Taking on illicit trade

Trade in illicit tobacco is rising at an alarming rate in some European states, but declining in others, including in Greece, the Netherlands, Portugal and Romania. How can policy-makers learn from the approach taken in these member states to take on organised crime and tackle the problem?
The Parliament Partner Content

By The Parliament Partner Content

The Parliament Partner Content team works with organisations from across the world to bring their stories to the eyes of policy makers and industry stakeholders across Europe.

24 Oct 2023

KPMG’s latest report into illicit cigarette consumption in Europe presents a mixed picture across the continent. The report, commissioned by Philip Morris International, has been carried out on an annual basis since 2007, providing a longer view on how consumption is changing over time. It covers the EU, UK, Norway and Switzerland, and this year for the first time Ukraine and Moldova have been included in the analysis.

The overall figure for the consumption of contraband and counterfeit cigarettes has seen a relatively modest increase since 2019, 33.4 billion to 35.8 billion cigarettes in 2022; but this overall figure masks two developments. The first is the alarming growth in the counterfeit market, which has increased from 5.5 billion in 2019 to 13.1 billion in 2022, more than doubling its share of the illegal market. The other is the very uneven distribution, France alone accounts for 47% of the EU27’s illicit consumption, whereas 21 out of the EU-27 experienced stable or declining consumption.

“France’s consumption has more or less doubled in three years,” says Gregoire Verdeaux, senior vice president of External Affairs, PMI. “Illicit consumption is based on empty packet surveys, so if anything, these figures are under-estimates.”

Asked why France had particularly stark figures Verdeaux said that there were three elements that had created a perfect storm: “Do you have a high prevalence of smokers? Are these smokers sensitive to price changes? And, are people able to easily turn towards the illegal or black market?”

In general there is a much lower prevalence of smoking among professionals, but a much higher rate for the unemployed and those on lower incomes. The cost-of-living crisis has led to many smokers turning towards the illegal market, especially where there is high taxation and a lack of affordable alternatives.

By contrast, the KPMG study found that 21 countries had experienced a stable or declining share of illicit cigarette consumption. If France is taken out of the picture, overall illicit consumption declines by 7.5%. This is largely due to decreases in Greece, the Netherlands, Portugal and Romania. Remarkably, Poland and Romania have reduced their illicit consumption to its lowest since the studies started.

Asked how this has come about, Verdeaux says: “Countries like Poland and Greece still have a high prevalence of smokers, but the illicit market is in decline. Traditional tobacco control policies are simply not enough. Aggressive fiscal policies, prohibitionist approaches, and lack of deterrence in some countries are only benefitting criminals and pushing smokers toward the black market.”

Lukasz Koslowski, Chief economist from the Federation of Polish Entrepreneurs, attributes Poland’s success to four factors: “In Poland, we have a tobacco taxation roadmap. It shows us the level of taxation on cigarettes and other tobacco products until the year 2027. So the market has a much greater opportunity to adapt. Secondly, Polish tax authorities have established partnerships with market partners, this has helped to clamp down on illicit activities. I also think that the fact that our tax policy includes differentiation of the level of taxation of tobacco products, is encouraging people to look for legal and cheaper alternatives to tobacco, such as, heated tobacco, e-cigarettes or nicotine pouches. Finally, the level of illegal traffic has been reduced by stricter border controls with Belarus. Today the trend in Europe is for illegal factories within a country.”

The failure to reduce the illicit market brings two heavy costs. Firstly, KPMG estimates that increasing taxes on legal cigarettes has the counterintuitive result of reducing tax revenue from cigarettes. KPMG estimates that this could be worth as much as €11.3 billion a year. This marks a significant increase of more than 8.5% on 2021.

Secondly, the growth in counterfeit production has become a valuable revenue stream for organized criminal groups (OCGs). European law enforcement agencies report that production seems to be largely based in the EU. Despite record seizures in 2022, illicit cigarettes are a rewarding business for OCGs; a model that is booming in the current environment. While the ongoing war in Ukraine and Belarus stemmed imports from these countries, OCGs have stepped in to set up their own production lines, ready to supply the higher-priced Western European markets. “We don’t have 100% clarity,” says Verdeaux. “But police raids suggest the phenomenon of illegal manufacture has become a domestic issue in the EU.”

“OCGs are attracted to the higher profit they can make from the counterfeit market,” says Vanessa Franssen, Professor at ULiege, Affiliated Senior Researcher KU Leuven. Franssen says that in her interviews with law enforcement, they foresaw growing illegal trade to the UK, for example, with planned increases in tax on cigarettes. “There is a debate on what is the optimal tax level, but as long as there are divergent tax rates there will be an incentive for organized crime.”

Juan Carlos Buitrago Arias, a retired Brigadier General from Colombia’s national police who has worked on all questions of illicit commerce and the involvement of criminal organisations, says that international cooperation is critical. His work included cooperation with several agencies, including Europol, in order to tackle these large complex organisations. He says that the illegal trade of cigarettes is very much entangled with hard drugs and in some instances is a lot more profitable for criminal gangs: “Illicit trade in cigarettes is neither petty nor victimless. It is a high-profit, low-risk crime, which serves transnational criminal networks. This is a reality that governments must face head on.”

Research has also found that the production of illegal cigarettes often involved people who may have been trafficked. “People were living in horrible situations and treated inhumanely,” says Franssen. “We also see the risk of corruption; organized crime tries to infiltrate customs and police forces to gain intelligence. We don’t know the extent of this problem.”

Law enforcement are making efforts to tackle the illicit trade, but it is an uphill struggle and various channels, including online platforms, continue to grow, with orders quickly fulfilled through third party delivery services.

“The Netherlands is taking an interdisciplinary, inter-institutional approach focusing on the problem,” says Franssen. “It brings together police, data analysts, the custom authorities, the public prosecution service and this has seen a decline of counterfeit cigarettes.”

In other countries cooperation is proving difficult between different agencies, there is also a need to build trust between agencies in different countries, something Europol is trying to do.

PMI are calling for a reassessment of the policy choices they believe are leading to the growth of this market.

“Some countries are unwilling to embrace innovation and offer alternatives to cigarettes to adult smokers,” says Verdeaux. This means lifting bans, making alternatives legally available; raising awareness of alternatives; ensuring that alternatives are able to compete on price with the illicit market; and, making sure that the alternatives are acceptable, in terms of experience, for current smokers. “The cost of ignoring the negative impact of illicit cigarettes on adult smokers, and on public health, is too high to turn a blind eye to.”

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