Canada - tobacco firms settle cigarette smuggling case..

April 13, 2010 - Reynolds Tobacco Co. an an indirect subsidiary of Reynolds American Inc., on Tuesday, April 13th revealed a comprehensive settlement agreement with the Canadian federal, provincial and territorial governments with payment of $325 million. The agreement resolves all of the governments' civil claims related to contraband cigarettes in Canada during the 1980s and 1990s.

The cases stem from cigarette sales in Canada from 1989 to 1994, when the federal and provincial governments increased taxes to reduce tobacco use. Rising prices fueled a black market in which Canadian-made cigarettes were shipped to the U.S., where taxes were lower, before being smuggled back across the border.

The tobacco companies knew their exports would be sold on the black market, police said when criminal charges were filed in 2003.

The average price of a carton of 200 cigarettes tripled from C$15 in 1981 to C$45 in 1993, according to a study done by Physicians for a Smoke-free Canada. Contraband (illegal, illicit, black market) cigarettes sales rose from zero in 1985 to 14.5 billion, about 72.5 million cartons, in 1993, according to the study. The governments rolled back taxes that year in a bid to reduce smuggling.

Canadian exports rose from 1 billion cigarettes in 1987 to 15.7 billion in 1993, Statistics Canada, a federal agency, said in a report. The RCMP’s (Royal Canadian Mounted Police) investigation took eight years as police reviewed 763,000 documents and conducted 275 interviews, police said.

Imperial Tobacco Canada Ltd. and Rothmans Inc., Canada’s two biggest tobacco companies, agreed in 2008 to pay about C$1.15 billion in fines and penalties to settle charges they helped cigarette smuggling in the 1990s.

Japan Tobacco's JTI-MacDonald unit will pay C$150 million to settle out of court claims brought by federal and provincial governments. Under a separate settlement, R.J. Reynold's former Northern Brands unit will pay C$75 million.

As part of the civil settlement, R.J. Reynolds has agreed to pay the governments C$325 million ($325 million). The company is also bound to adopt packaging, marking and other measures that will assist the Canadian governments in their efforts to combat the movement of contraband tobacco products in Canada, in the event it decides to sell tobacco products in Canada in the future.

The settlement comes after more than ten years of litigation both in the United States and in Canada and enables the company eliminate continuing expense, inconvenience and distraction to its core business and "the uncertainties inherent in continuing to litigate complex matters of this nature."

R.J. Reynolds currently does not conduct business in the Canadian tobacco market. R.J. Reynolds and its parent company, R.J. Reynolds Tobacco Holdings, Inc., sold its international businesses, including RJR-Macdonald, Inc., its former Canadian affiliate, to Japan Tobacco Inc. in 1999.

RJR Nabisco (National Biscuit Company) Holdings Corp. announced on March 9, 1999 that it had completed the sale of its international tobacco business to Japan Tobacco, Inc. for $8 billion, including the assumption of $200 million of net debt.

Japan Tobacco's JTI-MacDonald unit will pay C$150 million to settle out of court claims brought by federal and provincial governments.

In a separate development, Northern Brands International, Inc., a subsidiary of R.J. Reynolds Tobacco Holdings, Inc., also entered into a plea agreement with the Ministry of the Attorney General of Ontario. The agreement requires Northern Brands to pay a fine of C$75 million. Northern Brands was created in 1992 for the purpose of transacting all sales of RJR-Macdonald tobacco products in the United States and was accused of conspiracy to aid others in the sale and possession of contraband cigarettes in the early 1990s. Northern Brands ceased being an operating company in 1997.

The Canadian government hailed the settlements, saying it collected a total of C$1.7 billion from the industry as punishment for the smuggling. The Non-Smokers Rights Association called the deal a "sellout," because the government lawsuits had originally claimed C$10 billion in damages against JTI-MacDonald and its related companies.

Canadian authorities had once described the smuggling operations as the largest corporate fraud scheme in the country's history, while R.J. Reynolds blamed the lawsuits on an overzealous anti-tobacco lobby.

The industry remains in litigation over attempts by Canadian provinces to collect for the health care costs of treating illnesses caused by smoking. (Alberta joins some other provinces in suing tobacco companies..); Canada - tobacco companies may face C$200 billion in claims..)

References: R.J. Reynolds Settles Canadian Government Claims With $325 Mln. - Update; R.J. Reynolds Agrees to Pay Canada C$325 Million (Update1) by Joe Schneider, Bloomberg.com, 4/13/2010; Firms settle Canadian cigarette smuggling case by Allan Dowd, Reuters, 4/13/2010.