[Intl-tobacco] How can cigarette smuggling be reduced? (fwd)

[Robert Weissman]

How can cigarette smuggling be reduced?
Joossens and Raw 321 (7266): 947  BMJ 2000;321:947-950 ( 14 October )
by Luk Joossens, consultant a, Martin Raw, honorary senior lecturer b.=20

Source: British Medical Journal, Friday, 10/13/00
a International Union Against Cancer, EU Liaison Office, rue de Pascale 33,=
=20
1040 Brussels, Belgium, b Department of Public Health Science, Guy's King's=
 and=20
St Thomas's School of Medicine, University of London, London

Correspondence to: L Joossens joossens@globalink.org

The tobacco industry has argued that tobacco smuggling is caused by market
forcesby the price differences between countries, which create an
incentive to smuggle cigarettes from "cheaper" countries to "more
expensive" ones. The industry has urged governments to solve the problem
by reducing taxes, which will also, it says, restore revenue. The facts
contradict all these assertions.

Smuggling is more prevalent in "cheaper" countries, and where taxes have
been reduced, such as in Canada, consumption has risen and revenue fallen.
There are, however, countries that have solved the problem by better
control, Spain being the most impressive example to date, and the new
World Health Organization framework convention may at last promote control
of tobacco smuggling at the level at which it must be tackledglobally.

Tobacco smuggling has become a critical public health issue because it
brings tobacco on to markets cheaply, making cigarettes more affordable
and thus stimulating consumption, consequently increasing the burden of
ill health caused by its use. Smuggling is not a small phenomenon: we have
estimated that, globally, a third of legal cigarette exports disappear
into the contraband market.1 This extraordinary proportion results in a
second key effect of smugglingthe loss of thousands of millions of dollars
of revenue to government treasuries.

We also showed in our earlier studies that tobacco smuggling defies
apparent economic logic. Common sense might suggest that cigarettes would
be smuggled from countries where they are cheap (southern Europe, for
example) to expensive countries (such as northern Europe) and that this is
due simply to price differences between these countries, as the tobacco
industry claims. Although this does happen, it is not the largest type of
smuggling, and in Europe there is far more smuggling from north to south
rather than the reverse.2

In fact, smuggling occurs in all parts of the world, even in regions where
taxes are low. One internal document of BAT (British American Tobacco),
the largest European international tobacco company, estimated that 318
billion (nearly 6%) of world cigarette sales of 5300 billion were DNP
(duty not paid)  cigarettes, an industry term for contraband.3 Eastern
Europe and the Asia-Pacific region accounted for most of this, at about 85
billion each, although Western Europe was also important at about 50
billion. In relation to total market sales, volumes of DNP cigarettes are
largest in Eastern Europe (about 13%) and in Africa and the Middle East
(about 12%) but are also substantial in Latin America (about 9%) and
Western Europe (about 7%). Western Europe has the highest prices in the
worldin 1996 they were four to five times higher than in Africa, the
Middle East, and Eastern Europe4yet, despite these high prices, smuggling
is on average lower than in other regions of the world.  In other words,
cigarette smuggling is not caused principally by "market forces." It is
supply driven, caused mainly by fraud through the illegal evasion of
taxes.

Summary points

Cigarette smuggling occurs in all parts of the world, even in regions
where taxes and prices are low

The solution to combat smuggling is not to decrease taxes, as this will
increase consumption and decrease revenue

Spain has been successful in combating smuggling by reducing the supply of
illegal cigarettes

Only action to control cigarette transit at international level will solve
the smuggling problem

Yet the tobacco industry has lobbied governments to reduce tobacco tax,
arguing that this will solve the smuggling problem and increase government
revenues.  This is not true: when the Canadian government reduced
cigarette tax in response to industry pressure the results were
disastrous. Tobacco smuggling not only makes tobacco available cheaply but
also sabotages national tobacco taxation and tobacco control strategies.
Its key characteristic is not cross border shopping and bootlegging but
large scale fraud in which millions of cigarettes evade duty and appear on
the contraband market. The true beneficiaries are the tobacco companies.2
In this article we suggest solutions to combat smuggling which follow
logically from a true understanding of its cause.

Methods

Smuggling is illegal trade, which means that statistics are often not
reliable.  Customs and excise authorities in various countries do make
estimates but often don't publish them. Apart from figures quoted from
published articles, our sources for estimates of smuggled cigarettes have
been customs authorities, and for tax revenue tax and health authorities.
Often these are based on conversations, exchanges at conferences, or
documents unofficially handed to us, but they are rarely "published" or
otherwise in the public domain.

