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Experts want end to deal with tobacco industry

The agreements drawn up between the European Union (EU) and the four major transnational tobacco companies to crack down on cigarette smuggling and recoup lost tax revenues are failing to meet their stated aims, concludes research published online in the journal Tobacco Control. They are littered with loopholes, which the tobacco companies can easily exploit, and should be abandoned.

The agreements were drawn up between 2004 and 2010 with Philip Morris (PM), including Philip Morris International (PMI), Japan Tobacco International (JTI), British American Tobacco (BAT), and Imperial Tobacco Limited (ITL), following emerging evidence of the direct and indirect involvement of the tobacco industry in smuggling activities, and subsequent litigation. The agreements released these companies from any civil claims relating to previous smuggling activities and, in the case of Philip Morris and JTI, were set up in exchange for dropping legal proceedings against them.

The intention was to crack down on the illegal trade in cigarettes across Europe by requiring the four companies to secure their supply chain through marketing and tracking/tracing activities and by making two types of payment to the European Commission and the member states of the EU.

These payments comprised annual fixed sums payable from 2004 up to 2030, ranging from US$200 million to US$1 billion; and ‘seizure payments’ equivalent to 100 per cent of the evaded taxes for seizures above quantities of 50,000 cigarettes in one haul, or up to 500 per cent if total annual seizures exceed 150-450 million cigarettes.

To find out how well the agreements are working, the researchers analysed documents for 2004-12 not publicly available, but obtained under EU legislation. These showed that some €70,728,624 (US$100 million) had been paid out during this period by three out of the four transnational companies — PMI, JTI and ITL.

In 2012, these companies stumped up just €4.1 million, equivalent to 20 million seized cigarettes. But this is a tiny fraction (0.5 per cent) of the 3.8 billion cigarettes seized in the EU that year, say the researchers.

The European Anti Fraud Office (OLAF) estimates that cigarette smuggling loses the EU €10 billion every year, so the average yearly total for seizure payments of €8.3 million represents just 0.08 per cent of these losses.

There are two main reasons why these payments are so small, they suggest. Only large-quantity seizures qualify for the penalty, and since the agreements were reached, the average size of consignments has shrunk; and secondly, the payments only apply to genuine, not counterfeit, products, yet customs officials rely on industry to determine the status of the seizures not subject to independent verification.

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