Select Committee on Health Minutes of Evidence

Examination of witnesses (Questions 1460 - 1479)



  1460. No, I appreciate that; I understand that perfectly well and the reasons for it. The Chancellor nevertheless is not simply a lone wolf. You have very individual responsibilities in relation to the budget but general strategy and strategic thinking you must at some stages discuss. But you were not successful in persuading—
  (Mr Clarke) I am sure I discussed it with the Prime Minister because Chancellors do discuss it with the Prime Minister and sharing the problem. I will not go into the politics of my budget, though I am quite prepared to do so, but if you remember the background to my budgets they were quite tight budgets, unlike my successor at the moment. I was dealing with a large fiscal deficit which I was getting under control and there were one or two unpopular tax measures in my budgets usually which were quite unpopular with my own colleagues and very unpopular with the other side of the House. In that context it was particularly difficult to suddenly start telling people that I wanted to put VAT on domestic fuel but I was no longer going to raise tax on tobacco. I think at that time you would not have been the only member of your party to have reacted somewhat vigorously to that, particularly as away from the responsibilities of office the arguments of ASH are very tempting, until you actually get face to face with the problem that you are causing smuggling. I hope the present Chancellor shares my doubts, though he shows no signs of it. I really do think he ought to address it. I have not read the Treasury Select Committee report as I have just been handed it, but I hope they have been handed it as well.

  1461. So you really pin the responsibility onto governments which does seem a novel approach. I would pin the responsibility for crime onto the criminals.
  (Mr Clarke) That is true of course. The Government is no more organising or encouraging smuggling, the British Government does not want to encourage smuggling of course that would be an absurd argument, neither does British American Tobacco. That is why in our submission you will see a huge list of governments with whom we collaborated to try to restrict the trade and traffic back. We try to work with the Treasury here actually to discuss strategies by which one might control it. It is unfortunately the case that the reason people smuggle is to make money out of the differential in tax. That is the prime reason. In some countries, not this one, it is made even worse when the Government, for its own reasons as in China, imposes restrictions on legitimate imports so you cannot import legitimately sufficient cigarettes to meet the demand for your product. That just means you have a screaming demand for the smuggled product which people can make money out of by taking it into the country.

  1462. Perhaps you can explain a little bit of your own article. You have indicated that you think the Government should bring down the level of taxation for the reasons you give. You say, "Where any government is unwilling to act or their efforts are unsuccessful, we act, completely within the law, on the basis that our brands will be available alongside those of our competitors in the smuggled as well as the legitimate market". Can you tell me what you mean by "we act"?
  (Mr Clarke) We sell to licensed distributors in countries where the tax is paid. We sell into the legitimate trade where we have chosen legitimate traders. As we have already explained, Mr Broughton and myself, there are circumstances, France is one, Paraguay is another, and although BAT are not involved Andorra sounds certainly like another, where you just know that some of it is going to be smuggled. We do not deal with Andorra and we do not deal with any distributor who we think is just a smuggler. We deal with legitimate licensed distributors.

