The European Community has filed on 3 November 2000 in New York a civil action against Philip Morris, R.J. Reynolds and Japan Tobacco. The civil action alleges breaches by these corporations of the U.S Racketeering Influenced and Corrupt Organization Act (RICO). In January 2001 the governments of Italy, Germany and Spain decided to join this civil action.

The full 188-page text of the EU Complaint is available, in PDF format,

at the following link:

http://www.nyed.uscourts.gov/pub/rulings/cv/2000/00cv6617cmp.pdf

Herewith, some excerpts of the complaint which contains 187 pages :

Plaintiff, THE EUROPEAN COMMUNITY, acting on its own behalf and on behalf of its Member States it has the power to represent (hereinafter referred to as "THE EUROPEAN COMMUNITY" or "PLAINTIFF"), by and through its undersigned attorneys, for its complaint against the Defendants, RJR NABISCO, INC., R.J. REYNOLDS TOBACCO COMPANY, R.J. REYNOLDS TOBACCO INTERNATIONAL, INC., NABISCO GROUP HOLDINGS CORP., RJR NABISCO HOLDINGS CORP., R.J. REYNOLDS TOBACCO HOLDINGS, INC., JAPAN TOBACCO, INC., individually and as a successor to R.J. Reynolds Tobacco International, Inc. and its affiliated entities (hereinafter collectively referred to as "RJR DEFENDANTS" or "RJR"), PHILIP MORRIS INTERNATIONAL INC., PHILIP MORRIS COMPANIES, INC., PHILIP MORRIS INCORPORATED, d/b/a PHILIP MORRIS U.S.A., PHILIP MORRIS PRODUCTS, INC., and PHILIP MORRIS DUTY FREE, INC. (hereinafter collectively referred to as "PHILIP MORRIS DEFENDANTS" or "PHILIP MORRIS"), alleges as follows:

[…] The RJR Defendants and the Philip Morris Defendants, jointly and as individual corporations, control, direct, encourage, support, promote, and facilitate the smuggling of cigarettes into the European Community in a variety of ways, including but not limited to the following:

• The Defendants sell cigarettes directly to persons or entities they know, or have reason to know, are smugglers, or to distributors who they know, or have reason to know, are selling the cigarettes to smugglers.

• The Defendants sell large quantities of cigarettes to entities and/or destinations even though the Defendants know, based on their own marketing studies, that the legitimate demand for cigarettes from those entities and/or destinations cannot possibly account for the orders made and the massive quantities delivered. Under these circumstances, the Defendants know that their cigarettes are being sold for illegal purposes.

• The Defendants knowingly label, mislabel, or fail to label their cigarettes so as to facilitate and expedite the activities of the smugglers.

• The Defendants provide marketing information to the distributors and to the smugglers so that the smugglers will order, purchase, sell, and distribute the cigarettes manufactured by the Defendants that are in greatest demand in the area of ultimate consumption of the smuggled cigarettes.

• The Defendants generate false or misleading invoices, bills of lading, shipping documents, and other documents that expedite the smuggling process.

• The Defendants engage in a pattern of activity by which they ship cigarettes designated for one port knowing that in fact the cigarettes will be diverted to another port so as to be smuggled.

• The Defendants make arrangements by which the cigarettes in question can be paid for in such a way as to be virtually untraceable.

• The Defendants make arrangements for the smuggled cigarettes to be paid for into foreign accounts including Swiss corporations and/or Swiss bank accounts in an attempt to improperly utilize Swiss banking and privacy laws as a shield to protect the smugglers from government investigations concerning their activities.

• The Defendants have formed, financed, and directed the activities of industry groups, in order to disseminate false and misleading information to Plaintiff and the public.

• The mails and wires were used, or were caused to be used, the furtherance of the above actions and the unlawful scheme to defraud Plaintiff.

[…] In 1994, the RJR Defendants initiated a process by which their executives could receive massive bonuses if they met specified performance targets. These bonuses could be as high as two to three million dollars to an executive who met certain targets. Motivated by this incentive, these executives met the marketing targets and received these bonuses by drastically increasing sales through smuggling. This process continued for several years and, upon information and belief, still continues today. The European Community experienced a massive surge in smuggling of RJR products in 1996, which on information and belief was directly as a result of the bonus program that RJR put into place.

