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Illicit Tobacco & Alcohol Trade

Continual cigarette price rises are lining the pockets of organised criminals and terrorists

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cigarette price rises

Lawmakers across the developed world seem to be united behind the idea that the best long-term approach to reducing levels of smoking is to keep on hiking the price of tobacco products until consumers can no longer afford them. Earlier this week, CBC News reported that an internal Health Canada study recommended that Ottawa should significantly increase the price of cigarettes if it wants to meet its target of reducing smoking levels to 5% of the Canadian population. In the UK, British Chancellor Philip Hammond yesterday used his Budget speech to announce that the price of a packet of cigarettes in Britain will continue to rise at 2% over the rate of inflation. The Australian government intends to take the price rise strategy to extreme lengths by increasing the cost of a packet of cigarettes to A$40 ($30.33) by 2020. But while numerous studies have shown that making tobacco products more expensive does reduce levels of smoking, there is evidence to suggest that increasing the cost beyond a certain point may have more negative effects than positive.

A report published at the beginning of November by the Washington DC-based Tax Foundation think tank revealed that New York, which levies the highest rate of state cigarette taxation in the US, is the country’s capital of illicit tobacco. The Tax Foundation estimates that in 2015, the latest year for which data is available, 56.8% of all cigarettes smoked in New York were smuggled into the state. New York City Mayor Bill de Blasio announced he would like to see tobacco taxation rise still further in the state, suggesting that cigarette tax should increase by $2.50, bringing the minimum price for a packet of smokes up to $13. This would make cigarettes purchased in New York three times more expensive than those bought in North Dakota, making interstate tobacco smuggling even more attractive to organised criminals. In Europe, 9% of all cigarettes smoked were fake or smuggled last year, representing an overall tax loss to European governments of as much as €10.2 billion ($12.16 billion), according to a study from KPMG. The report noted that this made illicit tobacco one of the largest major players in the European cigarette market last year. In May, a separate KPMG report revealed that the Australian government lost A$1.61 billion last year as a result of tobacco smuggling, and that 13.9% of tobacco products consumed in the country were illicit

Put simply, repeatedly raising the price of tobacco products both increases the profits organised criminals can make from the illicit cigarette trade, and makes it more likely that those who are determined to continue to smoke will seek out cheaper ways of doing so, be they legal or not. The fact that cigarette prices in many western countries are going up at such a fast pace makes it inevitable that the illicit tobacco trade will continue to grow, losing governments billions of dollars’ worth of lost tax revenues, and lining the pockets of organised criminal gangs and terror groups. In countries such as the UK and Australia, and in certain US states, the point at which the positive effects of repeatedly hiking the cost of tobacco products continue to outweigh the negative seems to have passed. While the World Health Organisation has said that increasing the price of tobacco is one of the cheapest and most effective ways of reducing smoking, the wisdom of piling taxation onto cigarettes sold in the developed world is looking increasingly shaky as prices continue to go up and up. If anything, prices need to go up in low to middle-income countries, which are home to 80% of the world’s smokers.

As tobacco prices continue to rise in developed countries, more organised criminals will be drawn to the illicit cigarette trade, which is becoming all the more attractive to smugglers as potential profits soar; not least due to the fact that illicit tobacco is much less risky than drug dealing or people trafficking. The fact that profits from cigarette smuggling are known to fund terrorist groups such as Daesh, Hezbollah and al-Qa’ida makes the policy of continually fuelling the trade by whacking up prices in the developed world look increasingly questionable. As well as creating business opportunities for criminals and terrorists, high cigarette prices are also resulting in the loss of huge amounts of tax that could be spent on public health initiatives and research into smoking-related illnesses.

Increasing tobacco prices has played a major part in cutting smoking rates in many countries across the world, but the time has come to recognise that continually hitting tobacco enthusiasts in the pocket will not eradicate the habit. Putting the libertarian argument that people should be allowed to smoke themselves into an early grave if they so wish to one side, the time has come for policy makers to accept that putting up the price of tobacco again and again has serious consequences that have for some time now outweighed the benefits of doing so. In developed countries at least, governments that want to reduce smoking rates must come up with new ways to persuade smokers to stub out the habit for good.

