YOU ARE HERE: LAT HomeCollections

The Nation

Counterfeit Cigarettes Force Tobacco Firms to Fight Back

November 24, 2003|Myron Levin | Times Staff Writer

The world's biggest tobacco companies are under siege from counterfeit cigarettes, which threaten the industry with the loss of billions of dollars in revenue and the loyalty of millions of smokers.

It is an awkward situation for the companies. For years, they made money off the smuggling of genuine Marlboros, Winstons and Benson & Hedges as governments lost a fortune in taxes. Now crooks who once specialized in sneaking authentic brands past tax authorities are finding more profit in pushing cheap knockoffs instead.

Whether they actively encouraged the illicit sale of their products, as some charge, or simply turned a blind eye, big tobacco firms benefited because smuggling evades taxes and import restrictions that raise prices and smother demand.

Counterfeits are a different story. British American Tobacco Chairman Martin Broughton has called the counterfeiting of all goods a "social epidemic." British American and the three other top tobacco multinationals -- Philip Morris, Japan Tobacco and Imperial Tobacco -- have committed millions of dollars and an army of lawyers and sleuths to the defense of their brands.

The anti-counterfeiting campaign aligns the interests of tobacco and government authorities as never before. But as stalwarts of law and order, cigarette makers come off to critics as hypocrites. As they seek closer ties with customs authorities, "the cigarette manufacturers recognize that their reputation is rather jaded," said John Robertson, director of enforcement for the United Nations mission in Serbia's Kosovo province, a longtime smuggling stronghold.

The companies deny they ever condoned smuggling, saying they have been innocent bystanders to crimes that result from tax differentials and weak border controls. Government investigations and lawsuits, however, allege that the companies supplied billions of cigarettes to intermediaries during the 1980s and '90s, with the clear understanding that the smokes would be slipped past customs authorities.

In the late 1990s, for example, an R.J. Reynolds subsidiary and a sales executive were convicted of orchestrating a massive "round-tripping" scheme in which cigarettes produced by RJR's Canadian unit were exported to the U.S. and then ferried back in small boats across the St. Lawrence River to evade Canada's hefty cigarette tax.

According to government estimates, about one-fourth of exported cigarettes wind up being diverted from legal channels and spirited across national boundaries. Annual tax losses worldwide have been estimated as high as $30 billion. It makes little difference to revenue agents whether a smuggled pack is real or fake -- it's a tax loss either way.

The distinction is crucial for cigarette makers. They get paid for each genuine pack sold, even if it's smuggled. But counterfeits create double-barrel anxieties -- wiping out sales and threatening to drive once-loyal customers away. If a smoker buys a pack of knockoffs and finds "it tastes revolting ... we've lost them forever," said one tobacco official who asked not to be identified.

The companies say they don't know how much they are losing to bogus versions of their brands. Some estimate that as many as 200 billion counterfeit cigarettes are sold each year, enough to supply a pack a day to more than 27 million people.

And the flow of fakes is rising. "We've seen counterfeits come from nowhere in the last couple of years," one European law enforcement officer said.

In recent months, Philip Morris has sued about 2,800 merchants, most of them in California, after undercover buys revealed they were peddling fake Marlboros from China. British American says imitations of its brands have been found in at least 70 countries. In Belgium, counterfeits make up more than 95% of smokes seized as contraband. In Colombia, once awash in real but smuggled Marlboros, a high percentage of black-market Marlboros are fakes.

While they continue to battle for market share, the industry's Big Four have joined forces to attack the wave of counterfeits. They have recruited former law enforcement and intelligence operatives and patched together a global network of informants and private investigators who prowl ports and sniff out illicit production sites in counterfeit strongholds such as China, Paraguay and the Balkans.

"The counterfeit issue is so devastating to all of us that we've declared it a noncompetitive issue," said Mark Mulvey, vice president of corporate security at Geneva-based JT International, a Japan Tobacco unit.

To be sure, counterfeiters have victimized other industries. There is a booming trade in bogus pharmaceuticals, cosmetics, toiletries and designer bags and apparel, along with pirated videos, music and software. According to the International Chamber of Commerce, counterfeiting and piracy were a $450-billion enterprise in 2000, accounting for 7% to 9% of global trade.

Only tobacco companies, however, are dogged by accusations that they have profited from illegal sales of their own products.

Los Angeles Times Articles