Countries' responses to smuggling

Canada and Sweden

Canada and Sweden reduced their taxes on tobacco products because of
concern about increased smuggling. In Canada the negative consequences for
public health and tax revenue are now well documented.

After the Canadian tax reductions in 1994 the real price of cigarettes
fell by a third. The prevalence of smoking increased in teenagers from 16%
to 20% and also increased in the population as a whole.5 Federal tax
revenues fell by $C1200m, more than twice as much as predicted.6

In Sweden the data needed to evaluate the impact of the tax reduction are
yet not available. Two substantial tax increases, in December 1996 and
August 1997, raised cigarette prices by about 43% to roughly $6 a pack.
They increased tax revenue and reduced cigarette smoking in Sweden.7
However, in response to the perception that smuggling was becoming a
problem (and to lack of public support for the tax increases) the 1997 tax
rise was repealed in August 1998.7 Data on smoking prevalence for 1999 are
not yet available, but, as table 1 shows, tax revenue was lower than in
the previous two years (Paul Nordgren, National Institute of Public
Health, Stockholm, personal communication).

View this table:

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Table 1.

Swedish tobacco tax revenue (data from National Institute of Public
Health, Stockholm)

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Table 2.

Excise revenue from tobacco sales in Spain (data from Spanish Customs and
Excise)

Canada is important for another reason. The key to the story was the
export by Canadian manufacturers of Canadian cigarettes to New York State
(where there is no market for them as US smokers mainly smoke US brands),
from where they were smuggled back into Canada. At the very least, the
tobacco industry could be said to have facilitated the smuggling by
supplying the cigarettes. In fact, in 1998, for the first time, a tobacco
company was convicted for assisting in a smuggling operation. An affiliate
of RJR Nabisco pleaded guilty to charges of helping smugglers illegally
re-route export cigarettes into Canada. The affiliate, Northern Brands,
agreed to pay US$15m in criminal fines and forfeitures for its involvement
in these illegal activities. In 1999 the Canadian federal government
launched a US$1bn lawsuit in Syracuse, New York, against R J Reynolds
companies and the Canadian Tobacco Manufacturers' Council, alleging that
the cigarette makers ran a vast illegal smuggling operation. An employee
of Northern Brands, to which the cigarettes were exported, pleaded guilty
of being in charge of selling eight billion contraband cigarettes into
Canada, but RJ Reynolds denies that it played a role in encouraging this.

8 9

It is clear that more and more governments now feel that the tobacco
industry has a case to answer in relation to tobacco smuggling. In recent
months Canada, Columbia, and Ecuador have filed lawsuits against US
tobacco companies for smuggling. Although the Canadian suit was dismissed
in July 2000 on jurisdictional grounds, Canada has now appealed.10 The
European Commission announced in July 2000 that it plans a civil suit
against US cigarette makers for alleged involvement in smuggling,11 and in
Britain the Parliamentary Health Select Committee has called for an
investigation by the Department of Trade and Industry into the alleged
involvement of BAT in smuggling.12

Spain and Andorra

Spain is one of the few countries in the world to have tackled smuggling
successfully. It did not do so by reducing tobacco tax.

Despite Spanish cigarettes being among the cheapest in the European Union,
smuggled cigarettes had a market share of 15% in 1995.2 One of the sources
of smuggled cigarettes in Spain and the European Union was Andorra. In
1997 there was concerted action at national and European levels to reduce
the supply of contraband cigarettes. Close collaboration between the
authorities in Spain, France, Britain, Ireland, and Andorra and the
European Anti Fraud Office (OLAF)  reduced the supply of smuggled
cigarettes from Andorra.

Actions included sealing the Andorran border, civil guard brigades
patrolling valleys and hills to make smuggling more difficult, and
political pressure on the Andorran government by the European Union and
its member states that forced it to create new legislation making it
illegal to smuggle tobacco into neighbouring countries.13

As a result contraband cigarettes, which had accounted for 12% of the
Spanish market in early 1997, held only 5% by mid-1999 (Ignacio Garcia,
Customs and Excise, Madrid, personal communication). Sales of legal
cigarettes increased from 78 billion in 1997 to 89 billion in 1998, and
tax revenue increased by 25% in the same year (Jesus Lauzurica, Customs
and Excise, Madrid, personal communication) (see table 2 ). According to
the Spanish customs authorities, their success was not due to controlling
distribution at street level, which is almost impossible, but to reducing
the supply into the country at "container level" through intelligence,
customs activity and cooperation, and technology (Ignacio Garcia, Customs
and Excise, Madrid, personal communication).