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Counterfeit and smuggled cigarettes cost EU member states €10 billion in lost tax revenue last year

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counterfeit and smuggled cigarettes cost EU member states €10 billion

The EU illicit trade in black market cigarettes cost member state governments a total of €10 billion ($11.23 billion) in lost tax revenues in 2018, according to a new report from professional services firm KPMG.

That figure was up €369 million on 2017, despite the total number of counterfeit and smuggled cigarettes consumed in EU nations falling 1.1 billion to 43.6 billion.

Commissioned by US tobacco giant Philip Morris International, the independent study revealed that the EU market for smuggled and counterfeit traditional smoking products was equivalent in size to total legal cigarette sales in the United Kingdom, Austria and Denmark combined last year.

In total, counterfeit and smuggled cigarettes in the EU were estimated to account for 8.6% of all consumption across the 28-nation bloc in 2018.

KPMG found that while the circulation of smuggled, illicit whites and other illicit tobacco product volumes declined in 2018, counterfeit was the only category to show year-on-year volume growth.

The number of fake cigarettes in circulation across the EU rocketed by 33% to 5.5 billion in 2018, which was the highest level recorded since KPMG first conducted the study back in 2006.

Half of the nations included in the study witnessed an increase in the consumption of fake cigarettes last year, with the largest volumes being reported in Greece (1.5 billion) and the UK (0.9 billion).

Commenting on KPMG’s findings, Alvise Giustiniani, PMI Vice President of Illicit Trade Prevention, said: “Beyond damaging government revenues, harming legitimate businesses—including our own—and fuelling crime in local communities, the availability of cheap, unregulated cigarettes on the black market undermines efforts to reduce smoking prevalence and prevent youth from smoking.

“For PMI to have impact in our drive to unsmoke the world, we must sustain our combined efforts to eliminate illicit cigarette trade, while ensuring responsible access to better alternatives for the men and women who would otherwise continue to smoke.”

Last month, Europol announced that it had coordinated an operation involving law enforcement agencies from a number of EU members states that resulted in the break-up of a gang that is thought to have made some €680 million from cigarette trafficking and a range of other illegal activities.

The organised criminal network behind the conspiracy is said to have made the majority of its profits through the smuggling of cigarettes and drugs to the UK, before shipping cash to Poland, where it was laundered in currency exchange offices and invested in property in Spain and other countries.

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Australian terrorist financing investigation results in disruption of major cigarette smuggling conspiracy

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cigarette smuggling conspiracy

An investigation into terrorist financing conducted by law enforcement agencies in Australia has led to the arrest of eight men on suspicion of involvement in an illicit cigarette importation conspiracy run from Sydney.

The counter-terrorism operation that resulted in the men’s detention, which involved officers from the New South Wales (NSW) Police Force’s Terrorism Investigation Squad, the Australian Criminal Intelligence Commission (ACIC) and the Australian Border Force (ABF)-led Illicit Tobacco Taskforce, resulted in the identification of an organised criminal gang involved in the importation of illicit tobacco, drug trafficking and money laundering.

In a statement, NSW Police said three suspects were detained on Tuesday at Sydney Olympic Park, where one man was found by officers to be carrying A$12,000 ($8,245) in cash.

After those arrests, investigators carried out a series of raids on domestic properties, business premises and storage units across Sydney’s south-west, resulting in the seizure of illicit tobacco, A$50,000 in cash and a range of luxury items, including designer watches, jewellery and handbags.

During the raids, a further six suspects were detained, and were later charged with a number of offences including membership of a criminal organisation, tobacco smuggling, money laundering and the criminal possession of more than 500kgs of tobacco.

