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Category: Illicit Trade

  • 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.
  • Laser Liaison

    Laser Liaison

    Photos: Heinen Koehl

    Heinen Koehl’s coding equipment combines serialization and aggregation in one unit.

    By Stefanie Rossel

    Last November, parties to the Protocol on Eliminating Illicit Trade in Tobacco Products gathered virtually to strengthen the treaty that had entered into force three years earlier. Among the decisions adopted was a roadmap to improve the global track-and-trace system. Currently, use of track-and-trace systems for tobacco products is probably most advanced in the European Union, where it is regulated under articles 15 and 16 of the Tobacco Products Directive. For cigarettes and roll-your-own products, the EU has mandated traceability and security features since May 20, 2019. By May 2024, it will be compulsory for all other tobacco products, including cigars, cigarillos and smokeless tobacco products, as well.

    For tobacco product manufacturers, placing individual identifying codes on each pack and then on each bundle is a challenging additional step in the production process. Heinen Koehl, a Luxemburg-based supplier of processing and logistics equipment for the tobacco industry, has developed several machines to facilitate that process. The Label Application System (LAS) and the Laser Coding Extension (LCE) have been designed for “pack-to-bundle” aggregation.

    “The LAS applies a bundle label onto the head side of each bundle and verifies this bundle with a camera. In contrast to the LAS, the LCE serializes each single pack within the bundle with a laser to provide it with a unique track-and-trace code,” says Stefan Hahn, managing director at Heinen Koehl. “This code is then verified with a camera system to carry out the aggregation. Contrary to traditional solutions available in the market, where various printing technologies such as CO2 or ink printers have to be implemented into existing bundle packers, we have developed a patented stand-alone solution. By using a special laser designed by expert company Koenig and Bauer Coding, we can apply the unique track-and-trace code to the pack through the overwrap without destroying the film. This is not only an advantage in production, but also for the security, availability and performance of the track-and-trace system.”

    Standardized Solution

    Easy integration is the greatest benefit of the LAS and LCE, which together can be built into the production line without changing the existing equipment. Since existing machinery doesn’t have to be adapted to additional hardware and functionality, the implementation time is significantly shorter than with other solutions. Similarly, the stand-alone combination can easily be moved to another production line or location without complex conversions of existing equipment, according to Hahn.

    “With our solutions, serialization and aggregation of individual packs into bundles is carried out in one unit,” he says. “Other technologies require several production steps between serialization and aggregation, which means potential risks for the track-and-trace functionality.”

    According to Heinen Koehl, the LAS/LCE combination is a standardized solution independent from packer type. This means that operators and maintenance staff don’t need special training. Maintenance is similar for both machines within a manageable expenditure of time.

    The LAS/LCE combination can be adapted to all bundle types and sizes and allows for easy format changes. It has been designed for all speed ranges with up to 100 bundles per minute and up to 1,000 packs per minute, respectively.

    While the LAS/LCE is presently being used for coding packs and bundles of cigarettes and cigars, Heinen Koehl has developed an additional machine especially for roll-your-own and pipe tobacco pouches based on the same technology. Known as LAS Pouch, this machine combines coding, verification, bundle label application and aggregation into one system that lasers the track-and-trace code on the pouch through the film.

    Heinen Koehl also offers solutions for the manual aggregation of tobacco products that can be adapted to customer requirements and minimize disruption of the production process.

    Suitable also for yet-to-be-regulated markets, Heinen Koehl is delivering its coding equipment to customers worldwide, including to clients in the U.S., Europe, Russia, the UAE, Saudi Arabia and Indonesia. As track-and-trace requirements spread around the world, Hahn says he sees great potential in other markets as well.

    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.
  • Cigarette Smuggling up Dramatically in Australia

    Cigarette Smuggling up Dramatically in Australia

    Photo: Maxim

    The Australian Border Force (ABF) has detected a significant increase in attempted illicit tobacco imports at the Australian border, according to the Border Security Report.

    The ABF discovered 878.8 tons of undeclared loose-leaf tobacco and 712.7 million undeclared cigarette sticks between Jan. 1, 2021, and Dec. 31, 2021. This is a 45 percent increase compared to 2020.

    The majority of the illicit tobacco is coming from the Middle East and Asian regions. Illicit imports are either held for further investigation or incinerated.

    “Our detection numbers show we are very alert to the different methods and patterns of concealment used in illicit tobacco importations at our borders,” said Susan Drennan, commander of the agency’s Trade and Travel Operations East division. “Our message to those who think they can import such large amounts of illicit tobacco and get away with it is to think again.”

    Illicit tobacco imports that are linked to serious and organized crime syndicates are referred to the Illicit Tobacco Taskforce (ITTF). The ITTF combines the operational, investigative and intelligence capabilities of the ABF, the Australian Taxation Office, the Department of Home Affairs, the Australian Criminal Intelligence Commission, AUSTRAC and the Commonwealth Director of Public Prosecutions.

