The government of Canada sued R.J. Reynolds Tobacco Holdings Inc. yesterday, alleging that the company has smuggled billions of cigarettes into the country as part of a carefully orchestrated tax-dodging scheme.
Canadian officials, who are seeking $1 billion in damages, accused Reynolds and related companies of defrauding the government and subverting its anti-smoking campaign by flooding the country with black market cigarettes. Reynolds executives allegedly used a complicated maze of shell companies--as well as trucks, boats and snowmobiles--to duck Canada's steep excise taxes and ferry illegally imported cigarettes across the U.S.-Canada border.
Officials at Reynolds, the second-largest tobacco company in the United States, would not comment. "We haven't had a chance to review the suit," said spokesman Seth Moskowitz.
The litigation opens a potentially damaging new line of attack against tobacco companies and could spur a wave of similar lawsuits around the world, experts said. While a few countries have sued U.S. cigarette makers to recover health care costs, Canada is the first to try to hold the tobacco companies liable for lost revenue from untaxed cigarettes.
If the suit succeeds, cigarette makers could face court challenges and litigation expenses that might eventually rival the billions the industry has already spent on health-related litigation, according to experts. Many countries have long suspected or claimed that tobacco companies have a hand in illegally importing cigarettes. Countries that have hesitated to file suit for health-related damages could embrace the smuggling issue.
"This case may truly open a whole new door," said Matthew Myers of the National Campaign for Tobacco-Free Kids. "Its potential impact is enormously serious."
The Canada suit accuses Reynolds, which is based in Winston-Salem, N.C., and several connected companies of trying to subvert a 1991 government campaign to reduce teenage smoking by raising pack prices. Soon after excise taxes were more than doubled in Canada, the government maintains, Reynolds and others stepped up efforts to ship black market cigarettes into the country.
Reynolds allegedly sold to U.S. distributors cigarettes that were made in Canada or Puerto Rico. Then, through a complicated and interconnected scheme, the company had those cigarettes surreptitiously shipped back into Canada, thereby evading the country's stiff taxes, the lawsuit alleges. Many of the cigarettes, the government contends, were shipped through the St. Regis/Akwesasne Reservation, an Indian reservation that straddles the U.S.-Canada border.
The conspiracy was highly successful, the government said. In 1992, approximately 20 percent of cigarettes sold in Canada were purchased on the black market, according to the government. Two years later, 40 percent of cigarettes were black market buys, and during this time the Canadian market share for Reynolds--which makes the Camel and Winston brands--rose from 12 percent to 20 percent.
Canadian officials contend that Reynolds worked hard to hide its links to the alleged scheme and even suggested that organized crime was behind the influx of contraband cigarettes.
"Today we are starting to prove in court that these companies named in the lawsuit have systematically and deliberately contravened not just the public health policies aimed at protecting Canadians and particularly youth from smoking, but the will of Parliament and the laws of this country and United States," said Allan Rock, Canada's minister of health, at a news conference yesterday.
The litigation was filed in federal court in Syracuse, N.Y., under the U.S. Racketeer Influenced and Corrupt Organizations Act. The suit seeks to end the purported smuggling scheme and to force the disgorgement of allegedly ill-gotten profits.
Charges stemming from Canadian smuggling allegations have already generated more than 20 felony convictions. Last December, a Reynolds subsidiary, Northern Brands Inc., which also is based in Winston-Salem, pleaded guilty to participating in a cigarette smuggling scheme and agreed to a $15 million fine. The company purportedly helped bring Canadian-made cigarettes into the United States under the pretense that they would be sold in Estonia and Russia. The cartons were illegally sent back to Canada, saving the company millions of dollars in taxes.
At the time, Reynolds executives issued a statement calling Northern Brands' activities "inconsistent with the way Reynolds does business."
On Monday, a former Northern Brands executive, Leslie Thompson, was sentenced to six years in prison for his part in the smuggling efforts, becoming the first tobacco executive to serve time for the way tobacco products were marketed.
The stock market shrugged off the new lawsuit yesterday. Shares of Reynolds rose 25 cents to $18.25 on the New York Stock Exchange.