In 2004, Cyprus-based tobacco distributor Tlais Enterprises Limited (TEL) was told it had received a “red card” from British customs, a warning that the company was suspected of cigarette smuggling.
TEL’s owner, Ptolomeos Tlais, was surprised. Born in Lebanon to a wealthy trading family, Tlais was doing, he said, exactly what his supplier, Gallaher Tobacco, had told him to do: quickly dumping large amounts of cigarettes onto developing countries. Everyone involved, he insists, knew that some of these smokes — especially their low-end Sovereign brand — would find their way back to the U.K., where avoidance of high tobacco taxes guaranteed smugglers a windfall.
In fact, Tlais had even signed a unique deal with both Gallaher — the U.K.’s largest cigarette manufacturer — and the U.K. customs service, giving them unprecedented access to his shipping records. In the deal, Tlais agreed to unload tens of millions of moldy cigarettes by mixing them with new cigarettes and selling them overseas. If anyone deserved a red card, Tlais felt, it was Gallaher for coming up with the plan.
Yet just a few months later, in January 2005, Gallaher told Tlais that it could no longer send his company cigarettes because he was involved in smuggling. Each sued the other in the U.K. for breach of contract, with Gallaher claiming it was still owed $3.2 million for cigarettes purchased and Tlais seeking $675 million in lost profits and other damages. Tlais is also pursuing Gallaher — now owned by Japan Tobacco International — in his native Lebanon, where a criminal court case is about to begin against three Gallaher managers and Gallaher itself for fraud. In addition, Tlais has sued U.K. customs in Cyprus for allegedly assisting in smuggling, misrepresentation, and damaging his reputation, a case that started this month.
These actions, borne of pique, have opened a crack in the usually insular community of tobacco manufacturers and distributors. From the U.K. lawsuit have come some 13,000 internal documents on the inner workings of Gallaher and Tlais, revealing how a major tobacco company got others to do its dirty work, and how customs officials shrugged this off. Not since litigation during the 1990s forced millions of documents out of the tobacco industry has such an inside look been available at the seamy underside of a major cigarette company.
Tlais’s dealings with Gallaher date from 2000 and continued through 2005 — a time of major upheaval in the tobacco industry, when it came under heavy pressure around the world for contributing to smuggling. The smuggling by Big Tobacco is widely thought to have subsided since a series of press exposés in 2000-01 helped prompt government crackdowns and billion-dollar settlements. But the Tlais case suggests that, at least in the case of Gallaher, the smuggling continued for years, and indeed was business as usual.
Tlais and his co-workers today make a litany of charges against Gallaher. Among the claims: that TEL was made the scapegoat for practices by Gallaher which included dumping billions of cigarettes in markets where they could not possibly hope to sell them legally; that Gallaher dealt with companies known to be smugglers while publicly speaking out against the practice; that the company sold cigarettes through duty-free channels meant for airports and border shops, knowing that those cigarettes often ended up in the hands of organized crime; that Gallaher sold substandard cigarettes that were expired, damaged, and moldy to developing countries such as Iran and war-torn Iraq; and that the U.K. customs service, rather than being a barrier to smuggling, was complicit as long as the U.K.-made cigarettes went to other countries.
Gallaher has denied any impropriety. Last April, in fact, the company prevailed in its U.K. legal dispute with TEL when Judge Christopher Clarke ruled that Gallaher had sufficient cause to cancel its contract with the distributor, and had, in fact, attempted to clean up its record on smuggling. Indeed, the judge fingered TEL, not Gallaher, for indiscriminately selling cigarettes to known smugglers.
Judge Clarke, however, did not let Gallaher off the hook. In his 326-page ruling, he took the company to task for its past involvement in smuggling, and noted that the company’s later practices “gave rise to a risk of smuggling” — including Gallaher’s supplying of a distributor without “any due diligence,” goods that “were shipped to Cyprus and not to their ultimate destination,” and export of cigarette packs with health warnings only in English, not in local languages.
Gallaher did not respond to ICIJ’s request for an interview.
Documents released during the various legal disputes, as well as interviews with industry insiders, similarly depict an unseemly record for Gallaher. Among Gallaher’s critics is Heiko Arjes, a veteran tobacco businessman and brand integrity consultant who worked with Gallaher and Philip Morris in the Middle East and Africa. Arjes stated in a deposition for the U.K. case that Gallaher was deeply implicated in the “transit” and “duty not paid” cigarette trade — longstanding industry euphemisms for smuggling, according to the court ruling and various industry records. “My direct experience with Gallaher,” Arjes stated, “confirmed that they were still more interested in pursuing transit, non-duty-paid business than the other manufacturers who had cleaned up their act.”
