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

Altria Client Services on behalf of PM USA | 2.10.2011 | 1 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

Altria Client Services on behalf of PM USA | 2.10.2011 | 2 Key Points of Dec. 30, 2010 Submission to FDA

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:

. 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

Altria Client Services on behalf of PM USA | 2.10.2011 | 3 Unlicensed Manufacturing (Loosies)

ATF New York - United States CBSA - Canada

Source: Images provided to ALCS upon request by ATF & CBSA January 2011

Altria Client Services on behalf of PM USA | 2.10.2011 | 4 Unlicensed Manufacturing (Loosies)

RCMP - Canada Source: National Post Story: Tobacco taxes encourage cigarette black market, June 20, 2010

Altria Client Services on behalf of PM USA | 2.10.2011 | 5 Illegal Imports of Genuine International Products

Seized by CBP at Chicago Mail Port, July 2010

Altria Client Services on behalf of PM USA | 2.10.2011 | 6 Illegal Imports of Counterfeit Products

Seized by CBP Received from at Chicago Mail Port www.webvipshopping.com January 2011 December 2010

Altria Client Services on behalf of PM USA | 2.10.2011 | 7 PM USA Cigarette Manufacturing

Source: Altria Client Services & Altria.com 2010

Altria Client Services on behalf of PM USA | 2.10.2011 | 8 Counterfeit Cigarette Operations in China

Source: China’s Marlboro Country, Center for Public Integrity June 28, 2009 Source: Images courtesy of PMI, Fujian Province 2004

Altria Client Services on behalf of PM USA | 2.10.2011 | 9 Remote Sales of Illegal Imports & Counterfeits

Source: ALCS BI Google Search February 04, 2011 Altria Client Services on behalf of PM USA | 2.10.2011 | 10 Remote Sales of Illegal Imports & Counterfeits

discount-cigarettes-store.com USA001.com

Altria Client Services on behalf of PM USA | 2.10.2011 | 11 Ties to Organized Crime and Terrorism

Source: Miami New Times, July 02, 2009 Altria Client Services on behalf of PM USA | 2.10.2011 | 12 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

Altria Client Services on behalf of PM USA | 2.10.2011 | 13

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.

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