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“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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Police arrest man in connection with plot to smuggle 16 tonnes of loose-leaf tobacco and 20 million cigarettes into Australia

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plot to smuggle 16 tonnes of loose-leaf tobacco and 20 million cigarettes

An anti-tobacco smuggling police unit in Australia has detained a man in connection with a plot to illegally import tobacco products that cost the country some A$24 million ($16.6 million) in lost taxes.

Officers from Australia’s Illicit Tobacco Taskforce (ITTF), which was set up back in May 2018 to help the country’s government raise  A$3.6 billion over a four-year period by cracking down on tobacco smuggling, arrested the suspect on Saturday morning in connection with the massive haul.

The man was detained at Melbourne Airport before he was later charged with five offences against the Customs Act 1901.

He appeared before Melbourne Magistrates Court on Monday morning, where he was bailed to reappear in April next year.

Prosecutors claim the man was involved in a plot to smuggle almost 16 tonnes of loose-leaf tobacco and over 20 million cigarettes into Australia over the course of the past two years, avoiding an estimated A$24 million in excise duty.

Commenting on the seizure, Acting Commander of Australian Border Force (ABF) ’s Special Investigations unit Leo Lahey said: “This arrest is the result of a complex and protracted investigation by the ITTF and continues the focus of the ITTF on targeting the most serious and significant organised crime syndicates trafficking in illicit tobacco.”

In Australia, the maximum penalty for tobacco smuggling is 10 years behind bars and/or a fine of up to five times the value of duty evaded.

Earlier this month, ABF revealed that its officers had detected and seized more than 39 million illicit cigarettes in Melbourne over the course of just one week.

The illicit cigarettes, which would have deprived the Australian government of some A$40 million in evaded duty had they been sold on the black market, were discovered in sea cargo shipments after customs officers noted inconsistencies with import declarations.

Border force officers said one shipment, which was declared as being synthetic grass but in fact contained 20 million cigarettes, was not hidden at all, while a second that was declared as glass bottles was stashed behind a cover load and contained 19 million cigarettes.

Speaking after the discovery of these shipments, Assistant Minister for Customs, Community Safety and Multicultural Affairs Jason Wood said that since its establishment, the ITTF had been involved in the seizure of more than 67 tonnes of smuggled tobacco and approximately 230 million trafficked cigarettes, protecting more than A$264 million in duty.

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UK-based tobacco smuggling gang jailed for ten years after being caught with over 10 million illicit cigarettes

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UK-based tobacco smuggling gang jailed for ten years

Three men have been jailed for a total of more than 10 years after UK tax authorities found more than 10 million smuggled cigarettes stashed on a farm in the English county of Yorkshire.

Michael Haley and his two Polish associates, Rafal Miller and Grzegorz Kojak, were caught red-handed by investigators while they were loading illicit tobacco onto the back of a truck.

After opening several metal containers the trio were loading onto a lorry, revenue inspectors discovered multiple cardboard boxes filled with a total of 10,853,500 cigarettes.

If the illicit cigarettes had been sold on the black market, the UK Treasury would have been deprived of over £3 million ($3.93 million) in unpaid tax duty.

All three men pleaded guilty to excise fraud during a hearing at Hull Crown Court, resulting in Haley and Miller each being jailed for three years and nine months, and Kojak being handed a sentence of three years and three months.

Police are still investigating the whereabouts of a fourth mad who fled the scene as Haley, Miller and Kojak were arrested.

Commenting after sentencing, Brett Wilkinson, Assistant Director of the Fraud Investigation Service at Her Majesty’s Revenue and Customs, said: “This was a deliberate attempt to flood the streets with illegal cigarettes and deprive our public services of millions of pounds.

“Hayley, Kojak and Miller thought their smuggling scam would go unnoticed – but they were wrong and now they are paying the price.

“We will continue to pursue criminals who think stealing from taxpayers is acceptable. I urge anyone who has information about the smuggling, selling or storing of illicit tobacco to report it.”

Last week, North Yorkshire County Council Trading Standards announced that its officers had used sniffer dogs to detect illicit tobacco worth an estimated £27,000.

The dogs were deployed during an intelligence-led operation targeting tobacco smugglers.

The canines located 29,000 cigarettes and 29.25kgs of rolling tobacco concealed hidden in kitchen shelving units and drawers that would not have otherwise been discovered during raids on properties linked to the alleged smugglers.

Dr Lincoln Sargeant, Director of Public Health for North Yorkshire, commented: “People who deal in illegal tobacco are more likely to encourage others, especially children and young adults, to smoke.

“All tobacco is harmful but the illegal tobacco market and in particular the availability of cheap cigarettes makes it harder for smokers to quit and remain smoke-free.”

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Europe-wide operation results in dismantling of tobacco smuggling operation that cost tax authorities €70 million

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dismantling of tobacco smuggling operation

An international operation coordinated by Eurojust, Europol and the European anti-fraud office OLAF has resulted in the breakup of a cross-border organised crime gang behind a major illicit tobacco smuggling operation.

A day of action involving law enforcement officials from seven countries resulted in the arrest of 18 people suspected of having links to the conspiracy.

The suspects were arrested on suspicion illegally storing and trading some 670 tonnes of illicit tobacco and several money laundering offences.

Alleged members of the gang, who are said to have deprived customs authorities in the Netherlands of some €70 million ($77.7 million) throughout the course of their plot, were detained in a coordinated series of 29 raids in Italy, Poland, Belgium, the UK and the Netherlands, mainly in the south eastern province of Limburg.

Police officers from Romania and Cyprus are also said to have contributed to the operation.

In total, the effort involved more than 250 investigators, including police, fiscal detectives and customs officers who were deployed during the action day.

In a statement, Europol said the gang is thought to have purchased tobacco in Italy before processing it at illicit cigarette factories and selling it on to traders.

“The criminals played a role as well in the brokerage of illegally produced cigarettes and bought, sold and repaired machinery for cigarette production,” Europol said.

“As a result of international cooperation, since last year already illegal cigarette factories have been dismantled in Poland, the Czech Republic and the Netherlands, whose operators had close links to the criminals who have now been arrested.”

The operation was the result of analysis conducted by a special operational taskforce that was set up in February 2018 comprising of Europol, UK tax authorities and FIOD, the Dutch fiscal information and investigation service.

In a report published back in June of this year, KPMG said the illicit trade in black market cigarettes across the European Union deprived member states of some €10 billion of tax revenues in 2018.

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

According to the study, which was commissioned by Philip Morris International, the EU market for illicit smoking products was equal to legal cigarette sales in the UK, Austria and Denmark combined in 2018.

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