Category: Illicit Trade

HMRC Testing U.K.-Only Tracking System

Photo: Tobacco Reporter archive
Her Majesty’s Revenue and Customs (HMRC) is testing a new U.K.-only track-and-trace system this month to prepare for the country’s full exit from the European Union (EU) on Dec. 31, 2020, reports The Grocer.
Wholesalers will not need to buy new hardware for the new system, but they will have to upgrade software to comply. Retailers selling directly to the public will not have to make any changes.
“To minimize changes for businesses, it will be possible to use existing scanning devices,” sand an HMRC spokesman. “However, businesses will need to make arrangements with their scanning equipment solution provider to connect and submit data to the new U.K. gateway.”
Wholesalers in Northern Ireland will need to submit data to both the new system and the existing EU system; some EU rules will continue to apply in Northern Ireland after the U.K. leaves the EU.
October 20, 2020
Dutch Authorities Raid Illegal Tobacco Factory

Photo: Europol
The investigation service of the Dutch tax authorities, FIOD, raided an illegal tobacco factory near Utrecht in the Netherlands, according to Europol. It is one of the largest illegal cigarette factories uncovered in the Netherlands. The factory was in full operation when law enforcement entered the premises. Thirteen suspects were arrested comprising mostly of nationals from Eastern Europe. Investigators seized 3.6 million cigarettes and 32,000 kilos of tobacco along with packaging material, cigarette paper, filters and glue. The tax loss prevented to the Dutch state revenue for the illegal production is estimated at €6 million ($7.04 million).
Supported by Europol, this operation is the result of cross-border cooperation between the Dutch authorities and Ukrainian State Border Guard Service.
In general, illegally processing and producing tobacco is dispersed across multiple facilities so criminals can spread the risk, according to Europol. In this case, the entire production cycle took place in one factory. The factory was in a rural warehouse allowing the criminals to go unnoticed with their illegal activities. Dutch authorities estimated that the machinery could potentially produce 1 million cigarettes a day. The production is believed to have been destined for the black market in countries where the retail price of cigarettes is high. The factory is presumed to have produced 18 million illegal cigarettes seized abroad in recent months.
Europol’s Analysis Project Smoke dedicated to investigating the unlawful manufacturing and smuggling of excise goods supported the investigation. The exchange of information between law enforcement authorities and the analysis of operational data contributed to the identification of the potential location of the factory. Links established with recent seizures of tobacco in other countries helped further the investigation.
FIOD is also an active member of the ongoing special operational taskforce set up in 2018 between Europol and Member States to tackle top organized crime groups facilitating the supply of tobacco, machinery, skilled workers and non-tobacco material to illicit factories.
October 16, 2020
Poll: Irish ‘Understand’ Black Market Purchases

Photo: Tobacco Reporter archive
An overwhelming majority of adults in Ireland think that purchasing cigarettes and tobacco from the black market or other countries is “understandable” given the high cost of tobacco sold legally domestically.
According to a survey conducted by iReach for the smokers’ group Forest Ireland, 70 percent of adults agree that it is “somewhat understandable” (40 percent) or “very understandable” (30 percent) that smokers might choose not to buy cigarettes and tobacco from legitimate retailers in Ireland.
That view was supported by 85 percent of smokers and two-thirds (67 percent) of non-smokers. Only one in five (20 percent) of all adults found it not understandable.
The survey, which was conducted Sept. 24-30, also found that 65 percent of adults think the current level of tobacco duty—almost 80 percent on an average pack of cigarettes in Ireland—is either too high (22 percent), a little high (11 percent) or about right (32 percent).
Only one in four (25 percent) think tobacco duty is too low (21 percent) or a little low (4 percent).
Forest Ireland is urging the government to reject calls to increase the tax on tobacco. In its submission ahead of next week’s Budget, the group called on Finance Minister Paschal Donohoe to “give smokers a break.”
“A further tax hike will encourage even more smokers to buy tobacco abroad or on the black market because there is very little stigma associated with such transactions,” said Forest Ireland spokesman John Mallon.

