A comparison of Colombian tobacco imports with US tobacco exports reveals just how many contraband cigarettes were being shipped southward from the United States. According to the US Department of Agriculture’s Economic Research Service, $21.6 million worth of cigarettes — 1.06 billion sticks — were exported from the United States to Colombia in 1996. In that same year, the Colombian Department of National Statistics (DANE) officially recorded $10.7 million worth of cigarettes — just over 800 million sticks — as having been legally imported into the country from the United States. That discrepancy between exports and imports appeared through most of the 1990s.
Internal company documents dating back to 1991, made available as a result of the 1998 states’ settlement and introduced as evidence in the Colombian lawsuit, reveal how Philip Morris and BAT were battling for market share during this time — the same period during which the overwhelming bulk of cigarette smuggling to Colombia occurred. The record, for example, of a January 14, 1992, meeting in Miami held by BAT executives representing the company’s wholly owned subsidiaries in the United States (Brown & Williamson), Brazil (Souza Cruz), and Venezuela (Bigott), under the heading "Colombian Group Meeting Minutes," shows officials discussing cigarette marketing in Colombia, indicating the per-pack, no-tax price in pesos in 1991, a year in which the company had negligible legal cigarette exports to the country. The minutes noted that the company would begin selling "duty-paid" — i.e., legally imported cigarettes on which taxes are paid — in the coming year, 1992.
A document covering roughly the same period from the Philip Morris International division, titled "Latin America Region Strategic Plan," provides a listing of prices for its "duty-free" customers in La Guajira and Aruba for the years 1991-’93. During this time and into the late 1990s, Philip Morris was advertising heavily and maintaining an office in Bogot‡, while the company’s legal imports amounted to, as Steiner put it, "close to zero."
In fact, both BAT and Philip Morris were deploying mass advertising and discount marketing, and were providing favorable financing terms to their distributors in the battle for market share, when their sales were almost entirely illegal. Documents from both companies reveal the intense competition and propose measures such as discounts to wholesalers, contests, and free gifts to outflank each other. "Plans for 1992," Brown & Williamson minutes from a 1991 meeting state, "are to offer a five percent free-goods incentive in Maicao and in the San Andresitos to expand distribution in Bogot‡ and Medell’n." ("San Andresitos" is a colloquial reference to the kiosks that abound in Colombian cities selling smuggled goods; the name came originally from the Colombian island of San Andres, located off the east coast of Nicaragua, which itself has served as a key smuggling center.)
Until recently, few tobacco-industry insiders were willing to talk about the companies’ role in smuggling. But in February, Alex Solagnier, a 20-year veteran with BAT’s primary Colombian distributor for cigarettes, an Aruba-based company called ROMAR, went public. Solagnier worked as a marketing and finance manager and finally as the company’s chief financial officer, until he was fired after a business dispute with his superior in 1999; his chief responsibility had been selling BAT brands in Colombia. My NOW co-producer Oriana Zill and I were the first American journalists to speak with Solagnier, whom we filmed at his home in Aruba.
Solagnier says that BAT was integrally involved in setting the pricing, organizing distribution routes, and marketing cigarettes to the company’s distributors at a time when, he says, "95 percent of it [BAT’s cigarettes] was contraband." ROMAR itself, Solagnier explained, was set up with financing from BAT, in partnership with Aruban businessman Roy Harms, specifically to sell to the Colombian market when the bulk of BAT imports were smuggled into the country. (After a lengthy legal battle in which Solagnier and Harms traded accusations about financial mismanagement, an Aruban court ordered Harms to pay Solagnier more than $400,000 in severance pay, a figure for which Harms was reimbursed by BAT’s London headquarters.)
Solagnier explained that during the years 1994-’96, most of BAT’s cigarettes were sold by ROMAR in Maicao "on consignment," meaning that while ROMAR handled the distribution, the cigarettes were owned by BAT when they were sold in Maicao. He recalls going on trips with BAT officials to assess the placement of the cigarettes, to determine their credit needs, and to assess local demand. After studying the preferences of Colombian smokers, Solagnier says that BAT even designed a special cigarette package for its Belmont brand, which was produced by the company’s Venezuelan subsidiary, Bigott, with a hinge lid on a hard-box pack, distinguished from the soft packs sold in Venezuela. BAT was promoting Belmont as competition for Philip Morris products. "They knew that all these cigarettes were being smuggled," he says.
