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RJR affiliate pleads guilty to cigarette smuggling

December 23, 1998
Web posted at: 12:45 a.m. EDT (0445 GMT)

WASHINGTON (CNN) -- A now-defunct subsidiary of R.J. Reynolds Tobacco International pleaded guilty Tuesday and will be fined $15 million for operating a two-way excise tax-dodging Canadian cigarette smuggling operation.

The company, Northern Brands International, was charged with illegally moving 27 loads of Canadian cigarettes into the United States under the ruse that they were intended solely for export to Russia and the Republic of Estonia.

Instead, the merchandise, including the brand Export A, was diverted to the U.S. market for a short time and then smuggled back into Canada -- via an Indian reservation that straddles the Canadian border -- where they were sold into the black market.

The scam allowed Northern Brands, based in Winston-Salem, North Carolina, to avoid paying U.S. excise taxes and even steeper Canadian taxes as well, thus creating more profit for Northern Brands. The illegal operation took place from August 1994 through June 1995.

"Today's guilty plea may be the first time an affiliate of a major tobacco company has been convicted of a federal crime in the United States," said Thomas Maroney, U.S. Attorney for the Northern District of New York.

"I can only hope that the actions of these companies are not indicative of a new kind of cancer that could be linked to tobacco in the future," said U.S. Customs Commissioner Raymond Kelly.

RJR 'cooperating with the government'

Law enforcement sources tell CNN the probe is ongoing and federal authorities would like to know who at R.J. Reynolds set up the now-defunct Northern Brands. Officials also want to know, what-if anything RJR officials knew about Northern Brands' operations.

"In light of the recent debate surrounding the tobacco industry, now more than ever we must be vigilant in our efforts to prevent the smuggling of cigarettes," Kelly said.

RJR released a statement Tuesday, saying the company "very much regrets this episode."

According to C. Stephen Heard, Jr., a lawyer for Reynolds International, the company is undertaking "our own internal investigation to see how this could all happen. We're cooperating with the government."

He added that the company is "in the process of implementing a new worldwide customer screening process." The company will also set up an "enhanced corporate compliance program to better educate our sales representatives about what they can do and not do in the export sales market."

From CNN Justice Correspondent Pierre Thomas

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