Cigarette Smuggling
Driver held over HK$3.6m illicit cigarettes
Customs said today they have seized about 1.3 million illicit cigarettes, worth about HK$3.6 million, at the Shenzhen Bay Control Point yesterday and arrested a 52-year-old male driver.
Officers intercepted an incoming truck declared as carrying assorted goods at the control point last night. After inspection, they found the batch of illicit cigarettes inside 79 cartons mix-loaded with other goods on the truck.
HOW TOUGH ANTI -SMUGGLING MEASURES INCREASED GOVERNMENT REVENUES
THE UK EXAMPLE: HOW TOUGH ANTI -SMUGGLING MEASURES INCREASED GOVERNMENT REVENUES
The UK provides a case study for how tough antismuggling measures, as enshrined in the Illicit Trade Protocol, can enable governments to raise taxes, increase revenues and discourage smoking.
This wasn’t always the case. During the 1990s the government started increasing taxes above inflation to reduce affordability. By the beginning of the 21st century over 20 per cent of cigarettes smoked in the UK were smuggled, up from 5 per cent in the early 1990s. Worse still the illicit market share was predicted to grow to a third of the market within a couple of years if no action was taken. And access to cheap tobacco meant that the tax policy, which should have discouraged smoking and increased government revenues, was failing on both counts.
The tobacco industry lobbied hard, saying it was high taxes causing increased smuggling and the only solution was to cut taxes. But media investigations and parliamentary enquiries revealed that it was the industry itself that was fuelling the illicit trade. Tobacco transnationals were exporting cigarettes to countries where there was no end market, knowing they’d bounce back to the UK, cheap and untaxed. A good example is Andorra. From 1993 to 1997 sales of UK cigarettes to Andorra ballooned more than a hundredfold from 13 million to 1.5 billion. Andorra was importing enough cigarettes for every man, woman and child to smoke 140 a day. And it wasn’t just Andorra, British cigarettes were being exported to all sorts of places with no end market, including Latvia, Kaliningrad, Afghanistan and Moldova.
The tobacco transnationals denied all knowledge, but as one Member of Parliament said to the Chief Executive of Imperial Tobacco, “One comes to the conclusion that you are either crooks or you are stupid, and you don’t look very stupid.” The UK Government held its nerve and continued to increase taxes, while implementing a tough anti-smuggling strategy, which included strict supply chain controls and financial sanctions very much along the lines of the Protocol. Between 2000 and 2016, the last year for which there are figures, the size of the illicit market for cigarettes fell by nearly 60 per cent from 17 to 7 billion sticks, with revenue losses down from US$3.67 billion to US$2.36 billion (at current exchange rates).
Illicit trade is a major and growing global problem but the lesson from the UK is clear. The Illicit Trade Protocol can help countries raise taxes, increase revenues and drive down smoking prevalence.
Deborah Arnott
Chief Executive ASH (UK)
EVERYTHING YOU EVER WANTED TO KNOW ABOUT FREE ZONES
Trends in illicit tobacco trade require us to pay attention to illicit manufacturing, and particularly to “cheap or illicit whites” over counterfeit and contraband of major cigarette brands. This will require us to improve oversight and control of Free Zones.
WHAT ARE FREE ZONES?
Free zones (FZ), also known as free trade zones (FTZ) or Special Economic Zones (SEZ), are areas where regulations and controls are relaxed in an attempt to foster international investment, trade, and employment. This relaxation includes exemptions from import duties and taxation, as FZs are considered to be outside the applicable customs union for the country in which they are located. There are more than 4,000 such zones worldwide.
WHY ARE THEY PROBLEMATIC?
Because FZs are created to improve business and investment opportunities, these incentives often result in reduced financial and trade controls. Some countries totally disregard business in their FZs and often do not treat them as part of the customs territory, providing minimal or no oversight.
FZs facilitate the transit of illicit manufacturing (counterfeit or “illicit whites”) and their untaxed leakage into the customs areas of neighboring countries. Cigarettes may also be re-stuffed (repackaged) into new untraceable containers that are falsely presented as containing other products and leave the FZ to be sold illegally in other markets.
WHAT DOES THE ITP SAY ABOUT THEM?
Article 12 of the ITP requires Parties to implement “effective controls” on manufacturing of and transactions in tobacco and tobacco products in FZs. It also requires Parties to prevent the intermingling of tobacco products with non-tobacco products (where tobacco products and other products are mixed in a single container or other transportation unit in FZs, with the intention of facilitating smuggling). Article 12 also states that Parties should adopt and apply control and verification measures on the transit and transshipment of both tobacco products and manufacturing equipment. These controls need to be in place within 3 years of the ITP coming into force.
HOW DO WE MOVE FORWARD ON ARTICLE 12?
There are real challenges to the effective implementation of Article 12, particularly for low and middle-income countries, where many FZs are located, and which face financial constraints to effective enforcement.