October 8, 2020
Taming The Beast

Cormac O’Rourke (Photos courtesy of JTI)
JTI’s Cormac O’Rourke reflects on Malaysia’s struggle against the illicit trade in tobacco products.
By Stefanie Rossel
Malaysia holds a sad record: It’s the market most affected by illicit cigarettes. According to Nielsen, about 12.2 billion sticks of contraband cigarettes were sold and consumed in Malaysia last year, outstripping the number of cigarettes sold legally in the country.
Most illegal cigarettes are brought into the country, which has a total coastline of 4,675 km, through one of its numerous ports or through neighboring Singapore. Declared as nontaxable goods destined for a third country, they are not examined by customs. Instead of being shipped to their destinations, however, the cigarettes are smuggled into Malaysia.
Tobacco Reporter spoke with Cormac O’Rourke, general manager of Japan Tobacco International (JTI) Malaysia, about the strategies required to address the issue.
Tobacco Reporter: Illegal cigarettes accounted for 62.3 percent of the Malaysian cigarette market in 2019, up from 58.9 percent one year previously, according to Nielsen. What’s the situation today?
Cormac O’Rourke: The illegal cigarette trade situation in Malaysia remains critical in 2020. The latest reading of the Illegal Cigarettes Study for June 2020 shows illegal trade at 60.5 percent of the market. Malaysia continues to be No. 1 in the world for illegal cigarette trading, costing the country approximately $1 billion in lost tax revenues annually.
To what extent has the outbreak of Covid-19 and the related “movement control order” (MCO) contributed to the problem?
The MCO period posed several operational issues for the legitimate tobacco industry. In effect, supply of legal products was severely disrupted albeit not fully halted. During this period, the illegal trade syndicates pivoted to the e-commerce channel for sale. Even food delivery services were engaged for distribution. This resulted in a loss of earnings for retailers—[there are] approximately 60,000 throughout Malaysia who rely on the sales of tobacco as a primary source of income. The vacuum was filled by illegal traders where it is estimated that approximately $250 million alone of the annual $1 billion was lost in tax revenue during this short period. Normal supply has since resumed but illicit trade incidence remains stubbornly high at 60.5 percent.
The Malaysian Ministry of Finance has established a multi-agency task force (MATF) to combat illicit cigarette trade. How effective has this initiative been?
The establishment of a MATF in January 2020 led by the Royal Malaysian Customs has paved the way for a public-private sector partnership with a clear term of reference to comprehensively address the illicit trade issue in Malaysia.
Addressing the long-standing illegal trade problem in Malaysia requires a whole of government approach involving ministries and law enforcement agencies. We believe that the MATF with the involvement of the Royal Malaysian Police Force, Ministry of Domestic Trade and Consumer Affairs, [and] Ministry of Finance, among others, can drive enforcement efforts and also ensure sensible regulatory policies are discussed and validated so as to not exacerbate the problem any further. We are optimistic that the current government is now relooking into this issue seriously and [has] recently initiated a meeting in early August to reinstate the MATF with all stakeholders.
This is a national problem costing the country between $1 billion a year in lost tax revenue. It is further costing the small and medium enterprise sector, in particular retailers, billions of ringgits in lost margins. This is damaging not only from a jobs point of view but reputationally for the country as it strives to compete for its fair share of foreign direct investment.

