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American Morning

Cigarette Companies Investigated for Smuggling to Iraq

Aired May 09, 2002 - 09:33   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
JACK CAFFERTY, CNN ANCHOR: Markets are open, average is a little bit lower. Big, big rally yesterday, biggest one-day gains in eight months, and the federal government is looking at what could be a pretty weasely scheme concerning cigarettes and a couple of American companies.

To sort all of these things out, Andy Serwer, our buddy from "Fortune" magazine, the editor-at-large.

How are you doing?

ANDY SERWER, EDITOR AT LARGE, "FORTUNE": I'm OK.

You know, we are watching the futures -- the stock trading, we're open of course, slip a little bit here -- and neither one of us are surprised by that, a little profit-taking. I think an interesting point here, though, is that, you know, the rally yesterday does not mean we are back, and another point is -- low stock prices make for volatile trading. If you had put $10,000 into Cisco yesterday morning, by 4:00 you would have made more than $2,000 because the stock was up more than 20 percent. Of course, you could do damage to the downside in this kind of market too.

CAFFERTY: This all was triggered by some fairly vague comments by John Chambers at Cisco Systems. The company's earnings were a little better than expected. He said, Well, maybe things are getting a little better, maybe there will be some cap-ex (ph) spending, but it wasn't an out and out endorsement, hey, the good times are here again.

SERWER: People are still hoping. Especially with those tech stocks, and I do not think they are going to come back like they were before. No way.

CAFFERTY: All right. Now, what's this deal about these cigarette companies? What's going on there?

SERWER: Well, this is a really interesting story, Jack. Apparently, sources have told the "LA Times" that U.S. federal investigators are looking into allegations that RJ Reynolds and Japan Tobacco and other Tobacco companies have been smuggling cigarettes illegally into Iraq through Cyprus and through Turkey, garnering billions of dollars and avoiding hundreds of millions of dollars of taxes.

CAFFERTY: What do they base this on? I mean, they have hard evidence that they have been doing it? What do the companies say?

SERWER: Well, the companies are denying it right now, but there has been a lawsuit filed by the European Union with all sorts of allegations spelled out. Right now, the U.S. Customs Service is working on this, apparently with the U.S. Attorney's Office in the Southern District of New York.

And you know, smuggling cigarettes is a huge, huge business. Hundreds of millions of dollars every year, over a trillion cigarettes, or sticks, as they're called in the business, cross borders every year. What's really horrible, of course, is that breaking the embargo with Iraq means they are helping out a mortal enemy of the United States. And apparently, the ties are linking this scheme to Saddam Hussein's son, Uday, who controls all cigarette trading in Iraq.

So, if this is true, it's bad stuff. Now the cigarette companies might maintain that they sell cigarettes to intermediaries, but they have no idea where these cigarettes go...

CAFFERTY: Yes, right.

SERWER: ... and the U.S. government is going to have to prove that they actually sent them there, which is probably not true, or that they knew that the cigarettes were being channeled to Iraq. That would be the important point, that they knew the cigarettes were being channeled there.

CAFFERTY: Look (ph) for an indictment?

SERWER: That's very possible, and you know the penalties here can be severe. This is just one sort of penalty. 12 years in prison, a million dollar fine, plus civil penalties of over $275,000 per violation. That is the key, because they can really stack up, and because taxes on cigarettes are going up, smuggling is going up too.

CAFFERTY: All right. Keep an eye on it.

SERWER: We will.

CAFFERTY: Andy Serwer, "Fortune" magazine editor-at-large.

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