The RJR Defendants, through their own personnel and outside consultants, analyzed the routes by which large quantities of RJR cigarettes were smuggled into the European Community. From this investigation, RJR was put on notice of and exploited the smuggling routes into the European Community. For example, the Kingdom of Spain has for many years been a primary destination for smuggled Winston cigarettes. The ultimate consumers in Spain demand cigarettes of the highest quality and wanted to be sure that they were receiving authentic American cigarettes. Additionally, various RJR executives were paid money by smugglers to insure that these particular cigarette smugglers would not have other smugglers infringe on their territories.

As the demand for Winstons in Spain increased throughout the 1990s, increased numbers of lesser quality smuggled Winstons from other sources were being smuggled into Spain, thereby interfering with the authorized smuggling that was directed by the RJR Defendants. In order to offset and prevent the unauthorized smuggling, the RJR Defendants undertook certain steps. First, they developed a particular presentation of Winston cigarettes known to the Spanish consumer as "patanegra". Among other ways, the patanegra presentation could be distinguished from regular Winston cigarettes in that it contained certain distinctive markings and did not contain a blue sticker that was found on most Winston cigarettes. The RJR Defendants produced the "patanegra" presentation specifically for their best smuggling customers so as to insure that they could maintain their competitive advantage over other smugglers and the RJR Defendants could increase their market share. The "patanegra" presentation was developed specifically for the Spanish market and sold only in Spain

The RJR Defendants carefully controlled and monitored all the sales of their cigarettes in Spain, both smuggled and legally sold. Because of the way the RJR Defendants mark and label their cigarettes, the RJR Defendants identified RJR cigarettes that were in the marketplace and which were smuggled into the country by persons without the authorization of the RJR Defendants. The RJR Defendants also identified the distributor from whom those cigarettes were purchased. The RJR Defendants control the distribution of smuggled cigarettes in the marketplace, and require their distributors to insure that the smuggled cigarettes are distributed only in the RJR-designated markets. For example, when the RJR Defendants detected a large volume of "unauthorized" smuggled cigarettes on the streets in Spain, the RJR Defendants would purchase the entire load of unauthorized RJR cigarettes. They would then return the cigarettes to the distributor who sold them, and require the distributor to reimburse the RJR Defendants for the amount that they had paid on the street for the cigarettes. The distributors would then resell the cigarettes to a purchaser who would be counted on to smuggle the cigarettes to an authorized destination. In some instances, smuggled cigarettes were seized by Spanish authorities. If these "unauthorized" smuggled cigarettes were seized by authorities and sold at auction, the RJR Defendants would purchase those cigarettes at auction. The RJR Defendants would then require the smugglers to reimburse the RJR Defendants for fifty percent of the price that the RJR Defendants had paid for the cigarettes at the auction. This was one of the ways in which the RJR Defendants would punish smugglers for smuggling unauthorized cigarettes into Spain and thereby control the smuggling market.

[…] From at least 1991 through 1997, a large percentage of the cigarettes that were ultimately to be smuggled was shipped from New-York to the Caribbean for distribution into Europe and South America. In approximately 1991, distributors for RJR informed RJR that they had received complaints from the smugglers that the cardboard cases in which the cigarettes were being packaged were too weak and, as such, the cigarettes were being damaged. The smuggling of cigarettes is performed in such a fashion that there is a greater risk of damage to the product and accordingly the containers for the cigarettes must be made stronger. In response to this information, RJR increased the strength of the cardboard master cases for cigarettes that were to be directed into the smuggling channels. The strengthened master cases were shipped by RJR from ports in New-York to the Caribbean at least from 1991 to 1997. Confirmation that the cases would be strengthened was made by use of the U.S. wires in letters faxed from the RJR offices in Miami to RJR executives and customers in 1991 and 1992.

The RJR Defendants knowingly and intentionally shipped large volumes of cigarettes to individuals and corporations in certain free trade zones such as the Colon Free Trade Zone in Panama. These sales were made to companies that were known smugglers and/or known money launderers. Although the ultimate destination of these cigarettes was nowhere near Panama, RJR shipped these cigarettes directly to Panama so that the money launderers could use the secrecy laws of the Republic of Panama as a shield by which to divert the cigarettes to their ultimate destinations without being scrutinized by the agencies and governments to which customs duties would be owed on these cigarettes. A substantial percentage of these cigarettes were ultimately smuggled into the European Community. The RJR Defendants endeavored to conceal the sale of their products into smuggling channels by transferring the cigarettes to several destination prior to the ultimate delivery to the final customer.