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You have named cigarette transshipment and repeated excise tax increases as issues that exacerbate the illicit trade problem. Furthermore, Malaysian smokers have mentioned corruption as the biggest hurdle to controlling illicit cigarette trade in a recent survey by British American Tobacco. What has been done recently to tackle these issues?
Transshipment of illegal cigarettes through Malaysia is estimated to account for up to 50 percent of the illegal volumes coming into the country. This can only be done via the ports through a systematic approach to smuggling and abuse of documentation procedures. The industry has tabled recommendations for the government to ban the practice of transshipment for cigarettes. This, coupled with designating a single point of entry for tobacco products into Malaysia, would curtail the use of this channel for smuggling, remove the uncertainties related to processes and procedures as well as help address any corruption issues that may exist.
We believe that implementing the right policies in addressing this problem has to be the focus while enhancing enforcement effectively by deploying the various enforcement assets and powers available to relevant agencies controlling the borders, ports and even retail outlets. This has to be underpinned by a predictable stable tax environment, thus the call by the industry for an excise increase moratorium for the next two years. This will ensure that affordability will continue to improve while allowing time for the MATF initiatives to take hold.
What should be done in your view to better combat illicit cigarette trade in Malaysia? Is this a problem that can be solved at all?
Stamping out the black economy in Malaysia requires a real concerted effort that can only be addressed by absolute and resolute enforcement, which is why the setting-up for the MATF under the Ministry of Finance earlier this year was a significant step in the right direction and the reestablishment of the MATF a key action point to pursue by the government. Provided there remains a predictable stable taxation environment, targeted policies that close the loopholes currently being exploited, strong political will and stringent enforcement, there is a real chance to bring the situation under better control.
What are the consequences for your business in Malaysia, and what is your outlook on opportunities in that market?
The industry has been forced to make significant adjustments, addressing costs as well as reducing investment to cope with the elevated illegal trade situation. Illegal trading has impacted all parties throughout the legal supply chain.
Given the severity of the situation on the legitimate tobacco industry, retailers and associated enterprises, we call on the government to redouble its efforts to protect jobs and industry for Malaysia. A moratorium on excise tax would be a good start. Furthermore, there is an opportunity to lessen the load on the legitimate industry cashflows by deferring payment of excise and import duties, allowing for duty payment drawbacks for unsold goods as well as a reduction of import duties on ASEAN [Association of Southeast Asian Nations]-sourced products that is currently at 5 percent of cost. Releasing locked cash would ease some financial burden and more importantly would allow the industry to support retailer liquidity as they have been hard hit by the pandemic.
Malaysia also has a problem with illicit vapes, which reportedly made up 10 percent of the total Malaysian market in 2019. What’s the current situation, especially regarding the MCO during the Covid-19 pandemic?
The illegal vaping segment continues to grow unabated and accounts for an estimated 10 percent of the market. Nicotine-based vaping products are technically illegal in Malaysia given the provisions under the Poisons Act 1952 requiring any sale and distribution of nicotine-based products to necessitate a license from the Ministry of Health. However, no license has been issued to date.
The proliferation of vaping products, for which the Ministry of Health has indicated that 90 percent are nicotine-based, has been aided by not only the smuggling of such products that are sold in traditional brick-and-mortar stores [but also by] illegal online sales, most of which are imported and misdeclared as food items. Our position to government has been consistent for an appropriate regulatory framework to be established allowing for the proper introduction of vaping products in the country.
How is the problem of illicit vapor products also being tackled by the MATF and other stakeholders? How effectively has it been done so far?
It remains too early to assess given the recent reestablishment of the MATF, but we are hopeful that with proper policies in place and stronger coordinated enforcement, there will be a positive impact on the situation. We estimated that if illegal cigarette trading is reduced by 50 percent, the country would benefit from at least a $500 million increase in tax revenues. The efficiency of the MATF and its constituent agencies should be assessed based on the revenues that it can recover from reducing illegal trade, and we are confident that proper key performance indicators will be put in place toward that end.
Could you please describe the state of tobacco harm reduction in Malaysia?
The reduced-risk products segment is still in its infancy in Malaysia. While open tank vaping products have been around for the past several years, albeit illegally, heated-tobacco products have only been introduced in the past two years. Nevertheless, there remains an absence of a proper regulatory and taxation framework that would cover especially nicotine-based vaping products, which adds to the illegal segment in the country.
Our position has been consistent that a proper regulatory framework needs to be established to allow for the introduction of vaping products in the country. The current situation only allows for an unregulated and illegal industry to flourish.
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.

