WEDNESDAY 16 FEBRUARY 2000

MR M BROUGHTON, MR K CLARKE, MR C BATES and MR D CAMPBELL

  1360. Could you describe the cigarettes?
  (Mr Campbell) They are Belmont cigarettes, a BAT brand in the region. They are marked "extra suave", on the side they say "Duty free in Venezuela", in other words the duty is not paid. They have in gold the emblem of British American Tobacco on them. These were purchased and they were filmed being purchased in the "sanandresitos", black markets, of Bogota Colombia just three weeks ago. That of course takes me to one of the points which you raised, and it is a very serious point, and that is the manner in which the activities of British American Tobacco have supported narcotics trafficking. This is not done deliberately but it is done knowingly according to the evidence in the files. First of all, you simply cannot be a marketing person, as for example Mr Keith Dunt the finance officer was, in Latin America in 1992 onwards without being aware as everyone in this room must be aware that the primary source of crack and cocaine into the North American and West European markets is Colombia. Because of the measures introduced in the United States in 1989, particularly the clampdown in Panama which was previously a major transit route, it became much more difficult for traders in the cartel to repatriate American dollars raised by the sale of narcotics in the United States and in Europe. The method they adopted to return value to the country was primarily to smuggle cigarettes; not only cigarettes, also a small amount of liquor, some high value goods, but the best, easiest, simplest method is cigarettes. BAT were not alone in supporting this, but they supported it assiduously, they supported it deliberately and since their papers show that they were aware of the distinctions between clean and dirty narco-currency within the people they dealt with in Aruba I have to conclude that there is a case to answer at least and substantial evidence simply from their own papers that they must have been aware that they were contributing in this major way to the money laundering support activity of cocaine trafficking out of Colombia.

  1361. You have substantiated a number of points I was asking you to. At this point it would be helpful to put these points to Mr Broughton and Mr Clarke and ask what their response is to the allegations Mr Campbell is making.
  (Mr Broughton) Let us make a general point first that an assumption seems to be being made by Mr Campbell that knowledge of what happens in a market is a criminal offence. I would say to you that we do understand pretty well what happens in various markets. We do analyses of markets, we study what happens to different brands in different markets, our own brands, competitor brands. You would expect that of a consumer goods company like British American Tobacco. So knowing what happens in a market, knowing that a market exists and there are some duty paid and indeed some smuggled goods in there is hardly a surprise. The Government authorities know it and indeed we often bring it to the attention of the Government authorities. We need to start with a position that knowledge of what is happening in a market is not, as far as I have understood, a criminal offence. First thing. Second, we need to understand a little bit about how markets operate, distribution systems. Different markets operate in different ways. In some markets, Brazil would be an example, British American Tobacco's trading company in Brazil, Souza Cruz, distributes directly to over 200,000 retail outlets. It is a direct distribution system. In other markets there are distributors; some of those are exclusive distributors and some of them are not exclusive distributors. Exclusive distributors would either be somebody who solely sells British American Tobacco group cigarettes or could be somebody who sells a whole range of goods, liquor, confectionary, etcetera, and cigarettes, but only British American Tobacco cigarettes in terms of that part of his deal. So he may be exclusive in either sense, solely cigarettes or a bigger trader, or they may be general wholesalers who trade, distribute stocks from each party. The process in each country of getting goods from the manufacturer to the primary distributers, through sometimes wholesalers, sometimes direct to retailers, usually a mix, is a very complex position, as it is with most fast moving consumables. There is nothing particularly unique here. You need to understand that there are lots of levels in the distribution chain in lots of different countries and in other countries there are not. It is not just one simple thing. Let us just go through the terminology which Mr Campbell uses. As he said, we do use the term "smuggled", we do use the term "contraband" because we can do an analysis of the market and some goods are sometimes smuggled into markets; they may be ours, they may be somebody else's. If they are smuggled, they are smuggled, we use the term "smuggled". We do also use the terms "DNP", "general trade", "transit". Contrary to what Mr Campbell says, they are not specifically euphemisms for "smuggled". That is not to say that there are not times where DNP would be the same as smuggled in one market.

  1362. Can you be specific about this? If it is not smuggled, if it is not duty not paid, what is it? What does it mean?
  (Mr Broughton) It means goods in any one market on which duty has not been paid. That could include duty free. If you take Colombia for example, goods sold by anybody into the duty free zone in Colombia have not paid duty. They are not smuggled, they are DNP.

