January 26, 2006

New protocol will reduce supply to illegal Internet cigarette traffickers

(Wilmington, DE): Attorney General Carl Danberg today announced that Philip Morris USA (“PM USA”) has agreed to incorporate protocols aimed at combating the illegal sale of PM USA cigarettes over the Internet and through the mails. The protocols are being adopted voluntarily by PM USA pursuant to an agreement reached with 37 Attorneys General across the country.[1]

The protocols provide for the: (a) termination of shipments of cigarettes to any of PM USA’s direct customers that the Attorneys General have found to be engaging in illegal Internet and mail order sales; (b) reduction in the amount of product made available to direct customers found by the Attorneys General to be engaged in the illegal re-sale of PM USA cigarettes to the Internet vendors; and (c) suspension from the company’s incentive programs of any retailer found by the Attorneys General to be engaging in such illegal sales.

The Attorneys General believe that virtually all sales of cigarettes over the Internet are illegal because the sellers are violating one or more state and federal laws, including: (1) state age verification laws; (2) the federal Jenkins Act (which requires that such sales be reported to state authorities); (3) state laws prohibiting or regulating the direct shipment of cigarettes to consumers; (4) state and federal tax laws; (5) federal mail and wire fraud statutes; and (6) the federal RICO law. Many of the sales made by foreign websites also violate federal smuggling, cigarette labeling, money laundering and contraband product laws.

The Attorneys General note that Internet cigarette sales also present a significant risk to public health, because most Internet vendors illegally fail to charge taxes, and it is well-established that lower cigarette prices lead to increased smoking rates. Moreover, while brick-and-mortar retailers check photo IDs to prevent children from buying cigarettes, the vast majority of Internet sellers have age verification systems that are wholly inadequate. Numerous studies have shown that the earlier an individual begins to smoke, the more likely it is that the person will become addicted, and thus age verification through photo IDs is essential to protect children from a lifetime of smoking.

Today’s agreement is the third major development in the Attorney Generals’ multi-pronged effort to restrict the payment, shipment and supply operations of the illegal Internet cigarette traffickers. In March 2005, the Attorneys Generals announced that the major credit card companies had all agreed to stop processing credit card payments for the Internet retailers. Later in the year, both DHL and UPS agreed to stop shipping packages for the vendors engaged in these illegal sales.

PM USA notes that it previously has penalized direct customers and retailers who sold its cigarettes illegally over the Internet and through the mails. PM USA is now the first tobacco product manufacturer to agree to reduce the supply of cigarettes to direct customers who supply vendors engaged in the illegal re-sale of PM USA cigarettes on the Internet. The Attorneys General commended PM USA for its cooperation in the effort to reduce these illegal sales. In addition, the Attorneys General will be encouraging other tobacco product manufacturers to take steps to reduce the supply of their cigarettes that are re-sold by illegal Internet cigarette traffickers.

[1] The negotiations with PM USA were led by the New York State Attorney General’s Office. In addition, the Attorneys General from the following jurisdictions have joined this agreement: Alabama, Arkansas, American Samoa, California, Colorado, Connecticut, Delaware, District of Columbia, Georgia, Hawaii, Idaho, Illinois, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Mexico, New Jersey, Northern Marianas, Oklahoma, Oregon, Puerto Rico, South Carolina, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming.

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