Tobacco Smuggling

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Tobacco companies have facilitated the smuggling of their own cigarettes and roll your own tobacco for decades. Internal company documents reveal that in the 1990s smuggling was an integral part of tobacco companies' business strategies. By the late 1990s and early 2000s, the tobacco industry’s involvement in smuggling had been exposed leading to public investigations, court cases and extremely negative publicity for the tobacco companies. Using a massive public relations drive, they claimed they had changed and were now the victims, not the perpetrators of tobacco smugggling. But contemporary evidence indicates signficant ongoing tobacco company involvement in the illicit tobacco trade.[1][2]

Why Would Tobacco Companies Smuggle their Own Product?

The tobacco industry can benefit from smuggling in the following ways:[1][2][3][4]

  • The tobacco companies are paid for the product whether it is smuggled or not. In other words, they are paid when they sell to the distributor regardless of whether it then enters the legal or illegal channel.
  • The reduced average market price as a result of smuggling discourages quitting and increases total sales, particularly sales among key industry targets – the young and the least well off.
  • Illegal sales undermine tobacco control measures including packaging laws, and age restrictions on sales.
  • The industry uses smuggling to press the case for reduced excise taxes, leading to increased sales in the legal market.
  • The industry uses smuggling to argue against tobacco control policies claiming that every policy will increase tobacco smuggling (this despite their documented involvement).
  • The industry uses smuggling as a market entry strategy – where imports are restriced or tarriffs are high, it smuggles to avoid these restrictions and tarriffs. It then argues that the presence of illicit on the market indicates a need to lift the import restrictions or privatise the state owned tobacco company.[5]

Historic Tobacco Smuggling

Major tobacco companies have an extensive history of facilitating the illicit trade. By the late 1990s, it was estimated that one third of global annual cigarette exports could not be accounted for via legal distribution routes.[6] Despite the tobacco industry knowing that cigarette smuggling increased sales to children, documents from the Truth Industry Documents Archive and other evidence has shown the extensive involvement of the industry in facilitating smuggling by shipping huge quantities of cigarettes to 'smuggling hubs'. The cigarettes were then forwarded via these hubs via the black market, often back to the countries from where they were shipped.

See also:

Ongoing Tobacco Industry Involvement in Illicit Trade

Image 1: % share of UK illicit market by type, adapted from systematically collected seizure data from 9 English regions between April-November 2014 and December-April 2015/16.[7]
Image 2: Latest available global data from the World Customs Organization showing % of cigarettes seized by type
Image 3: Collated results from Project Sun and Star reports, estimating the volume and type (billions of sticks) of illicit cigarettes in the EU

Following damaging revelations of tobacco industry involvement, litigation and inquiries, the tobacco industry claimed it had changed. Over recent years it has claimed it is now the victim of tobacco smuggling.[1][2] However there is now growing evidence from diverse sources that it remains involved and that the majority of cigarettes on the illicit market are the tobacco companies’ own products.[2] Whistle-blowers,[8] researchers,[9] investigative journalists,[10][11] and government investigations and reports[12][13][14] all indicate that industry involvement in tobacco smuggling has continued since the 1990s.[2] This is supported by data as detailed below.

Tobacco companies often suggest that cheap/illicit whites (cigarettes that are legally produced, usually not by a transnational tobacco company, but have no legitimate market and are manufactured with the intent of being smuggled elsewhere) and counterfeits (products bearing a trademark of a tobacco manufacturer that are manufactured by a third party without consent) are the key components of illicit tobacco trade.[15]

However, diverse data covering the UK, the European Union (EU), and the world, consistently show that the single largest component of the illicit tobacco market is tobacco products that are actually manufactured legally by large tobacco companies before ending up on the illicit market (hereby referred to as tobacco industry illicit).[2] The UK Department of Health commissioned the Trading Standards Institute to systematically collect data on tobacco seizures regardless of size in 2014 and 2015/6. It found that approximately 70% of seized cigarettes were tobacco industry illicit (Image 1). Note: Image 1 involved some re-coding of the source data because two highly seized TI brands had been erroneously coded as illicit whites.[2]

Data from the World Customs Organization also indicate that, globally, approximately 70% of seizures are tobacco industry illicit (Image 2).[16] Even studies funded by tobacco companies show that tobacco industry’s illicit remains the single largest problem within the illicit cigarette market across the EU, comprising an estimated 89% of the illicit market in 2007 and 58% in 2016 (Image 3).[17][18][19][20][21][22][23] However, industry-funded reports do not tend to highlight that their own findings show that tobacco industry illicit is the single largest component of the illicit market.[4]

It is noteworthy that, by contrast, levels of counterfeit which the industry claims ‘are increasingly growing’[24] are tiny – around 5% of the market in these comprehensive data sources.