October 1, 2020
Warning Against Fake Synthetic Nicotine

Photo: Liliya623 | Dreamstime.com
Next Generation Labs, a producer of synthetic nicotine, is advising the vape industry to be wary of recent claims by numerous Chinese manufacturers regarding the availability of synthetic nicotine for use in recreational adult vaping and other nicotine containing products.
According to Next Generation Labs, many of these brands are potentially violating the company’s nicotine manufacturing process patent or trademarks, or are counterfeit, fake, mislabeled, or are potentially misrepresenting their synthetic base material as being “not made or derived from tobacco leaf, stem, stalk, root, flowers or waste,” when they actually are tobacco-derived.
Over the past six years, Next Generation Labs has invested heavily in strengthening its intellectual property worldwide. In a press note, the company said it will act against any company that may violate its process patents for the manufacture of synthetic nicotine.
September 18, 2020
Bosnia and Herzegovina Black Market Surges

Photo: Nenad Maric from Pixabay
The illicit trade in tobacco products has expanded significantly in Bosnia and Herzegovina over the past decade, reports The Sarajevo Times.
The legal market for tobacco products shrunk by more than 56 percent from 2010 to 2020, resulting in huge losses to the state budget.
In the first seven months of this year, the government collected BAM430 million ($261.5 million) less in tobacco taxes than it did in the same period last year. Bosnia and Herzegovina’s black tobacco market is believed to be the largest in Europe.
The Indirect Taxation Authority (ITA) of Bosnia and Herzegovina is now advocating a harmonization of tax levies to reduce the prices of legal cigarettes, which it believes will reduce the incentive to smuggle.
Meanwhile, citizens are encouraged to anonymously report suspicions of illicit tobacco trade to the ITA.
September 15, 2020
JTI Warns of ‘Gathering Storm’ in Black Market
Photo: dexmac from Pixabay
Japan Tobacco International (TJI) has published a report, independently verified by Intrinsic Insight, entitled ‘The Gathering Storm’, on how the illegal tobacco trade is operating during the Covid-19 pandemic and preparing to reap the rewards in the economic aftermath.
Law enforcement agencies around the world have welcomed the report, which is based on 63 field studies, conducted across 50 countries including Russia, Canada, Malaysia and the Philippines where tobacco smugglers currently have a strong presence. JTI intelligence found that the global public health crisis and financial downturn has created the conditions for a ‘perfect storm’ where organized criminal groups will further exploit public demand for cheap goods, and capitalize on dwindling buying power in the impending global recession, particularly in countries with high tax regimes.
The report has provided JTI with a global picture of four emerging trends, consistent with Euromonitor and Europol intelligence:
Evidence shows that criminal groups are biding their time in readiness for an anticipated boom in illegal tobacco sales
Western countries have seen relatively little reduction in the production and availability of illegal tobacco. Since April 2020, local enforcement agencies have made significant seizures of illegal factories or their components in the Czech Republic, Greece, Ireland, Belgium and Spain
Changed law enforcement priorities and border restrictions have been mixed in limiting supply and the availability of illegal tobacco: whilst governments and authorities in Far East Asia were quicker to impose restrictions, those in the West failed to act with such precision
Technology has been increasingly deployed throughout the pandemic to enable sales of illegal tobacco to continue where strict lockdowns were put in place by governments throughout Eastern Europe, the Middle East, Africa and Asia Pacific, where WhatsApp and Facebook have provided quick and easy methods of communication between the consumer and criminals. Furthermore, the International Chamber of Commerce predicts that global counterfeit trade will reach $4 trillion by 2022, primarily fueled by e-commerce.
According to the World Bank, the global trade in illegal tobacco is already worth an estimated $40 billion-to-50 billion each year to the criminal groups who produce, manufacture, smuggle, distribute and sell tobacco products on which there is no tax duty paid. The loss of revenue to law-abiding retailers is also significantly felt, as is the impact on consumers who are lured into buying sub-standard products.
“To some consumers illegal tobacco is a victimless crime, which is why we need to inform them not only of the hidden dangers they are consuming, but the wider social consequences of buying from criminal groups who also traffic people and arms,” said Ian Monteith, JTI’s global anti illicit trade director. “Our report, shared with over 160 law enforcement agencies across the world, is the first of its kind for intelligence gathering during the pandemic, and we hope it will serve as a warning to governments of ‘the gathering storm’ in the black market.”
To tackle ‘the gathering storm,” JTI is calling for:
Improved enforcement at national borders
Improved intelligence sharing through public and private partnerships between all industries and law enforcement agencies
Exploration of fiscal measures that will allow consumer confidence to grow and avoid the temptation to spend on illegal products
Coordinated global campaigns to inform consumers through increased awareness about the dangers of illegal tobacco and the consequences that arise through its trade.
September 11, 2020
Criminals Embedded in Supply Chain After Ban

