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Illicit trade in Tobacco products: Knocking out an unending scourge

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Dominated globally by organised crime, the illicit tobacco trade could
be said to be a frightening tripod that damages legitimate business,
undermines public health and facilitates the supply of tobacco to
young people. The criminality involved, including the use of the
proceeds to fund other crimes, has a devastating effect on individuals
and communities worldwide.
One may argue that illicit tobacco trade has largely been fueled by
over-regulation and over –taxation of the legitimate producers of
tobacco products. Government tax policies, which result in excessively
high retail prices, are the key drivers of the growth of the illegal
trade in tobacco products. Weak laws, penalties and inadequate
enforcement, whether from limited resources and training or
conflicting priorities, are also important factors which encourage the
illegal trade.
Plain packaging of tobacco products is one of stringent measures
propagated by anti-tobacco groups to curtail further spread of
smoking. Also known as homogenous packaging, it requires the removal
of colours, imagery, corporate logos and trademarks, while also
denying tobacco manufacturers the latitude to differentiate their
products from that of competition.
Australia is the first country to mandate plain tobacco packaging with
Ireland and United Kingdom ultimately overcoming the hurdle by
becoming the second and third countries passing legislation that
cigarettes and other tobacco products be sold in plain packaging, free
of colourful logos and other branding that is believed by some, to be
encouraging tobacco use.
The Australian plain packaging law has been challenged by some
countries at the World Trade Organisation (WTO) for being in breach of
existing WTO agreements on intellectual property rights and it will be
interesting what the outcomes of these legal challenges are.
The Australian plain packaging regime, which pioneers the repression
of cigarette branding, is a very good example of the stringent
regulation paving way for illicit trading in tobacco products.

As claimed by pro-tobacco lobbyists, plain packaging is a motivation for
promoters of illicit trade to advance in their nefarious business. In
a study published by KPMG in 2013, counterfeit tobacco sales in
Australia rose to almost 14 per cent of the Australian market shortly
after the plain packaging law was introduced. KPMG further states in
the report that illicit sales not only deprive Australia of hundreds
of millions in lost tax revenue, they also increase law enforcement
costs in reaction to greater criminal black market activity.
In most countries, tobacco is considered an ideal product for tax
revenues as demand is relatively inelastic. Today, all countries
impose at least a tax on tobacco products, which in most cases is paid
in the country of consumption. The tobacco industry is, no doubt, an
important revenue source for governments.
The global footprint of smuggling has changed, as criminals exploit
emerging international and political factors. Cheap, factory-produced
cigarettes have become increasingly available for large-scale
smuggling. Smaller volume and higher frequency smuggling through
non-traditional routes have also increased.
For example, in 2011, over 60 per cent of cigarettes (as against 36
per cent in 2006) sold in New York were smuggled from another state,
according to the Mackinac Centre for Public Policy, a free-market
think tank, thereby reinforcing the Bureau of Alcohol, Tobacco and
Firearms’ (ATF) estimated lost government revenue at more than $5
billion a year.
A report published in Sun Herald, Australia reveals that black market
in fake cigarettes cost the Australian economy $1.1billion in lost
tobacco excise revenue and Goods and Service Tax. It undermines
legitimate business and is dominated by internationally organised
criminal groups often involved in other crimes such as drug smuggling
and people trafficking.
Cigarettes are among the most commonly traded products on the black
market due to high profit margins, relative ease of production and
movement and low detection rates and penalties. Sadly, the shadowy
nature of this trade makes the scale hard to estimate.
How big is the problem?
In 2000, when the illicit market share for cigarettes was 22 per cent
and 61 per cent for hand-rolling tobacco, the Customs and Excise in
the United Kingdom introduced stringent measures such as high taxation
to tackle the problem. Still, the problem remains significant.

In 2013–14, the illicit market shares were 10 per cent for cigarettes and
39 per cent for hand-rolling tobacco. The illicit trade in tobacco
products makes it more affordable and accessible to people in
low-income groups, as well as children, as cigarettes are usually sold
at lower prices.
As the products are not subjected to legal restrictions and health
regulations aimed at halting the use of tobacco, including warnings on
packaging, there is a knock-on effect on health. In yet another report
by KPMG International, it was stated that involvement in Australia’s
illegal tobacco market is perceived by organised crime groups as a low
risk, high profit activity which large profits can be made with
minimal risk of detection or significant penalties.
According to Tobacco Underground, a project of the International
Consortium of Investigative Journalists, illicit trafficking in
tobacco is a multi-billion dollar business, which can be seen in
counterfeiting businesses in China to warlords in Pakistan.
The UN Security Council’s investigative body found that millions of
pounds in illicit tobacco revenues are reaching al-Qaeda, the Taliban
and other terrorist organisations around the world. Smugglers operate
across multiple borders and continents, and quickly adapt their
operations to take advantage of new opportunities that result from
changes in taxation and regulation.
For example, a report published in a Taiwan peer-reviewed journal for
health professionals in tobacco control states that smugglers no
longer imitate international brands, but merely create their own
brands such as “Mo-Shen’, ‘Fu-qi (good fortune) and ‘Shan’ (the
Chinese fir) to suit the needs of illicit buyers in the country.
The report further states that in Africa, counterfeit cigarettes and
‘illicit whites’ have become more prominent in recent years in the
illicit market. Libyan ‘illicit whites’ (where an estimated 80 per
cent of cigarettes consumed are illegal) are produced in Luxembourg
and Bulgaria and imported through Dubai to Togo and Benin. The report
revealed that most smokers in Africa cannot afford more expensive
international brands, but are eager to buy new brands at low price.
In view of the spectrum of illicit activities, there is no single
solution, which will eradicate this growing problem.

 

No government, regulatory body, law enforcement agency, or manufacturer – acting
alone – can eliminate the illegal trade in tobacco products.
However, a concerted effort by all stakeholders, such as governments,
regulatory and law enforcement agencies and tobacco companies is
required to stub-out the consuming ember of illicit trade in tobacco
products.

Ultimately, it is imperative for governments to lead this
fight so that effort by other key stakeholders will not be futile.
Strong government engagement and prioritisation are required for
success in fighting illegal trade in Nigeria and elsewhere.