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EU, Philip Morris near deal

$1b settlement would end row over smuggling

BRUSSELS -- The European Union and the maker of Marlboro cigarettes said yesterday they were close to a $1 billion deal to end years of legal wrangling by cracking down together on smuggling and counterfeits that are costing both sides enormous sums.

Under the draft agreement, Philip Morris International would make payments over 12 years totaling about $1 billion -- the biggest sum the EU has ever extracted from a single company.

In return, ''all disputes" would be resolved between the company, part of the US tobacco and food giant Altria Group Inc., and the European Commission, which has filed two lawsuits in recent years against Philip Morris and was contemplating a third.

The latest, filed in New York in 2001, accused US tobacco giants of complicity in cigarette smuggling by intentionally oversupplying neighboring countries. Such smuggling is estimated to cost European governments $1 billion annually in lost taxes.

The lawsuit was dismissed on jurisdictional grounds but a US Appeals Court gave the EU a green light in January to file a new one based on money laundering laws.

Even if the lawsuit weren't refiled, analysts said the deal likely would be a good one for Philip Morris if it stems the tide of fake Marlboros into the high-margin European market, which the company says costs it $100 million each year.

''This is not a company that's shy of litigation, to say the least," said David Adelman, tobacco industry analyst with Morgan Stanley in New York. ''I think this is a situation where by providing funds and resolving conflict, you're in a position to much better address and attack a real business issue."

The money could help cash-strapped governments -- particularly in the poor eastern countries joining the EU next month -- hire and train more customs officers, pay for better equipment and technology ''and create a better working relationship," Adelman said.

EU Budget Commissioner Michaele Schreyer said the 10 EU governments that joined the commission's legal action are now reviewing the draft.

''We are waiting on the approval of the member states," Schreyer said. ''We hope that we can sign the agreement very soon."

The potential deal would result in ''substantial payments over a number of years," she said, declining to elaborate. A company spokeswoman confirmed reports of about $1 billion over 12 years.

''That is reflective of the terms of the draft agreement," said Nerida White, a spokeswoman at the company's headquarters in Lausanne, Switzerland.

The amount would exceed the record $611 million the EU recently fined Microsoft Corp. in an antitrust case.

But both sides stressed the prospective payments were not penalties but a commitment to work together. ''What it really represents is moving from conflict to very firm and strong cooperation," White said.

Philip Morris International -- which markets Philip Morris brands outside the United States -- said it is concerned about cheap imitations made in China, South America, and eastern Europe, particularly its most popular, Marlboro.

The May 1 addition of eight eastern European countries into the EU adds another dimension to the problem, given that their cigarette taxes are generally much lower than in western Europe.

Smugglers could get truckloads of authentic Marlboros in an eastern EU member like Latvia, where excise taxes are only 10 percent, and make money by selling them illegally in Britain, where the taxes run to 211 percent and where cigarettes cost about $8.60 a pack.

In a statement, the EU said the draft covers ''broad areas of cooperation with European law enforcement agencies" to ensure the company's brands, which also include L&M and Chesterfield, are sold legally.

Also in the draft are ''customer oversight policies" to deter sales to minors and ''tracking and tracing" provisions from the factory to stores, the EU said.

Philip Morris also said it would pay for the installation of equipment in customs offices to detect fakes.

Schreyer declined to say whether negotiations were underway with other companies.

In 2002, the EU filed a new lawsuit in US District Court in New York against R.J. Reynolds, accusing the maker of Camel and Winston cigarettes of working with organized crime and terror organizations and laundering the profits through New York banks.

Japan Tobacco Inc., which acquired R.J. Reynolds international tobacco operations in 1999, also hoped to open settlement talks after its previous overtures had been rejected, said spokesman Guy Cote in Lausanne.

A British American Tobacco PLC spokesman in London said it too was ready to work with ''governments to counter smuggling."

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