Tobacco industry's focus on contraband is a smokescreen

The article by Michel Gadbois of the Canadian Convenience Stores Association ("Higher cigarette taxes won't help," Opinion, July 22) is part of a tobacco-industry strategy to divert government efforts so that they focus solely on the illegal tobacco market instead of addressing the total tobacco epidemic.

The effectiveness of tobacco taxes in lowering tobacco consumption has long been recognized by all the leading public-health authorities. The tobacco industry itself wrote in 1987 that "rising taxes are the main contributor to volume declines." In fact, the policy is so effective in curbing sales that the tobacco industry, to counter high prices, engaged in contraband in the 1990s, a crime for which it has recently pleaded guilty.

Now the source of the contraband problem has shifted to a few First Nations reserves, and the tobacco industry, which is not benefiting this time from the illegal sales, and its allies, such as the Canadian Convenience Stores Association, are professing that there is a "growing illegal black market" and that governments are failing to appropriately address the issue.

It is important to point out that the tobacco industry has only itself to blame for the current contraband crisis, because it planted the seed of greed and the knowhow among traffickers by supplying them in the past with tobacco products. In addition, it is always a valuable exercise to take a look at what the industry is saying internally to have another perspective on the situation.

Philip Morris International, the parent company of Rothmans, Benson & Hedges in Canada, wrote in its latest annual shareholders report (2010) that:

"In Canada, the total tax-paid cigarette market was up by 9.5 per cent, mainly reflecting stronger government enforcement measures to reduce contraband sales since mid-2009."

In a half-year report published in 2010, British American Tobacco, the parent company of Imperial Tobacco Canada, had this to say on the subject:

"Volume growth was achieved on the back of a significant reduction in illicit product as a result of the authorities' enforcement activities."

BAT also stated in a recent shareholders' presentation that the size of the illicit market in Canada had decreased from 32.7 per cent in 2008 to 18.7 per cent in 2010.

As for retailers, the 2010 November/December issue of Your Convenience Manager magazine reported that:

"Increased awareness, tightened border security and stiffer penalties are making it more difficult for smugglers to distribute tobacco in Canada. As a result, cigarette sales are up 10 per cent . The largest dollar volume growth came from Quebec and Ontario - two of the hardest-hit regions for contraband - where dollar volume sales improved 18 per cent and 13 per cent respectively."

Not surprisingly, these statements reflect what governments are currently reporting on the contraband market. For example, the latest Quebec government budget indicated that:

"The efforts to curb the illicit tobacco trade are producing excellent results. After five consecutive years of declining revenue from the specific tax on tobacco products, revenue has risen for the second year in a row . The Ministère des Finances estimates the tax losses associated with tobacco smuggling at $225 million for 2010, i.e. roughly 20 per cent of the market. The estimated losses for 2008 were $300 million, representing about 30 per cent of the market at that time."

The previously mentioned presentation from BAT provides the motive why the industry continues to cry wolf regarding the contraband problem, despite evidence to the contrary:

"Increased illicit trade awareness leads to less tax increases."

It is a common business practice for the tobacco industry to mislead governments. In this case, it is important to understand that the industry's focus on contraband is intended not only to influence tobacco-tax policy but also to forestall any new tobacco-control policies. We saw this last fall with the tobacco industry's failed attempt to derail the federal government's renewal of graphic warnings on tobacco packages on the pretence that the contraband problem had to be resolved first.

The record-breaking $1.7 billion in fines and settlements paid by the tobacco industry for its role in the 1990s smuggling crisis clearly had no deterrent effect on its misleading behaviour. Whatever the industry's public view on the matter, the facts show that governments are on the right track to curb the illicit market. There is no doubt for the health community that contraband tobacco still remains a significant public-health threat that needs to be resolved. However, the tobacco industry's continuing disregard for the truth is a further justification for governments to press on with controlling the legal market as well.

State seeking $8.1 million in tobacco case

The state of Mississippi hasn’t received millions of dollars in tobacco settlement money because one of the companies who entered into the 1998 tobacco settlement failed to report profits from the sale of 7.8 billion cigarettes made for Star Tobacco and Pharmaceuticals, Inc., the state argued Monday.

Brown and Williamson Holding, Inc., which later merged with R.J. Reynolds, manufactured and shipped the cigarettes to Star as part of a contract they’d entered into. However, special counsel Gary Wilson argued Monday, the cigarettes were sold for profit in the United States, though Brown and Williamson failed to report those sales as part of the profits that went into calculating the payments in the tobacco settlement.

Attorney General Jim Hood filed suit in 2010 alleging that the miscalculations “resulted in artificially low payments in Mississippi for 2001 and for every year thereafter in which Mississippi was entitled to a net operating profits adjustment.”
Star sold the cigarettes using such brand names as Gunsmoke and Vegas, research showed, between 1999 and 2002. The company that manufactured their cigarettes, Brown and Williamson, were a part of the master tobacco settlement agreement in 1997 that encompassed 46 states.
Mississippi, Wilson said, is due to be repaid the $3.6 million it was denied plus interest for the years it went unpaid, bringing the total amount to an estimated $8.1 million at the end of June.

On the Call: Lorillard CEO Murray Kessler

The Food and Drug Administration, which is currently reviewing the public health impact of menthol cigarettes, is conducting an independent review of research gathered by its advisory committee.