Police believe members of the gang were responsible for the importation and sale of more than seven tonnes of illicit tobacco products, estimated to be worth in excess of A$1.8 million.

Commenting on the success of the operation, ABF Acting Regional Commander for NSW Garry Low said: “We know illicit tobacco is an attractive market for criminal syndicates due to the lucrative profits that can be made in evaded tax, and as we can see here, the profits are often channelled back into organised crime.

“Illicit tobacco costs Australia about A$600 million a year in lost revenue. The ABF, working with our law enforcement partners, will continue to do everything we can to crack down on this black market, the criminals involved in it, and prevent illicit profits being channelled back into other criminal activities.”

In May of last year, lawmakers in Australia launched a crackdown on the sale of illicit tobacco that they claimed would raise some A$3.6 billion over a four-year period.

The Australian government said the initiative was intended to prevent the sale of 864 tonnes of illicit tobacco that is estimated to slip past the country’s customs officers every year.

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Illicit Tobacco & Alcohol Trade

“Legal and illegal trade in tobacco products are often intertwined”

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multi-million dollar tobacco smuggling gang

Illicit Trade News Networks has interviewed Benoît Gomis, research associate at the Global Tobacco Control Research Programme at Simon Fraser University who has recently published a study on the illicit trade in South America. From the beginning of the illegal trade seeded by British American Tobacco and Philip Morris International to the ongoing trade organised by Tabesa, Benoît Gomis gives a clear picture of how legal and illegal are intertwined as long as tobacco products are involved.

Illicit Trade News Network: You recently published a study on illicit tobacco trafficking in South America and more specifically in Paraguay. Can you go back over the figures from this study in a few words?

My colleagues and I just published two papers in Globalization and Health on Paraguay’s illicit tobacco trade.

In the first paper, we demonstrate how the trade was originally seeded by British American Tobacco (BAT) and Philip Morris International (PMI), who from the 1960s onwards used Paraguay as a transit hub to smuggle their cigarettes to the then protected markets of Argentina and Brazil. Two developments later led to a boom in Paraguayan production: 1) the transnational tobacco companies (TTCs)’ switch from high-end to cheap smuggled brands in the late 1980s and early 1990s – products with which local manufacturers could now compete, and 2) Brazil’s introduction of a 150% export tax to end the TTC scheme – by which cigarettes were sent to Paraguay and then re-smuggled to Brazil. Based on our estimates, between 1989 and 1994, Paraguayan cigarette production was below the annual domestic consumption of three billion cigarettes. It grew to 12 billion sticks by 1998 and 27 billion by 2003 despite stagnating consumption.

In the second paper, we document how Tabacalera del Este (most commonly known as Tabesa) capitalized on the conditions created by BAT and PMI and a permitting regulatory environment. Created in 1994, Tabesa is now one of Paraguay’s largest companies. It was founded and is still owned by Horacio Cartes who was President of Paraguay between 2013 and 2018. Based on data on the company’s imports of cigarette components, we estimate that Tabesa imports enough to produce 25-36 billion cigarette sticks per year. Given domestic consumption and legal export figures, this means that between 19-30 billion cigarettes produced by Tabesa annually end up on the illicit market. An estimated 70% of that is smuggled to Brazil, and our research finds that Tabesa has been exploring other international markets.

Tabesa executives notably told Paraguayan journalists that the company legally exports to a number of countries, including Bulgaria, Curaćao, the Netherlands Antilles and the Netherlands. However, our analysis of UN Comtrade data shows significant discrepancies, suggesting illicit trade. For instance, between 2001 and 2016, there were no cigarette exports reported by Paraguay to Bulgaria, nor any cigarette imports reported by Bulgaria from Paraguay. In that same period, Paraguay reported exports of 1.4 billion cigarettes to Curaçao, 481.2 million cigarettes to the Netherlands Antilles, and 111.4 million cigarettes to the Netherlands, yet none of those countries reported any cigarette imports from Paraguay. In total, between 2001 and 2016, 5.7 billion cigarettes officially shipped by Paraguay to 10 markets where Tabesa exported to were unaccounted for.

