Firms settle Canadian cigarette smuggling case

VANCOUVER (Reuters) - Two cigarette makers reached settlements with Canada on Tuesday over their alleged role in smuggling operations that ran so rampant in the 1990s they forced Canadian anti-smoking taxes to be rolled back.

R.J. Reynolds Tobacco Co will pay C$325 million ($325 million) and Japan Tobacco’s JTI-MacDonald unit will pay C$150 million to settle out of court claims brought by federal and provincial governments.

Under a separate settlement, R.J. Reynold’s former Northern Brands unit will pay C$75 million.

The deals bring to an end more a decade of litigation over allegations the companies exported Canadian cigarettes to the United States knowing they would actually come back to Canada illegally and not be taxed.

Canada settled similar allegations in 2008 against, Imperial Tobacco Canada Ltd, a unit of British American Tobacco, and Rothmans Benson & Hedges Inc., which is partly owned by Philip Morris.

Cigarette smuggling was widespread the early 1990s as Canadians attempted to avoid big tax hikes on tobacco designed to deter smoking. The flood of contraband eventually forced those taxes to be reduced in 1994.

“It had a devastating impact on Canada’s anti-smoking initiatives,” said Rob Cunningham of the Canadian Cancer Society.

Much of the smuggling happened through aboriginal reserves that straddle the New York-Ontario border. The situation was worst in Quebec and Ontario.

Smuggling has again become an issue with provincial governments again using high taxes to discourage smoking.


R.J. Reynolds sold RJR-MacDonald to Japan Tobacco in 1999 and pulled out of the Canadian market. Northern Brands handled RJR-MacDonald’s sales in the United States in the 1990s.

“This settlement enables us to eliminate the continuing expense, inconvenience and distraction to our core business, and the uncertainties inherent in continuing to litigate complex matters of this nature,” R.J. Reynolds said.

The company does not admit wrongdoing in its settlement, which sheds little light on how the smuggling network operated.

JTI-MacDonald, which had faced both criminal and civil charges, said the settlement was consistent with Japan Tobacco’s international policies on smuggling. It pleaded guilty to a regulatory violation.

JTI-MacDonald’s agreement with the governments calls for it to exit the court protection from creditors it sought in 2004 in response to the litigation.

The Canadian government hailed the settlements, saying it collected a total of C$1.7 billion from the industry as punishment for the smuggling.

The Non-Smokers Rights Association called the deal a “sellout,” because the government lawsuits had originally claimed C$10 billion in damages against JTI-MacDonald and its related companies.

Canadian authorities had once described the smuggling operations as the largest corporate fraud scheme in the country’s history, while R.J. Reynolds blamed the lawsuits on an overzealous anti-tobacco lobby.

The industry remains in litigation over attempts by Canadian provinces to collect for the health care costs of treating illnesses caused by smoking.

($1=$1 Canadian)

Additional reporting by Alexandria Sage in San Francisco; editing by Rob Wilson