  The Committee suspended from 6.12 pm to6.21 pm for a division in the House.
  (Mr Bates) The arguments Mr Clarke was advancing about tobacco tax are predictable and well rehearsed. Unfortunately they do not tell the actual real picture. Most cigarette smuggling in the UK is not cross-border bootlegging driven by cross-border tax differentials. If a miracle broke out in ECOFIN and European Finance Ministers decided to harmonise tobacco taxes we would still have a great deal of smuggling. The reason is that smuggling is driven by the difference between duty paid and duty not paid prices and that is the nature of the operation which was going through Andorra and that is why it is important to understand the complicity and involvement of the tobacco industry in that particular trade. If they are supplying wholesalers who are then transiting the product back into the UK, the margin is not the difference between the price tax paid in Belgium and the UK, but the difference between the UK tax paid price and the untaxed price which is a very substantial margin indeed. That is the prime driver of smuggling and this why these arguments are diversionary and incorrect really. That is why in some of the countries which have the lowest levels of taxation in the European Union such as Spain and Italy you still have some of the very highest levels of tax smuggling which is a totally different kind of trade to the one which is being portrayed there. That is why I think it is important. This is a health issue, whatever they say, it is a health issue and not purely a fiscal matter because the price of cigarettes affects the consumption of cigarettes which in turn affects health. The appropriate response to this, again endorsed by the World Bank, is not to capitulate on what is a well-founded economic and health policy but is to tackle crime. To give an indication of the extent to which resources are devoted to this, if you take the £35 million pledged in the comprehensive spending review to Customs & Excise for tackling tobacco and alcohol fraud, that amounts to just five pence in every ten pounds of lost revenue at 1999 levels. That to me gives an impression of how disproportionate and how disproportionately small the response has been to try to tackle this as a proper law and order issue. It is one of those crimes, a bit like speeding, which is waved through on the nod, yet it is a massive fraud, the tobacco companies are behind it, whatever they say. There are so many documents indicating their control of tobacco smuggling around the world, the patterns are exactly the same in the UK wholesale market. You can see, for instance, in section 8.7 of our evidence, BAT were able to control the price in the smuggled market and the illegal market independently. That means that they know right down through the distribution chain who is supplying the legal market and who is supplying the illegal market. The fact that they could talk with Philip Morris about how they would vary prices in those two illegal markets indicates a level of control which suggests they are involved in this right up to their necks right down to the end-user. It is not something which is a matter of knowledge and going on behind their backs which they are unfortunately having to take account of, it is something they are involved in and controlling. That is why it is important for here and internationally.
  (Mr Campbell) I want to confirm that and just say that, as we summarised this, clearly the abiding question on the smuggling issue has been the evidence which has in fact been made available, it has been around for some time. When we hand over the evidence we see what happens: it gets torn up. Just yesterday I went down to the depository and found a file of papers concerned with smuggling in Africa. I have put a pre«cis, which perhaps Mr Burns would deplore, in my second note to the Committee which makes it clear that smuggling is a priority. It makes the illegality clear. It shows the complicity of the then chairman, Sir Patrick Sheehy, in what were cover operations of an advertising nature to increase the smuggling. Yesterday at Guildford I asked the British American Tobacco staff whether I could have a copy of that full file to bring with me to the Committee today, something they said there would be no difficulty in doing. It was only 100 pages; a lot for you to read but at least Mr Burns could have had the satisfaction of seeing everything in context. It was refused to me, so I am afraid that at the moment, thanks to BAT, all you have is that pre«cis. In relation to the issue of the smuggling through Canada, I have taken the precaution of giving this next document to the Clerk and not to Mr Broughton. That document which I have given to the Clerk a few moments ago is an admitted statement of fact before the US court in Louisiana of the smuggling operations which two Brown & Williamson executives conducted as part of this overall operation, dealt with in that other document I am talking about, to smuggle cigarettes back into Canada. It is an admitted statement by two employees of Brown & Williamson who pled guilty to the offences. Brown & Williamson is of course the BAT subsidiary in the United States, wholly owned. It states that the way it was done was that the cigarettes were taken out of Canada to Brown & Williamson then moved into warehouses in the south of the United States, allegedly sold offshore, but in fact taken by Vietnamese smuggling gangs into Canada. From the very top the managing director Mr Herter to the tacky details of smuggling through ships and warehouses in Louisiana the company's corporate responsibility is not only established by their own documents but was proven and admitted by their own employees in the courts of the United States. My final remark would be to endorse strongly the part which Audrey Wise picked up in pointing out the remarks in Mr Clarke's article. What this is really about is not a fine debate about tax policy, but about tobacco companies saying in the case of British American Tobacco perhaps not in Britain but certainly to the rest of the world, if you do not bring down taxes we will smuggle. I accept that British American Tobacco by not having major domestic markets in the United Kingdom is not perhaps in the same way making that threat to the United Kingdom Government but it is making it everywhere else and it is not acceptable anywhere.

