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Illicit Tobacco & Alcohol Trade

France ramps up its fight against illicit cigarettes

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In the face of criticism that the French government has not done enough to stem the flow of illicit tobacco into the country, French MPs and Senators have been redoubling their efforts to address the problem. In the most recent attempt, Senator Xavier Iacovelli brought together all of the debate’s various stakeholders, for the very first time in France, to discuss the issue at a conference in late November.

The conference was urgently needed: despite a significant fall in the number of smokers, France remains the number one country in Europe for the illicit trade of cigarettes. The conference’s communiqué provides some arresting figures which underline the gravity of the black market for tobacco. In France, black market tobacco counts for 25% of total consumption, with illicit trade translating into a loss of €3 billion in fiscal revenues nationally, compared to €20 billion for the European Union (EU) as a whole.

None of the diverse stakeholders present at the Senate conference were willing to contest these figures. Disagreements surfaced however when it came to discussing solutions to the problem, notably how best to implement a scheme to “track and trace” cigarettes sold.

The overwhelming prevalence of contraband cigarettes

Illicit trade includes both contraband (legitimate products upon which taxes due are not paid) and counterfeit (fraudulent imitations of legitimate products) products. All parties at the conference—even the tobacco industry representatives— agreed that 98-99% of illicit tobacco in France is contraband rather than counterfeit, meaning cigarettes manufactured by the tobacco companies themselves that have subsequently evaded the appropriate taxation.

To explain how this many licit smokes slip through the cracks, Iacovelli cited the arresting example of the parallel tobacco trade in Andorra. The tiny principality consumes 120 tonnes of tobacco per year, yet buys 850 tonnes from tobacco companies. The surplus supply, which retails for €1.20 a packet in Andorra, is carried by 8 million tourists across the border into Spain and, principally, into France, where a packet costs €8. While supplying Andorra’s duty-free shops in reasonable quantities is not in and of itself illegal, in practice it means that tobacco companies are able to get their product on the French and Spanish market without it being subject to the taxes which pad government coffers and underpin public health initiatives.

Tracing tobacco

Being able to pinpoint exactly when a tobacco product leaves legal channels is key to stopping this illegal flow. One of the most robust tools for doing so, the World Health Organisation (WHO)’s Protocol to Eliminate Illicit Trade in Tobacco Products, officially entered into force on 25 September this year. Under the pact, signatory countries are required to establish “tracking and tracing” systems by 2023, enabling authorities to follow the movement of legal tobacco products from factory floor to the final consumer.

Perhaps unsurprisingly Big Tobacco — having repeatedly been shown to be involved in cigarette smuggling itself — has pushed back against the WHO Protocol and other attempts to crack down on illicit trade. The tobacco manufacturers typically argue, as one industry representative did at Iacovelli’s conference, that the root of the problem is that the average consumer perceives the price of cigarettes as too high. According to Big Tobacco, this high price, intended as an incentive to encourage people to stop smoking, naturally leads consumers to attempt to outmanoeuvre governments’ fiscal strategies. Research has generally dismissed this argument, finding that raising tobacco taxes does not necessarily impact the amount of tax evasion.

Big Tobacco muscles its way into track & trace

Despite arguing that high tobacco taxes, rather than the lack of an effective track and trace scheme, is the root of the illicit tobacco trade, the industry has simultaneously been aiming to position itself as central to the debate surrounding how best to trace tobacco products.

Having developed Codentify – its own bespoke trace and track system – Philip Morris International (PMI) has sold parts of the intellectual property behind the scheme for peanuts to a French company, Inexto. Subsequently, PMI has also led its direct tobacco industry competitors in a coordinated lobbying campaign worldwide to encourage national governments to adopt its system.

Given the industry’s record of direct and indirect involvement in the illicit trade of tobacco, it is concerning that a certain number of governments in Africa and South America have indeed purchased Codentify, the independence of which is highly contested by anti-tobacco activists and health professionals. Perhaps more surprising, however, in 2017 the European Commission itself proposed that the industry be in large part responsible for the tracking and tracing of its own products in the EU.

Many health advocates have warned that Codentify is the industry’s “Trojan horse”, and argue that the Commission’s decision has the effect of putting the fox in charge of the chicken coop. Moreover, the WHO Protocol, to which the EU is a party, takes a clear position in this regard: the tobacco industry is part of the problem of illicit trade in cigarettes, not part of the solution, and must therefore have no influence on regulation – a real thorn in the side of one of the most influential lobbies in Brussels.

An unreliable partner

It is for this reason that PMI used the French Senate conference to contest jurists’ argument that the WHO Protocol, by way of its adoption across EU Member States, supersedes existing EU law on the issue, and therein the directives of the European Commission. At the same time, the Commission has attempted to hit back at criticism of its track and trace proposals, claiming that they are fully in line with the WHO Protocol.

As these debates continue to rage, what seems clear is that the tobacco industry has shown again and again—including at Iacovelli’s conference—that it will go to extensive lengths to look after its own interests, making it a problematic partner in initiatives to collect taxes and safeguard public health.

Prompted by the example set by Senators like Xavier Iacovelli, the French government could and surely will do more to stem the illicit trade of tobacco in France. Those hoping for swifter progress, however, should also be looking to mitigate the influence Big Tobacco continues to wield over tobacco policy.

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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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