Photo: Tobacco Reporter archive
Dismantling the criminal networks that sprung up during South Africa’s ban on tobacco and alcohol sales may take years, according to Edward Kieswetter, the country’s revenue service commissioner.

The ban, aimed at managing the health impact of the Covid-19 pandemic, has allowed illegal operators to gain a foothold in the market, Kieswetter said in an online address to tax practitioners.

Having marketed themselves to previously honest smokers and drinkers during the ban, illegal and criminal operators are now embedded in the supply chain, according to Kieswetter.

Tobacco and liquor remained readily available through the black market after the ban took effect on March 27. Producers and retailers complained the restrictions have resulted in thousands of job losses and encouraged illegal trade.

National Treasury data show the government lost out on ZAR9.5 billion ($568 million) in alcohol and tobacco taxes in the first four months of the fiscal year. A 2018 report published by Tobacco Institute showed South Africa was already one of the world’s biggest markets for illicit cigarette sales at the time.

While the bans were lifted in the middle of August, shops are still only allowed to sell alcohol four days a week, and the authorities have warned they could reinstate the curbs if needed.

September 9, 2020
New App Helps Consumers Spot Frauds

Photo: Marius Berthelsen from Pixabay
The United Arab Emirates’ Federal Tax Authority (FTA) recently launched an smart application designed to help consumers detect uncertified tobacco products by scanning the digital tax stamps placed on cigarette packages and tobacco products included in the Marking Tobacco and Tobacco Products Scheme, which went into effect at the beginning of 2019.
The application also aims to ensure that these products meet the standard specifications, are not smuggled, and have been subjected to tax. The app is part of the FTA’s continuing efforts to protect consumers from commercial fraud and combat tax evasion utilizing the latest technologies.
“The ‘FTA DTS’ smart application is one of the effective tools that support the ‘Marking Tobacco and Tobacco Products Scheme,’ which came into effect at the beginning of 2019 to combat tax evasion, protect public health and reduce the risks to consumers from the inferior products entering local markets,” said Khalid Ali Al Bustani, director general of the FTA.
“The FTA, through the new application, will offer consumers the opportunity to contribute to the control efforts aimed at protecting the markets from commercial fraud and inferior products, protecting public health, preserving the environment, promoting the concept of community partnership and eliminating negative practices in local markets.”
The FTA intends to extend its digital tax stamps requirement to water pipe tobacco and electrically heated cigarettes in 2021.
August 28, 2020
Illicit Tobacco Factory Dismantled in Germany

Photo: Europol
Authorities have arrested 12 individuals who ran a large illegal tobacco factory in Kranenburg, Germany. The illegal factory could produce 10 million cigarettes per week.
Around 200 officers were involved in the raid. The 12 workers arrested on site were all Polish and Ukrainian nationals, aged between 28 and 59 years old. 11 million cigarettes were also seized as they were being loaded onto a lorry.
This is the fourth such illicit production facility uncovered on the German territory and undoubtedly one of the largest. The estimated tax loss to the German state revenue for the illegal production alone stands at approximately €1.5 million ($1.77 million) per week, according to Europol, which estimated that the factory had been operating since the end of 2016.
Most of the cigarettes are believed to have been destined for the black market in the United Kingdom where the retail value of cigarettes is much higher than in Germany.
The operation was launched by the German authorities based on information provided via Europol by the Polish Police Center Bureau of Investigation. Europol further supported this operation by facilitating the information exchange between the involved authorities and by analyzing the operational data to identify the main targets.
The investigation is still ongoing to try to identify potential links to other European countries.
August 27, 2020