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Countervailing Effects of a Potential Ban on Menthol Cigarettes
Joe Murillo – Vice President and Associate General Counsel
Altria Client Services on behalf of PM USA
February 10, 2011
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Brand Integrity’s Role & Strategies
Role: To protect the integrity of Altria’s tobacco operating companies’ brands and the legitimate trade channels through which they are distributed and sold.
Strategies:
Market Monitoring
Investigative Intelligence
Law Enforcement Engagement & Support
Litigation
Trade Compliance
Product Intelligence & Security
Legislation
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Key Points of Dec. 30, 2010 Submission to FDA
Significant expansion of the unregulated, illicit cigarette market
Increased organized crime
Increased burdens for law enforcement
An erosion in underage access prevention
Declining tax revenues and tobacco settlement payments to the states
Significant job losses within the legitimate distribution chain – from farmers to retail clerks; and
Self-mentholation of cigarettes
PM USA believes that banning menthol cigarettes could trigger a series of unintended consequences that would be detrimental to FDA’s public health objectives and to society more generally. These unintended consequences would likely include:
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Unlicensed Manufacturing (Loosies)
ATF New York - United States CBSA - Canada
Source: Images provided to ALCS upon request by ATF & CBSA January 2011
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Unlicensed Manufacturing (Loosies)
RCMP - CanadaSource: National Post Story: Tobacco taxes encourage cigarette black market, June 20, 2010
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Illegal Imports of Genuine International Products
Seized by CBP at Chicago Mail Port, July 2010
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Illegal Imports of Counterfeit Products
Seized by CBP at Chicago Mail Port
January 2011
Received from www.webvipshopping.com
December 2010
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PM USA Cigarette Manufacturing
Source: Altria Client Services & Altria.com 2010
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Source: China’s Marlboro Country, Center for Public Integrity June 28, 2009
Counterfeit Cigarette Operations in China
Source: Images courtesy of PMI, Fujian Province 2004
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Remote Sales of Illegal Imports & Counterfeits
Source: ALCS BI Google Search February 04, 2011
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Remote Sales of Illegal Imports & Counterfeits
discount-cigarettes-store.com USA001.com
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Ties to Organized Crime and Terrorism
Source: Miami New Times, July 02, 2009
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Countervailing Effects of a Potential Ban on Menthol Cigarettes
Joe Murillo – Vice President and Associate General Counsel
Altria Client Services on behalf of PM USA
February 10, 2011
Countervailing Effects of a Potential Ban
on Menthol Cigarettes
Prepared Remarks by Joe Murillo
Vice President and Associate General Counsel
Altria Client Services on behalf of PM USA
TPSAC Meeting, February 10, 2011
Rockville, MD
Mr. Chairman, thank you for the opportunity to address the committee.
My name is Joe Murillo. I am Vice President and Associate General Counsel for
Altria Client Services. I am here today on behalf of Philip Morris USA.
As part of my job, I oversee our Brand Integrity Department, which we
formed nearly ten years ago to lead the company’s efforts to combat illicit trade.
We undertook that effort because, as tobacco products move outside of the legal
distribution chain, law abiding businesses lose revenue. Consumers lose out on
quality. And states and localities lose taxes, while experiencing higher levels of
crime. That is why we have developed the strategies shown on slide 2.
Our efforts range from monitoring sales channels for illicit activity to
advocating for legislation that strengthens the law in this area. In addition, we
have supported hundreds of law enforcement investigations. This includes
working with the ATF, the TTB, the FBI, and dozens of other federal, state and
local law enforcement agencies. We have also brought lawsuits against
thousands of entities, to stop counterfeiting and other contraband activity.
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Today, I would like to talk to you about the countervailing effects of a
possible ban or restriction on menthol. We discussed these effects in detail in our
December 30th submission to the FDA. They are shown on slide 3 and include:
a significant expansion of the unregulated, illicit cigarette trade
increases in organized crime
increased burdens on law enforcement
an erosion of efforts to prevent underage access
declining tax revenues and other payments to the states
significant job losses, and
increased self‐mentholation of cigarettes.
