Archive a Smoking Gun for Tobacco Firm

GUILDFORD, England —  This handsome town south of London is steeped in history. An 11th-century castle built by William the Conqueror overlooks the village center from a lovely hilltop park. The Rev. Charles Lutwidge Dodgson, better known as Lewis Carroll, is buried here.

On the outskirts is a no-frills two-story building packed with history of another sort. Known as the Guildford depository, it is a house of secrets, or former secrets, of the world’s second-largest tobacco company, British American Tobacco.

British American created the archive to hold millions of pages of documents produced for the anti- tobacco suit filed by the state of Minnesota in 1994. Most of the records involve health and marketing issues that were the crux of the lawsuit.

But embedded in the mountains of paper are fistfuls of memos on British American’s links to cigarette smuggling -- documents that weren’t pertinent to the lawsuit and that the company never was asked to produce. It turned them over anyway, for reasons that remain a mystery.

The smuggling papers chronicle British American’s swashbuckling march through the developing world and the role of contraband sales in its global expansion. Among the papers are memos from high-ranking executives discussing the importance of illicit sales in maintaining or building market share against like-minded competitors in such locales as Lebanon, Argentina and China.

Their disclosure rocked the industry, fueling charges that global tobacco firms had encouraged smuggling to crack closed markets at a cost to governments of a fortune in lost taxes. The documents lent powerful momentum to a barrage of lawsuits and investigations, including a long-running probe of British American by Britain’s Department of Trade and Industry.

“It’s almost an unfathomable mistake on their part, which starts me asking whether it was a mistake,” said Eric LeGresley, a Canadian lawyer who has mined the Guildford archive for ammunition for various clients, including the European Union. “I just find it difficult to believe that they could have been so dumb.”

Current and former British American executives declined requests for interviews for this story and did not respond to written questions. In a prepared statement, the company said it had produced for the Minnesota case all the files that might contain relevant material -- without reviewing the contents of each file. As a result, the company said, “some files contained nonrelevant as well as relevant documents.”

Tobacco companies have denied that they ever encouraged smuggling, blaming it on high cigarette taxes and porous border controls. But critics say the Guildford memos show that British American worked through intermediaries to direct contraband shipments to specific markets -- and assumed its rivals were doing the same.

Jon Ferguson, a former deputy attorney general for Washington state, said that when he first saw the memos on a visit to Guildford, he wondered: “What the hell were those doing here? I couldn’t figure out why they had produced those documents.”

They certainly weren’t germane to the cases being litigated when British American coughed them up.

Minnesota was among the first of dozens of states that sued the company, its U.S. unit Brown & Williamson Tobacco Corp. and its rivals -- including Philip Morris Cos. and R.J. Reynolds Tobacco Co. The suit accused them of saddling the state with extra medical costs by concealing information and enticing smokers with fraudulent marketing claims. The state sought internal documents from the 1950s to the 1990s showing what the companies knew when they were downplaying the risks.

British American produced about 6.5 million pages. Rather than haul them to the U.S., the company set up the depository to accommodate visiting plaintiffs’ lawyers. Minnesota’s case was settled in 1998, and as part of the agreement the company promised to keep the archive open and available, by appointment, to members of the public. Academics, activists and lawyers have been coming ever since.

Defendants in high-stakes litigation typically fight tooth and nail to avoid producing damaging documents. The tobacco industry in particular is known for its hardball resistance to discovery requests. Indeed, for the first 35 years of tobacco litigation, cigarette makers never once produced a significant number of damaging documents. That makes the British American disclosures seem all the more baffling.

“I’m not aware of a case where a company has divulged information which was so damaging where they weren’t under some legal compunction to do so,” said Stephen McG. Bundy, a law professor at the University of California at Berkeley.

Tobacco foes have suggested that British American was so steeped in the dodgy routines of the global trade that it did not realize the papers would cause a sensation. Others have speculated that a page-by-page review could have added millions of dollars in legal costs, though the firm did not cite this as a factor.

For tobacco foes and government officials who had suspected the companies of colluding with smugglers, the papers seemed heaven sent.

It was one thing to suspect the industry, “but quite another to see how they are running the black-market business,” said Clive Bates, former head of England’s leading anti-tobacco group, Action on Smoking and Health. “The documents are absolutely central to the move from speculation and suspicion to evidence.”

Many of the documents were written by or copied to senior executives. Although words such as “contraband” and “smuggled” occasionally appear, the memos typically use what industry experts say are euphemisms for those terms, such as “transit,” “general trade” or “duty not paid.”

British American has declined to discuss specific documents, citing the Department of Trade and Industry probe. But the company has said that anti-tobacco campaigners have misinterpreted the papers. They don’t prove collusion, the company has said, but merely that British American recognized smuggling as a fact of life.

