International -- Latin American Business
Colombia Looks to Crack Down on Contraband (int'l edition)
Can Bogota stanch the massive inflow of smuggled goods?
Prices can't be beat at Bogota's Primavera shopping district. Here, in the Colombian capital's largest market for smuggled goods, a bottle of Johnnie Walker Black Label whisky goes for $16, or about half the price of legal imports. But if Colombian authorities have their way, cut-rate deals on contraband booze will soon be history. On Oct. 10, Seagram Co. and United Distillers & Vintners Ltd. inked a pact with the Colombian government, pledging to sell their products exclusively through authorized importers.
Smuggled goods are part of the scene in many emerging markets, but Colombia is in a class by itself. In this Andean nation, contraband is inextricably tied to the drug trade. The illicit commerce encompasses everything from foreign-label liquor and cigarettes, to television sets, computers, stereo equipment, and items as large as refrigerators. Most of the merchandise pours into the country's northern ports from free-trade zones in Panama and Aruba. It is then transported to major cities and sold at deep discounts at sprawling marketplaces, such as Primavera.
Colombia's President Andres Pastrana is enlisting the help of multinationals to break that pattern. Besides Seagram and UDV, the government has signed cooperation agreements with Philip Morris, British American Tobacco, General Electric, Whirlpool, Sony, Aiwa, and Panasonic, among others. Some companies are also participating in a nationwide advertising campaign entreating consumers not to buy contraband goods and are training Colombian customs officers so they can better intercept illegal shipments. Eight electronics companies, meanwhile, have pledged to service products only if they are accompanied by official warranties that prove they were legally imported.COOPERATION. National Customs Director Ricardo Ramirez credits efforts by foreign business with helping slash contraband in half over the past two years, to $1 billion. (Private groups acknowledge there's been some improvement, but contend the overall figure is closer to $5 billion.) According to official statistics, contraband's share of total cigarette imports is now 10%, vs. 80% two years ago. Meanwhile, legal sales of imported electronics account for 80% of the market, up from 40% in 1998. "This doesn't work without the cooperation of multinationals," says Ramirez.
Colombian authorities appreciate the help. Yet they've also made it clear that they won't stand for multinational involvement in the contraband trade. Colombia's customs and tax agency, DIAN, is investigating Philip Morris on charges that it understated the value of imports between 1996 and 1998, in order to evade tariffs. Meanwhile, 30 Colombian provinces have filed a racketeering suit against Philip Morris and BAT in a U.S. federal court. The companies are charged with facilitating contraband and defrauding local governments of tax revenues. Both Philip Morris and BAT have denied the charges. Smuggling "doesn't help us," says Don Harris, Philip Morris International's vice-president for international corporate affairs strategy. "It depreciates our legal product."
Whatever their official stance on the issue, foreign companies may be unwitting participants in the contraband trade. That's because smuggling is fueled by another type of illicit commerce. According to the U.S. Justice Dept., Colombian cartels launder an estimated $5 billion to $6 billion a year in profits by means of a system dubbed the black-market peso exchange. Through the exchange, which operates in major U.S. cities, drug dealers trade in dollars for pesos at unfavorable discounts, because they need to get their money back into Colombia. The currency traders then sell the cheap greenbacks to smugglers, who use the money to buy merchandise in the U.S.
That's why some experts say Pastrana's chances of killing off the contraband trade for good are virtually nill. "If you don't eliminate money laundering, you won't eliminate contraband," says Ricardo Bonilla, director of the Center of Investigations for Development at Colombia's National University, which published a study on the subject in 1997. If that can ever be done, both Colombia and the U.S. would probably spring for more than just a bottle of Johnnie Walker--Black Label, not black market, of course.By Suzanne Timmons in Bogota