Since many Parties remain committed to FZs on the grounds of their claimed economic benefits, the Protocol’s required controls will need to be implemented with considerable care. Detailed guidance and technical assistance will be needed. Implementation of Article 12 also requires effective engagement with international enforcement agencies such as the World Customs Organisation, Interpol, Europol, and the Financial Action Task Force on Money Laundering (FATF/OECD). FCA is calling for:
- The establishment of a working group on free zones to provide detailed guidance to Parties on implementing Article 12 of the Illicit Trade Protocol.
- This working group should develop a set of criteria outlining what legislative options are available for effective controls in free zones, as well as;
- Clarifying the level of oversight that customs authorities are expected to perform within free zones, and;
- Recommending models for effective interagency cooperation (e.g. customs, law enforcement) to address illicit trade within FZs.
THE CANADIAN EXAMPLE: TOBACCO COMPANIES CONVICTED OF CONTRABAND
In Canada, in 2008 and 2010, the three major tobacco companies were convicted of contraband and entered civil settlements with federal and provincial governments. The convictions followed guilty pleas and resulted in fines of C$525 million, the largest in Canadian history. Civil payments totalled C$1.175 billion, with fines and civil payments together totalling C$1.7 billion (US$1.3 billion).
These outcomes arose from actions in the 1990s when the three major tobacco companies in Canada exported vast quantities of Canadian made and branded cigarettes tax-exempt to the U.S., knowing that these cigarettes would return to Canada illegally as contraband. The result was that an estimated 25-30 per cent of the Canadian market in 1993 was contraband. At the time, the companies claimed that they were not doing anything illegal.
The contraband situation prompted the federal government and 5 of 10 provincial governments in 1994 to reduce tobacco tax rates (the rates were not fully restored until 2002) . This had a serious adverse impact on smoking prevalence trends, especially among youth. Moreover, government tobacco tax revenue decreased substantially following the reduction in tax rates.
Eventually there were criminal investigations, including Royal Canadian Mounted Police (RCMP) searches and document seizures at tobacco company offices. The three companies that were convicted and entered civil settlements were Imperial Tobacco Canada (British American Tobacco subsidiary); Rothmans, Benson & Hedges (Philip Morris International subsidiary); and JTI-Macdonald (now a Japan Tobacco International subsidiary, but previously, in the 1990s as RJR-Macdonald, an R.J. Reynolds subsidiary). Also, Northern Brands International, a U.S. subsidiary of R.J. Reynolds, was convicted in both Canadian and US courts.
Governments recovered only a small percentage of the total revenue lost. In subsequent court filings, federal and provincial governments estimated that more than C$10 billion was forgone. Adding in the lower revenue following the tax rollback, the forgone revenue would be much, much higher.
The Canadian experience shows not only the importance of high tobacco taxes and contraband prevention, but also demonstrates that the tobacco industry has engaged in illicit trade on a massive scale and cannot be trusted.
Rob Cunningham, Canadian Cancer Society
HOW BIG TOBACCO THREATENS THE ILLICIT TRADE PROTOCOL
The first Meeting of the Parties to the Illicit Trade Protocol (ITP) starts today. It is crucial for delegates to understand the tobacco industry’s role in illicit trade before discussions begin.
The ITP aims to eliminate all forms of illicit tobacco but has a particular focus on securing the supply chain of legally manufactured tobacco products. Latest estimates suggest that approximately 60–70 per cent of the illicit market is tobacco industry product, indicating that, at the very least, tobacco companies are failing to control their supply chain in the knowledge that their products will end up on the illicit market.
The ITP requires a global track and trace system to reduce tobacco smuggling which will be achieved by each party requiring that every pack manufactured in or imported to their territory has a unique, secure marking providing information on manufacture, shipping and distribution.
The ITP stipulates that this ‘shall not be performed by or delegated to the tobacco industry’- a crucial requirement given that the industry has a vested interest in controlling measures aimed at controlling its supply chain. To this end, PMI adapted its pack marker system Codentify and freely licensed it to its three main competitors who then collectively promoted it to governments using front groups and third parties, despite the system being ineffective and inefficient as a track and trace solution.
In 2016 the system was sold to a company called Inexto, with PMI claiming this complied with WHO requirements.
Yet some of Inexto’s staff feature long-time PMI employees credited with creating Codentify and a complex web of shared intellectual property interests exists between these individuals and the two companies.
This is not the only threat that the industry poses to the ITP. Tobacco companies are a major funding source of data on illicit tobacco with the industry regularly commissioning reports which provide data on the scale of illicit tobacco across various countries and continents.
Recent research from the Tobacco Control Research Group at the University of Bath found that existing assessments of industry-funded data demonstrate that such data are not reliable. When compared with independent sources, they consistently overestimate the scale of illicit tobacco and frequently fail to meet the quality and transparency standards of peer-reviewed research.
