Business Analysis: BAT hit by fresh claims it used smuggling to expand into Asia

DTI under pressure after investigation of tobacco giant was dropped in March

New allegations that smuggling played a central role in British American Tobacco's (BAT) expansion into Asia are emerging through research published today.

New allegations that smuggling played a central role in British American Tobacco's (BAT) expansion into Asia are emerging through research published today.

From detailed analysis of millions of BAT's own internal documents by researchers at the London School of Hygiene and Tropical Medicine (LSHTM), the company is accused of condoning and profiting from the smuggling of its brands into Asian countries such as China, Cambodia and Thailand in the 1990s, when the region had restrictions on foreign imports. The LSHTM research team, which is publishing its findings on BAT's activities in Asia today, also alleges that BAT carried out dubious lobbying techniques to manipulate governments in the region away from cigarette advertising controls and health warnings.

BAT has always denied any involvement or assistance in smuggling and a three-year investigation by the Department of Trade and Industry (DTI) into allegations of criminal activity was dropped in March. It concluded there was no evidence to support claims the company had been involved in illegal activity and no further action was taken. "We work actively with Government and Customs and Excise authorities worldwide to help them eliminate both smuggling and counterfeit tobacco products, which are caused by tax differentials, weak border controls and import restrictions or bans," a statement from BAT said yesterday.

But the LSHTM, after studying BAT's internal documents, asserts that contraband trade in Asia was considered vitally important to exploit what were then closed markets to foreign companies. As consumption of cigarettes in Western markets began to decline in the 1980s, tobacco companies undertook a scramble to hook the millions in the developing world on their brands. The Asia-Pacific region is now the second largest for BAT, with nearly one-quarter of its cigarette volumes sold there.

Contraband cigarettes are referred to by a variety of euphemisms by BAT in its documents, such as "transit trade", "general trade" and "duty not paid". Internal memos included in the LSHTM research state that BAT's mission was to maximise its share of global exports market, "irrespective of which sub-channel of exports is involved". Highlighting its priorities on illegal versus legal trade, one memo says: "It is in BAT's interest that markets are legal, taxed and controlled. However, our primary responsibility is to meet consumers' demands as profitably as possible."

According to one document unearthed by the researchers, general trade accounted for 72 per cent of exports in the Asia-Pacific region from 1992 to March 1994. A memo discovered from the then chief executive of BAT, Barry Bramley, in 1992, states BAT's strategy in the Far East was one of consolidating its position as an importer "as well as building on the successful general trade business in the region". A document referring to a report on a visit to Thailand showed BAT's average monthly transit volume was about 22 million cigarettes in the late 1980s, "earning a total group trading profit of the order of £1m per annum".

BAT is alleged to have condoned smuggling into China, a key market for tobacco companies. China is the biggest cigarette market in the world, with 350 million smokers and 1.7 trillion cigarettes, or "sticks", smoked a year. Since China re-opened to foreign investment in the 1980s, BAT tried to get back in to the country but was faced with tight import restrictions. LSHTM says it circumvented import restrictions by allowing contraband cigarettes to flow into the country from Hong Kong. In 1990, BAT internal records show sales to China of 28 billion sticks a year. Official government figures for the level of all legal tobacco imports at the time were 10.5 billion.

The revelations about BAT's activities in China come at a critical time for the company, as it is trying to set up a factory there. In July this year, it announced a major venture in China but was left embarrassed when the Chinese state tobacco authority denied it permission to build. Talks with the Chinese authorities continue.

The lack of tobacco marketing restrictions in Asia was also exploited by BAT, according to the research. In Cambodia, for example, there were no restrictions on tobacco advertising in the 1990s, and as the government emerged from 20 years of civil war, BAT identified the country as an ideal new market. Cambodia, according to the researchers, was also seen as perfectly placed as a base from which contraband cigarettes could travel into Vietnam and Thailand.

The research pinpoints documents relating to Thailand, where tobacco companies, including BAT, orchestrated a campaign to stop the government forcing ingredients labelling on cigarettes. Fearing the legislation would go against it, a BAT memo says: "We need to be ready to pump in GT [general trade] stocks in case the supply is disrupted by the regulation."

Researchers have brought the evidence of these alleged activities to light after a secretive four-year operation to request, copy and scan 8 million internal documents from BAT's archives. BAT was ordered by a US court in 1998 to make its documents available to the public after a case against the tobacco industry by US states to recover the health costs of treating people with smoke-related illnesses. The company established a depository in Guildford, but LSHTM researchers claim it was extremely difficult to get access to the archive and some documents had been tampered with. The archive is due to close in 2009 and in May, a team from LSHTM announced it had copied all the documents in the depository and published the archive on the internet to secure public access to the documents indefinitely.

It is now in the process of further analysing the documents, and the Asia revelations follow research by LSHTM of BAT's documents relating to the former Soviet Union. This research, published in June, alleges that in the break-up of the bloc and the subsequent economic hardship in the region, BAT targeted money from EU aid packages to fuel cigarette imports.

In light of the body of new research that is now stockpiling against BAT, anti-smoking campaigners and MPs say the DTI has serious questions to answer over its investigation. Its report was never made public and researchers from the LSHTM believe there is a weight of evidence showing the extent the company relied on smuggled cigarettes to penetrate Asian markets.

David Hinchliffe MP, the chairman of the Health Select Committee, which ordered the DTI to conduct its investigation, said yesterday: "I was very disappointed that the DTI would not make its report publicly available. I will be looking at this research very carefully."

Jeff Collin, co-author of the LSHTM research papers, said he was "astonished" by the DTI's decision. "Asia is the key to BAT's future prospects and its own documents highlight how important illicit trade was to the company. It could not get normal access to the region, because of trade bans and state monopolies. Smuggled cigarettes got its brands into the countries, and it would then use the existence of contraband cigarettes as a means of persuading governments to let them in legitimately with a low tax rate. There is evidence here that makes the failure of the DTI to take any action incredible," he said.