  1363. So basically Mr Campbell and Mr Bates are making wrong assumptions on the use of words within your documents.
  (Mr Broughton) Yes. They have made assumptions that every time you see the letters DNP it is a euphemism for smuggling. What I am saying to you is that you will find documents where it will talk about DP and DNP and in that particular market the whole of the DNP may be smuggled goods. You will find other markets where DNP may not include any smuggled goods. I think you should also understand that not only DNP goods are smuggled; duty paid goods are smuggled. If you take for example cigarettes sold from the UK to France, duty is paid in France and then they are smuggled back into the UK. That is the duty paid cigarette. It is not a DNP, it is a duty paid cigarette. What I am trying to say to you is that all of those terms—general trade is another one—it is fair to say that most of the goods which end up being smuggled would form part of DNP. In other words there is much more DNP smuggled than duty paid smuggled, but they are not simple euphemisms. "General trade", exactly the same, it is not a simple euphemism.

  1364. To be clear, and obviously we will bring in Mr Campbell and Mr Bates again in due course, you are refuting entirely the very serious allegations which Mr Campbell has made a few moments ago in respect of BAT; entirely.
  (Mr Broughton) Yes. He is making lots of suggestions but the two he has covered so far are basically that we manage smuggling and that we are involved in some form of money laundering.

  1365. You reject that completely.
  (Mr Broughton) I refute those two completely.

  1366. May I come back to Mr Clarke? May I put a question to you, Mr Clarke, going back to your earlier intervention? I appreciate you are a lawyer and I am not lawyer and you understand the laws of privilege in much more detail than I do. Going back to your original point, much of what Mr Campbell said earlier on is on the record in The Guardian article and certainly in respect of Channel Four News. Has BAT acted in terms of legal action against The Guardian on the information which was produced early on, two or three weeks ago?
  (Mr Clarke) No.

  1367. It has not.
  (Mr Clarke) No; we did not threaten legal action, we did not contemplate legal action, there has been no question of legal action.

  1368. You have not taken legal action.
  (Mr Clarke) No, because he has not made any of the allegations of criminal conduct against individuals which he has made in documents to this Committee in The Guardian.

  1369. With respect, these allegations are pretty serious allegations.
  (Mr Clarke) Yes, but he has not actually got on to any of them yet so far. He is making these general allegations about trade in Colombia. May I make two points on that because I have been listening to Mr Campbell, because obviously I am as concerned as the Committee to see whether he has anything to substantiate these allegations which he is making. It seems to me, listening carefully to what he said, that what he said was cigarettes are smuggled into Colombia and you can buy smuggled cigarettes in Colombia. With the greatest respect, he has not so far produced anything which takes us beyond that. If we can discover what the issues are here: cigarettes are smuggled, so is whisky, so is beer, so is perfume, so are cars, so are watches, so are cameras, lots of consumer goods are smuggled; I might say in past years particularly in Colombia, but I shall come back to that in a moment. What he has not produced is any evidence to say that BAT is the originator, the organiser, a participant in that smuggling because, as Mr Broughton explained, we sell in some countries to wholesalers; some who deal only in cigarettes, some who deal in a whole lot of other things. In the case of the particular market he is talking about, he is talking about Aruba, a duty free island in the Dutch Antilles, where smuggling is a problem. We only sell, in that market as in others where we do not have our own distribution network, to wholesalers who are licensed. We only sell to wholesalers who pay the duty, not necessarily in Aruba because it is a duty free zone, the duty to the Government where they are. Of the people who want to sell our products we accept about one per cent because we do not just let anybody wander in and start buying our products. We are the victims of the smuggling when by some channel beyond our control our products go into the smuggled market. We suffer as a result of the smuggling. We have our own distribution network, it is damaged by it, we lose control over our product and it is one thing to say that our products are smuggled, but there is no evidence at all which I have ever seen to suggest that BAT is participating in this smuggling. We seek to minimise it and avoid it. The other thing in these markets is that I can help a bit on Colombia because I have been to Colombia—not with BAT, long before I had anything to do with BAT. I went there as Home Secretary when we were dealing with the drug traffic and we were dealing with money laundering which we were trying to cooperate with the Colombian Government to reduce. That was the Government's interest so I have seen a little of conditions in Colombia and taken part in trying to work with the Americans, and I am sure the present Government still does, in trying to cut down money laundering in that part of the world. The problem in Colombia—I do not think it is true today because we have acted with the present Colombian Government—is that it is one of those countries where smuggling is prevalent, where the authorities have no control over parts of the territory. There has been suspicion in the past that the authorities include people who are collusive with the smuggling. Some of that is because there were dishonest people in the past in the administration, some of it is for social reasons, because the only source of wellbeing and income for large communities is smuggling. The result is that people like BAT, Philip Morris, people who make Scotch whisky, anybody who wants anything in Colombia, will find their goods are being carted about by smugglers. We prefer not to do it. A brief story going back to when I was Home Secretary. I had crossed the Venezuelan/Colombian border by road; it was quite attractive. I went through a strict customs point where there were queues of pantechnicon lorries being checked by the authorities and stopped on the bridge to look over the river, which constituted the border. Two hundred yards away, in full sight of the customs officers and myself, an endless stream of people was crossing the river carrying large cartons on their heads. I do not know what they were, I have no idea, they were probably every good known to man. There were warehouses on the Venezuelan side, warehouses on the Colombian side and most of the local population who were able-bodied were actively engaged carrying things over the river with the customs officers plainly doing nothing about it. I suspect the reason is that the mainstream of the local economy is smuggling, has been smuggling for 200 years. If you stop that kind of smuggling you have poverty stricken people in the town, on either side. When the exchange rate changes the flow goes the other way. I am sure the authorities would like to stop it but when I was there they were plainly colluding in it and the only thing which restricted the quantity was that you could not get it over in a truck but had to carry it with a porter if you wanted to smuggle it. No doubt there were BAT cigarettes in that, but the idea that BAT was knowingly supplying that channel, with the greatest respect, is nonsense. We have since acted with the Colombian Government and we have acted to try to regularise the trade because we want to. As a result of our cooperation with the Colombian Government we think smuggling in Colombia is now down to 10 per cent of the total Colombian market. That is lower than this country. In this country over 25 per cent of cigarettes sold in this country are smuggled. I have no doubt they include British American Tobacco cigarettes, not because we have anything to do with organising it, but because the difference between the tax in this country and France is so enormous that it is more profitable for people to smuggle tobacco than it is to smuggle cannabis. That is the Government's fault, not ours and we would act with the British Government if they were prepared to try to stop it.

