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In Depth - Tobacco Traffic - Phillip Morris Responds

Dear Mr. Schapiro and Ms. Zill:

Thank you for your follow-up inquiry. We explained in our previous statement that while the lawsuits against Philip Morris International ("Philip Morris") and its affiliates had all been dismissed, the plaintiffs had indicated their intention to appeal, and thus we would not discuss the specific allegations of those cases in the media. Those appeals have now been filed. The plaintiffs have also indicated that they intend to file new suits dealing specifically with money laundering allegations. Since the questions raised in your letter reflect specific allegations in the existing and threatened lawsuits, we will address those allegations in court, if necessary. However, we can offer the following comments.

Philip Morris' Position on Money Laundering

Philip Morris does not condone money laundering; nor do our business practices facilitate it. When the U.S. government highlighted the use of consumer goods as a possible mechanism for money laundering in the late 1990s and began working with U.S. companies to prevent them "being victimized by drug money-launderers," Philip Morris, like many other U.S. companies, enhanced its pre-existing policies to guard against the use of its products as part of the money laundering chain. Philip Morris has comprehensive policies designed to ensure that we receive funds only from legitimate sources.

We also reiterate what we said in our prior statement: we believe that there is no problem with respect to the smuggling of genuine Philip Morris products (as distinct from counterfeit products) into Colombia today. The Republic of Colombia agrees. Thus, to the extent that money laundering in Colombia is linked to the smuggling of cigarettes, Philip Morris' products are not involved.

Finally, we hope you will acknowledge the involvement of the U.S. plaintiff lawyers representing the Colombian Departments in the preparation of your program. Allegations about money laundering, which only recently became a focus of the Colombian Departments' lawsuits - just as the Court was about to dismiss the Departments' smuggling claims - represent an attempt by these contingency fee lawyers to prop up a failing lawsuit with inflammatory statements designed to elicit media coverage.

Money Laundering Generally

Any objective discussion of money laundering and its relationship to the sale of consumer goods must take into account the overall context and history of the money laundering problem. Money laundering has been and remains a major international problem for banks and other financial institutions and governments. Misuse of financial systems through complex transactions involving the placement, layering and integration of billions of dollars through banks to launder funds has been widely reported. For example, you will no doubt be aware, from your own research in this area, of the recent Bank of New York case, which reportedly involved the laundering of $7 billion.

Money Laundering in Colombia

As PBS has previously reported, the Black Market Peso Exchange ("BMPE") has been used to finance the purchase of a wide variety of different consumer goods, including computers, electronics, household appliances, cigarettes, alcohol, footwear, textiles, automobiles and even helicopters. See, e.g., Zill and Bergman, U.S. Business and Money Laundering. As explained in the Congressional hearings on this issue in June of 1999, representatives of the U.S. government met with many different U.S. companies in 1998 and 1999 in an effort to educate them about the BMPE and steps that could be taken to avoid being "victimized by this trade." See Senate Caucus on International Narcotics Control Committee Hearing (June 21, 1999). The first was for companies to implement "know your customer" policies. The second was for companies selling products to Colombia to accept only certain forms of payment and to avoid payments with cash, money orders or third party checks, as well as multiple payments in small amounts designed to circumvent the reporting requirements of the U.S. banking industry. The third was for companies to deal only with licensed distributors in Colombia itself. As discussed below, Philip Morris has implemented all of these initiatives, and has taken additional measures as well.

Philip Morris' Response to the Money Laundering Problem

Philip Morris, in common with other consumer goods companies, has responded to those concerns by reviewing and enhancing pre-existing procedures relating both to customer selection and acceptable forms of payment. The results of that exercise are reflected in the enclosed copy of the Philip Morris Companies Inc. Policy Statement on Compliance with Fiscal Trade and Anti-Money Laundering Laws. We would draw your attention to the following elements of the Policy Statement in particular:

  • The Company's policy is clearly articulated:

    "We will not condone, facilitate, or support contraband or money laundering and we will cooperate with governments in their efforts to prevent illegal trade in the products that we manufacture." (para. IV. A)

  • Employees are given clear direction by the Policy Statement:

    "Moreover, in no circumstances should an employee assist any person in any conduct involving our products that violates fiscal, trade or anti-money laundering laws and/or regulations, including evasion of applicable taxes or import duties." (para. V. D)

