EU, Philip Morris reach $1.25 bln legal settlement

The world's top tobacco company, Philip Morris, agreed yesterday to pay $1.25 billion to the European Union over 12 years to fight contraband cigarettes and end legal disputes with the EU over smuggling charges.

The deal between Philip Morris, part of food and tobacco group Altria, involved no admission of liability, but ended all legal battles between the two sides. The amount was slightly higher than a $1.0 billion settlement aired in April.

EU Budget and anti-fraud Commissioner Michaele Schreyer said half of the money would be paid out over the first three years of the deal. Philip Morris will also make payments if its genuine cigarettes were seized in anti-smuggling operations.

"We believe that it will enhance the ability of the European Commission and the member states to combat the illegal trade in cigarettes which results in the loss of substantial tax and customs revenues each year," Dr Schreyer said.

"The payments could, subject to several variable factors, total approximately $1.25 billion over 12 years, and would be payable over those years in varying amounts," the company added.

Altria said in a filing to the US Stock Exchange that it had recorded a pre-tax charge in the second quarter of $250 million for the initial payment.

It will make additional payments of $150 million on the first anniversary of the deal, $100 million on the second anniversary and $75 million each year for the next 10 years.

The funds from Philip Morris, maker of the Marlboro, L&M and Chesterfield brands, would be used by the Commission and EU states. No decision has been taken on how to share them out.

Altria shares opened up 0.5 per cent at $49.65 in New York. The accord involves Philip Morris keeping a close eye on customers to ensure they are not involved in smuggling or faking cigarettes. It will continue its system of selling only so much to a particular market as is needed to meet legitimate demand.

There will also be a system to track shipments to see where genuine goods slip out of the authorised sales networks and the marking of cases to show their intended market of sale.

The Commission has fought years of legal battles with top tobacco firms such as Philip Morris, R.J. Reynolds and Japan Tobbaco, accusing them of colluding in smuggling cigarettes to evade EU customs and taxes.

Philip Morris had in turn gone to the European Court of Justice against the Commission.

"This cooperation agreement represents a major step forward against the common enemy of counterfeit and contraband cigarettes," said Andre Calantzopoulos, President and CEO of Philip Morris International.