Tobacco Firm Pays to Curb Smuggling

The tobacco giant Philip Morris, manufacturer of Marlboro, is to pay $1.25bn to the European Union and its member states to help stop the counterfeiting or smuggling of cigarettes.

Michaele Schreyer, the German budget commissioner, yesterday hailed a landmark deal that ends a longstanding legal wrangle between Brussels and the US company.

"We hope it will serve as a model for other manufacturers who are willing to work with us to combat illegal trade in their products," Ms Schreyer told reporters as the laboriously negotiated agreement came into force.

The money will go to the EU budget and those of the 10 countries which joined the commission's lawsuit accusing the company of complicity in smuggling Marlboro and other brands into the EU, where cigarettes are often heavily taxed, by intentionally oversupplying other countries with lower tobacco duties.

The excess was then allegedly smuggled into EU states and sold on the black market, depriving national treasuries - and the EU itself - of tax and customs revenue.

"The European community and member states are losing hundreds of millions, if not billions of euros per year from smuggling and counterfeit cigarettes," Ms Schreyer said.

The commission's role is to prevent fraud against the EU budget, which includes both VAT and customs payments.

The money will be paid out over 12 years "to combat illegal trade in counterfeit and genuine cigarettes". Half of the total will be paid in the first three years up to 2007.

The EU money will go to the Olaf anti-fraud unit in Brussels, while Belgium, Finland, France, Germany, Greece, Italy, Luxembourg, the Netherlands, Portugal and Spain are expected to spend their share on national customs offices.

Philip Morris International made no admission of liability or wrongdoing, but its president, André Calantzopoulos, said the row was over. "We both decided to move from a litigious approach to a collaborative approach and this agreement turns the page," he said in a statement issued in Lausanne.

Three lawsuits filed in American courts were dismissed on technical grounds, but a US appeals court gave the EU the go-ahead in January to file a new one based on money-laundering laws. PMI, meanwhile, countersued in a European court.

All litigation is now resolved. Both sides say that the millions of dollars in lost revenue end up lining the pockets of organised crime or terrorist groups.

Philip Morris has estimated that 1% to 2% of the 232bn cigarettes sold under its brand names across the EU each year are counterfeit. EU officials agree that fake cigarettes are now the biggest problem, but the row began in the 90s over the genuine article.

The agreement requires Philip Morris to pay more "in the event of future seizures in the EU of its genuine products above defined quantities".

To prevent that, the company is to make it harder for smugglers to ship cigarettes out of the country for which they were intended by ensuring sales volumes are "commensurate with legitimate market demand".

It will improve procedures for tracking and tracing products, including indicating on packaging which market the cigarettes were intended for and putting scannable bar codes on "master cases".

Last year, 20m counterfeit Marlboro cigarettes were confiscated in Kosovo alone. Groups ranging from Vietnamese gangs in eastern Germany to paramilitaries in Northern Ireland have profited from the lucrative trade.

Suspicions of tobacco industry collusion in smuggling have grown since researchers showed that about a third of all cigarettes entering international markets each year could not be accounted for.

Yesterday's agreement led to immediate calls for manufacturers to do more to combat cigarette smuggling and tax evasion in the US.

"Big Tobacco cannot justify doing less to reduce smuggling here than it has now committed to doing in Europe," said Representative Lloyd Doggett and Senator Ron Wyden of the US Congress in a statement.