Category: Illicit Trade

  • Philippines: Illegal Cigarettes Cost Country Billions of Pesos

    Philippines: Illegal Cigarettes Cost Country Billions of Pesos

    Photo: Tobacco Reporter archive

    The Philippine government is losing about PHP26 billion in taxes annually due to illicit cigarettes, according to The Manila Bulletin.

    About 13 percent of cigarettes sold in the Philippines are illegal, stated PBA Party-List Representative Jericho Jonas B. Nograles, citing a Euromonitor International report.

    “Euromonitor estimates [that] in some areas in Mindanao, six of 10 cigarettes sold in retail are illegal,” Nograles said.

    Outside Mindanao, illegal tobacco trade is prominent in Bataan (31.6 percent), Palawan (24.8 percent), Nueva Ecija (22.2 percent) and Zambales (11.5 percent).

    In 2021, the Bureau of Internal Revenue (BIR) collected nearly PHP180 billion in excise taxes from the tobacco industry. The BIR also estimated that the government lost PHP3.8 billion in revenue from 2018 to 2021 due to illicit trade.

    Meanwhile, the Customs’ apprehensions on illicit tobacco products reported foregone excise taxes of PHP2.9 billion from 2019 to 2022.

  • Illicit Trade Surges in South Africa

    Illicit Trade Surges in South Africa

    Photo: Tobacco Reporter archive

    A new study by Ipsos shows that illegal cigarette trade has surged in the past year in South Africa.

    Illicit trade exploded during a five-month ban on tobacco sales that was implemented to prevent the spread of Covid-19 during 2020. While the ban was lifted in August 2020, illicit trade continues to be significantly higher than it was before the measure.

    The Ipsos study showed: four out of five stores in the Western Cape (80 percent) now sell cigarettes below the minimum collectible tax (MCT) rate of ZAR22.79 per pack, as do almost 70 percent of outlets in Gauteng, a significant increase compared to previous research; the number of garage forecourts across the country selling illicit cigarettes has quadrupled in the last year—despite the 2020 sales ban having been lifted; a single pack of 20 cigarettes is now on sale for as little as ZAR7 in many retail outlets nationwide.

    The latest Ipsos study provides compelling evidence that criminals continue to dominate South Africa’s tobacco trade.

    Johnny Moloto, general manager, BAT South Africa

    “This is less than a third of the MCT and down even further from ZAR8, which was the lowest price found in the October 2021 study; and products bearing trademarks licensed to or owned by Zimbabwe-based Gold Leaf Tobacco Corporation and CarniLinx, a member of South Africa’s Fair-Trade Independent Tobacco Association, continue to win this illegal price war,” BAT South Africa (BATSA) wrote in a statement.

    “The latest Ipsos study provides compelling evidence that criminals continue to dominate South Africa’s tobacco trade,” said BATSA General Manager Johnny Moloto. “These criminals are hiding in plain sight, robbing the fiscus of vital revenue when it is needed most. They are destroying legitimate businesses and jobs while national unemployment rates hit record highs.”

    Tobacco Reporter covered South Africa’s struggle with illicit trade in-depth in its March 2022 issue (see “Damage Done“). 

  • Survey: Smokers Happy to Buy Illicit Tobacco

    Survey: Smokers Happy to Buy Illicit Tobacco

    Photo: BAT

    Nearly three-quarters (71 percent) of participants in a poll among U.K. smokers bought illicit tobacco in the past year, according to a recent survey reported in Talking Retail.

    The figure is down from 2019, when the same survey found that 78 percent of respondents said that they had bought illicit tobacco.

    One challenge for the industry is that few consumers have moral reservations about purchasing illicit products. Sixty-eight percent of survey participants said they had no issue with buying tobacco this way.

    Carried out by the Tobacco Manufacturers’ Association (TMA), the survey of 12,000 smokers also found that nearly one-fifth (19 percent) of respondents bought their illicit tobacco from social media sites.

    “There is positive news in this year’s survey findings, with more people reporting illicit tobacco when they were aware of it—a major uplift to 32 percent compared with 17 percent in 2017—and a decline in people purchasing illegal tobacco in every region across the U.K., with the exception of London,” said Rupert Lewis, director of the TMA.