  1370. The essence of what you have said is that Mr Campbell has not in any way substantiated the very serious allegations.
  (Mr Clarke) No.

  1371. Right.
  (Mr Clarke) You can buy smuggled Belmont on the streets of Colombia but BAT have not put them there.

  1372. Let me get back to my question which you partly answered but not fully. Are you, BAT, taking legal action against The Guardian or Channel Four News over what was in those articles and the coverage they gave to your company and the allegations concerning smuggling a couple of weeks ago? You are not. Are you or are you not?
  (Mr Clarke) No, of course we are not, it gives them credibility. It is no good having investigative journalists making assertions of this kind unsupported by any evidence of any kind. It is far more straightforward to do what I did, which was to put an article in The Guardian saying these were unsubstantiated inferences and a misunderstanding of the situation. Because a company's products are smuggled, it does not mean the producers are smugglers. If you had any of the whisky distillers here, they would tell you the same, if you had any of the car manufacturers here they would tell you the same. It is frankly, unless Mr Campbell can take it any further, quite unfounded to suggest that the company whose products are being smuggled is organising the smuggling. We do not and we would not and we would stop any of our employees doing it.

  1373. Let me just be clear. You are not taking action against either Channel Four News or The Guardian. That is an important point. Mr Campbell, can you briefly follow up the point which has just been made that you have not in any way substantiated the serious allegations which you have made?
  (Mr Campbell) On the contrary, the documents which are already before the Committee, are cited by Mr Bates and referred to by myself, fully substantiate these allegations. All that I can say to Mr Clarke is that there is none so blind as those who will not see. Has he yet read Mr Bates's paper? Perhaps you will ask him that later. Has he weighed and considered these documents? I know as a careful lawyer he will want to look at them in their context and he is right to do so. We looked at all of these documents in their context. We are also conscious of the way you approach evidence and therefore I absolutely agree with Mr Broughton that you must search and we did search to see whether the words "transit", "DNP" bore any alternative meaning. We could find no document which suggested at any place on its face or by implication that these terms meant anything other than illegal. On the contrary we found copious documents comparing the use of transit products with legal products in the context of BAT. I should welcome it, through you Mr Chairman, if Mr Broughton were to refer me to perhaps a single page in BAT's documents which sets out the meaning of DNP as embracing legal markets also.
  (Mr Broughton) May I say that he makes it sound as though it is only a BAT term?
  (Mr Campbell) I agree with that.
  (Mr Broughton) Hong Kong Duty Not Paid is a requirement for duty free—