In June, the federal agency said members of its Center for Tobacco Products planned to submit its review to an external peer review panel in July and expected the process to be completed in the fall of 2011.
The review comes after the FDA in March received a report from the Tobacco Products Scientific Advisory Committee that removing menthol cigarettes from the market would benefit public health because the minty flavoring tobacco has led more people to pick up smoking and makes quitting harder. However, the report said menthol smokers are not likely to be at a higher risk of disease or exposed to a greater number of toxins.

The panel also said the FDA should consider other factors, including whether a ban could increase the market for counterfeit and smuggled cigarettes.

Many analysts believe the agency won't ban menthol, which about 19 million Americans smoke. Menthol cigarettes are one of few growth areas in the shrinking cigarette market.A menthol ban or other restrictions on the flavored cigarettes would fall heavily on Greensboro, N.C.-based Lorillard Inc., whose Newport brand is the top-selling menthol cigarette in the U.S.

New marijuana ballot measure starts circulating

A new marijuana legalization ballot measure was cleared Monday to start seeking petition signatures.
But its proponents aren't affiliated with the Oakland-based backers of last year's Proposition 19, who intend to mount a 2012 initiative of their own.
The state attorney general's official summary says the measure, named by its proponents as "The Regulate Marijuana Like Wine Act of 2012," would decriminalize marijuana sales, distribution, possession, use, cultivation, processing and transportation by people at least 21 years old.
Advertising of marijuana, except for medicinal use, would be banned, but zoning restrictions would not apply to marijuana growing and processing. Existing agricultural taxes and regulations would apply to all except noncommercial production of up to 25 flowering plants or 12 processed pounds per year. Sales of marijuana with at least 1 percent THC -- the herb's most prominent psychoactive ingredient -- would be allowed only to people 21 and up.
The measure also would direct state and local officials not to cooperate with enforcement of the federal ban on marijuana.
Proponents James Gray, William McPike and Steve Kubby have until Dec. 19 to collect valid signatures from at least 504,760 registered voters in order to qualify it for the ballot.
Gray, a former Orange County Superior Court judge and the 2004 Libertarian nominee for U.S. Senate, is a longtime drug reform advocate from Newport Beach.

McPike is a Fresno attorney specializing in marijuana law. Kubby, of South Lake Tahoe, is a longtime marijuana advocate and the 1998 Libertarian gubernatorial nominee.
They aren't with the Coalition for Cannabis Policy Reform, which grew out of last year's Prop. 19 legalization effort. Although 53.5 percent of voters rejected Prop. 19 in November, the measure did have support from 4.6 million voters and so the coalition intends to try again in 2012.

Innovation, pricing key to tobacco growth

Euromonitor International says innovating, raising prices and introducing smokeless products remain key growth strategies for tobacco companies as smokers worldwide face tax hikes, smoking bans, health concerns and social stigma.
The research firm says it expects nearly 7 percent more cigarettes to be sold annually by 2015, with increases in emerging markets. But it expects declines in places with greater tobacco control measures like the U.S. and Europe.

Prices are projected to rise 25 percent in that period.
Companies are looking to smokeless products and those with possible reduced health risks for growth. Revenue from smokeless products rose 11 percent in 2010 but remains small compared with cigarette revenue.
Euromonitor says rising prices will encourage illicit trade, which grew to about 10 percent of the cigarettes consumed in 2010.

Feds seize illegally imported cigarettes from Vietnam

Federal agents in Seattle seized 6,500 cartons of cigarettes and more than $200,000 in cash Wednesday as part of a sweeping investigation into the illegal import of Marlboro Reds, 555s and other Philip Morris brands from Vietnam.

Mark Leiser, the assistant special agent in charge of the Seattle field office of the federal Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), said agents executed 14 search warrants at three businesses and 11 residences, where they seized the cash and cigarettes.

He said agents also seized five vehicles that were either purchased with illegal proceeds or were used to transport the cigarettes, which were shipped to the Seattle area through the U.S. mail.

Those involved in the scheme avoided paying taxes on the cigarettes, defrauding the federal and state governments of an estimated $24 million since 2008, Leiser said. He estimated that the 6,500 cartons seized on Wednesday alone represented $262,000 in lost tax revenue.

Leiser and Brad Kleinknecht, the inspector in charge of the U.S. Postal Inspection Service, gave only vague details of their joint operation at a news conference Wednesday at the Jackson Federal Building in downtown Seattle because the affidavits outlining their investigation have been sealed in U.S. District Court.

No one was taken into custody Wednesday, but arrests are expected once the U.S. Attorney's Office reviews the case and makes charging decisions, Leiser said.

The warrants were served in Seattle, Kenmore, Shoreline, Kent and Tacoma, ATF spokeswoman Cheryl Bishop said.

"It was common knowledge in the areas where they were sold," she said.

In Vietnam, a carton of Marlboros costs $7 to $9 in U.S. dollars. In Washington — which has one of the highest tax rates on cigarettes in the nation at a little over $3 a pack — that same carton costs $79 to $85, according to Postal Inspector Jerry Styers.

In spring 2010, officials with the state Liquor Control Board contacted the ATF with information about street-level sales of cartons and packs of cigarettes from Vietnam that lacked tax stamps, Leiser said. Investigators determined that cigarettes were being sent through the mail to Seattle-area residents, who then sold cartons for $20 to $30 less than what a smoker would pay at legitimate retail businesses, he said.

The state tax on a carton of cigarettes is $30.25, plus $10.07 in federal tax, Leiser said. In Washington, the money is used to subsidize public education and the health-care system and help fund public-works projects, he said.

"For those who say these kinds of investigations are a waste of money or that it's a victimless crime, I would say they're wrong," Leiser said.

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