My remarks today focus on the illicit cigarette trade. Based on our years of
experience in this area, we believe that a ban or other restriction on menthol
would result in a significant increase in the demand for contraband cigarettes.
While the exact amount of this increase may be the subject of debate, there is
little doubt that a large increase would occur.
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We expect that existing criminal networks will adapt and expand to supply
contraband menthol cigarettes to fill the unmet demand that a ban would cause.
There would likely be three sources of illicit menthol cigarettes in case of a ban.
Unlicensed and unregulated manufacturers
Smugglers, who illegally import cigarettes meant for sale outside the
United States
And counterfeiters.
Regarding the first group, a number of unlicensed and unregulated
cigarette manufacturers currently operate in North America. Some of these
manufacturers are reportedly on Native American reservations along the
U.S./Canadian border. According to government reports, these manufacturers
produce millions of unregulated cigarettes every day. The cigarettes they
produce, which include Menthol varieties, are often sold in plastic bags and are
called “loosies.” Examples of loosies, seized by the ATF and the Canada Border
Services Agency, are shown on slide 4.
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Loosies demonstrate the remarkable capacity of illicit cigarette traders to
fill a demand where legitimate products are either too expensive or not available.
It is estimated that these untaxed, unlabeled, and unregulated loosies account for
40‐50% of all cigarettes smoked in certain areas of Canada.
Illegally imported cigarettes are another form of illicit trade. Slide 6 shows
the front and back of Marlboro Menthol cigarettes that were manufactured by
Philip Morris International for sale in the Philippines. Philip Morris International is
a separate company operating outside of the United States. These cigarettes
were illegally diverted by smugglers and were seized by U.S. Customs en route to
Illinois.
We are also greatly concerned about a large increase in counterfeit
cigarettes. Counterfeit cigarettes are fakes designed to look like the real thing.
The Marlboro Menthol cigarettes pictured on the left of slide 7 are counterfeits
recently intercepted by U.S. Customs in Chicago. The pack of Newports pictured
on the right was purchased through a website and shipped from China.
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It is hard to appreciate just from these pictures how similar in appearance
these packs are to genuine packaging. Counterfeiters have developed
sophisticated methods of producing high quality packaging. It usually takes an
industry expert to tell the difference.
The majority of counterfeit cigarettes sold in the United States originate
from China. Counterfeiters in China are reported to have the capacity to produce
more than 400 billion counterfeit cigarettes each year. To put that in perspective,
that would amount to about 125% of the total U.S. cigarette volume.
Genuine cigarettes sold by Philip Morris USA are manufactured in modern
regulated facilities, such as the one shown on slide 8, which are registered with
and subject to inspection by the FDA. By contrast, facilities used to produce
counterfeit cigarettes, such as these in China shown on slide 9, do not operate
under the same product regulation and controls.
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Illicit cigarettes are distributed in a variety of ways. Counterfeit and illegal
imports often arrive in large container shipments. Unlicensed domestic
manufacturers ship by the truckload. These illicit products are then often
distributed through organized criminal networks to retail shops and street
vendors. But one of the most alarming distribution channels is a simple point and
click order through the internet.
As slide 10 indicates, a recent Google search for “cheap menthol cigarettes”
produced about 290,000 hits. As an example of what these sites offer, slide 11
shows screenshots of websites that sell untaxed, unregulated counterfeit and
other illicit cigarettes to U.S. consumers. The cigarettes offered for sale include
menthol variants of U.S. and international brands, many of them complete with
counterfeit state tax stamps. These websites are readily available to U.S.
consumers and offer express shipment into the United States.
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Whether through the internet or through other means of distribution, illicit
sales often involve large organized, criminal enterprises. It has been widely
reported that major international criminal organizations participate in the illicit
cigarette trade and use the substantial profits to fund other criminal activities.
A menthol ban would likely create more opportunities for a variety of criminal
enterprises.
We urge the committee and the FDA to carefully consider these likely
effects. Thank you again for this opportunity to address you. I would be happy to
answer any questions you may have.