Tlais’s allegations are also supported, in part, by an unlikely source: a top Gallaher manager who said he was in charge of the trade. Norman Jack, a longtime Gallaher insider, stated in an affidavit in the Lebanon case that the company set up a smuggling system using distributors to shield the company and give it deniability.
Gallaher’s Rescue Plan
Gallaher’s problems date to 1998, when, like other big tobacco firms, the company was reaping huge rewards from selling cigarettes that routinely ended up on black markets abroad. Gallaher and U.K.-based Imperial, for example, were selling so many cigarettes to Andorra, a small European principality in the Pyrenees mountains between France and Spain, that every man, woman, and child would have had to smoke seven packs a day to account for the trade.
Gallaher’s attitude at the time was summed up by Peter Wilson, then its chairman and chief executive, who told the BBC: “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.”
Despite the big profits, 1998 turned into a rough year for Gallaher, according to trial records. Across the EU, as borders disappeared, so did the duty free shops that ran a brisk business in tax-free cigarettes. Taxes on cigarettes — especially in the U.K., its home market — had soared, leading to decreased sales. Then the company sales in Russia, its largest foreign market, nosedived after the ruble was devalued.
At the same time, Gallaher had just upgraded a plant in Northern Ireland with new high-speed cigarette-making equipment that would allow the company to benefit from large-scale production. But the drop in sales threatened the plant’s profitability if it could not be kept operating near capacity.
In response, Gallaher officials embarked on a bold plan to dramatically bolster their sales worldwide. To implement the strategy, Gallaher brought in Jack, a trusted, long-time manager, in the spring of 1999. Jack, according to his sworn statement in Tlais’s lawsuit in Lebanon, was asked to flood markets in developing countries with Gallaher brands — to “sell billions rather than millions.” Jack said the strategy was directly overseen by Gallaher chief executive Wilson himself. There was no plan to support the brands with advertising as is customary in opening new markets.
In his statement, Jack said he prepared a presentation for the Gallaher board explaining how this was to be done, clearly pointing out that the procedures would involve “trading and transit” — the industry code for smuggling. Jack felt he needed to protect himself and communicated regularly with top management because “we were all aware that we were embarking on business that was potentially extremely risky.” To avoid prosecution, Jack said he was told not to put anything in writing, to avoid knowing too much about where cigarettes were destined, and to avoid meetings on the topic.
“By following this course of action,” Jack stated, “we could never be accused of conspiring to smuggle . . . and it was always possible to deny knowledge of everything and blame the distributor.”
To help distribute the cigarettes, Jack signed up Namelex, a Cyprus-based company run by a former Gallaher executive. Tlais was an investor in Namelex and would fund a large number of the company’s tobacco sales, according to court records.
Business at first was great. Over time, Gallaher shipped tens of billions of cigarettes to Namelex’s warehouses in Cyprus and Dubai.
But among Namelex’s staff was a British manager named Michael Clarke (no relation to Judge Clarke, who heard the Tlais case in London). Namelex’s Clarke began to wonder if the plan they were following was legal. He asked Jack, who told him to follow the same rules he was using, according to Jack’s statement. The idea was to look the other way and avoid asking questions.
Under Namelex, there seemed to be no shortage of suspicious shipments. U.K. customs would later say a hefty amount of the company’s cigarettes were eventually smuggled back into the U.K.
From 2000 to 2002, Namelex also sold Gallaher cigarettes to an array of questionable distributors, including a Cypriot-based company named CT Tobacco owned by one Christos Tornarides. A playboy scion of a wealthy, politically-connected family, Tornarides had worked extensively with Imperial and had a reputation for diverting cigarettes, the U.K. court decision said.
Namelex and CT Tobacco got into trouble right from the start. In August 2000, the “Marina,” a Cambodian-registered ship, was stopped by Greek authorities near Crete, packed with more than 11,000 cases (110 million cigarettes) of Gallaher’s Sovereign and Mayfair brands, most of which had been sold or traded to CT Tobacco by Namelex. British and Greek law enforcement reportedly suspected the cargo was to be diverted in Latvia to a paper company run by a former KGB officer from Kazakhstan and then smuggled into the U.K. The ship, according to press reports at the time, attempted to ram Greek customs boats.
