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By Maud S. Beelman

WASHINGTON, November 29, 2001 — The Bush administration sought to use anti-terrorism legislation, rushed through Congress in the wake of the Sept. 11 attacks, to shield U.S. tobacco companies from foreign lawsuits alleging cigarette smuggling and money laundering.

The White House backed a tobacco industry proposal that would have blocked foreign governments from using U.S. courts to go after corporate tax cheats. Canada, the European Union and the governors of Colombia have filed federal civil racketeering lawsuits, seeking billions of dollars in lost revenue and damages from the world's largest tobacco companies. The suits allege the companies smuggled their cigarettes to evade taxes and duties on their products.

Known in legislative parlance as a "rule of construction," the administration-backed measure was added to the Financial Anti-Terrorism Act of 2001 late on Oct. 16, on the eve of its passage in the Republican-controlled House of Representatives. But the rule ran into strong opposition from Democratic senators and was not part of the USA PATRIOT Act, which President Bush signed into law on Oct. 26. House wording that would have expanded existing law on money laundering crimes to include specifically fraud against foreign governments, however, was eliminated.

The rule of construction did not refer directly to tobacco companies. But it was backed by the White House, Rep. Tom DeLay, R-Tx., and lobbyists for the tobacco industry, including the U.S. Chamber of Commerce, congressional sources said.

"The White House wanted it there," one source said, adding, "The White House put pressure on us to make the case even stronger for the Chamber."

R. Bruce Josten, the Chambers executive vice president for government affairs, wrote to Treasury Secretary Paul ONeill on Oct. 10 and Oct. 15, urging changes in the money laundering legislation that was proposed as part of Congress sweeping anti-terrorism act.

In the Oct. 15 letter, a copy of which was obtained by the Center for Public Integrity, Josten said "the legislation highlights the broader problem presented by foreign states attempting to use the civil RICO law and the U.S. courts as a means to collect monies allegedly due under foreign revenue laws." RICO stands for the Racketeer Influenced and Corrupt Organizations Act.

Josten asked O'Neill to support wording he proposed for the money laundering legislation wording that appeared in near-identical form one day later in the House bill, which was passed on Oct. 17.

The original version of the Houses Financial Anti-Terrorism Act of 2001 had expanded what constituted "specified unlawful activity for money laundering" to include "fraud or any scheme to defraud against a foreign government or foreign government entity, if such conduct would constitute a violation of this title if it were committed in interstate commerce in the United States "

That passage was dropped from the House bill under pressure from the White House and tobacco lobbyists, sources said. The Chamber of Commerce and the tobacco companies were worried what effect such specific language would have on Canada's lawsuit against R.J. Reynolds, where the 2nd U.S. Circuit Court of Appeals on Oct. 12 had ruled that, in the absence of clear congressional intent, an 18th century Revenue Rule prohibited Canada from using U.S. courts to collect unpaid taxes. [The dissenting judge in the 2-1 appeals court decision called the Revenue Rule "an old and dubious common law rule" that had nothing to do with Canadas suit, which he said was based on alleged violations of U.S. law.]

"What they wanted would have ended any chance of Canada successfully appealing the 2nd Circuit case," said a congressional source. "The White House was trying to get that nailed down for the Chamber [of Commerce]."

One lawyer involved in the RICO lawsuits said if the measure had passed Congress as proposed, "the rule of construction would have killed the cases," because it would have required new treaties to pursue the claims, by which time the statute of limitations would have expired.

Maura Payne, a spokeswoman for RJR, said the company "did not take a position on the bill or lobby it."

For the exclusive benefit of tobacco companies

Canada, the EU, the governors of Colombia, and other Latin American countries are suing the worlds leading cigarette manufacturers Philip Morris, RJR and British American Tobacco under civil RICO in U.S. federal and state courts. The lawsuits allege the companies knowingly smuggled their cigarettes to evade national taxes and that the smuggling became enmeshed with money laundering operations. Two year-long investigations by the Center for Public Integrity, based on thousands of pages of internal company documents and reporting worldwide by the Center's International Consortium of Investigative Journalists, have shown tobacco company involvement in cigarette smuggling and corporate ties to organized crime. The tobacco companies have denied any wrongdoing.

The Campaign for Tobacco-Free Kids, a tobacco watchdog group in Washington, said it knew of no pending lawsuits that might be affected by the proposed legislation other than those against the tobacco companies.

The provision "serves only as a special-interest legislation for the exclusive benefit of the major U.S. cigarette companies," the group said in an Oct. 19 memo. "Taking action that could impede the foreign governments access to U.S. courts for this purpose while the President is seeking greater international cooperation among the worlds governments to fight terrorism and shut off terrorist funding sources does not make sense." It added that the measure "could directly contradict the purposes of the Financial Anti-Terrorism Act by impeding the efforts of other countries to combat cigarette smuggling, which may be serving as a source of income for certain terrorist organizations or their financial supporters."

