Cigarette Giant to Pay $1bn to Eu

Philip Morris, the maker of Marlboro cigarettes, has agreed to pay $1bn (£547m) to the European Union to tackle smuggling and counterfeit products and at the same time settle a long-standing legal dispute between the two sides.

The amount is the highest ever extracted from a corporation by the EU, far exceeding the $611m penalty recently levied on Microsoft for abusing its dominance in the software market.

A statement from the European body said the broad agreement reached with Philip Morris would "resolve all disputes" between them.

In 2001, the EU filed a lawsuit against the company in a New York court, accusing Philip Morris and other tobacco firms of complicity in smuggling by oversupplying neighbouring countries where excise duty is lower.

Excise taxes run from 211% in Britain to just 10% in Latvia, creating an incentive for smugglers to buy in the east and sell in the west. The illegal cross border activity is estimated to cost European governments $1bn a year in lost tax revenues. The suit was dismissed but a US appeals court said in January that the EU could refile its case.

Both Philip Morris and the EU were keen to characterise the $1bn payment not as a fine but as a commitment to work together to fight issues problematic to both. Philip Morris, which will pay the sum over 12 years, has not admitted to any wrongdoing in reaching the accord. The cash will be used to fund anti-contraband and anti-counterfeit measures.

"There is a realisation that we both have a shared problem and that the best way to tackle this is through collaborative efforts," said David Davies, a Philip Morris spokesman. "What this really represents is moving from conflict to a very firm and strong cooperation. To do that, we needed to resolve past conflicts."

He said £1bn was a significant amount, adding: "This is a significant problem that will only get worse as the EU expands and borders open up. We regard this as an investment."

The prime concern at Philip Morris is counterfeiting. The company estimates that fake versions of its products are the company's fourth biggest single competitor. The company's other brands include L&M and Chesterfield.

The cooperation talks have been going on for several months. A draft of the agreement still needs to be signed by member states and the Philip Morris board.

The agreement is with the commission and 10 of the member states, not including Britain. Mr Davies said other countries could join in at a later date. The draft covers "broad areas of cooperation with European law enforcement agencies".

Philip Morris estimates that around 1m packs of counterfeit cigarettes are sold daily in the EU. The problem has worsened with the growth of the internet.