One month after the Marina was seized, Namelex sold 65,000 more cases to CT Tobacco for export to Albania, according to testimony and Namelex records. Albania, then a smuggling haven, seemed an odd choice for such a shipment, as no market existed there for Mayfair and Sovereign brands. Jack and Clarke, according to the U.K. judgment, “discussed the risk of diversion in the light of Mr. Tornarides’ reputation, [and] that senior members of the [Gallaher] board . . . were very pleased with the deal which should proceed immediately.”
Gallaher cigarettes were even sold to Iraq and to the regime of Saddam Hussein, then under U.N. sanctions. In an interview, Clarke said he and Jack did business with Hussein’s sadistic son Uday on his yacht in Baghdad, just months before U.S. troops invaded (although he said he and Jack believed their actions were legal at the time).
In 2001, U.K. customs officials issued a red card to Namelex, and Gallaher used the action as a basis for cancelling its contract with the company. Despite Tlais’s close ties to Namelex, Gallaher replaced the distributor with TEL, Tlais’s own company. TEL agreed to sign a new contract and take over vast quantities of Gallaher cigarettes waiting to be sold by Namelex — more than 400,000 cases of them, or 4 billion cigarettes in all. The cigarettes ranged in age from 9 months to two years old, well past the expiration date, according to Tlais. They had been stored in warehouses in Dubai and Cyprus, and some of the packs were discolored and the cigarettes themselves were molding. Mold in tobacco, if smoked, can add to cigarettes’ harmful effect.
The solution was an unusual agreement signed in 2002 between U.K. customs, Gallaher, and TEL. In it, Tlais agreed to provide documentation of future shipments to Gallaher and U.K. customs, and customs officials agreed to supply TEL with real time information on seizures of Gallaher brands, so that TEL could avoid smugglers. Perhaps more importantly, customs also “acknowledged” Gallaher and Tlais’s plan to dispose of their mountain of aging cigarettes: They would mix the old stock into batches of new cigarettes — for export.
“If you look at the industry, it’s unheard of to mix old goods with new goods,” said Clarke, the former Namelex manager who by then had gone to work for Tlais. “If you’re importing old goods through duty paid (channels), you can’t get away with it.”
But as long as the old smokes stayed away from British shores, apparently U.K. customs officials were satisfied. It was an extraordinary deal. The expired cigarettes had no legitimate market overseas, said tobacco experts. They lacked freshness certificates required in many countries, their English-only warning labels were not allowed in many countries, and they lacked proper tax stamps.
U.K. customs did not respond to questions from ICIJ on the agreement or any matter.
Distributors soon began complaining about the moldy cigarettes Tlais was pushing, and a shipment to Iran was turned back. Tlais repeatedly warned Gallaher that the cigarettes were garbage and unsellable, but Gallaher continued to insist the cigarettes be sold. Tlais said he even paid for destruction of the Iranian shipment and asked Gallaher to destroy more of the old stock.
While acknowledging the problem, Gallaher officials still insisted that much of it be sold by mixing it with fresh stock, according to Gallaher records. A handwritten note on the inspection report is clear about what to do next: “Sell [to] Iraq.”
“These goods in the condition that they have been since the first inspection can never be sold in a duty-paid market without problems,” Tlais wrote to Gallaher chief executive Nigel Northridge in 2004 after almost two years of trying to sell the bad cigarettes. “Gallaher has placed me in a very bad position by following their instructions to sell against my own advice.”
Gallaher defended the company’s actions in testimony in the U.K. cases by Nigel Espin, then a Gallaher manager. “I would see a market like Iraq, which was just opening up after the release of sanctions or the relief of sanctions, would be a more suitable market to sell these into rather than a more sophisticated market at that time,” Espin testified. “I would not want to be smoking moldy cigarettes. [But] if I did not have a cigarette at all, then I probably would be quite happy to smoke a moldy cigarette. . . . I do not think that is necessarily bad, that they are sold into Iraq.”
Tlais, who now expresses remorse over the deal, sees it differently. “Gallaher was poisoning people,” he said. “I shouldn’t have allowed myself to sell the cigarettes. I didn’t sell them because I wanted to, but because I had a [U.K. customs] agreement.” Michael Clarke said the implications of the deal should have been obvious. “Everyone knew [the old goods] would be smuggled,” Clarke said. “If you’re selling moldy meat, you’re going to sell it to dodgy people.”
