Tobacco giants to pay $550-million settlement

A warning is seen on a package of Canadian cigarettes in Montreal

A pack of Canadian cigarettes with a warning label is seen in Montreal, June 28, 2007. The Supreme Court of Canada has unanimously upheld a law limiting tobacco advertising, ruling that although the restrictions limited free speech they were justified by the need to boost public health. REUTERS/Shaun Best (CANADA) SHAUN BEST/REUTERS

Two prominent tobacco companies will pay $550-million to the provincial and federal governments to settle lawsuits that accused them of shipping cigarettes from Canada to the United States, only to have them smuggled back into Canada at bargain prices.

R.J. Reynolds Tobacco Co. of Winston-Salem, N.C., which no longer sells cigarettes in Canada, will pay $325-million, while its defunct subsidiary Northern Brands International Inc. will pay $75-million. JTI-Macdonald Corp. of Toronto will pay $150-million.

Like a similar settlement in 2008 that saw two other tobacco firms pay more than $1-billion in civil and criminal penalties, Tuesday’s deal drew the wrath of anti-smoking groups that said the companies got off far too easy. The tobacco makers’ actions – which helped depress cigarette prices – contributed to increased smoking and thousands of deaths, they said.

Under the deal, R.J. Reynolds admitted no wrongdoing while Northern Brands pleaded guilty to a count of conspiracy to aid in the sale and possession of contraband cigarettes in the early 1990s. JTI-MacDonald pleaded guilty to a regulatory offence. All other criminal charges against the companies and individual executives were withdrawn.

The settlement money will be split among the federal government and the provinces, with Ottawa getting about $266-million. Quebec will get the largest provincial chunk, about $97-million.

“It is a good thing to put this behind [us],” federal Minister of National Revenue Keith Ashfield said in an interview. “It was a very complex file … and I think what we arrived at is a reasonable settlement.”

Starting around 1989, tax-free cigarettes began pouring across the border from Canada, often through native reserves, with the complicity of the tobacco companies. In the United States, the cigarettes were distributed to smugglers who sent them back to Canada to be sold at very cheap prices.  Ottawa tried to stop the trade by increasing export taxes on cigarettes, but later decided to sharply cut tobacco taxes to make the smuggled cigarettes less attractive. The government lost billions of dollars of tax revenue as a result, while smoking became much cheaper. That’s what infuriates anti-smoking groups, which say the tobacco companies got sweetheart deals in their settlements, considering the damage caused.

“It’s a rotten deal for Canadian taxpayers,” said Neil Collishaw, research director at the lobby group Physicians for a Smoke-Free Canada. “It’s chicken feed compared to what these people owe.” The taxes avoided through smuggling were several times higher than the $1.7-billion in settlements paid in the past two years, he said, perhaps as much as $5-billion.  The firms and their executives have been given a “get-out-of-jail-free card” and can pay their taxes “at 25 cents on the dollar,” Mr. Collishaw said.

Garfield Mahood, executive director of the Non-Smokers’ Rights Association, said the cheaper cigarette prices that resulted from the smuggling – and the subsequent tax cuts – increased rates of smoking in the 1990s, especially among young people. This caused as many as 40,000 additional tobacco-related deaths, he said. “There is nothing in this settlement that addresses the tragic health repercussions from this criminal behaviour.”

In the United States, some settlements in government suits against the tobacco industry included health benefits, but in the Canadian cases “there is not a peep of this,” Mr. Mahood said. He characterized this latest settlement as “ugly” and a “cave-in.”

The tobacco companies take a different view. “The terms of the settlement are acceptable to us, given the nature and extended duration of the proceedings,” said David Howard, a spokesman for R.J. Reynolds. “We’re certainly happy to put this matter behind us and move forward,” he said, while eliminating the “continuing expense, inconvenience and distraction.”

While this settlement brings an end to the litigation on the cigarette smuggling front, there are still substantial lawsuits outstanding against the tobacco companies in Canada. Several provinces have filed suits to try to reclaim some of the health-care costs that they say have been boosted by tobacco use.

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