(Credit: GERARD JULIEN/AFP)

Customs officers checking a container of contraband cigarettes at the port
of Marseille

Andorra is important because it illustrates the role of the tobacco
industry.  Andorra was not only supplying illegal cigarettes to the
Spanish market but also to Britain. Exports from Britain to Andorra (which
has a population of only 63 000) increased from 13 million cigarettes in
1993 to 1520 million in 1997. Since few of these cigarettes were legally
re-exported and Andorran smokers do not generally smoke British brands,
then either each Andorran (including children and non-smokers) was smoking
60 British cigarettes a day in 1997 or these cigarettes were being
smuggled out of Andorra. It seems obvious that the companies would know
what was happening to their cigarettes. In a television interview on the
BBC's Money Programme of 8 November 1998, a spokesperson for the tobacco
company Gallaher said: "We will sell cigarettes legally to our
distributors in various countries. If people, if those distributors
subsequently sell those products on to other people who are going to
illegally bring them back into this country, that is something outside of
our control." In response to the interviewer's comment, "I suggest it is
within your control, because you could stop supplying them," the
spokesperson said:  "That would do nothing to influence the degree of
smuggling because the smugglers would just bring back somebody else's
product."

United Kingdom

Tobacco smuggling has become a problem in Britain relatively recently and
has been driven by the increased price of cigarettes in Britain compared
with the rest of Europe (over =A34 or $6 a packet) and the high value of
sterling. As with Canada, smuggling became a problem as mainly domestic
brands became available to smuggling networks outside Britain which
brought them illegally back into the country.

British customs and excise authorities have estimated that the contraband
market increased from 3% in 1996-7 to 18% in 1999-2000 and that lost
revenue increased from =A3680m in 1996 to =A32500m in 1999.14

Again the tobacco industry has argued that this is due to market forces.
Again, however, the real problem is not "tourist" cross border shopping
and bootlegging but container fraudthat is, the disappearance into the
contraband market of container loads of cigarettes exported by the tobacco
industry, as illustrated by Andorra.

Customs and excise estimate that in 1999 =A350m of revenue was lost from
smuggling by air passengers, =A3340m from cross channel bootlegging, but
=A31400m from container smuggling.14 This is essentially because a containe=
r
holds 5-10 million cigarettes, rather than a few thousand, and has a
higher profit margin because the cigarettes are exported duty unpaid
(rather than duty paid but from a cheaper country). Thus a container of 10
million transit cigarettes (duty not paid) can be bought for $200 000 and
sold for about $2m, a very attractive profit margin.

The UK government has responded by announcing measures that include a
network of scanners for detecting containers, prominent fiscal marks on
cigarette packs, increased punishment, more customs officers, and a
campaign to increase public awareness. By its own admission, the
government hopes to contain rather than eliminate the problem.14 Given the
clear incentive of the tobacco industry to make cigarettes available to
smugglers, a real crackdown on smuggling will require controls on
cigarette transport, something that will require concerted action at
international level.

Conclusions

Andorra shows that tobacco companies view contraband markets as simply one
area of market competition. In an extraordinary admission, the deputy
chairman of BAT (a former minister for health) recently said: "Where any
government is unwilling to act or their efforts are unsuccessful, we act,
completely within the law, on the basis that our brands will be available
alongside those of our competitors in the smuggled as well as the
legitimate market."15 An editorial in the Guardian the following day said
that this was an incredible admission:  "He has openly admitted that the
company supplies cigarettes knowing that they are likely to end up on the
black market."16

A generous conclusion would be that the tobacco industry transports
containers of a product worth $1-3m with astonishing recklessness. In
fact, as we have shown, the real problem is fraud, and the real solution
must therefore be to control, through international treaty, the transport
of this valuable and dangerous product. One of the problems has been that
the manufacturers have been technically within the law, arguing that what
dealers do with their (legally sold and bought) cigarettes is not their
business. Similar arguments have proved socially and politically
unacceptable when the product is arms, and so we recommend that tobacco
export and transit should be controlled by mechanisms similar to those for
arms control. In October 2000 the World Health Organisation will start
negotiations for a framework convention on tobacco control. A specific
protocol could deal with tobacco smuggling. It could, for instance,
require "chain of custody" markings on all packages of tobacco products,
placing the onus on the manufacturers to show that cigarettes arrive
legally in their end user markets. Manufacturers might also apply for
export licences for cigarettes. Only such action at international level
will resolve the problem, but it has now been shown to be soluble.

Acknowledgments

We thank Teresa Salvador, Joan Villalbi, Paul Nordgren, Clive Bates, and
David Sweanor for providing information and for helpful comments on a
draft of this paper.

Footnotes

Funding: This research was supported by the Cancer Research Campaign (UK)
and the National Institute for Public Health (Sweden).

Competing interests: None declared.

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(Accepted 10 August 2000)