Gallaher shipped millions of cigarettes to the statelet of Andorra that were later re- imported into Britain as contraband. Cigarette smuggling cost British taxpayers pounds 150m in 1997 and is said to be increasing dramatically.
A confidential European Commission report provides evidence that Gallaher knew the cigarettes would be smuggled back. "Andorra has been for many years a traditional source whereby cigarettes were smuggled into the European Union," says the report. Since 1996 "the smuggling of cigarettes from Andorra into the EU has had a serious economic impact on the UK and Ireland".
The report, obtained by the BBC's Money Programme, also reveals that the other main British cigarette manufacturer, Imperial Tobacco, which makes Embassy and Lambert & Butler, sold large quantities to the Pyrenean principality.
Andorran Customs figures show that total imports of British cigarettes rose more than 100 times between 1993 and 1997. Cigarettes that retail for over pounds 3 a packet in Britain cost as little as pounds 1 in Andorra. Last year, some 3.1 billion cigarettes were imported. On the basis of that figure, every man, woman and child in Andorra would have smoked 140 cigarettes a day.
Andorra has no official exports of cigarettes. But, the rise in sales coincided with substantial seizures of cigarettes from Andorra by the Customs agencies of other European countries, according to the confidential report from Uclaf, the EC's anti-fraud unit. The head of Uclaf, Per Brix Knudsen, says the tobacco company "must have been aware that the sudden increase could not be explained by any legal supply to a normal commercial market".
Gallaher's annual report for 1997 says: "Gallaher believes that the gains in Andorra relate to increased bootlegging trade into the UK." But when challenged by the BBC that the firm sanctioned smuggling, Peter Wilson, Gallaher's chief executive said: "We will sell legally to our distributors ... if those distributors subsequently sell those products on to other people who are going to illegally bring them back into this country, that is something totally outside our control."
Imperial Tobacco declined to comment.