Tobacco's Other Secret

Once Les Thompson was a record-breaking sales executive for R.J. Reynolds Tobacco Co. He had a million-dollar expense account.

Now, however, Thompson is facing a six-year prison term. He says he is the fall guy in a smuggling scheme that netted R.J. Reynolds more than $100 million. 60 Minutes II Correspondent Scott Pelley investigates.

"RJR makes a conscious decision to enter the illegal cross border business," Thompson says. There is "no question," Thompson says, that this was a corporate decision.

The Northern Brands subsidiary was the answer to a crisis R.J. Reynolds was facing in Canada. In 1991, the Canadian government increased taxes on cigarettes, nearly doubling the price of a pack. The government's idea was to cut smoking, especially among teen-agers. The plan worked: Sales plummeted.

So what did the company do? "Really the options were limited," Thompson says. "The no-brainer in the equation becomes: We have to enter the black market. We have to enter the black market. We've got to pursue this tax-free environment through the illegal smuggling efforts back into Canada."

If the cigarettes were smuggled, Canada couldn't tax them. The cost of a pack would fall by half, and sales would soar.

Thompson, who worked for R.J. Reynolds for 20 years, says the smuggling was set up like this: Canadian cigarettes were shipped to the United States and then onto an Indian reservation in upstate New York. The reservation straddles the border.

R.J. Reynolds' cigarettes, called "Export-A's," were loaded onto boats and carried to the Canadian side of the reservation. The smugglers claimed that because they never left the reservation, the cigarettes were legal. But Thompson says that it important to understand that the reservation was receiving 5 billion cigarettes a year.

The pretense was the cigarettes were legal because the smugglers claimed they never left the reservation.

But Thompson says you have to understand the reservation was receiving 5 billion cigarettes a year. "It's a little difficult to digest," Thompson says. "The numbers state that there are approximately 2,800 Native Americans that live on the reservation."

That means each man, woman and child on the reservation would have to smoke nearly 5,000 cigarettes a day. In fact, Thompson says, the cigarettes were distributed throughout Canada. He claims that, at one point, 60 percent of R.J. Reynolds' Canadian business was from smuggled cigarettes.

According to Thompson, in 1993, Northern Brands averaged $1.3 million a week in profits.

"We were considered the most - single-most - profitable business unit in the RJR Nabisco family of companies," Thompson says.

Did anyone at the company ever ask questions about how he had done so well? "They didn't want to know; they didn't want to talk about it," Thompson says. "They knew exactly where the money was coming from. They knew the answers, why ask them? They knew the answers."

Thompson says his worries about the business were eased by R.J. Reynolds executives in Canada. "A lawyer on the company's board tells me in a meeting in my vice president's office that 'This is a legal business. It's a loophole. Nobody likes it but we've got to be there.'"

Asked if he knew that the enterprise was not legal, Thompson says, "(It was) certainly sensitive. (I'm) obviously going to be labeled less than astute in this area."

He says that when he was reassigned to North Carolina, the legal issues came up again, with lawyers at headquarters.

Says Thompson: "On an average of approximately every other Monday, an in-house lawyer from upstairs would come down and talk to us about our operation or how our earnings were doing. But (that) left you with some feeling that, 'Yeah, it's sensitive, but we're here. We're all in this together. And it's - it's a loophole. It's gray. It's legal, OK?'"

Thompson says the scheme began at R.J. Reynolds' Canadian subsidiary called RJR-MacDonald. He remembers executives there were taking pains to leave no trace of the company's involvement.

"We were told to keep no paperwork in this business," Thompson says.

According to Thompson, the man who told him not keep any paperwork was his vice president of sales at RJR-MacDonald. "He insisted...'You're not keeping any documents are you?'" Thompson says. "He reminded me on many occasions not to keep any hard copy on any correspondence with their offices."

"From middle management and on up and below, people knew exactly what was going on," Thompson says.

"If the tobacco industry wants smuggling to happen, it happens," says Greg Connolly, director of the Massachusetts Tobacco Control Program.

Connolly testified to Congress that several tobacco companies have been investigated in foreign countries for helping smugglers.

"This is not an exception to the rule," he says. "If you look at different companies from different parts of the world, you see the same thing happening. This is the first time when someone's come forth and spilled the beans and pointed the finger where the finger should be pointed."

Where should it be pointed? "Directly at management," he says.

Thompson says RJR's Canadian management followed his business closely. He says a senior executive called him the Indian trader. He also remembers a financial officer once joked that Thompson must not be doing his job because RJR cigarettes weren't turning up in custom's seizures.