[…] In order for cigarette smuggling to be conducted efficiently, certain labeling and stamping must be conducted at the factory where the cigarettes are produced. Certain labeling, health warnings, and the language in which the package is printed have a significant effect on the value of the cigarettes at their ultimate destination. Also, in order to smuggle cigarettes into certain nations, tax stamps often are affixed to the cigarettes at the factory at the time of packaging. The RJR Defendants, on a regular basis, packaged their products specifically to meet the needs of their smuggling customers. Additionally, it is a routine practice to attach tax stamps or, on many occasions, counterfeit tax stamps on the product at the factory. Had the RJR Defendants and its agents conducted a reasonable inquiry concerning the source and/or validity of the tax stamps, or had they not chosen to turn a blind eye to the source and/or validity of the tax stamps, they would have known that the improper use of the tax stamps facilitated smuggling to the detriment of the Plaintiff.

[…] In order to maintain and exercise control of the smuggling enterprise, the RJR Defendants, as well as Richard Larocca and others, required the smugglers to keep logs of their loads, to keep track of where the loads were delivered, and to record the price for which the cigarettes were sold. This allowed the RJR Defendants to keep direct, hands-on control of the entire smuggling process. The RJR Defendants even threatened smugglers that, if they did not keep proper records of their smuggling activities, the RJR Defendants would deal with other smuggling customers.

In the mid to late 1990s, the RJR Defendants implemented a policy by which they would not sell cigarettes to any distributor unless the distributor verified to the RJR Defendants exactly who the final customer was. If the distributor failed to accurately inform the RJR Defendants who was to be the ultimate purchaser of the cigarettes, the RJR Defendants would either supply no cigarettes at all to the distributor or would only supply a fraction of the volume requested by the distributor. The final destination of all RJR cigarettes sold worldwide was known to the RJR Defendants.

[…] The scheme to smuggle RJR Defendants' cigarettes into the European Community was conceived and executed by each of the named RJR Defendants. When the Defendant, JAPAN TOBACCO, INC., purchased R.J. Reynolds Tobacco International, Inc., the Defendant, JAPAN TOBACCO, INC., continued with the smuggling policies that had been in place prior to the purchase. Even after the purchase of R.J. Reynolds Tobacco International, Inc., the smuggling methods, means, and procedures continued under the ownership of JAPAN TOBACCO, INC. at least through 1999. Richard Larocca is currently an employee of JAPAN TOBACCO, INC. and currently fulfils much the same role for JAPAN TOBACCO, INC. that he fulfilled for the RJR Defendants prior to 1999.

[…] The Philip Morris Defendants have been actively involved in cigarette smuggling for many years, ad this scheme has been carried out by means of activities conducted throughout this District and throughout this State. Examples of the methods and means by which the Philip Morris Defendants have facilitated the smuggling of cigarettes into the European Community include the following:

• The Philip Morris Defendants have, for several years, sold Marlboro cigarettes to an individual known as Corado Baianchi. Mr Baianchi has openly admitted tot he press that he has sold Philip Morris cigarettes to smugglers so that those cigarettes could be smuggled into Italy. In spite of Mr Baianchi's public admission that he has been a conduit between the Philip Morris Defendants and smugglers for the distribution and sale of contraband cigarettes in Western Europe, upon information and belief, the Philip Morris Defendants continue to sell cigarettes to him, even though he has admitted that at least part of his purchases from the Philip Morris Defendants is for the purpose of sales to smugglers. Andrew Reitman, the senior vice-president for Philip Morris's subsidiary in Europe, has acknowledged that Philip Morris does, in fact, know that its cigarettes are being sold as contraband by smugglers into the European Community. In their transactions between the Defendants and Mr Baianchi, the Defendants utilized the mail an methods of wire communication on a regular basis for the purpose of expediting the ordering of cigarettes, shipment and delivery of cigarettes, verification of delivery, payment, and verification of payment for the cigarettes sold as part of the enterprise.

• The Philip Morris Defendants created a circuitous and clandestine distribution chain for the sale of cigarettes in order to facilitate smuggling within the European Community. The Philip Morris Defendants own, either wholly or partially, and/or operate and/or license facilities in the United States that produce Marlboro cigarettes and other brands owned by Philip Morris Defendants. These cigarettes are produced both for domestic consumption and for export. The cigarettes produced for export bear distinctive markings as being United States tax exempt and specifically produced for export. These Marlboro cigarettes are the sold to affiliated or wholly owned distributors in Belgium and in other countries which, in turn, sell the cigarettes to distributors in Europe and also to distributors in the Caribbean and Central America who then return the cigarettes to Europe. The purpose of this labyrinthian distribution structure is to sell, or cause the sale, to distributors that are known smugglers or business associates of smugglers within the European Community, while concealing such sales from government authorities. The decision to establish and maintain this distribution chain was made at the highest executive levels of the Philip Morris Defendants.

