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A scheme to smuggle hundreds of millions of dollars worth of tax-free Canadian cigarettes back into Canada got its start in 1992 at a popular Niagara Falls restaurant, the Canadian government charges in a $1 billion racketeering suit filed against R.J. Reynolds Tobacco and its affiliates.

The suit, filed in U.S. District Court in Syracuse, also documents how the black-market cigarettes were shipped through Foreign Trade Zones in Buffalo, Niagara Falls, Liverpool and Champlain.

Once in this country, ownership of the cigarettes was transferred to American wholesalers -- including two in Western New York -- sold to members of the Akwesasne Mohawk Indian tribe in northern New York and smuggled across the Canadian border to be resold illegally at below-market prices, the suit alleges.

The U.S. government has already proved the criminal conspiracy that allowed the smuggling and convicted 21 people and a corporate subsidiary of R.J. Reynolds.

The Canadian government's suit brings a new wrinkle, accusing RJR-Macdonald and the Canadian Tobacco Manufacturers Council with playing key roles in the smuggling.

It all began, according to the suit, at a March 1992 meeting at the Como Restaurant in the Falls.

At the session with top officials of Reynolds' Canadian subsidiary and former Republican city chairman Robert Tavano and his brother Louis, Canada's attorney general alleged, a smuggling operation began that grew so huge it eventually forced Canada to drop its high tobacco taxes two years later.

The smuggling operation, which brought guilty pleas from the Tavanos and Leslie Thompson, the high-ranking RJR-Macdonald executive who first met with them at the Como, caused the Canadian government to lose hundreds of millions in revenue the suit is attempting to recover.

The smuggling provided cheap cigarettes to Canada at a time when the government had raised taxes to cut down on smoking. It also had another, longer-term effect, according to Canadian tobacco critics.

"As many as 40,000 people will die (from smoking) in the future as a result of the increase in additional smokers," Garfield Mahood, executive director of the Canadian Non-Smokers Rights Association in Toronto, told The Buffalo News.

In 1991, before the smuggling began, about two of every five Canadian teens, ages 15 to 19, were smokers, Canadian Health Minister Allan Rock told reporters. In 1995-96, he said, the rate had climbed to nearly one in three, or 31 percent, where it remains today.

"It was during the period that this alleged activity by RJR-Macdonald and others took place that youth smoking increased," Rock said.

Guy Cote, a spokesman for RJR-Macdonald, said the company denies the allegations and would deliver a more detailed response in the future.

"It looks to us now as a new twist to an old story," Cote said.

RJR-Macdonald has said before that Thompson was acting on his own without any direction from Reynolds superiors.

At the meeting at the Como, the suit alleges, the Tavano brothers and Larry Miller, who ran a company called LBL, told Thompson and two other Reynolds executives that they were in the business of buying Canadian cigarettes to sell to the Indians to smuggle back into Canada.

The incentive for the smuggling was clear.

After 1991 and the hefty increase in cigarette taxes, the price for a carton of cigarettes in Canada had gone from less than $26 a carton to $48 and as high as $60 in Newfoundland. The price in the United States at the time was $22.

At another meeting a month later, according to the lawsuit, the Tavanos again met with the Reynolds' representatives and said they could sell Reynolds' Export A's brand to the Indians. The deal was quickly approved.

By fall of that year, the suit charges that Thompson was directed by his bosses at Reynolds to visit the Foreign Trade Zone in Buffalo.

"During his visit, Thompson learned how the (Foreign Trade Zone) system worked and determined that it could be corrupted to facilitate smuggling," the suit alleges.

More Reynolds executives came for another visit on Oct. 13, 1992, according to the suit, and "It began to 'export' large volumes of tobacco from Montreal to FTZs located in Buffalo, Niagara Falls, Liverpool and Champlain, N.Y."

Timothy Palisano, director of operations at the Foreign Trade Zone in Lackawanna, said he is prevented from talking about any customer, but said all shipments through the zone are legal and supervised by the U.S. Customs Service.

How large was the smuggling market?

In 1989, the Canadian suit states, exports of Canadian-brand cigarettes to New York numbered 500,000. The number shot to 20 billion in 1993, after the taxes. And they were mostly Export A's and duMauriers, not exactly hot sellers in the United States.

The cigarettes left Canada for import to Russia, Estonia and other countries. Instead, the Canadian suit alleges, the ownership was transferred once they arrived in the Foreign Trade Zones.

The Tavanos' company, LBL, and J.R. Attea Wholesale in Buffalo were two of the companies that bought the Canadian cigarettes and sold them to the St. Regis Akwesasne Reservation, the Canadian suit alleges.

"Attea sold tobacco to customers on the St. Regis/Akwesasne Reservation for smuggling back into Canada," the Canadian suit charges.

J.R. Attea Wholesale, owned by Elias "Junior" Attea, no longer exists, but a family member said Attea followed the law and had all necessary permits to sell to the Indians. Attea, who now lives in Tennessee, could not be reached to comment.

The Canadian smuggling operation was so profitable, according to the racketeering suit, that it accounted for $60 million of the $100 million RJR-MacDonald made in 1993.

At one point, the suit alleged, the company was making $1.5 million a week and prompted a company executive to brag it was more profitable than Ford Canada.

Canadian Justice Minister Anne McLellan said the suit was delayed until the criminal case against the Tavanos and nearly two dozen others were completed.

Robert Tavano, 61, was sentenced in October to four years in prison. He was supposed to get five years, but had a year knocked off for his cooperation with American and Canadian prosecutors.

His brother Louis, 58, identified by the Royal Canadian Mounted Police as an associate of the late mob boss Stefano Magaddino, has terminal cancer and has not been sentenced. Both are also ordered to pay a $1 million fine.

Thompson, the former RJR-Macdonald executive, was sentenced to 70 months in prison, and Northern Brands International, a former RJR subsidiary, paid $15 million in fines and forfeitures.

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