    “However, the 2021 findings still highlight the continued widespread availability of illicit tobacco as well as the entrenched perception among many consumers that it is ‘acceptable’ to trade or buy illicit

  • Armenian Counterfeiters Arrested in France

    Armenian Counterfeiters Arrested in France

    Photo: Europol

    Authorities dismantled an Armenian criminal gang in France, detaining 11 individuals and seizing more than 2.5 tons of counterfeit cigarettes, along with €100,000 ($111,689) in cash and €150,000 in winning lottery tickets, according to Europol. Four guns and various types of ammunition were also confiscated.

    The investigation was completed by French Customs with support of Europol’s European Financial and Economic Crime Centre and the French National Police. They simultaneously searched 13 sites in and around Lyon, France.

    The seized cigarettes were imported from different European countries before being stored in warehouses and then sold on the black market in multiple French cities.

  • Belgium Shuts Down Illegal Cigarette Factory

    Belgium Shuts Down Illegal Cigarette Factory

    Photo: Tobacco Reporter archive

    Belgian Customs, with the help of Europol’s European Financial Economic Crime Center (EFECC), raided and shut down an illegal cigarette manufacturing factory in a former pet hotel in Arlon, Belgium, according to Europol.

    Belgian authorities seized the complete cigarette manufacturing machinery and arrested 14 workers, mainly from Eastern Europe. Also seized were 4 tons of tobacco and 2 million counterfeit cigarettes.

    Additionally, 40 million counterfeit cigarettes were seized in trailers in an industrial area in Duffel, Belgium. These cigarettes were presumed to have been manufactured at the illegal factory in Arlon and were most likely destined for the black market in France and the U.K.

    French Customs was also involved in the investigation, seizing over 25 tons of cigarettes and 16 tons of tobacco from the same organized crime group in the city of La Longueville.

  • British Authorities Seize Illicit Tobacco

    British Authorities Seize Illicit Tobacco

    Photo: Tobacco Reporter archive

    Authorities seized 13 million illegal cigarettes and 4,300 kilos of hand-rolling tobacco across England and Wales, reports City AM.

    The operation involved raids on homes and shops conducted by Her Majesty’s Revenue and Customs (HMRC) staff, Border Force officials, police and local authorities. The raids are part of a broader strategy aiming to tackle the government’s “three ‘tiers’ of criminality,” with HMRC shutting down illegal factories abroad and Border Force intercepting smuggled products and cash at the border.

    Illegal trade costs the treasury £2 billion ($2.61 billion) each year. The government has implemented high and increasing tobacco tax, raising duty by 2 percent above the rate of inflation each year in order to discourage consumption and raise revenue. As duties have increased, though, illegal trade has also increased.

    According to the European Anti-Fraud Office, 70 percent of U.K. consumers buy black market tobacco products because they are cheaper than legal products.

  • Malaysia: Illicit Cigarette Prevalence Drops

    Malaysia: Illicit Cigarette Prevalence Drops

    nikkytok

    Illicit cigarette prevalence in Malaysia has dropped by 6.5 percentage points from 63.8 percent in 2020, according to Nielsen’s Illicit Cigarettes Study in Malaysia 2021, reports The New Straits Times.

    This is the first time since 2014 that illicit cigarette prevalence has registered a decline.

    “This indicates that the measures announced by the finance minister in Budget 2021 are starting to bear results,” said a Confederation of Malaysian Tobacco Manufacturers (CMTM) spokesperson. “This is an encouraging development, and CMTM urges the government and all stakeholders to continue all efforts to curb the illicit cigarette trade.”

    Malaysia is the number one country for illegal cigarettes, even with the decline. Smuggling syndicates are reacting to Budget 2021 measures by using new methods to illegally import cigarettes into the country.

  • Europol: Pandemic Has Boosted Illicit Trade

    Europol: Pandemic Has Boosted Illicit Trade

    Photo: Ivan Semenovych

    The distribution of counterfeit goods, including cigarettes, has thrived during the Covid-19 pandemic, according to the latest Intellectual Property Crime Threat Assessment, published by Europol and the European Union Intellectual Property Office (EUIPO).

