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October 9th, 2018:



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)


This week, the World Bank will release its Human Capital Index. This index rates countries on how close they are to having a healthy, educated workforce that is prepared for the more highly-skilled jobs of the future; and to compete effectively in the global economy.

The health and economic costs of tobacco are clear: it kills more than seven million people every year and millions more suffer from tobacco-related disease – often during their most economically productive years. The global economic cost of smoking amounts to nearly 2 trillion dollars annually, almost 2 per cent of the world’s GDP.

The tobacco industry pushes a narrative about its own economic contribution as an obstacle to the implementation of tobacco control policies. The true cost of tobacco is to be found in the stories of suffering told by the victims like Ike, a non-smoking mother of two from Indonesia, who developed throat cancer from second-hand smoke exposure, or Sunita, a 27-year old smokeless tobacco user from India, who never smoked but developed fatal oral cancer.

The FCTC and the ITP are solutions to reducing tobacco’s harm. If they are properly implemented, cost savings from improved health and productivity, and increased taxes, can fund investments in a country’s human capital and save lives.

Vital Strategies


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.


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.


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.


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.


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.


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

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