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July 17, 2012, 7:58 AM
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In Europe, Smoking Problem Poses Risk
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By Jacob Anbinder
For a continent that spearheaded workplace smoking bans and slaps some
of the highest tax rates on cigarette sales of any region in the world,
Europe has a smoking problem.
Bloomberg News A smoking cigarette sits on the edge of an ashtray in
London.
In 2011, according to a report commissioned by the European Union and
carried out by auditing firm KPMG, one in ten cigarettes sold in the
27-nation bloc was contraband–that’s around 65 billion cigarettes. The
report was part funded by Philip Morris International.
Making matters more difficult is the growing influx of so-called
“illicit whites,” which are legally manufactured in places like Ukraine
and Russia under brand names like Jin Ling and Raquel, then illicitly
smuggled into the EU duty-free, according to the report.
The influx of contraband cigarettes has implications not just for public
health–cheap cigarettes are widely thought to correlate with high
smoking rates–but also for tax revenues. At a time when many member
states are desperate for cash, the report estimates the EU’s annual
losses from contraband cigarette sales at €11 billion.
While some of the findings have been questioned by independent
tobacco-industry analysts, there is no denying the scale of the
problem.
Here in Brussels, where the Russian border is 900 miles away and tobacco
taxes relatively low, vendors outside a weekend market make their
rounds, mesh bags full of contraband cartons slung from their shoulders.
Your correspondent was able to purchase a pack of what appeared to be
Dutch Marlboros for €3.00 ($3.69)–40% percent off the store price.
The seller had no Jin Lings on hand, but that would seem an anomaly.
Illicit whites, according to the report, make up 24% of all illegal
cigarettes, up from 4% just five years ago.
The EU’s anti-smuggling strategy has changed significantly over the last
decade, with Brussels shifting from confrontation with the cigarette
companies to something closer to collaboration.
Early last decade, Brussels sued Philip Morris for secretly encouraging
the smuggling of its own cigarettes. The case was settled in 2004, with
the lawsuit dropped in exchange for $1.25 billion and a pledge to
cooperate with OLAF, the EU’s anti-fraud office, in anti-smuggling
efforts. Since then, the EU has settled with three other major tobacco
companies for an additional $900 million.
These deals resulted in the annual KPMG/Phillip Morris reports as well
as a host of other initiatives.
OLAF, which has taken the lead in coordinating anti-smuggling efforts in
Brussels, has in the mean time launched some successful anti-smuggling
stings, including a 2007 action called Operation Diabolo that saw
authorities intercept 135 million illicit cigarettes.
Austin Rowan, an OLAF spokesman, said his organization was optimistic
about its efforts, noting that the number of cigarette seizures had
decreased in 2011, a possible indicator, he said, of a shrinking illicit
market.
“For us, the real barometer is the reports of illicit seizures,” he
said.
But according to the report, the flood of illegal cigarettes has
continued to increase, particularly the illicit whites coming from the
east. As a result, it’s up to customs agents on the EU’s eastern
frontier to seize untaxed cigarettes bound for Poland or Romania.
The border can be porous, and Russian and Ukrainian customs agencies are
“pervasively corrupt,” said Anders Aslund, an expert on Eastern European
trade at the Peterson Institute for International Economics in
Washington.
Giovanni Kessler, the head of OLAF, said his organization is “developing
a cooperation strategy” on the issue of border control. Efforts include
posting a liaison officer to Ukraine to work with the authorities there
and an action plan for the EU’s eastern border detailing the bloc’s
anti-smuggling strategy, which the Commission adopted last year.
Russia’s imminent accession to the World Trade Organization, which the
country’s lower house approved last week, could give Brussels an
additional forum in which to address smuggling. The Commission also
hopes to convince eastern border countries to raise their own cigarette
taxes. That could discourage cheap imports by forcing up prices in
places like Moldova and Ukraine, where a cigarette pack can legally sell
for as little as €0.18 to €0.33. The EU is currently in negotiations
with those two countries, and intends to start talks with Russia soon,
an EU spokeswoman said.
But this would not stop illegal imports of illicit whites, which often
come to the EU straight from the factory gates, according to a 2008
investigation from the Center for Public Integrity, a U.S. non-profit
organization which conducts investigative journalism projects.
The simplest solution, some say, would be to fight smoking addiction
itself via a single, high EU-wide cigarette tax.
While EU member states have a veto on tax policy, Brussels has launched
an initiative that would require a new minimum cigarette tax rate from
2014 within the 27-nation bloc. Countries where the tax is lowest, like
Bulgaria, Greece, and Romania, will have until 2018 to implement the
change.
Cigarette companies have lobbied hard against raising taxes, arguing it
will feed the underground market. But public health advocates argue the
gains in terms of reduced smoking rates from tax hikes outweigh the
risks of increased smuggling.
In the meantime, tax revenues can actually increase. In the U.K., higher
tax rates have lifted tobacco duty revenues by 23% in the last decade,
while adult smoking rates have fallen about 25%, according to Cancer
Research UK.
Constantine Vardavas, a public-health expert at Harvard who has advised
the Greek government on its cigarette policy, said a tax increase could
allow the country to recoup the millions—perhaps billions—of euros it
loses every year to smuggling.
“That,” he said, “is a big chunk of the deficit that’s literally being
turned to ashes.”