Solagnier also explains that in the early 1990s, BAT and Philip Morris discovered the benefits of selling at least a small portion of their cigarettes legally, with full duties paid. Thus, reference to distinctions between "DP" (Duty Paid) and "DNP" (Duty Not Paid) began to appear in both companies’ internal documents. On April 16, 1992, a fax sent from BAT’s British headquarters to its branch office in Venezuela indicated the company’s growing sensitivity to attention being paid to contraband. In the memo, the executive asks whether the company could continue "with DP and DNP in parallel and be seen as a clean and ethical company at the same time" (underline in original). "Can we really do all this and continue DNP," he adds.
Translation: the company was interested in whether it would be beneficial to pursue legal imports along with its existing illegal imports. The answer, as shown by company documents and import statistics, was yes. Both BAT and Philip Morris gradually began increasing the number of legitimately imported cigarettes — while the flood of smuggled cigarettes continued. Solagnier says that this dual system came to be known as the "umbrella" — a system of providing legal cover for advertising and marketing a product the bulk of which continued to be smuggled.
And the advertising was, by the mid 1990s, everywhere. In magazines, at sporting events, on billboards, ads for American cigarettes seemed more abundant than they are here in the United States, where ever-tighter restrictions have been placed on the tobacco companies’ ability to advertise. At the same time, the companies launched a particularly cynical ploy — pressuring Colombian government officials to lower taxes on cigarettes as a means of reducing the incentive for smuggling. Josˇ Manuel Arias, director of the Colombian Federation of Departments, says that representatives of Philip Morris and BAT lobbied the state and national governments to lower Colombia’s relatively hefty taxes on cigarette imports.
Their efforts paid off. According to Dr. Diego Roselli, a professor of pediatrics at Javieriana University in Bogot‡ and former chair of the Colombian Council Against Cancer, the country saw a drop in cigarette tariffs from 125 percent to 45 percent in the mid 1990s. But the dramatic tax cut had a negligible impact on smuggling. Cigarettes continued to pour through the smuggling pipeline, selling for a little over a dollar a pack, just a quarter more than cigarettes produced in Colombia. At the same time, the tobacco companies gradually increased the amount of legal imports, where the margins were slimmer, but where they now enjoyed a lower tax rate and still obtained critical cover for advertising and other marketing activities.
Turning off the tap
The week in late November when I arrived in La Guajira, trouble was brewing. The government had initiated a crackdown on contraband: the previous weekend, Maicao traders attacked the warehouse of Colombian customs (DIAN) in the town, looting it of all the goods that the DIAN had confiscated in the previous weeks, including cartons of cigarettes. The director of DIAN, Ricardo Ramirez Acuna, would later explain that an "arrangement" had been struck in which the companies agreed to assist the customs service in insuring that their cigarettes traveled through legal channels.
While Colombian officials see this as good news, they also say that it is a strong indication of how deeply the companies have been involved in the smuggling enterprise. When they decided to turn off the tap, off it went.
As a result, however, the Way’uu, long accustomed to being the transport mules of the contraband business, now feel betrayed by Philip Morris. For the first time, they were willing to speak publicly about the long-time relationship they had with Philip Morris during more than a decade of boom times, fueled partly by the cigarette company’s nicotine contraband.
"We feel betrayed by Philip Morris because the Way’uu were the ones to bring the Marlboro cigarettes from the Caribbean islands into Colombia," asserts Alvaro Iguaran, a Way’uu lawyer and legal adviser. "Philip Morris sent their cigarettes through Maicao.... The Way’uus were the ones who distributed the cigarettes and showed them to the rest of the country. Once the market was established, now they leave us and go elsewhere."
With the crackdown on smuggling, unemployment among the Way’uu in La Guajira has jumped 20 percent. "Philip Morris should build us a hospital and some schools," argues Iguaran, who doesn’t want to wait for the Colombian state governments' lawsuit against Philip Morris and British American Tobacco to be resolved. "They should do this on their own, and not just because of this legal case!"
Iguaran’s plea is echoed in the comments of Ingrid Betancourt, a former congresswoman and senator running as an independent for president on an anticorruption platform. (Betancourt was kidnapped by the FARC guerrillas in February and remains in custody.) "Philip Morris pushed enormous quantities of cigarettes through Maicao into all of Latin America," she told me last November in Bogot‡. "If the Way’uu don’t do contraband, they starve.... Philip Morris has poured millions of dollars into a new NGO they created to promote the culture, dances, folklore of Colombia. Fine. But what about the Way’uu?"
Reflecting on BAT and Philip Morris’s deal with the Colombian authorities, Alex Solagnier comments: "They know they got caught.... Now they want to cooperate to combat something they initiated and organized. They invented it. And the question is not what they’re going to do now, but what did they do to create this problem?"
