court case smokes out Gallaher”, Sunday Times, 27 April 2008, p11