 

What are the major findings of your study on the modus operandi of tobacco trafficking?

Our findings suggest that the legal and illegal trade in tobacco products are often intertwined. BAT, PMI, and Tabesa have all had legal sales and legal exports, and yet have also used the illicit trade – in particular through free trade zones (FTZs) and other areas of weak governance – to enter new markets and increase their revenue. We also argue that Tabesa has used its legal exports to the US as a defence against smuggling accusations. More broadly, these papers – and other research we have conducted – suggest that the illicit tobacco trade is changing its nature. There are still signs of TTC complicity in the illicit trade, but other non-TTC actors are increasingly involved as well. Meanwhile, TTCs are attempting to recast themselves as responsible partners to governments by providing intelligence, training, equipment, financial resources and even influencing budget decisions in various countries across Latin America, while also commissioning and funding studies on the illicit trade and framing the issue in the media. It is of course in their interest to do so. Through these activities, TTCs aim to undermine competitors and fight against tobacco control measures that have been effective in reducing smoking rates (e.g. higher taxes, plain packaging).

 

In your study, you mention tactics allegedly used by Tabesa, PMI and BAT tactics in terms of illicit tobacco trafficking. What are these tactics?

These include: 1) creating new brands, manufacturing them domestically, exporting them illegally, using the revenue to reinvest in product development and production facilities to produce more cigarettes to a higher standard and thus compete for new markets overseas; 2) using free trade zones as transit hubs for smuggling; and 3) selling to a large number of domestic distributors and later arguing that subsequent illicit exports are not their responsibility.

 

What measures could countries plagued by illicit tobacco trafficking take at the national level?

The first measure is to tackle industry interference with policy making. TTCs are attempting to circumvent international guidelines to reclaim influence in tobacco control by supporting governments to tackle the illicit tobacco trade. But as the WHO warns, “There is a fundamental and irreconcilable conflict between the tobacco industry’s interests and public health policy interests.”

Second, governments would do well to increase resources dedicated to relevant law enforcement and customs departments – including adequate training independent of the tobacco industry.

Third, more data should be collected and analyzed independently of the tobacco industry. Very often there is much we do not know about the illicit tobacco trade in any said country, meaning that policy responses often rely on potentially misleading seizure figures and industry-funded data.

More broadly speaking, the more fundamental issues of weak governance, institutional capacity, political will, transparency, accountability, and corruption need to be tackled for any substantial progress to be made.

 

What measures could be taken at the international level and in terms of traceability?

Governments should fully implement the WHO Framework Convention on Tobacco Control and its Protocol to Eliminate Illicit Trade in Tobacco Products.

Our research played an important role in the Paraguayan government’s decision to sign the Protocol, a step in the right direction. The Protocol features a number of useful action points, including Article 10.1.b which notes that Parties shall “take the necessary measures” so that companies “[supply] tobacco products or manufacturing equipment in amounts commensurate with the demand for such products within the intended market of retail sale or use”.

Article 8 on Tracking and Tracing is perhaps the most central one, however. It notes that “the Parties agree to establish within five years of entry into force of this Protocol a global tracking and tracing regime”. Under the traceability system of the Protocol, detailed information on the entirety of the tobacco supply chain is for instance required, including “the name, invoice, order number and payment records of the first customer not affiliated to the manufacturer”, “the intended market of retail sale”, “any warehousing and shipping”, “the identity of any known subsequent purchaser”, and “the intended shipment route, the shipment date, shipment destination, point of departure and consignee” (Article 8.4.1). This system is intended to “further [secure] the supply chain and to assist in the investigation of illicit trade in tobacco products”. However, it is currently at risk of being controlled by the tobacco industry. Further research on this development and caution from governments are required to ensure that the track and trace measures put in place across the world effectively mitigate the illicit tobacco trade, rather than promote the commercial interests of TTCs at the expense of public health and good governance.

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