  1374. We understand the point. We understand that it is a general term which is used.
  (Mr Campbell) I entirely concede Mr Broughton's point that other companies use DNP to mean smuggling also; that is not an issue at all.
  (Mr Broughton) That is an absurd allegation. If you take as an example Hong Kong law, it requires that the duty free product has HKDNP written on the side. That is a legal requirement in Hong Kong: HKDNP. It means duty free, on sale duty free in Hong Kong. That is just one specific example.
  (Mr Campbell) The distinction between knowledge and intent is a correct one and I endorse it. Our views do not rest on merely having knowledge of smuggled markets but the intent is there. The intent is spelled out in plans to introduce new products through smuggling channels and I will refer, merely for the sake of brevity, and Mr Clarke should have a look at the following code named projects of BAT all of which concern plans conceived of with the future intent of creating smuggling of their products: project JACKO, project KNOTFRASS, project AJAX, project MARBLE. We have examined the files of all of these projects in full. They show without an iota of doubt that these were projects conceived in advance and planned to bring certain BAT cigarette brands by means of smuggling into markets in South America and they say so. I do agree that it is not disclosed in the documents that British American Tobacco itself and through its direct employees ever carries the products illegally across borders. It employs agents with whom it has very close relationships, the agents distribute to the smugglers, either directly or indirectly, the smugglers take them across the borders, in the borders they are taken by wholesalers to retailers and then in the end-market British American Tobacco and its country teams go in, manage, study, report on and, to use one of the words in their documents, incentivise those end markets. They have not merely the knowledge, they have the intent, they put that intent into effect and they derive financial benefit from doing so and those things are fully set out in their documents.

  1375. May I go back to Mr Clarke? In your article in The Guardian you indicated that there is a demand for your brand of cigarettes and if the demand is not met then people will switch to other brands. You clearly went on, that therefore your brands, through legal means, did appear side by side in the illegal market with your competitors' brands. You referred to the situation of the Colombia/Venezuela border. You have also indicated that the proportion of smuggling cigarettes in this country is probably now higher than that in Colombia.
  (Mr Clarke) We are very confident.

  1376. Would you agree that the Customs and Excise in the UK could not be described in the way that you describe the Venezuelan/Colombian customs and excise officers while people are daily walking past them?
  (Mr Clarke) If I may explain, as I hope I made clear, the anecdote referred to visits made in about 1992-93 when the proportion of smuggled products in the Colombian market was, I assume, very much higher. What has happened is that Colombia is one of those governments with whom we have managed to reach an agreement, as was said, that steps can be taken to cut this down. The present Colombian Government is actively concerned to cut down the level of smuggling, not least for the very good reason, as Duncan Campbell has said, that it is all wrapped up with the money laundering of the drugs trade. So the present Colombian Government is making considerable efforts. Now, in the last year, 1999, as far as we are aware at the moment, it appears to us that about 10 per cent of the Colombian market is smuggled. The United Kingdom has gone in the reverse direction and the amount of smuggled product in this country has been soaring, particularly in the last two years. I think the Government agree that the percentage of the market in this country is 25 per cent or more which is being smuggled. The cause of that is the growing disparity between the price here and the price in France. The price in other parts of the continent is the origin of all smuggling and there is no doubt because the smuggling is building up because people are getting used to it. Again going back to my time in Government, what has happened is that as tobacco smuggling has got more and more profitable more and more organised gangs have moved in to tobacco smuggling in this country. I am sure that most members of the Committee know perfectly well that we have a problem with smuggling in this country. Actually as it happens as a proportion of our market we now have a bigger problem than the Colombians do.

  1377. A proportion of your product which you say you are selling through legitimate markets is finding itself on the illegal market in this country.
  (Mr Clarke) Yes.

  1378. You make the point that unless it does you will lose out to your competitors. It is not just a point about BAT it is about all tobacco manufacturers. Can you explain how goods which you sell legitimately through the legal processes with all the controls and duty paid find—
  (Mr Clarke) May I give a simple example? Mr Broughton knows more obviously as the executive and has a greater and longer knowledge of the mechanics than I. I give a simple example. If you buy retail cigarettes in France you can make an awful lot of money by smuggling them into the United Kingdom. It is a very, very profitable trade if you can get them over an unmanned border. I think we all know that people do. You cannot say that the cigarette company which has at some stage distributed cigarettes which have got into the market in France is party to the smuggling, otherwise you would need to have the Scotch whisky distillers here, you would need to have the brewers. If you go to these warehouses in France where you can buy all this stuff, the beer is British, the whisky comes from Scotland which is being purchased there. You can go to a duty-free shop just straightforwardly or buy duty paid and there is a huge profit so long as you smuggle it to the United Kingdom and distillers and Diageo and ourselves are not parties to that smuggling.

  1379. But you could not say to which wholesaler or where your product was sold which finds itself on the illegal market in this country.
  (Mr Broughton) In this particular case, we could not say which specific one. We just sell to the Tescos and the Carrefours.