Big Tobacco (Page 3)

Until recently, few tobacco-industry insiders were willing to talk about the companies' role in smuggling. But in February, Alex Solagnier, a twenty-year veteran with BAT's primary Colombian distributor for cigarettes, an Aruba-based company called ROMAR, went public. Solagnier worked as a marketing and finance manager and finally as the company's chief financial officer, until he was fired after a business dispute with his superior in 1999; his chief responsibility had been selling BAT brands in Colombia. My NOW co-producer Oriana Zill and I were the first American journalists to speak with Solagnier, whom we filmed at his home in Aruba.

Solagnier says that BAT was integrally involved in setting the pricing, organizing distribution routes and marketing of cigarettes to the company's distributors at a time when, he says, "95 percent of it [BAT's cigarettes] was contraband." ROMAR itself, Solagnier explained, was set up with financing from BAT, in partnership with an Aruban businessman, Roy Harms, specifically to sell to the Colombian market when the bulk of BAT imports were smuggled into the country. (After a lengthy legal battle in which Solagnier and Harms traded accusations about financial mismanagement, an Aruban court ordered Harms to pay Solagnier more than $400,000 in severance pay, a figure for which Harms was reimbursed by BAT's London headquarters.)

Solagnier explained that during the years 1994-96, most of BAT's cigarettes were sold by ROMAR in Maicao "on consignment," meaning that while ROMAR handled the distribution, the cigarettes were owned by BAT when they were sold in Maicao. He recalls going on trips with BAT officials to assess the placement of the cigarettes, to determine their credit needs and to assess local demand. After studying the preferences of Colombian smokers, Solagnier says that BAT even designed a special cigarette package for its Belmont brand, which was produced by the company's Venezuelan subsidiary, Bigott, with a hinge lid on a hard-box pack, distinguished from the soft packs sold in Venezuela. BAT was promoting Belmont as competition for Philip Morris products. "They knew that all these cigarettes were being smuggled," he says.

Solagnier also explains that in the early 1990s, BAT and Philip Morris discovered the benefits of selling at least a small portion of their cigarettes legally, with full duties paid. Thus, reference to distinctions between "DP" (Duty Paid) and "DNP" (Duty Not Paid) begin to appear in both companies' internal documents. On April 16, 1992, a fax sent from BAT's British headquarters to its branch office in Venezuela indicated the company's growing sensitivity to attention being paid to contraband. In the memo, the executive asks whether the company could continue "with DP and DNP in parallel and be seen as a clean and ethical company at the same time." [underline in original] "Can we really do all this and continue DNP," he adds.

Translation: The company was interested in whether it would be beneficial to pursue legal imports along with its existing illegal imports. The answer, as shown by company documents and import statistics, was: yes. Both BAT and Philip Morris gradually began increasing the number of legitimately imported cigarettes--while the flood of smuggled cigarettes continued. Solagnier says that this dual system came to be known as the "umbrella"--a system of providing legal cover for advertising and marketing a product the bulk of which continued to be smuggled.

And the advertising was, by the mid-1990s, everywhere. In magazines, at sporting events, on billboards, ads for American cigarettes seemed more abundant than they are here in the United States, where ever-tighter restrictions have been placed on the tobacco companies' ability to advertise. At the same time, the companies launched a particularly cynical ploy--pressuring Colombian government officials to lower taxes on cigarettes as a means of reducing the incentive for smuggling. José Manuel Arias, director of the Colombian Federation of Departments, says that representatives of Philip Morris and BAT lobbied the state and national governments to lower Colombia's relatively hefty taxes on cigarette imports.

Their efforts paid off. According to Dr. Diego Roselli, a professor of pediatrics at Javieriana University in Bogotá and former chairman of the Colombian Council Against Cancer, the country saw a drop in cigarette tariffs from 125 percent to 45 percent in the mid-1990s. But the dramatic tax cut had a negligible impact on smuggling. Cigarettes continued to pour through the smuggling pipeline, selling for a little over a dollar a pack, just a quarter more than cigarettes produced in Colombia. At the same time, the tobacco companies gradually increased the amount of legal imports, where the margins were slimmer, but where they now enjoyed a lower tax rate and still obtained critical cover for advertising and other marketing activities.

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