Dr Brand

  1463. I was also interested in exactly the same quote which Audrey Wise used by Mr Clarke. Mr Broughton heard evidence about the Amber Leaf campaign which Gallaher's ran trying to influence the market share of bootlegged handrolling tobacco. The working documents which came from the company to the advertising company talked about targeting bootleggers, working with bootleggers to make sure that they carried their product. Is that the sort of activity you have to indulge in when you are trying to keep your market share in some of your foreign overseas markets?
  (Mr Broughton) I am sorry, I must have got lost somewhere. Could you repeat the question you want me to answer?

  1464. Do you have campaigns running overseas like the Amber Leaf campaign run by Gallaher's to influence the bootlegging market into this country?
  (Mr Broughton) No, is the crudest answer but it is not quite as simple as that.

  1465. Do you want to qualify your answer?
  (Mr Broughton) We do advertise in countries where some of our products are smuggled. Okay? That is in countries where you will often find we have a significant or even fairly small legitimate business share, duty paid share, of the brand we are trying to promote and there will also be product being smuggled in. We do advertise brands which would be in that situation in those countries in an effort to build up the brand on a duty paid basis, on a fully legitimate, fully legal basis in the hope that we can get to a situation where the entire smuggling operation can be cut out, the Government can work to do that and that the product can still get to the consumer on a duty paid legitimate basis. So we do advertise. So you will get allegations.

  1466. You will advertise generally but you are saying that you will not run promotions targeted at the distributors of the non duty paid business.
  (Mr Broughton) To the best of my knowledge that is right.
  (Mr Bates) There are several documents which refer to so-called umbrella operations and there is one at the end of paragraph 8.4 in our memorandum. This is not entirely at variance with what Mr Broughton is saying. Again it is Keith Dunt, current finance director of BAT talking to Barry Bramley. "RECOMMENDATIONS ... It is recommended that BAT operate under `umbrella' operations. A small volume of Duty Paid exports would permit advertising and merchandising support in order to establish the brands for the medium/long term with the market being supplied initially primarily through the DNP", or smuggled, "channel". What is happening there is the advertising campaigns—it is quite right—are to develop the brand knowing that the majority of the purchases are happening outside duty free or duty paid but are happening in the smuggled market. They are building up demand for the product in the illegal distribution channels, maybe with the hope that in the future that will be converted to legal business. However, there is absolutely no doubt that the target of the marketing in there is aimed—and that is what this document says here—at building up the illegal sales of the brand.
  (Mr Campbell) In the second note I gave to the Committee, the very short one, at the bottom of the second page is a plan put to the chairman to develop legal "cover"—the word is drawn from the documents—for cigarettes which were sold in the Cameroons in 1991. They were only sold illegally; that is made very clear in the quotes. It says, "As there are no legal imports" into this country "... no local media is used". That is the third paragraph on the final page. Then it says, "However a major campaign on the Africa No 1 radio programmes transmitted from Gabon", a neighbouring country, "is funded from Unit 2 resources". Unit 2 is a unit of the Staines headquarters of BATCo at that time concerned with smuggling. There you have it. I hope Mr Broughton will accept, at least for this example, this is an advertising operation done from a neighbouring country on radio to support a product in Cameroons for Cameroons which was wholly illegal in that country.


