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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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Police in New Zealand seize 1.8 million smuggled cigarettes and NZ$2 million in cash

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1.8 million smuggled cigarettes

Customs officers in New Zealand have seized some 1.8 million illicit cigarettes and more than NZ$2 million ($1.36 million) in cash during an operation targeting tobacco smugglers.

The investigation also resulted in the confiscation of multiple properties, luxury vehicles and a number of bank accounts.

Operation Whitethorn – a six-month probe that began after New Zealand authorities identified a company suspected of smuggling cigarettes inside sea containers – saw a business owner from Auckland arrested last Wednesday as he attempted to leave the country.

A recent container search resulted in the discovery of 340,000 cigarettes hidden inside 12 metal cabinets, which led to investigators searching multiple Auckland properties, where they found some 1.5 million cigarettes and five refuse bags filled with bank notes.

Police said they expect to make further arrests in connection with the cigarette-smuggling plot.

Had the seized tobacco been sold on the black market, the New Zealand government would have lost an estimated NZ$1.8 million in tax revenue.

Commenting on the success of the operation, Customs Investigations Manager Bruce Berry said: “Customs has seen an increase in the commercial quantities of smuggled or misdeclared Chinese-branded cigarettes in recent years. This investigation has uncovered the largest scale tobacco fraud to date.

“While it’s okay to import cigarettes, smuggling or misdeclaring them to evade taxes is illegal.

“Customs will not hesitate to identify and take action against those who seek to financially benefit from such illegal activity, including restraining the assets of the worst offenders.”

Back in March of this year, the New Zealand Customs Service issued a warning after a marked increase in the amount of abandoned and seized tobacco at the country’s airports that had been sent from overseas, a large amount of which had originated from the Asian region.

During 2017, over three million cigarettes/cigars and around half a tonne of loose tobacco was intercepted by Customs at New Zealand airports, with more than 2.5 tonnes of tobacco abandoned as people did not want to pay extra charges.

A report published in May by professional services firm KPMG revealed that approximately 9.2% of the 2.1 million kilos of tobacco consumed in New Zealand in 2017 was estimated to be illicit.

“Flows of Australian and Chinese labelled packs accounted for the majority of non-domestic flows,” the report said.

“Almost half of the flows originating from Australia were not compliant with the Australian plain packaging requirements, indicating that these flows were illicit.”

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Record haul of 9.5 million smuggled cigarettes seized by customs officers in Western Australia

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record haul of 9.5 million smuggled cigarettes

Police in Western Australia have arrested a man in connection with the discovery of a record illicit haul of 9.5 million smuggled cigarettes.

The 28-year-old was detained after officers from Australian Border Force (ABF) seized the 47,500 packs of cigarettes during a container examination facility in Fremantle, a port city in Western Australia.

ABF agents moved in after anomalies were detected when a 40-foot container was x-rayed and a sniffer dog indicted the presence of tobacco.

Further examination of the container’s contents led to officers discovering the smuggled cigarettes concealed beneath an initial layer of boxes of plastic panels.

The seizure of the haul resulted in ABF officers carrying out raids at two residential properties and a tobacconist shop in Morley, a suburb of Perth.

This led to the discovery of a further 31,000 illicit cigarettes and the seizure of numerous documents and electronic devices.

The suspect was taken into custody at one of the homes that were raided and charged with one count of importing tobacco products with the intention of defrauding the revenue.

He appeared in the Perth Magistrates Court on Saturday and was granted conditional bail to reappear in the same court on 9 November.

Had the Southeast Asian-manufactured cigarettes made it onto the black market without being intercepted by law enforcement authorities, the Australian treasury would have lost A$7.66 million ($5.47 million) in evaded duty, police said.

In a statement, ABF Regional Commander for Western Australia Rod O’Donnell said the seizure was the largest ever made in the state’s history.

“This is by far the biggest illicit cigarette seizure made in WA. Importantly, we’ve been able to prevent the Commonwealth being defrauded of more than $7.66 million in legitimate revenue,” he said.

Commander Rod O’Donnell added: “Illicit tobacco is an international issue, with much of the profits from cigarettes sold illegally in Australia being used to fund other criminal activity both here and overseas.

“The ABF is committed to working with our international partners to detect, investigate and disrupt those involved in the illegal tobacco trade – and to stop the profits from these smuggling operations from funding further criminal activity.”

If the man is convicted, he could face a maximum penalty of 10 years behind bars and/or a fine of up to five times the amount of duty evaded on the cigarettes he attempted to smuggle.

In May, Australian authorities announced a crackdown on the sale of illicit tobacco that they predicted could raise some A$3.6 billion over a four-year period.

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Multi-million dollar modern-day cigarette bootlegging gang arrested in New York

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modern-day cigarette bootlegging gang

Eight members of a US modern-day bootlegging gang have been charged with grand larceny, conspiracy and other crimes after they were arrested in connection with a plot to smuggle cheap cigarettes into New York to sell with counterfeit tax stamps.

The gang members, who are said to have made millions out of the conspiracy, were arrested on Monday after police raids resulted in the seizure of 6,267 cartons of untaxed cigarettes, as well as $2.3 million.

Speaking after the defendants were charged, Queens County District Attorney Richard Brown said: “The defendants in this case are modern-day bootleggers who allegedly peddled untaxed cigarettes to enrich themselves.

“This smuggling ring raked in millions of dollars at the expense of New Yorkers.

“Purchasing cheaper cigarettes from out of state and applying counterfeit tax stamps on them cheats both the state and city out of much-needed tax revenue.

“The defendants now face prison time as a result of their alleged greed.”

“I want to acknowledge the exceptional work of the multiagency Strike Force that investigated this illegal operation. My office will continue to work diligently with our law enforcement partners to root out those who set up illegal operations in Queens County.”

Prosecutors allege that Nasir Jafri purchased over 37,000 cigarette cartons from retailers in Virginia and Maryland before driving them to New York, where tobacco products are subject to additional taxes.

Defendants Ahmad and Hassan Abualrub are then said to have bought the cigarettes from Nicholas Galafano before transporting them to Brooklyn, where they sold them on to customers.

A search of Beatrice Villafane’s home, which prosecutors allege was used by the gang as a “stash house”, led to investigators recovering more than 3,500 cartons of untaxed cigarettes, nearly 100,000 counterfeit New York State tax stamps, paraphernalia used to remove and affix stamps, counting machines and more than $200,000 cash.

Last year, a report from Washington DC-based think tank the Tax Foundation revealed that New York was the US capital of illicit tobacco.

The study found that an estimated 56.8% of cigarettes smoked in New York in 2015 were smuggled into the state.

That figure represented a 35.8% increase on the amount of smuggled tobacco smoked in 2016 in New York, which levies the highest rate of state cigarette tax in the US.

“Growing cigarette tax differentials have made cigarette smuggling both a national problem and in some cases, a lucrative criminal enterprise,” the report authors wrote.

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