But at least one insider has disputed that explanation. In a letter to British American Chairman Martin Broughton that was leaked to the press, Iain Hacking, a former marketing executive, said the company “has been brilliantly successful over thirty years in growing & optimising profits from managing the extensive smuggling of various Group brands.”

In fact, many of the memos appear to back that up.

In 1992, for example, Keith S. Dunt, British American’s regional director for Latin America and later its chief financial officer, rebuked the firm’s top executive in Argentina for being queasy about contraband sales. “We will be consulting here on the ethical side of whether we should encourage or ignore the DNP [duty not paid] segment,” the memo said. “You know my view is that it is part of your market, and to have it exploited by others is just not acceptable.” Dunt retired from the firm in December 2001.

The Guildford documents also show that the American subsidiary, Brown & Williamson, used intermediaries in Cyprus to bring a flood of contraband into Lebanon during its long civil war.

Among the papers are protest letters from top Lebanese officials to B&W; executives and the U.S. cultural attache in Beirut. “Large shipments of American cigarettes which far exceed the local requirements in Cyprus are regularly made with full knowledge and intention of using that island as a springboard for an eventual dumping into Lebanon,” a letter written in 1986 charged.

A British American executive all but conceded the point in a 1995 memo. In a summation of BAT operations in Lebanon, he wrote that B&W; had “seized the opportunity of economic chaos” to dominate the contraband market.

Other memos tell of British American’s response to a delicate challenge: advertising brands that had no legal presence in the market without arousing suspicions. The solution: an “umbrella,” or cover, operation, in which just enough cigarettes would be legally imported to legitimize the ads.

The strategy was to be used in the African nation of Cameroon, according to a memo in November 1991. Legal imports would be arranged “to provide cover for advertising and GT [general trade] business.” According to the memo, then-BAT Chairman Sir Patrick Sheehy had been consulted and found the plan “perfectly acceptable.”

Sheehy also blessed a plan to boost contraband sales in Argentina, according to another memo. “I am advised that the Chairman has endorsed the approach that the Brazilian Operating Group increase its share of the Argentinian market via DNP,” a 1993 memo by a senior company executive said.

Some documents suggest that British American viewed the illicit trade as an uncomfortable but necessary evil that, for competitive reasons, it had to pursue. “It is in BAT’s interest that markets are legal, taxed and controlled,” a memo dated May 12, 1993, said. “However,” it added, “our primary responsibility is to meet consumers’ demands as profitably as possible.”

For example, British American had more contraband sales in China than archrival Philip Morris but nowhere near the sales it could have if large-scale imports were legalized. In the early 1990s, China agreed in talks with the U.S. to lower trade barriers on numerous products, including tobacco. But the country’s State Tobacco Monopoly Administration somehow hadn’t gotten the message.

As a British American memo sourly noted in November 1993, the company had hoped to increase sales of “officially imported duty paid cigarettes,” but continuing trade barriers were forcing it to continue relying on what the memo called “free market sales.”

As long as such sales “remain dominant,” it said, “alternative routes of distribution and unofficial imports need to be examined, evaluated and, if appropriate, maximized. It is recognized that distribution of our products in China is key to [BAT’s] long term success.”

In Vietnam, however, contraband sales were so profitable that British American was in a bind when offered a chance to go straight.

The year was 1993, and despite banning imports to protect its state monopoly, Vietnam was awash in contraband smokes. The company’s State Express 555 was the leading black-market brand. Choosing the path of least resistance, Vietnamese officials decided to seek a joint venture between their monopoly, Vinataba, and a multinational producer. According to Guildford documents, British American had the inside track.

But company executives feared that the deal would result in “total cannibalisation” of their extremely lucrative contraband sales. That is, “legal volumes” of British American brands produced by the joint venture might kill off the “very profitable GT business,” a memo warned.

Leading negotiations with Vinataba was Nicholas Brookes, a lawyer and BAT’s director of new-business development. Brookes later would be BAT’s top gun in the U.S., becoming chairman and chief executive of Louisville, Ky.-based Brown & Williamson, the third-biggest U.S. cigarette maker. He remains B&W;’s chairman and a member of BAT’s management board but is scheduled to retire at the end of this year.

Brookes said in a memo that he had been directed to analyze the Vietnamese proposal using a worst-case assumption that every legal sale by the joint venture would mean “a sale lost to GT.” According to his June 1993 memo, the directive came from the British American Chief Executives Committee, headed by then-CEO and current BAT Chairman Martin Broughton.

Other memos contended that spurning the Vietnamese offer was not a real option. Vietnamese officials were reading British American’s hesitation as a sign that the company “was more interested in making money out of smuggling and therefore was not sincere in its intentions,” one memo said.

And in a letter to Brookes, the head of British American’s unit in Singapore warned that the company, by passing up the deal, might be left with nothing. The Vietnamese “intend to take draconian steps to eliminate smuggling,” the letter said. Thus, if a rival became Vinataba’s partner, British American could be shut out of the market entirely.

British American ultimately signed the agreement.