As Tlais worked on unloading Gallaher’s moldy cigarettes, the smuggling game was changing. Gallaher and other cigarette companies were under growing pressure by authorities to clean up their act. Still, TEL proved just as ineffective as Namelex at keeping goods out of the U.K., according to the U.K. court summary.
TEL used a Dubai-based company as its major distributor. The goods were soon diverted to Africa and across Eastern Europe, including to smuggling havens in Latvia, Ukraine, and Montenegro. When U.K. customs officials asked to see documentation, Gallaher said much of the company’s papers were either missing, incomplete, or suspected by Gallaher of being forged, according to the judge’s summary.
Tlais and Clarke dispute this, but Tlais’s reputation was beginning to suffer. There was evidence that CT Tobacco and other companies given red cards were still getting supplies of cigarettes indirectly through TEL.
By 2004, three out of every four genuine cigarettes seized by U.K. customs were made by Gallaher — and Tlais was a prime suspect. In his ruling against Tlais, Judge Clarke found it likely that “well over 50 percent of the cigarettes supplied to TEL ended up being smuggled.”
Tlais disputes the judge’s assumptions, but it was clear that TEL was becoming a liability to Gallaher. “Gallaher never trusted me,” Tlais now recalls. “I kept asking, ‘Do you want to work with me?’ and they said, ‘Yes we do.’”
Tlais said he tried to clean up his business — that TEL stopped working with five suspect distributors, but that his distributors were dumping the old cigarettes wherever they could and he rarely received information from customs to help him avoid known smugglers. He claimed he repeatedly warned Gallaher about other companies, but said officials there were not only uninterested but had originally brought him some of the distributors who later got him into trouble.
TEL was finally red-carded by U.K. customs in 2004. Gallaher cancelled its agreement with the company, citing TEL’s red card, its poor documentation, its closeness to distributors suspected of smuggling, and its failure to investigate seizures. Gallaher brought suit in British court and, furious over the betrayal, Tlais countersued.
Gallaher’s contract with TEL allowed it to break their contract if TEL received a red card. But red cards are unusual administrative actions — a kind of blacklist with no formal hearing or appeal process. Tlais has never seen the documentation of his company’s red card and cannot verify that it even exists. In fact, customs makes the documents available only to U.K. manufacturers, and bases the information primarily on seizures and the opinions of manufacturers themselves. To Tlais, this is far too chummy a relationship and speaks to a “blame the distributor” system that allows big companies to escape accountability.
“Gallaher should have been red-carded, not me,” he said. “They made me sell this [expletive] under their agreement and then they complain about smuggling.”
“The Whole Conversation”
Tlais’s own problems continued. His company soon attracted the attention of investigators of the European Anti-Fraud Office (OLAF), an arm of the European Commission. In 2005, he was charged with smuggling in Greece after an OLAF investigation found that transit cigarettes sold by Tlais for Bulgaria were instead being sold off in Greece. Tlais was considered an accessory to the crime because he had sold the cigarettes to known smugglers. At first convicted and sentenced to four years in prison, Tlais won on appeal and the case was dismissed.
Tlais fared less well in British court, when, in April, Judge Clarke ruled that the company was within the law when it cancelled the TEL contract over concerns about smuggling.
As for Gallaher, the 150-year-old company was bought in 2007 by Japan Tobacco International (JTI), a $50 billion behemoth half-owned by the Japanese government. In December 2007, OLAF and JTI struck a deal to avoid litigation by the European Commission and its member states over smuggling. To atone for Gallaher’s past, JTI agreed to pay a €400 million fine. JTI, for its part, promised to clean up the mess it had inherited. In exchange, JTI got a two-year moratorium on enforcement of smuggling statutes against Gallaher.
Tlais said the whole episode cost him a heavy price both in terms of money and trauma to his family. Everyone involved, he said, ultimately lost. Gallaher’s point man on smuggling, Norman Jack, was considered by some managers to be “too close to Tlais,” according to the court’s judgment, and eventually left Gallaher. Most of the Gallaher executives, meanwhile, have been replaced by JTI.
Michael Clarke, the Namelex manager, is still out of a job. Clarke, for his part, thinks there is plenty of blame to go around, from the dubious distributors to Gallaher and the U.K. customs service. “They always say it’s the distributor’s fault,” he reflected, “but you don’t see the whole conversation.”
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