Cigarette Smuggling: Poland to Sweden Nick Johnston, Walter Kegö and Christina Wenngren Cigarette Smuggling: Poland to Sweden by Nick Johnston, Walter Kegö and Christina Wenngren © Institute for Security and Development Policy, 2016 Disclaimer: The opinions and conclusions presented in this report do not necessarily re ect the views of the Institute for Security and Development Policy (ISDP). All views are interpretations of ISDP alone who are responsible for any inaccuracies in this report. The contents of this document may not be quoted or reproduced without express permission of ISDP. For editorial correspondence and enquiries, please contact ISDP at: [email protected] About the institute: The Institute for Security and Development Policy is a Stockholm-based independent and non-profit research and policy institute. The Institute is dedicated to expanding understand- ing of international affairs, particularly the interrelationship between the issue areas of con- flict, security, and development. The Center for Transnational Threats (CTT) aims to provide strategic analysis and practical solutions to help decision makers in both the public and pri- vate sectors to achieve their goals. 2 Table of contents Front matter......................................................................1 Table of contents..............................................................2 1. Introduction......................................................................3 2. The Illegal Tobacco Trade...............................................4-8 3. Poland - the Nexus of Trade...........................................9-19 4. The Swedish Trade..........................................................20-23 5. Recommendations - EU Level........................................26-29 6. Recommendations - Sweden..........................................30-32 7. Avenues for further Research.........................................33 Acknowledgements.........................................................34 Appendix..........................................................................35-41 Table of Contents 3 1. Introduction Characterisation Outline Cigarette smuggling is a fast-growing This report is broken into four sec- criminal enterprise in the European tions. The first section will describe market. The limited legal repercus- the general nature of the illegal tobac- sions and immense profit margins co trade within the European Union make the movement of cigarettes (EU) and its impacts on government an incredibly attractive enterprise. functions. The second section will According to Lithuanian Customs explore cigarette trends in Poland reports, efficient smuggling organi- since Poland is the dominant origin sations stand to gain approximately of tobacco products within the EU. 1000% on their initial investment. The third section will focus on current This return is comparable with the trends in Sweden and examine its role narcotics industry, but with much as a transit country. The final section more lenient legal penalties if convict- will provide recommendations for all ed for involvement. levels of law enforcement, from local to international, on addressing the As more organisations become in- issue. volved in this trade, its impacts be- come more apparent. In Latvia, for ex- The information provided in this ample, the size of the cigarette black report is drawn from online research, market has grown by approximately discussions with informants closely 30% each year. In 2015, 650 million il- involved with cigarette smuggling, legal cigarettes were consumed in the interviews with agents from both the country, over a quarter of the entire Polish Central Bureau of Investigation tobacco market. As a result, the state (CBS) and Polish Ministry of Finance, budget in Latvia loses 50-70 million Swedish Customs and other special- euro of taxes annually to the black ists in the field. market. Introduction 4 2. The Illegal Tobacco the industry and the cost of invest- Trade ment, this is an understandable out- come. As the market becomes more competitive, less efficient manufac- Trends turers will generally disappear in the face of a growing monopoly which Smuggling is not a new practice nor is has the capability to operate and it the most innovative. However, the manoeuvre around the existing weak unique socioeconomic environment legislation. of the EU provides opportunities to make incredible profits. Since there is a consistent market for cheap tobac- Causes co products across the EU, there is a Geographically speaking, Europe is stable demand for smugglers’ wares. unique in that it holds a very crowd- The current legislative shortfalls sim- ed distribution of states ranging from ply enable smugglers to deliver their relatively poor to very affluent. As supply. one travels westwards in the EU, the local Gross Domestic Product (GDP) The KPMG Cision report from 2011 increases significantly, meaning there identified that the market for untaxed is little distance needed to be trav- cigarettes in Sweden showed a strong elled before common goods increase correlation between the presence of greatly in comparative value, as seen organised crime and the amount of in Figure 1. illegal cigarettes in a specific region. The ideal process for an organisation Owing to the overwhelming scale of intending to smuggle cigarettes is to Figure 1 – Average cigarette prices across the EU black market from a Lithuanian Customs Presentation The Illegal Tobacco Trade 5 purchase the cigarettes outside the lar, officers from the Polish Ministry eastern border of the EU, such as in of Finance note the World Health Belarus, for as little as 15 euro cents Organisation’s Framework Conven- per pack. They are then imported tion on Tobacco Control. Until an through a porous section of the EU amendment in 2012, the convention border, such as in Latvia, and then only contained one article dedicat- onto a country such as Germany ed to combating the illegal industry. which increases the value of that Both officers recognised the enduring same pack of cigarettes by approxi- effects of this shortcoming. Essential- mately four to five euros. If that same ly, both the illegal and legal industries pack is smuggled to Norway, the have been merged into one uniform UK or Ireland, its value will increase entity. Naturally as a result, the per- even further to just under ten euros, ception of the legal industry has been a total increase of over sixty times the negative. original value before sundry costs are As the Polish Police commented, the considered. ‘free market’ means there will always be demand for tobacco products. The Legal Issues only effective measure that can be taken in this case is thus to limit the Normally, this drastic increase in supply of illegal products not subject price is accounted for through local to taxes and regulation. No matter tariffs enforced on licensed vendors what future regulation is enforced on who import the cigarettes. Even in the the legal industry, the illegal industry EU, individual states have the capac- will remain largely unaffected by it. ity to pursue duty and tariffs from im- Tackling the size of this unregulat- porters. However, these fees are large- ed segment is thus a priority and all ly nominal in nature and exceedingly resources should be used in counter- difficult to impose on illegal products. ing it. Despite the size of the threat Thus, smuggling can easily bypass they face, law enforcement authorities all measures of price correction as have made few formal agreements goods cross borders. With no fixed to cooperate in combatting the trade. border controls between European Instead, they predominantly rely on states, customs officers must have personal contacts and direct depart- intelligence or reasonable suspicion to mental correspondence. investigate vehicle contents. Perhaps some of the most effective However, there are also a number of joint efforts include working with more specific legislative shortfalls tobacco producers, such as Phillip that have contributed to the rise of Morris (an American global tobacco the illegal tobacco trade. In particu- company), in order to combat the il- Cigarette Smuggling: 6 Poland to Sweden legal industry. Up to July 2016 (when The agreements themselves are also the Phillip Morris agreement expired), intended as a deterrent to the major the EU had agreements with each manufacturers from being involved of the four major global producers in the illegal market. The primary of tobacco products. It must be not- function to achieve this is a legal- ed that two of these agreements are ly binding payment of 100% of the settlements to past lawsuits (Phillip evaded taxes in case a seizure is made Morris, settled 2004 and Japan To- of genuine (not counterfeit) products bacco, settled 2007) in which the EU in quantities exceeding 50,000 pieces. asserted the producers’ compliance Fines levied as a result of these agree- in the function of the illegal trade. ments totalled just over 70 million euro These agreements provide a formal between 2004 and 2012. Although this framework in which law enforcement figure seems imposing, it is estimat- authorities could cooperate with the ed to be only around 0.08% of the manufacturers directly. However, of- estimated tax losses resulting from ficials from the Polish Ministry of Fi- the trade during these years. Thus, nance revealed that this provision has although the agreements formalising never fully been realised as there is an cooperation with major players in the