Philip Morris Reaches $1.25B Deal With EU

BRUSSELS, Belgium – The maker of Marlboro cigarettes agreed Friday to pay $1.25 billion to help the European Union (search) combat smuggling and counterfeiting — and to end years of legal wrangling over a black market that both sides say costs them hundreds of millions of dollars annually.

The EU's head office hailed the deal with Philip Morris International (search), the largest payment it has ever extracted from a single company, as a landmark that could be copied by other tobacco giants threatened with litigation.

"We hope it will serve as a model for other manufacturers who are willing to work with us to combat illegal trade in their products," said EU Budget Commissioner Michaele Schreyer.

The goal is to wipe out illegal sales of black market cigarettes — sometimes genuine but these days usually counterfeit — that deprive manufacturers of sales and governments of tax revenue while generating profits for organized crime or even terror groups.

Philip Morris, a unit of Altria Group (MO), estimates 1 to 2 percent of the 232 billion cigarettes sold with its brands across the 25-nation EU each year are counterfeit.

While the EU agrees that fake cigarettes today are the main problem, and getting worse, its case began in the 1990s over the real article.

The EU alleged Philip Morris and other tobacco companies intentionally oversupplied low-tax markets with Marlboros and other brands so the surplus could be smuggled into countries with higher taxes and sold cheaply on the streets.

Three lawsuits filed by the EU in U.S. courts were dismissed on technical grounds, but a U.S. appeals court gave the EU a green light in January to file a new one based on money laundering laws. Philip Morris, meanwhile, countersued in a European court.

As part of the agreement, all litigation is resolved.

Schreyer conceded that smuggling of genuine Philip Morris cigarettes had been "greatly reduced" over the last few years. She refused to call Friday's deal a settlement or to characterize the payment as a fine for past behavior by Philip Morris.

The agreement includes no admission of liability or wrongdoing, EU officials said.

"The bottom line is and the most important thing is that we turned that page," Philip Morris International president Andre Calantzopoulos said, declining to address the merits of the EU's case. "This is an agreement about looking forward."

Philip Morris International, a unit of U.S. tobacco and food giant Altria Group Inc., will make the payments over 12 years, with half coming in the first three years.

The money will go to the EU budget and the 10 countries that joined the EU's lawsuit against the company: Belgium, Finland, France, Germany, Greece, Italy, Luxembourg, the Netherlands, Portugal and Spain. Other EU countries may join later.

The EU portion is slated to beef up the anti-fraud office in Brussels, but EU officials said it would be up to national capitals to decide exactly how they spend their share of the pie, which has yet to be worked out.

The agreement also requires Philip Morris to pay more "in the event of future seizures in the (EU) of its genuine products above defined quantities."

To prevent that, Philip Morris agreed to make it harder for smugglers to ship cigarettes out of the country for which they were intended, including ensuring sales volumes are "commensurate with legitimate market demand." It also will fortify procedures for tracking its products, including adding indicators on certain packaging.

Both sides also pledged to work together to identify the source of counterfeit cigarettes and interrupt production as well.

Last year, 20 million counterfeit Marlboro cigarettes were confiscated and destroyed in Kosovo alone. Groups ranging from Vietnamese gangs in eastern Germany to paramilitaries in Northern Ireland have profited from the lucrative trade, law enforcement officials say.

The problem is not unique to Europe. Federal authorities arrested 10 people in five states last February for smuggling more than 100 million fake cigarettes from Asia into the United States.

In 2002, the EU sued R.J. Reynolds Tobacco Co. (RJR) in federal court in New York, accusing the maker of Camel and Winston cigarettes of working with organized crime and terror organizations and laundering the profits through New York banks.

A message left at R.J. Reynolds in Winston-Salem, N.C., was not immediately returned. A Geneva-based spokesman for Japan Tobacco Inc., which acquired R.J. Reynolds' international tobacco operations in 1999, said his company would study the deal.

Spokesman Guy Cote added JTI shared the concern over smuggling and counterfeits. "We all have the same problem," he said. "It's sure that we have a commercial interest in this question."

In morning trading on the New York Stock Exchange, shares of Altria Group were up 58 cents at $49.98 while RJR shares rose 38 cents to $65.98.