    “Organized crime groups capitalize on unwitting smokers looking for cheap cigarettes to enrich themselves and to fund other types of criminal activities that harm our community,” said Greg Linsdell, commander of the ABF Special Investigations division. “The ABF is working tirelessly to stop this activity both at our border and within Australia through comprehensive and powerful ITTF investigative actions.”

  • Smuggling Ring in Spain and Portugal Disrupted

    Smuggling Ring in Spain and Portugal Disrupted

    Photo: Europol

    Spanish and Portuguese law enforcement agencies have dismantled a criminal network involved in cross-border tobacco smuggling, according to Europol.

    On Feb. 16, more than 100 officers simultaneously raided addresses on either side of the border, detaining eight suspects.

    The officers seized 2 tons of cut tobacco and tobacco strips, more than 10,000 counterfeit cigarettes and tobacco cutting and drying equipment. They also recovered €37,800 ($42,778.46) in cash.

    Property searches were carried out in the province of Sevilla (Spain) and in the cities of Coimbra, Lisbon, Leiria and Aveiro (Portugal).

    The criminals are suspected of having illegally imported from Spain to Portugal large quantities of leaf tobacco and strips, destined to produce counterfeit cigarettes. This criminal network had tobacco storage and production facilities scattered across both countries.

    Law enforcement believes these criminals have smuggled over 7 tons of tobacco products from Spain to Portugal in 2021 alone.

    The revenue loss generated by this illegal activity is estimated at over €163,000 in Portugal.

  • ITC Bars Unauthorized Juul-Compatible Pods

    ITC Bars Unauthorized Juul-Compatible Pods

    Photo: JHVEPhoto

    The U.S. International Trade Commission (ITC) has issued a general exclusion order barring the importation of any unauthorized cartridges compatible with the Juul System that infringe Juul Labs patented product designs, including compatible flavored pods and refillable pods.

    This ruling follows a filing by Juul Labs submitted to the ITC on July 10, 2020, that sought a general exclusion order directed at all importers of unauthorized cartridges that copy Juul Labs’ patented pod designs without authorization.

    “Today’s ITC ruling represents a major victory against manufacturers of illicit vapor products who seek to bypass regulations and undermine efforts to create a more responsible marketplace for the category,” said Wayne Sobon, vice president, intellectual property at Juul Labs, in a statement.

    “In addition to targeting the importation of all infringing products, regardless of the brand, this sweeping action will provide the additional public benefit of helping rid the market of unauthorized Juul-compatible products that can be modified by the user, such as empty and refillable pods.”

  • Governments Warned Against Big Price Hikes

    Governments Warned Against Big Price Hikes

    Policymakers should consider the risks of encouraging the illicit trade of tobacco products before raising the prices through higher taxes, according to Alvarez & Marshall.

    In a 2021 report titled “Causes and Control of Illegal Tobacco,” the U.S. consultancy says that taxation policy and its effect on the affordability of tobacco products is an important factor in the global illegal tobacco trade.

    “There is a 97 percent correlation between taxes and tobacco consumption,’’ the A&M report said.

    “Illegal trade grows when legal tobacco products become less affordable,” it added. “When cigarette prices rise more quickly than consumer incomes, consumers begin to seek cheaper options and switch to illegal products.”

    This suggests that increasing the price of tobacco and reducing affordability encourages smokers to seek cheaper products and creates opportunities for criminals. In other words, less affordable tobacco products result in more illegal trade.

    “We find that … if cigarettes become 10 percent more expensive for consumers relative to their income, the share of illegal tobacco will rise by an average of almost 7 percent,” A&M added.

    In a separate study, relayed by the Business Inquirer, the EU-ASEAN Business Council and Transnational Alliance to Combat Illicit Trade estimates that governments in Southeast Asia lose tax revenues of about $3.32 billion yearly.

    Aside from causing monetary losses to governments and legitimate businesses, the illegal tobacco trade undermines public health initiatives, contributes to underage smoking, and funds organized crime and terrorist activities, according to the EU-ASEAN study.

  • Philippines Losing Billions to Illicit Trade

    Philippines Losing Billions to Illicit Trade

    Photo: Piotr Pawinski

    The Philippine government has lost nearly PHP3 billion ($588.17 million) in tax revenues since 2019 due to smuggling or illegal entry of cigarettes into the country, reports Philstar.

    The Bureau of Customs (BOC) has intercepted 127,675 master cases of illicit cigarettes since the Tobacco Tax Law was approved in 2019, according to BOC Deputy Commissioner Teddy Raval.

    The estimated value of the seized cigarettes reached PHP9.73 billion, more than half of which was accounted for in 2020 at PHP5.77 billion. The government forfeited PHP2.9 billion in excise revenues between 2019 and January 2022 due to smuggling of cigarettes.

    “They took advantage of the mobility restrictions, including Customs restrictions, but you caught them,” said Albay Representative Joey Salceda in a House hearing, referring to smugglers attempts to take advantage of Covid-19 restrictions.