  1467. Mr Broughton, do you want to respond to that point?
  (Mr Broughton) Several points which you have stored up for me to respond to. May I respond to several of them at the same time, please? Let us take Mr Bates's Keith Dunt memo because that is one we have all had in front of us for some time. "It is recommended that BAT operate under `umbrella' operations. A small volume of Duty Paid exports would permit advertising and merchandising support in order to establish the brands for the medium/long term". I am utterly amazed that anybody can be surprised at that part of the strategy. If I stop there I can't see anybody saying, well what else would you do except to advertise and merchandise in order to establish, build up the brands for the medium/long term? It recognises that the brands are currently going through DNP channels, so there is a demand for them, so it is better to advertise to build up for the long term on a duty paid basis because that is the way the market needs to be run in the long term. We have to work together with governments to get the markets on a fully duty paid basis. That seems to me a perfectly rational, sensible strategy, to advertise and merchandise, to support what is at the outset a small volume but nevertheless you want to build a small volume into a big volume; you want it to be established for the medium/long term is what it says. I find it incomprehensible that that is a damning document. May I go back to the B&W employees in Louisiana? I am not going to say to you that there is nobody within the British American Tobacco group of companies who has ever broken a law. To say that nobody in the company has ever broken the law would be an absurd thing for me to tell you, not just over the 98-year history of the company that clearly there have been, over the 29 years I have been in the company clearly there have been. When individuals break the law, if we discover they are breaking the law, we would normally be the one to bring prosecution. We might just fire them depending on how small an infringement it is, but we would normally prosecute such actions. That case which was quoted there, yes, I think the two B&W employees were indicted, they certainly made an admission. What is interesting of course, the part which Mr Campbell did not say, is that nobody brought a case against Brown & Williamson. There was no indication, despite the admission that these people were obviously involved as individuals, no case ever brought against Brown & Williamson because Brown & Williamson was not involved. These were two individuals who, it was subsequently discovered, were doing it on their own account. The allegation is right, yes. I am afraid all companies from time to time find that they do have employees who are not necessarily 100 per cent honest. Those are not the only two; I could give you other examples of the same. It does not mean Brown & Williamson were involved. May I go back? A little while ago you were talking about the Treasury Select Committee. I notice that despite ASH's submission making much of the orchestration of smuggling by tobacco companies that was not the conclusion that the Treasury Select Committee came to. They would seem to me to be a perfectly appropriate committee to judge that, whereas this Committee seems to me to be meant to be here for the health issues relating to this. I was rather hoping we would get round to some of those. I would just say one other thing. You indicated before the last break that you wanted to wrap up fairly soon. I certainly endorse that. However, Mr Campbell made three other serious allegations against us: money laundering, that I misled this Committee and collaboration in fixed prices. I do hope you are going to allow us to refute each of those categorically.

  1468. I should be happy for you to do that now. If you feel there are things you wish to comment on, if you could do that briefly I would appreciate it. We have a number of areas we want to cover before we conclude. Feel free, if you can, briefly, to respond to those points. We should be very grateful.
  (Mr Broughton) May I go to the involvement in money laundering? At the bottom of page 11 and top of page 12 of the Public Eye Investigative Report, the document which was sent to everybody. Mr Campbell talks at length there about money laundering and money laundering in Colombia. He then goes on to use extrapolated conclusions that we are great supporters of narcotics as a result of this. Money laundering, as I understand it and I think he understands it the same way, consists of Colombians exporting drugs to America, getting dollars which would be—I think the term is—dirty dollars. They then have to find products and I accept entirely that the smuggling route is a means of finding products to convert those dirty dollars into clean pesos. His whole case is based on a letter which is quoted in this document. On 8 March Keith Dunt received an e-mail about the difficulty of obtaining clean dollars for BAT's Venezuelan subsidiary in January. It was necessary in December to reduce the selling price from $125 to $96 per case, that is in line with Belmont, such that Romar, the distributor could then sell through at $106 per case and receive clean dollars. That statement that he is using to substantiate the money laundering is exactly what substantiates that they do not. That statement is quite clear. He is having to drop the price in order to receive clean dollars. Dirty dollars are available. He could sell it at a higher price for dirty dollars, which is what is available. To get clean dollars is very difficult so he had to drop the price because he is only prepared to accept clean dollars not the dirty dollars involved in money laundering. That is what that statement says. There is a whole long thing in there about Mansur, which is a Philip Morris distributor, who was indicted for money laundering. He makes allegations that the BAT distributor there was investigated. Yes, they were investigated but they were not charged whereas Mansur were charged. I think I can say to you categorically that the whole of that piece proves rather that we were not involved in money laundering rather than proves that we were involved in money laundering. I think you subsequently have had discussions with the Colombian Government and perhaps have something to add on that.
  (Mr Clarke) Yes, about 12 months ago, because my contacts in Latin America are quite good, I picked up that there were allegations about in Colombia that we were involved in money laundering which came back to the company. I actually did in the first place go to see Mr Broughton and went to the company to ensure that we investigated this suggestion and that our distributors—clearly no-one identified who was supposed to be involved—that our subsidiary in Colombia was not involved in money laundering. Firstly, it is not our policy to get involved in money laundering, indeed it is our policy definitely to avoid it. It was investigated, it was not substantiated, we have never been charged, as far as I am aware none of our subsidiaries has been charged. Indeed in Colombia now we have developed our own distribution network in the country so things have moved on. So the moment there was any suggestion that any of the people we were selling to were involved in money laundering we did in fact make sure that was not the case. Of course we have so many subsidiaries throughout the world in 180 countries that the problem is we cannot be sure, we cannot just say off the cuff that our locals are all doing what they are supposed to be doing. In Colombia there are plenty of temptations for people to get involved in money laundering. We investigated the complaint and discovered it to be ill-founded. We would do that again.