    The health crisis has presented new opportunities for trade in counterfeit and pirated products, and criminals have adjusted their business models to meet the new global demand.

    Imports of counterfeit and pirated goods reached €119 billion ($129.61 billion) in 2019, representing 5.8 percent of all goods entering the EU, according to the latest data from the Organisation for Economic Co-operation and Development and the EUIPO.

    “The COVID-19 pandemic has presented new business opportunities for criminals to distribute counterfeit and substandard goods,” said Europol Executive Director Catherine De Bolle in a statement. “At best, these products will not perform as well as authentic ones. At worst, they can fail catastrophically.”

    Tobacco products feature prominently among pirated products. In 2020, cigarettes represented the ninth most-seized counterfeit item in the EU.

    Illicit products represent 7.8 percent of total cigarette consumption and a loss of €8.5 billion in tax revenues in the EU, according to the report. Thirty percent of illicit consumption in the EU in 2020 was driven by counterfeit products. The number of seized counterfeit cigarettes increased by 87 percent from 2019 to 2020.

    In 2019, cigarettes were one of the most frequently reported counterfeit goods and the second most frequently seized counterfeit items at the EU’s external border.

    Illicit tobacco products are increasingly produced in the EU, in modern and professional production facilities, established closer to destination markets. Illicit flows between member states increased by 1.5 billion in 2020. Illicit production facilities have been detected in Belgium, Bulgaria, Germany, Spain, Hungary, the Netherlands and Poland.

    China and Russia are the main countries of origin for counterfeit cigarettes smuggled into the EU. The most popular destination markets are those that feature high retail prices for tobacco products. Illicit tobacco products also transit through the EU to large markets, such as the United Kingdom.

    The growth of the e-cigarette/vaping market in recent years has entailed a subsequent increase of counterfeit vaping products entering the EU market.

  • Illicit Trade Up In Massachusetts

    Illicit Trade Up In Massachusetts

    Photo: spiritofamerica

    Massachusetts law enforcement officials seized nearly 213,000 smuggled electronic nicotine-delivery system products in 2021, according to a report by the Multi-Agency Illegal Tobacco Task Force.

    The seizures of vaping products reportedly dwarfed those of untaxed cigarettes, cigars and smokeless tobacco products. Massachusetts banned the sale of flavored cigarettes and vaping products more than two years ago, but those products are still getting into the state through the black market. The law imposed a 75 percent excise tax on the wholesale cost of vaping products.

    The task force, which is overseen by the Department of Revenue, has partnered with federal officials to dismantle cross-border smuggling operations and recover millions of dollars in unpaid tobacco and vaping product excise taxes. Under the new law, anyone caught bringing untaxed e-cigarettes or vaping products into the state can be fined $5,000 for a first offense and up to $25,000 for multiple violations.

    The provisions also allow police to seize untaxed vaping products as well as vehicles, boats and airplanes. The state collected more than $370 million in cigarette taxes alone in its last budget year, a 23 percent decline over the previous fiscal year, according to the Department of Revenue. The state collected more than $13 million in taxes on vaping products.

    While many anti-nicotine groups have praised Massachusetts’ ban of flavored tobacco products, the ban is not the success its proponents make it out to be, according to Ulrik Boesen of the Tax Foundation. While a study published in JAMA Internal Medicine found that the sale of flavored tobacco in Massachusetts decreased more than in 27 control states in the wake of the state ban, the authors failed to consider the impact of cross-border trade.

    According to Boesen, increased sales in neighboring New Hampshire and Rhode Island almost completely made up for the decrease in Massachusetts. “The end result of the ban, in fact, is that Massachusetts is stuck with the societal costs associated with consumption while the revenue from taxing flavored tobacco products is being raised in neighboring states,” Boesen wrote on the Tax Foundation’s website.

  • Damage Done

    Damage Done

    Soldiers of the South African National Defense Force guard confiscated cigarettes. (Photo: SANF)

    Eighteen months after lifting its cigarette ban, South Africa still struggles with inflated illicit sales.

    By Stefanie Rossel

    Sometimes the best intentions yield the worst possible outcome. In an effort to protect its citizens from the impact of Covid-19, the South African government banned the sale of alcohol, cigarettes and vape products from March to August in 2020.