At best the above evidence suggest that tobacco companies are failing to control their supply chain. Evidence shows they are over-producing products in some markets and oversupplying to others, both in the knowledge that excess products will end up on the illicit market. For example, in 2016, British American Tobacco (BAT) was fined £650,000, reduced on appeal to £100,000, for over exporting hand-rolled tobacco to Belgium which then found its way back to the UK illegally.[25][26]

In addition to evidence of continued facilitation of the problem, more serious allegations about contemporary tobacco company involvement in tobacco smuggling have also been made:

  • Former Japan Tobacco International (JTI) employees have accused JTI of remaining actively involved, describing ‘rampant smuggling’ throughout the Middle East, Russia, Moldova and the Balkans.[8] See: JTI Involvement in Smuggling.
  • Leaked tobacco industry documents suggest that BAT staff suspected JTI was facilitating smuggling into the Democratic Republic of Congo (DRC).[2]
  • Meanwhile, BAT illegally moved millions of dollars in cash from Uganda to the DRC to buy tobacco leaf which was then transported to Kenya and Uganda by truck, according to a BAT whistleblower. [27][28]
  • In 2011-2012, BAT cigarettes being distributed by a company previously implicated in tobacco smuggling were ending up in the illicit market across Africa, the Middle East and Europe with BAT staff agreeing not to discuss the problem by email.[2]

TobaccoTactics Resources

TCRG Research

Notes

  1. 1.0 1.1 1.2 A.B. Gilmore, G. Fooks, J. Drope, et al, Exposing and addressing tobacco industry conduct in low-income and middle-income countries, The Lancet, 2015; 385:1029-1043
  2. 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 A.B. Gilmore, A.W.A. Gallagher, A. Rowell, Tobacco industry’s elaborate attempts to control a global track and trace system and fundamentally undermine the Illicit Trade Protocol, Tobacco Control, Published Online First: 13 June 2018
  3. R. Hammond, A. Rowell, Trust Us - We're The Tobacco Industry, undated, Campaign for Tobacco Free Kids, Action on Smoking and Health, ASH website, 16 May 2001, accessed May 2018
  4. 4.0 4.1 A.W.A. Gallagher, K.A. Evans-Reeves, J.L. Hatchard, Tobacco industry data on illicit tobacco trade: A systematic review of existing assessments, Tobacco Control, 2018 (in press)
  5. A.B. Gilmore, M. McKee, Moving East: how the transnational tobacco industry gained entry to the emerging markets of the former Soviet Union-part I: establishing cigarette imports, Tobacco Control, 2004;13:151-160
  6. L. Joossens, M. Raw, Cigarette Smuggling in Europe, who really benefits?, Tobacco Control, 1998;7:66-71
  7. Chartered Trading Standards Institute, Tobacco control: Operation Henry, 2018, accessed May 2018
  8. 8.0 8.1 J. Holland, B. Jovanovic, S. Dojcinovic, Big trouble at Big Tobacco, 2011, accessed May 2018
  9. L. Joossens, A.B. Gilmore, M. Stoklosa, et al. Assessment of the European Union's illicit trade agreements with the four major Transnational Tobacco Companies, Tobacco Control, 2016;25(3):254-260
  10. V. Lavrov, Ukraine's 'Lost' Cigarettes Flood Europe: Big tobacco's overproduction fuels $2 billion black market, 30 May 2009, accessed May 2018
  11. J. Pauw, The President’s Keepers - Those keeping Zuma in power and out of prison. Chapter 8: Tom’s Tempest, Chapter 10: Up in Smoke, Tafelberg 2017
  12. Public Accounts Committee, HM Revenue & Customs: Progress in tackling tobacco smuggling: summary, 10 October 2013, accessed May 2018
  13. Comptroller and Auditor General Progress in Tackling Tobacco Smuggling, 6 June 2013, accessed May 2018
  14. J. Loggerenberg, A. Lackey. Chapter 11. Project Honey Badger. Rogue The inside story of SARS’ elite crime-busting unit. Jeppestown: Jonathan Ball Publishers, 2016
  15. Philip Morris International, KPMG Sun Report: One in Ten Cigarettes Consumed in the EU in 2012 Were Illegal; Dramatic Rise in Consumption of ‘Illicit Whites’, 23 June 2014, accessed April 2017
  16. World Customs Organization, Illicit Trade Report 2016, 2017, accessed May 2018
  17. KPMG, Royal United Services Institute, Project Sun: A Study of the Illicit Cigarette Market in the European Union, Norway and Switzerland, 2017, accessed May 2018
  18. KPMG, Project Sun: A study of the illicit market in the European Union, Norway and Switzerland, 2015 Results 2016, accessed May 2018
  19. KPMG, Project Sun: A study of the illicit cigarette market in the European Union, Norway and Switzerland, 2014 Results, 2015
  20. KPMG, Project Sun: A study of the illicit cigarette market in the European Union, 2013 Results, 2014, accessed May 2018
  21. KPMG, Project Star 2012 Results, 2013.
  22. KPMG, Project Star - 2011 Results, 2012
  23. KPMG, Project Star 2010 Results, 2011
  24. 53 billion illegal cigarettes illegally consumed in the European Union last year, Business Wire, 8 June 206, accessed May 2018
  25. BBC News, HMRC fines cigarette maker for oversupplying Belgium, 13 November 2014, accessed May 2018
  26. Monckton Chambers, British-American Tobacco Ltd v HMRC First-tier Tribunal (Tax Chamber), 14 February 2017; (2017) UKFTT 167 (TC): Tribunal clarifies tobacco manufacturers’ anti-smuggling duties, 7 March 2017, accessed May 2018
  27. M. Gillard, CANCER FOR CASH: Explosive Photo Exposes Big Tobacco's African Money Drops, 2 August 2017, accessed May 2018
  28. S. Bosely, Revealed: how British American Tobacco exploited war zones to sell cigarettes, 18 August 2017, accessed May 2018