Shedding light on the shadow of illicit trade

EU experts and MEPs came together in the European Parliament to highlight how the illegal trade in goods is far from being a victimless crime. Not only does it feed organised crime such as terrorism and forced labour, but it also has a huge economic impact and poses a threat to our society.
TP Impact

By TP Impact

TP Impact is the award-winning content, research, and event studio at Total Politics Group

13 Dec 2022

Illicit trade in Europe has seen a surge fuelled in part by the Covid pandemic, but also by the steep rise in the cost of living. Apart from the damage inflicted on the real economy due, for example, to loss of government revenue, illicit trade and the demand for cheaper goods has led to what Europol describes as an increasingly violent and complex world of organised crime in the EU. It has spread from traditional areas such as drug trafficking to other areas such as pharmaceuticals and luxury goods, where it can generate high profits at low risk.

At an event in the European Parliament on the question of illicit trade, hosted by MEP Tomislav Sokol of the EPP, Peter Mihok, from the European Commission’s unit dealing with organised crime, drugs and corruption for DG Home, said: “The Commission has adopted an organised crime strategy. It’s not enough to seize goods, you have to go beyond that and target the structures.” Mihok recognised that law enforcement alone won’t solve the problem and that there is as much work required on dealing with the demand for illicit and counterfeit products. “Obviously we cannot solve everything by law enforcement. We need to work as much on our demand side as we do on the supply. It's not just that we have a problem with organized crime, but we have to go on the demand side and to see how we can help."

Illicit trade is presenting a real and present danger to European security and a variety of measures are needed to effectively combat the trade

One of the ways to tackle the problem is to ‘follow the money’, according to, Arnaud Stien regulatory expert at the the EU Global Facility on Anti Money Laundering and Countering the Financing of Terrorism (AML/CFT). Stien talked about the measures needed to detect and identify suspicious activities: “The process is complex due to the diversity of actors: reporting entities, regulatory authorities and financial intelligence units. Our role is to bring all these actors together so that they speak a common language and co-operate more effectively.” Nevertheless, it is an uphill battle, not just between different jurisdictions, but within countries. Stein also underlined the need for more collaboration between private and public sector actors.

JTI EVENT PANEL

Speaking at the event from left to right 

  • Peter Mihok, Team Leader - Drugs Team, Organised Crime & Drugs Unit (HOME.D.5)
  • Anthony Helmsley, External Engagement Director, JTI
  • Tomislav Sokol, MEP EPP
  • Arnaud Stien, Key Expert on Regulatory Framework, EU AML/CFT
  • Bryan Carter, Moderator

Low risk, high reward

Unfortunately, illicit trade is a low risk and high reward sector. In the case of tobacco, illicit trade is now the third biggest industry player. Anthony Hemsley of JTI said: “What happens is, as the demand for these [illicit] products grows, we tend to see more criminal networks on our streets and in our neighbourhoods; they may start with supplying cigarettes, but this will often lead to much nastier things, especially drugs and weapons.”

Mihok pointed to the Serious Organised Crime and Threats Assessment Report (SOCTA) compiled by Europol, which states that: “Significant price differences between Member States, and between Member States and neighbouring non-EU countries are the main incentives for criminal networks involved in this profitable criminal activity.” The most recent report underlines that illicit “white” cigarettes – that are legally produced, but with the intention of being smuggled into other markets – are increasingly produced in the EU, closer to their destination markets.

When it comes to illicit trade in cigarettes, Tomislav Sokol MEP said that the challenge was particularly difficult for those countries that border countries outside the EU: “I come from Croatia, so we border countries of South East Europe, the so-called Western Balkans. These countries are some of the main sources of illicit trade of tobacco in Europe; countries like Montenegro, Bosnia Herzegovina, Albania, Serbia. So if we continue to increase prices of both cigarettes and alternative products then we'll have an enormous influx of illegal cigarettes, this has to be taken into consideration.”

A victimless crime?

There is currently a misconception that purchasing illicit products is a victimless crime. In the discussions with the panel of experts, Jeff Hardy, the Director-General of the Transnational Alliance to Combat Illicit Trade, pointed to the clear links that his organisation has found between illicit trade and forced labour, he thinks that this isn’t yet fully understood and needs to be researched in greater depth.

"What we see with these really huge profits is that this money is recycled,” Mihok says. “It becomes a competitor to the normal economy and we see it is corrupting our institutions and our societies [...] And, because of the competition to harvest illicit markets we are seeing more and more violence. Violence which twenty years ago we used to only see outside Europe, we are now seeing it in parts of our border and in our ports. So this is another reason why it is important.”

The International Chamber of Commerce estimates the current global annual loss to the economy from illicit trade at $4.2 trillion

Helmsley adds: “The driving force behind illicit tobacco is affordability… So as legal cigarettes become less affordable, we see more and more consumers turning to illicit tobacco. If there was no demand then there would be no illegal cigarette production. So we see criminal organisations setting up factories, literally all over the world, establishing networks and supply routes that facilitate delivering these illegal tobacco products.” There is also a further cost to health. The illegal sector is free of the stringent controls currently in place for legal cigarettes.

Economic hit

The International Chamber of Commerce estimates the current global annual loss to the economy from illicit trade at $4.2 trillion. But this is only one side of the coin, even if you are opposed to the use of tobacco in any form, this lost revenue is going to the illegal sector which in turn presents a security risk, as well as an enforcement cost to Europe.

The European Union has estimated as long ago as 2010 that around €10 billion is lost to the national and EU budgets each year due to the illegal trade in cigarettes. Hemsley says that with the drop in excise revenues from people choosing illicit products there is a temptation for governments to compensate for their lost revenue by making a further raise in excise duties, he argues that this exacerbates the problem: “It’s not necessarily about reducing excise. It's about moving excise at a moderate pace. If you push up prices so that they are no longer affordable people will be tempted to go elsewhere. Prices need to be predictable and not out of kilter with inflation.”  The extent of the problem is evidently far greater when one considers the multitude of products, beyond tobacco, that are being counterfeited or sold illegally across the EU.

What’s the solution?

In conclusion, there was a consensus that illicit trade is presenting a real and present danger to European security and a variety of measures are needed to effectively combat the trade, its proceeds and those involved, as well as finding more effective ways to tackle underlying demand through greater cooperation between regulators, law enforcement and industry.

Part of the solution, especially in relation to counterfeit products, is to work closely with businesses who are affected to find joint solutions that take account key drivers like excessive regulation and prohibitively high excise duties. What is clear from the growth of the illegal market, is that these problems can no longer be wished away, their impact on the street and to national security are real, particularly in times of economic hardship when people are struggling to make ends meet. 

This content was commissioned by Japan Tobacco International (JTI) and produced by Dods

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