  1469. Do you have any further points you want to respond to before we move on?
  (Mr Broughton) I take very seriously the allegations that I misled this Committee and I imagine this Committee takes those very seriously too. Frankly there is a page, from paragraphs 29 to 35, of almost total garbage of how I misled this Committee. I did say one thing wrong where I could be reasonably accused of having unfortunately and not deliberately misled the Committee and that was that I said to you—it is really covered in paragraph 34—that apart from material sent to Minnesota other documents are not scanned. What I should have said, and I understand Mr Lewis did explain to you Chairman, so you did get the facts but you got them all from Mr Lewis down at the depository, that the 350,000 have been scanned, in other words all of those which have been taken out for use. Seven and three quarter million have not been scanned. What I indicated to you was that of the 350,000 those which had gone to Minnesota had been scanned and I apologise to you because in fact it was the whole of the 350,000. I am aware that you had been informed of that by Mr Lewis. He also says that the Committee were not invited to see the separate BAT building behind the depository where scanning of company files had been under way for many months. The heavy implication is that there is something sinister in that. You will recall that the depository is in our archive, it is a piece of a larger piece and in the archive, yes, we are doing some scanning, not of any of the documents in the depository, for completely different reasons. For example all trademark management is going on an electronic basis, so we are going backwards in time to update the historic trademark business. Yes, we have a scanner looking at certain other documents from the archives but nothing to do with the depository. There is absolutely nothing misleading in what I said there. On paragraph 33 there are other remarks such as "nobody has shown any interest in it despite all the people who have been there". The "it" was the seven and three quarter million which nobody has picked out. I cannot say I promise you that is not misleading and I cannot see how I can be said to be misleading. I am also supposed to have said that most of the material which is of any relevance can be found on the internet already. I did say that. We were talking, if you recall, about the material which is of relevance to smoking and health and that is all mainly on the internet. I have to say to you that with one minor exception and I apologise for that minor exception I did not mislead this Committee.

  Chairman: We have heard what you have said, Mr Broughton.

Dr Stoate

  1470. May I start very briefly by saying that we have heard from Mr Campbell that he was refused a document which he felt was very important from the BAT depository yesterday, a 100-page document which he considered to be vital and he would have liked to bring to this Committee today. Why was he refused and what is the company's attitude towards that?
  (Mr Broughton) Did you go there?