But if they were laughing in the hallways at RJR-MacDonald, Thompson says, they were also watching their backs.

Thompson remembers.

"They checked our phones and computers for listening devices that may have been installed by the government. Within a few days they scheduled a visit to our homes to do the same sort of surveillance over our home phones as well as computers," he adds.

Thompson claims that other phones were also checked. He says that in RJR's Canadian offices, phones of the chief financial officer, the chief operating officer and the controller were also checked for bugs.

"To say you work for the industry and you were not aware of what was going on is just clearly, clearly willful blindness," Thompson says. "You couldn't possibly do that under oath. It wouldn't be possible. Myself included."

By 1994 federal investigators were aware of the smuggling operation. They zeroed in on distributors who were moving RJR's cigarettes over the border. Two brothers, Bob and Lewis Tavano, and another man, Larry Miller, were all convicted of money laundering in connection with the smuggling scheme.

The Tavanos and Miller got RJR's cigarettes onto the reservation. Miller was a Las Vegas slot-machine salesman who owned a piece of a casino. Lewis Tavano was a bookie who, police say, had links to organized crime. Bob Tavano had been convicted of bribery.

Thompson says that people at RJR introduced him to the three men. "Larry Miller, Bob Tavano and Lewis Tavano - those are the people that I was introduced to on behalf of the company by our executive," he says.

"If you take the company's position on Les Thompson," he says. "Les Thompson invented the business. It started with Les Thompson, and it ended with Les Thompson."

"Nothing could be further from the truth," he continues. "The company knows where they made the $100 million. They know the customers that produced the $100 million during this time frame. That money is in RJR Nabisco's coffers, not in my bank account."

In 1998 R.J. Reynolds' subsidiary, Northern Brands, paid $15 million in fines and penalties and admitted that it lied to U.S. Customs about why it was shipping Canadian cigarettes into the United States. But it never acknowledged smuggling the cigarettes back into Canada.

Thompson says that RJR made $100 million from the business. "It's a very profitable operation," he says. "But, you know, the downside is I'm going to prison for sponsoring the company's efforts in that market."

When the FBI began closing in, Thompson says RJR put him under wraps. They assigned him a do-nothing job and moved him to Florida.

"During the next 20 some odd months, roughly 21 months, company lawyers indicated to me that 'Stand tall, we're ll on the ship together. We'll get though this, the government is saber rattling.'" he says.

"Had I known how serious the consequences of my performance were going to be in regards to where I'm at today, I would have been at the prosecutor's door Monday morning June 1997," he says.

Last year, Thompson was arrested in connection with the smuggling scheme. He pleaded guilty to money laundering charges.

"I've been charged with money laundering $72 million," he says. "I don't have $72 million. I'm going to be paying a $100,000 fine very shortly at my sentencing. I am cashing in my pension in the United States to pay that fine. R.J. Reynolds has that money. I do not have that money."

R.J. Reynolds Tobacco declined to talk on camera to CBS News. In a statement, a spokesman says that neither R.J. Reynolds Tobacco nor the parent company have been implicated in any criminal investigation. Last year RJR sold its Canadian operations to a Japanese tobacco company.

Thompson claims that RJR says that he is to blame. "I'm a rogue player," Thompson says, characterizing its portrayal. "Started and stopped with Les. He's a bad guy. He was out of control. Nothing could be further from the truth."

Connolly says tobacco's big secret is that companies profit from smuggling even when not directly engaged in the smuggling itself.

"One third of U.S. cigarettes are never accounted for," he says. "If they were accounted for, and they had to pay taxes, a lot of those cigarettes wouldn't be sold. The tobacco industry would lose revenue and lose money. If one-third of U.S. computers were never accounted for, it would be a scandal. IBM would be outraged. When it comes to the tobacco industry, it's business as usual."

Thompson will begin his prison term in February. "I was convinced by the lawyers inside the company and outside the company, it's gray, it's a loophole, it's been here for years and it's going to be here long after," he says. "It hasn't stopped because Les Thompson is going to the gallows."

He is now cooperating with criminal investigations that are ongoing in the United States and Canada. Thompson is also the key witness in a civil suit that Canada has just filed against RJR demanding $1 billion in damages.

Money is not the only thing that Canada lost in the smuggling scheme. Ultimately the smuggling became so rampant that it broke the back of Canada's anti-smoking strategy. And the government cut the cigarette tax just to stop the smugglers. Smoking among teen-agers is once again rising.

Broadcast story produced by David Schneider;