Such data enables the industry to promote conclusions about the scale and nature of the illicit trade which cannot be easily disproved. The industry argues it is the victim of the illicit market, emphasising the role of counterfeit cigarettes, while arguing that that public health measures rather than the industry’s supply chain failures fuel illicit trade.
Parties to the ITP must reject the industry’s track and trace system while remaining vigilant against industry obscurantism. Parties also need to be aware that industry data on illicit serve as a platform for the industry’s lobbying and PR strategies. When fighting illicit trade, we shouldn’t look to the industry fuelling the problem to tell us how to understand or solve it.
THE PROTOCOL TO ELIMINATE ILLICIT TRADE IN TOBACCO PRODUCTS
THE PROTOCOL TO ELIMINATE ILLICIT TRADE IN TOBACCO PRODUCTS: A BRIEF HISTORY
Article 15 on the illicit trade in tobacco products was the first article on which an agreement was reached during the Framework Convention on Tobacco Control (FCTC) negotiations. The Parties recognised in this article that the elimination of all forms of illicit trade in tobacco products was an essential component of tobacco control. It is was rather novel that a public health treaty deal with illicit trade. Article 15 was only a first step. At the second Conference of the Parties, the decision was taken to start the negotiations for a separate protocol to eliminate the illicit trade in tobacco products (ITP). The ITP was adopted in 2012 and entered into force a week ago on 25 September 2018.
In the nineties, a big concern was that globally, a third of all exported cigarettes went missing while they were being transported internationally and entered into the contraband market. The evidence suggested that the tobacco industry was the chief beneficiary of smuggling. The industry benefited, using smuggling as a market entry strategy.
An article in the British Medical Journal in October 2000 outlined the reasons for the Protocol. “Tobacco smuggling has become a critical public health issue because it brings tobacco to markets cheaply, making cigarettes more affordable and thus stimulating consumption, consequently increasing the burden of ill health caused by its use. Smuggling is not a small phenomenon: we have estimated that, globally, a third of legal cigarette exports disappear into the contraband market. This extraordinary proportion results in a second key effect of smuggling—the loss of thousands of millions of dollars of revenue to government treasuries.”
The suggestion was made for a protocol to address the active involvement of the tobacco industry in smuggling operations. “In October 2000, the World Health Organisation will start negotiations for a framework convention on tobacco control. A specific protocol could deal with tobacco smuggling. It could, for instance, require “chain of custody” markings on all packages of tobacco products, placing the onus on the manufacturers to show that cigarettes arrive legally in their end user markets. Only such action at international level will resolve the problem, but it has now been shown to be soluble.”
Evidence of the direct and indirect involvement of the tobacco industry in cigarette smuggling is well documented–in internal documents that tobacco companies were forced to release in the course of litigation and in their own admission and court judgements. Since 1997, there have been several official investigations and subsequent court cases in different parts of the world (Hong Kong, Canada, Colombia) that have accused the industry of supplying smuggled cigarettes or at least of being aware of the illegal destination of their products.
The adopted Protocol is in line with the suggested solution outlined above, but is much more powerful. The ITP comprises 47 Articles; the substantive key provisions in Part III deal with supply chain control with the objective of tackling the illicit tobacco trade at the global level.
A QUICK GUIDE TO TRACKING AND TRACING
All Parties to the Protocol to Eliminate Illicit Trade in Tobacco Products (ITP) will need to establish a national tracking and tracing (T&T) system. That system needs to be linked into a global T&T regime within the next 5 years. The system may be adapted to national requirements but needs to be able to monitor and verify the authenticity of manufactured or imported tobacco products in its territory. Clear global standards are yet to be agreed upon.
What are the essential minimum requirements?
- A system that is unique, secure and unpredictable and not under the control or influence of the tobacco industry
- Recording of national information on secure servers, not operated by the tobacco industry and with access by the industry strictly limited and controlled
- Persons authorised by Parties, and independent from the tobacco industry, to have access to information about the international supply chain of tobacco products via a secure, usable and well-maintained global information-sharing focal point
What will it track?
- Date & time, location and productions shift of manufacture
- Machine, manufacturing facility and product description
- Name, invoice, order number and payment records of the first customer unaffiliated with the manufacturer
- Intended market of retail sale; intended shipment route, the shipment date, shipment destination, point of departure and consignee
- Any warehousing and shipping
- Identity of any known subsequent purchaser
Know your vendor
Countries will want to purchase adequate and fully functional T&T systems. However, identifying a suitable vendor in the market may be tricky for health government officials who are unfamiliar with T&T vendors. Some systems have been developed by the tobacco industry itself and are incompatible with the ITP.
The need for secure communication
Once the ITP is operational, it will involve the exchange of sensitive information. The confidentiality of any communication needs to be ensured. A secure system needs to be developed to protect it from the threat of criminal interests and the tobacco industry itself trying to corrupt and undermine the ITP.
