Pricey cloud of smoke over BAT

A fine imposed recently on British American Tobacco (BAT) by the UK government, linked to claims of international smuggling, raises further concern about its global business practices.

The Wall Street Journal reported last week that the British tax authority, Her Majesty's Revenue and Customs (HMRC), had hit BAT with a £650000 (R11.2-million) fine for oversupplying cigarettes into the Belgian market.

Because tobacco products in Belgium have a lower tax rate, the practice has meant the surplus can be smuggled back to the UK, according to the paper.

This is the first time the UK tax authority has penalised a major cigarette producer for the "oversupply of products to high-risk overseas markets", according to documents seen by Wall Street Journal staff.

Responding to Business Times questions, BAT said it "makes every effort to control [its] supply chain" and was "surprised and disappointed to have received an unjustified and inappropriate fine given that we have been in constant contact with HMRC regarding this matter and have informed them of progress made at every step of the way".

Although BAT has indicated that it intends to challenge the decision, the news comes as yet another uncomfortable development for a company attempting to portray itself as a legal and responsible global cigarette manufacturer heavily involved in a global war against tobacco smuggling.

Locally, BAT, through the Tobacco Institute of South Africa, has embarked on an intensive campaign to highlight and combat alleged smuggling activities of a new wave of "value" cigarette manufacturers, which are seen as a threat to the market share of traditional manufacturers.

Yussuf Saloojee, executive director of the National Council Against Smoking, said that BAT's UK fine was "linked to the illicit trade in cigarettes" and focused attention on evidence that BAT had been involved in illegal practices.

"The tobacco industry overstates the level of smuggling in SA. The reason for that is simple - it blames smuggling on high tax rates, and this puts pressure on the Treasury to keep the tax rate low," said Salojee.

However, the tobacco industry had a long history of complicity in smuggling, he said.

"BAT has been using the war on illicit trade to close down its rivals ... it's been passing on information on members of the Fair Trade Independent Tobacco Association to SARS, but cigarettes that come from major manufacturers will not be reported to SARS."

Francois van der Merwe, head of the Tobacco Institute of SA, disputed these claims, saying the institute's members "conduct their businesses in a legal and responsible manner ".

A Business Times investigation has unearthed evidence that BAT was involved in international industrial espionage using a network of agents paid in SA to "spy" on its rivals.

This activity has attracted the attention of SARS, which has been involved in investigations of the tobacco giant's use of outlawed international payments to pay its network of local informants.