  • Detailed "know your customer" checks similar to those first adopted by banks and financial institutions in response to money laundering are mandated. These require that before approving any new customer for any significant volume of our products, managers should obtain sufficient information about the customer and the customer's business to satisfy themselves that it is: (i) an existing legal entity; (ii) creditworthy; and (iii) a reputable enterprise engaged in a legitimate business. All such checks should be documented and repeated periodically, including in the event of any change in control of the customer. The frequency and extent of such checks will vary according to factors such as the nature and extent of the relationship, the level of purchases and the geographic areas where that customer does business. If there are any suspicious circumstances present or inconsistencies in information, additional due diligence should be undertaken. (para. V. A)

  • "Know your payment" policies designed to ensure that we receive funds only from legitimate sources are stipulated. These policies restrict acceptable forms of payment to (a) wire transfer or check, in both cases from a bank account in the customer's name; (b) cashier's check or bank draft, in both cases issued by a bank in the country in which the customer is located, and (c) cash, but only where the nature and scale of the customer's business are such that it is not commercially feasible under the local conditions for the customer to make other arrangements. This last provision has been applied only to small transactions with retailers who purchase directly from our affiliates in some countries. In all cases, payment must be made in the same currency as the invoice, and third party payments are unacceptable. (para. IV. B)

    In addition, we re-examined certain customer relationships and, in some cases, made decisions either to terminate or not renew the relationship upon its expiration. Given the pendency of the litigation and other legal issues, we cannot discuss specific customers or the specific reasons for those decisions. However, contrary to the suggestion in your letter, sales to companies controlled by the Mansur family in Aruba were terminated in late 1998, not 2000.

    We have also communicated our compliance policies to our customers, together with a statement that we expect our customers to act in a manner consistent with those policies, and warning customers that non-compliance could result in suspension or termination of our relationship. In some cases, we met with customers to educate them about our policies and encourage them to adopt their own formal procedures and guidelines geared to this issue.

    As we explained previously, we also subsequently entered into a cooperation agreement with the Republic of Colombia to formalize our efforts regarding smuggling. From the perspective of both Philip Morris and the Republic of Colombia, the agreement has been working very well.

    Philip Morris, like other companies, has taken substantial steps to address the concerns of governments. We believe that our policies and procedures represent a comprehensive, effective and responsible approach to the money laundering issue to the extent it impacts a consumer goods company.

    The Patriot Act of 2001

    Finally, with respect to your inquiry about the USA Patriot Act of 2001, certain changes to the proposed legislation were supported by the U.S. Chamber of Commerce and the National Association of Manufacturers ("NAM"), which represent the U.S. business community at large and not just Philip Morris. These proposed changes in no way affected the government's ability to bring suits to combat terrorism (efforts which, it should go without saying, we fully and unequivocally support). Nor were the business community's proposals predicated on concerns about money laundering (which is comprehensively covered in U.S. statutes). Rather, the proposals were intended to ensure that there would be no possible misinterpretation of the legislation to abrogate the longstanding Revenue Rule doctrine, applied by countries across the world, that precludes a foreign nation from suing in other countries' courts to recover foreign taxes.

    As Senator Miller (who sits on the Senate Finance Committee) explained during the mark-up of the bill, "we needed to have a clarification that would require that foreign governments that want to file lawsuits to enforce foreign laws should use their own court system and not ours." See Markup of International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001 Before the Senate Comm. on Banking, Housing and Urban Affairs, 107th Cong. 1n. 421-34 (Oct. 4, 2001).

    As the United States Court of Appeals for the Second Circuit recently held, allowing these claims for foreign taxes to be brought in U.S. courts would undermine the authority of the U.S. government to negotiate tax treaties with foreign nations, embroil the U.S. courts in sensitive foreign relations issues, and place American trade interests at a competitive disadvantage. The changes proposed by the Chamber of Commerce and NAM were intended to ensure that the legislation did not inadvertently alter this longstanding judicial doctrine.

    Conclusion

    Again, we hope this letter is helpful to you and contributes to your understanding of these complex issues and Philip Morris' efforts. Thank you for taking the time to obtain our thoughts.