  1471. Yes.
  (Mr Broughton) Mr Campbell, along with everybody else agrees when they go there to the conditions of going there and those conditions of going there were explained to you by Mr Lewis and I have to tell you that Mr Lewis knows these conditions a great deal better than I do. As I understand those conditions they include a process through which we go when you ask for a copy which includes privilege and confidential records checking etcetera. I do not want to bore you with the whole process all over again. He signed up to that process, he has been there before, he knows the process, he is going there again for three weeks in a couple of weeks' time. He knows the process and we simply followed the process, a process which he accepted before he went there.

  1472. So he will get those documents.
  (Mr Broughton) He will get those documents.

  1473. That is obviously very important. I want just to look briefly at the crux of this whole investigation this afternoon. It is clear that smuggling is going on on a very large scale across the world. It is clear that BAT products are being smuggled in large quantities across the world. There is no argument about that. The argument as far as we are concerned is how much BAT know and how much they are complying with this smuggling process in one way or another. That is what it is all about. You are saying that BAT has nothing to do with the process although they understand it is going on. Mr Campbell and Mr Bates clearly say that you are involved in the process. I think it is fair therefore for us just to tease a bit more out about this. I should like to start very briefly with some of the operations of Mr Dunt, who is currently your finance director and therefore a very senior person in the BAT machine, certainly not a junior employee, certainly not somebody who is out of control in the company, a very senior member of your team. Yet you are happy to say that when he says "It is recommended that BAT operate under `umbrella' operations" you think that is a perfectly innocuous thing to say.
  (Mr Broughton) Yes. The way that is written there an umbrella operation recognises—

  1474. What is an umbrella operation?
  (Mr Broughton) An umbrella operation recognises that in a certain market there are both duty paid legitimate stock and smuggled goods coming in.

  1475. He is recommending that they operate under umbrella operations.
  (Mr Broughton) No, an umbrella operation relates to advertising. It is not managing the business, it is advertising. Let me just make sure you understand that.

  1476. I understand that but at the end of this very same quotation, "... with the market being supplied initially primarily through the DNP channel".
  (Mr Broughton) Yes, it recognises that the market is—

  1477. It is recommending that.
  (Mr Broughton) No it is not recommending that. That is a statement of fact.
  (Mr Clarke) I am interested in the ethics of this. Both you and Mr Campbell, Dr Stoate, seem to think this is unethical. It has not occurred in quite this way in my time, and I suppose in a way it did in China until recently although there has been considerable change in China, but some countries restrict imports. My understanding—and we are going back to before my time in the company with most of this stuff—is that Vietnam at the time did not allow any legal imports and Colombia at the time did not allow imports. Let us take Vietnam. What happens, because of the conditions in some of these places, is that actually there is a very thriving tobacco market, all of it imported and you can go there at such times and find you can measure your market share compared to Philip Morris and everybody else because you can see. The pressure from the company, the proper representation from the company, is to stop restricting imports and let us operate legitimately. We will come in, we will distribute, we will pay tax. What happens whilst the market is raging in this informal way—not that I know about Vietnam—is that sometimes it causes complicity with half the people in authority in the countries you are dealing with. Whilst you are trying to persuade them to open up a legitimate trade, advertising firstly protects your market share in what is going on in Vietnam, but, more importantly, prepares demand for your product when you can get the right to import it. I personally do not see what is unethical about that. We advertise in such markets. Vietnam is an extreme example and I do not know whether we advertise there. In other markets where there is a lot of smuggling, of course we advertise because we want to keep our market share of the legitimate trade, we want to develop our brand if the legitimate trade takes over from the smuggled trade and so on. It is hurled at us that that is unethical. My guess is that the makers of Johnny Walker whisky and lots of other products do exactly the same thing. What on earth are they meant to do?

  1478. Whisky is quite a different matter because whisky does not actually kill 50 per cent of all those who drink it.
  (Mr Clarke) No, whisky is not a different matter, but I want to go on.
  (Mr Broughton) Neither does tobacco.

  1479. We are talking about the ethics. Let me just pursue one more thing.
  (Mr Clarke) In smuggling it is the same.

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