[…] The smuggling activities of the Philip Morris Defendants have enabled drug lords to launder their illicit profits. Narcotics-generated proceeds supply funds for the movement of billions of dollars worth of smuggled U.S. and foreign goods, including cigarettes, throughout the world, including the European Community. In short, what starts out as drug currency on the streets of the U.S. cities ends up as smuggled goods, including cigarettes, on the streets of Western Europe. Representatives of the Philip Morris Defendants are on actual notice that the source of funds used to purchase their cigarettes is drug trafficking, yet they continue to receive these funds and to sell cigarettes to these persons. By reason of this conduct, the Philip Morris Defendants aid, abet and act in concert with drug lords to launder their ill-gotten gains. The Defendants have long been on notice that cigarette smuggling activities are linked to money laundering. In or about 1994, the National Coalition Against Crime and Tobacco Contraband, which was funded by RJR and other tobacco companies, retained Lindquist Avey Macdonald Baskerville Inc. ("Lindquist") to, among other things, investigate and analyze cigarette smuggling in the United States. In its August15, 1994, report, Lindquist observed that :"There are indications that some Colombian cocaine barons still handle [contraband] cigarettes, but for a different purpose. It is believed that, in some cases, they patriate cocaine profits earned I the United States through cigarette purchases. These cigarettes are imported into Colombia and sold there, providing cocaine traffickers with a seemingly legal alibi for the source of their wealth".

[…]The Philip Morris Defendants knowingly and intentionally shipped large volumes of cigarettes to individuals and corporations in certain free trade zones such as the Colon Free Trade Zone in Panama. These sales were made to companies that were known smugglers and/or known money launderers. Although the ultimate destination of these cigarettes was not Panama, the Philip Morris Defendants shipped these cigarettes to Panama so that the money launderers could use the secrecy laws of the Republic of Panama as a shield by which to divert the cigarettes to their ultimate destinations without being scrutinized by the agencies and governments to whom customs duties would be owed on these cigarettes. A substantial percentage of these cigarettes was ultimately smuggled into the European Community. Shipments of this type occurred throughout the 1990s. Shipments of this type continue until the present day. In order for the smuggling scheme to operate, the cigarettes must be packaged and labeled appropriately and shipping documents must be prepared for presentation to the various governments of the countries where the cigarettes are sent. The packaging and labeling of the products in question and the preparation of the aforesaid documents are arranged by the Defendant, Philip Morris Products Inc., from its offices in Richmond, Virginia.

Throughout the 1990s and continuing into the year 2000, the Philip Morris Defendants continued to knowingly sell cigarettes to smugglers, or distributors who sell to smugglers, and have gone to great lengths to conceal this fact from the various law enforcement agencies and customs agencies around the world charged with the monitoring of cigarette sales. For example, throughout 1999 and into the year 2000, the Philip Morris Defendants on numerous occasions notified prosecutors and customs officials within the government of Panama that there is currently no authorized dealer in the Colon Free Trade Zone in Panama for the tobacco products of the Philip Morris Defendants. However, the Philip Morris Defendants continue to sell their products to persons in the Colon Free Trade Zone and conceal these activities.

[…] In order for cigarette smuggling to be conducted efficiently, certain labeling and stamping must be conducted at the factory where the cigarettes are produced. Certain labeling, health warnings, and the language in which the package is printed have a significant effect on the value of the cigarettes at their ultimate destination. Also, in order to smuggle cigarettes into certain countries, tax stamps often are affixed to the cigarettes at the factory at the time of packaging. The Philip Morris Defendants, on a regular basis, packaged their products specifically to meet the needs of their smuggling customers. Additionally, it is a routine practice to attach tax stamps or, on many occasions, counterfeit tax stamps on the product at the factory. A reasonable inquiry as to the source of the tax stamps, by the Philip Morris Defendants and/or their licensees, or a reasonable examination of counterfeit tax stamps would easily reveal that the cigarettes in question are being purchased for smuggling purposes. However, the Defendants and/or their licensees knowingly affix improper stamps to their cigarettes or willfully turn a blind eye to the issue of counterfeit stamps so as to maximize the illicit sale of their products.