July 31 (Bloomberg) -- Imperial Tobacco Canada Ltd. and Rothmans Inc., Canada's two biggest tobacco companies, agreed to pay about C$1.15 billion ($1.12 billion) in fines and penalties to settle charges they aided cigarette smuggling in the 1990s.

Imperial, the Canadian unit of the U.K.'s British American Tobacco Plc, was fined C$200 million after admitting it helped people sell untaxed cigarettes, the Royal Canadian Mounted Police said. Toronto-based Rothmans, which makes Benson & Hedges, also pleaded guilty and was fined C$100 million.

``These are the largest fines ever levied in Canada,'' Mike Cabana, the RCMP's assistant commissioner, said at a news conference in Ottawa. ``The message sent today is that no company is above the law.''

The case stems from cigarette sales in Canada from 1989 to 1994, when the federal and provincial governments boosted taxes to curb tobacco use. Rising prices fueled a black market, with Canadian-made cigarettes shipped to the U.S., where taxes were lower, then smuggled back across the border. The tobacco companies knew their exports would be sold on the black market, police said when the criminal charges were filed in 2003.

``They were concerned if this went to court the penalty would be even greater,'' Rob Cunningham, a policy analyst with the Canadian Cancer Society, said in a telephone interview. ``The fines are small compared to the many billions of dollars lost by federal and provincial governments.''

In addition to the fine, Imperial Tobacco agreed to pay C$50 million this year and a percentage of its sales for 15 years, to a maximum of C$350 million, the company said in a statement.

Imperial Stability

The plea and settlement gives Imperial ``the stability it needs to move forward,'' the company said.

Rothmans agreed to pay C$450 million over 10 years, in addition to the fine, the company said in a statement. Rothmans said resolution of the criminal case was a condition of its sale for C$2 billion to Philip Morris International Inc., which was announced today.

The average price of a carton of 200 cigarettes tripled from C$15 in 1981 to C$45 in 1993, according to a study done by Physicians for a Smoke-free Canada. Contraband cigarettes sales rose from zero in 1985 to 14.5 billion in 1993, according to the study. The governments rolled back taxes that year in a bid to reduce the smuggling.

Canadian Exports

Canadian exports rose from 1 billion cigarettes in 1987 to 15.7 billion in 1993, Statistics Canada said in a report. The RCMP's investigation took eight years as police reviewed 763,000 documents and conducted 275 interviews, Cabana said.

JTI-MacDonald Inc., a unit of Japan Tobacco Inc., wasn't a part of today's settlement and still faces charges. Cabana declined to comment on JTI because the case is before the courts.

Imperial Tobacco has 70 percent of the Canadian market because of the popularity of its du Maurier and Players brands, according to the Canadian Council for Tobacco Control. A Rothmans unit, Rothmans Benson & Hedges, is the second-biggest in Canada, with a 16 percent share, the council said.

Payments received from the companies will be distributed to federal and provincial governments based on an agreement they reached. Ontario, Canada's most-populous province, will receive C$156.9 million, and Quebec will get C$210.5 million, national revenue minister Gordon O'Connor said. The federal share will be C$574.9 million, he said.

To contact the reporter on this story: Joe Schneider in Toronto at jschneider5@bloomberg.net.

Last Updated: July 31, 2008 15:55 EDT