    For the legal cigarette market, the move backfired: Illicit trade, which according to market leader BAT South Africa (BATSA) already accounted for approximately 33 percent of all cigarettes sold in South Africa before the ban, soared to unprecedented new levels. “With very weak enforcement by government during the ban, the legal industry adhered 100 percent to the ban, but it gave the illegal players a golden opportunity to take over 100 percent of the market during that time,” explains Francois van der Merwe, advisor to the South Africa Tobacco Transformation Alliance.

    One and a half years after the ban was lifted, illicit tobacco still claims an estimated 60 percent of the total market, one of the highest shares in the world and only comparable to Malaysia. Out of a total market of more than 32 billion sticks, only 12 billion to 13 billion cigarettes were tax-paid in 2021, according to van der Merwe.

    Francois van der Merwe

    An online survey by the University of Cape Town’s Research Unit on the Economics of Excisable Products (REEP) showed that 90 percent of smokers continued to purchase cigarettes during the lockdown. Unable to buy their pre-lockdown brand, 46 percent of smokers switched from a multinational company brand to a brand produced by a local producer. Most of these licensed companies are members of the Free-Trade Independent Tobacco Association. Critics contend they conducted illegal business by selling vast quantities of their products at a fraction of the minimum collectible tax of ZAR21.60 ($1.41) per pack of 20—sometimes for as little as ZAR6 per pack.

    According to BATSA, these companies manufacture and earn profit on vast volumes of cigarettes while paying the South African Revenue Services (SARS) only a small portion of the tax owed. BATSA estimates that this under-declaration costs the country’s treasury at least ZAR8 billion annually. For the 2021–2022 government fiscal year, this figure is expected to rise to ZAR21 billion. BATSA reckons that more than 90 percent of all illegal cigarettes in South Africa are manufactured locally.

    During the lockdown, illicit whites were freely available, although at hugely inflated prices. The temporary sales prohibition dramatically changed the purchasing environment, the REEP survey found. Before the lockdown, 56 percent of smokers had bought their cigarettes from formal retailers, but only 3 percent did so after the ban had been lifted. The percentage of smokers who purchased from small informal spaza shops in townships increased significantly. Street vendors, friends and family or “essential workers” became new sources of cigarette supply. The profitability of dealing with illicit cigarettes attracted a range of new players, including crime syndicates, but also civilians seeking to make a living amid a worsening economic crisis.

    The financial damage of the ban was immense: It cost the government ZAR5.8 billion in tobacco tax revenue from BAT alone. In addition, the government lost a court case filed by the tobacco industry regarding the constitutionality of the ban. BATSA said it lost more than ZAR2 billion due to the sales ban.

    Johnny Moloto

    Smuggling Prevails

    While alcohol sales largely recovered after restrictions were relaxed, legal cigarette sales continued to languish. “Consumers have become used to buying illicit products, and this will make it increasingly difficult to eradicate the illicit trade,” says Johnny Moloto, general manager at BATSA. “The fiscus is projected to lose ZAR19 billion in cigarette excise tax in the 2021–2022 fiscal year alone as a result, which the country cannot afford.”

    In November last year, Ipsos found that illegal cigarettes were available in almost half of stores (43 percent) nationwide. Cigarettes are selling for the equivalent of ZAR8 per pack, close to a third of the ZAR21.60 in tax that should have been paid. “It is clear that taxes on these products could not have been paid by the manufacturer,” says Moloto.

    While reliably measuring illicit trade is inherently difficult everywhere, it is even more complex in South Africa, where cigarette packs don’t carry security features, such as stamps, indicated tax payments and illicit manufacturers comply with health warning requirements. The Ipsos study therefore used the “mystery shopper” model, under which researchers bought the cheapest cigarettes in almost 5,000 stores nationwide. Its findings echo those of the REEP survey. The ban, it said, would feed an illicit market that “will be increasingly difficult to eradicate when the lockdown and Covid-19 crisis is over.”

    Ahmad Ismail, general manager for southern Africa at Japan Tobacco International, believes South Africa has now reached that point. “The legal industry declined by over 40 percent alone during the Covid-19 tobacco ban,” he says. “Illicit tobacco flourished with very little enforcement during the lockdown. We have also witnessed an increase in cross-border smuggling in and out of South Africa, which was a problem that we had not experienced in several years. It will take more than three years for the legal industry to recover—not fully—if government acts immediately.”

