Canada sues tobacco firms for tax evasion in smuggling scheme

TORONTO -- Canada has filed a $1 billion lawsuit claiming that tobacco companies smuggled exported cigarettes back into Canada to avoid paying taxes -- and then pointed to the smuggling as evidence that cigarette taxes fueled the black market.

Police have called the conspiracy the biggest case of corporate fraud in Canadian history. The Royal Canadian Mounted Police have filed criminal charges against some of the same defendants, about a dozen companies falling under the R.J. Reynolds and Japan Tobacco groups.

The lawsuit, filed Wednesday, claimed tobacco companies exported cigarettes and then smuggled them back to avoid paying taxes imposed in 1991.

At the same time, the lawsuit said, the tobacco companies lobbied against the cigarette taxes by citing the smuggling operation they created as an example of the negative effect of higher taxes in Canada compared to the United States.

"A scheme was devised and implemented to gain illicit profits from the smuggling trade in tobacco products, resulting in substantial revenue loss" to Canada, the Justice Department said in a statement. The lawsuit seeks the profits the companies made on the scheme, along with damages.

It is the second lawsuit by Prime Minister Jean Chretien's government against companies in the R.J. Reynolds and Japan Tobacco groups, including JTI-Macdonald Corp. The first, filed in the United States in 1999, was dismissed on grounds that U.S. courts were unable to rule on Canadian tax matters.

JTI-Macdonald issued a statement that called the latest lawsuit a waste of time and money.

"These worn-out allegations are being pumped up by an overzealous anti-tobacco lobby whose very existence depends on repeatedly attacking the Canadian tobacco industry," the company said. "These unfounded claims have been dismissed before and we are confident they will be dismissed again."

According to the criminal case filed by the Royal Canadian Mounted Police in February, JTI-Macdonald allegedly set up a ring that smuggled cigarettes back into Canada in the early 1990s through the St. Regis Mohawk/Akwesasne Indian reservations on the border between Ontario and Quebec in Canada and New York.

Wednesday's government lawsuit said tobacco company officials recruited Indian smugglers, entertaining them on golfing and fishing trips.

JTI-Macdonald was known as RJR-Macdonald Inc. at the time. It was bought in 1999 by Geneva-based JT International, a subsidiary of Japan Tobacco.

"Their purpose was to increase RJR-Macdonald's share of the market among smugglers, to aid and abet the smuggling and increase tobacco sales in Canada, and to pressure Canada into lowering its tobacco taxes," the lawsuit said.

Cigarette taxes were increased in 1991 to try to reduce smoking, lowered in 1994 under pressure from the tobacco industry, then raised again starting in 1999. Taxes generally account for half or more of the cost of a pack of cigarettes.

The police charges cited JTI-Macdonald, four of its U.S.-based affiliates and eight of its former and current executives -- three living in Geneva, Switzerland, four in the United States and one in Canada.

The firm's major cigarette brands include Export A and Vantage.