The rule of construction was stripped from the bill during talks between the House and Senate, despite arguments on its behalf by Philippa Malmgren, special assistant to the president for economic policy and a staffer at the National Economic Council, headed by Bush's chief economic advisor, Lawrence Lindsay. Sources said Malmgren tried to sell an even broader version of the rule of construction than was passed by the House, but gave up in the face of strong opposition from Sen. Paul Sarbanes, D-Md., who questioned its germaneness to money laundering and the last-minute nature of its inclusion in the bill. She also accepted the argument, sources said, that since the broader language on fraud against foreign governments had been removed, the rule of construction was no longer necessary.

"I am very proud of the results that have come out with reference to money laundering because we dropped the administration proposal that would have eliminated due process safeguards that would have prevented RICO liability for tobacco companies," Rep. John Conyers, the ranking Democrat on the House Judiciary Committee, later said.

Rep. Robert Wexler, a fellow committee Democrat, agreed, saying, "If our allies are victimized by fraud, smuggling or money laundering emanating from U.S. soil, they should have the benefit of U.S. laws and U.S. courts to combat those offenses."

Several sources on Capitol Hill said they were not initially aware of the tobacco company backing for the measure. "No one understood the extent to which people were shilling for the tobacco industry," said one. The Oct. 25 Congressional Record, however, made clear the target beneficiaries of the proposed wording, noting the elimination of original administration proposals, including the "carve-out of tobacco companies from RICO liability for foreign excise taxes."

Hooked on tobacco money

The tobacco industry's political influence in Washington is widespread and greased by large campaign donations. Of the 12 most generous soft money donors to the Republican Party, four Philip Morris Companies, Inc., RJR, UST, Inc., and Brown & Williamson Tobacco Corp. are cigarette makers, the Center reported in The Buying of the President 2000. From January 1991 through June 1999, the four had contributed $12.8 million to the Republican National Committee and its affiliates. Philip Morris and RJR also contributed $2.1 million to the Democratic National Committee and its affiliates during the same period.

According to a recent report by the Campaign for Tobacco-Free Kids, tobacco companies have invested almost $4.3 million in the current Congress more than $3 million of that going to Republicans. Since 1997, Republican candidates and committees have received 82 percent of the more than $18 million tobacco interests have given to federal candidates, national parties and non-party political action committees, the report said.

The political action committee of Rep. Michael Oxley, the Republican chair of the committee that sponsored the bill containing the tobacco-backed language, has received $32,300 in tobacco money since 1999, the report said. In July 2000, Oxley threw a lavish party during the Republican national convention that was paid for, in part, by Philip Morris, The Washington Post reported at the time.

No. 3 among congressmens political action committees receiving tobacco PAC contributions was Rep. Tom DeLay's, which took in $64,500 since 1999, the report said. Several sources singled out DeLay, the House whip, as one of the backers of the rule of construction and noted he had a representative at the talks on the bill.

At least two senior Bush administration officials are well acquainted with the challenge foreign governments pose to the tobacco companies. In February 2001, the U.S. Chamber of Commerce filed an amicus brief in the Canadian case, along with the National Association of Manufacturers, on behalf of R.J. Reynolds and the Canadian Tobacco Manufacturers Council. The lead attorney on that filing was Theodore Olson, whose successful arguments before the U.S. Supreme Court in the 2000 presidential election ended the Florida recount and secured the presidency for George W. Bush. Olson was appointed U.S. solicitor general in May 2001.

The No. 2 official in the Justice Department, Deputy Attorney General Larry Thompson, is a former partner in the law firm of King & Spalding, which represents the Canadian Tobacco Manufacturers Council in the Canada suit.

"We were getting tons of mixed signals about who was in charge of the administrations view on this," one source said, adding that there was a split between lower level staff at the Justice Department, who opposed the rule-of-construction language, calling it "a stalking horse for the tobacco companies," and senior Justice officials who favored it.

Lawyers involved in the RICO suits believe that, ironically, the tobacco companies attempt at crafting favorable legislation may have backfired. The appeals court ruling in the Canadian case was based in part on the argument that there was no clear congressional intent for RICO laws to trump the old Revenue Rule. The European Union, which has filed an amicus brief with the 2nd Circuit for a rehearing, contends that is no longer the case. The brief, filed in light of the new law, quoted Sen. John Kerry, D-Ma., telling his fellow lawmakers, "we today clarify that it is the intent of the legislature that our allies will have access to our courts and the use of our laws if they are the victims of smuggling, fraud, money laundering, or terrorism."

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