    “The failure of government to enforce its own regulations during the sales ban was a golden opportunity for illicit operators to establish their brands firmly in the market in the absence of the legal brands,” says van der Merwe. “By dropping their prices post the lifting of the ban, they simply retained their market share, and the legal tax-paying brands are struggling to regain lost market share. With the lower volumes of legal brands, this resulted in many thousands of job losses across the value chain, including the most vulnerable jobs on farms in rural areas, but also in factories processing leaf and manufacturing products.”

    At an annual tax conference in 2021, the SARS commissioner noted that the lockdown brought about a proliferation of illicit cigarettes that has now embedded itself as an alternative to the regular brands. He said the SARS was fighting a losing battle in this regard.

    Ahmad Ismael

    Concerted Efforts Needed

    Although the major legal cigarette manufacturers in South Africa have called on the SARS and law enforcement agencies to increase their efforts to prevent criminal networks from selling illicit cigarettes, little has been done so far. In May 2020, the SARS canceled a tender for a track-and-trace system. “One of the main challenges was the lack of consultation with the industry, as local manufacturers and wholesalers would have been required to implement the system and bear the cost of implementation,” says Ismail. “Another challenge was that South Africa did not ratify the Framework Convention on Tobacco Control (FCTC) Protocol on Illicit Trade (ITP) and that the tender was not in line with the FCTC approach. This would have enabled them to align the system with global guidelines and systems being implemented and allocate a budget dedicated to fully comply with the protocol guidelines following a recommended and tested process implemented in Europe.”

    In 2020, the SARS instructed all cigarette manufacturers to install production counters that report directly to the authorities how many cigarettes are coming off the production line in real time. Moloto, whose company believes not enough is being done to combat illicit trade at this point, argues that this measure had not been enforced. Ismail claims that while being a step in the right direction, the system still relies on the transparency of manufacturers to report on their production levels.

    Moloto says the South African government must act to stop the flow of illicit cigarettes before the problem becomes even more entrenched. Both BATSA and JTI have asked the government to ratify the ITP immediately. “South Africa has been a founding member of the FCTC where the former minister of health, Honorable Dr. Aaron Motsoaledi, signed the ITP in Geneva in January 2013,” says Ismail. “Putting in place a track-and-trace system would allow tobacco products to be traced from the manufacturer to the wholesaler and to retail and contribute to the reduction of massive illegal cigarette trade.”

    JTI believes that a full digital volume verification system, in combination with a track-and-trace system, would be the most effective and affordable migration. This would give the government real-time insight into what is manufactured and thus help it curb under-declaration and tax evasion.

    “Track-and-trace aimed at tracking cigarettes from manufacturing plants to point of sale on its own will not prevent illicit trade,” Ismail admits. “However, it will support law enforcement agencies and legitimate businesses working in collaboration to reduce the problem. Consistent audits by the SARS need to continue, seizures of illegal tobacco products must intensify, and law enforcement agencies need to work in a coordinated manner to increase prosecution or closures of operators that decide to conduct illegal practices.”

    In addition to the other measures, BATSA has called for a minimum legal retail price of ZAR28 per pack. “This is a simple way to allow the police to seize illegal cigarettes more effectively without having to prove that the manufacturer has not paid the taxes due,” says Moloto. “It could be implemented quickly through the declaration by the government of a minimum price for cigarettes. It would also help consumers to differentiate between legal and illegal products.”

    South Africa’s experience proves that prohibition does not work, according to Ismail. “Illegal trade cheats everyone: governments, society, consumers and legitimate businesses,” he says. “It robs governments of tax revenues, harms hardworking retailers and invites organized crime into communities.”

    Stefanie Rossel is Tobacco Reporter’s editorial contributor. An experienced trade journalist, she combines sharp reporting skills with in-depth knowledge of the tobacco and vapor industries. Prior to joining Tobacco Reporter, Stefanie was editor-in-chief at Tobacco Journal International, where she worked for a decade. Fluent in English, German and French, Stefanie covers tobacco news around the world. She is based in Germany.