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The Illicit Trade in Tobacco Products and How to Tackle It Disclaimer and Statement of Purpose

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The Illicit Trade in Tobacco Products and How to Tackle It Disclaimer and Statement of Purpose The Illicit Trade in Tobacco Products and How to Tackle It Disclaimer and Statement of Purpose “The Illicit Trade in Tobacco Products and How to Tackle It” is published by the International Tax and Investment Center (ITIC), a non-profit research and education foundation. ITIC serves as a clearinghouse for information on best practices in taxation and investment policy, and as a training center to transfer such know how to improve the investment climates of transition and developing countries, thereby spurring formation and development of business and economic prosperity. The purpose of this publication is to serve as a resource guide and best practices reference for tax, customs, and law enforcement officials to improve their efforts to combat the illicit trade in tobacco products. ITIC received supplemental contributions from tobacco companies to help underwrite the cost of this publication. However, ITIC retained full editorial control and takes full responsibility for the content and any errors or omissions. The publication is not intended to be a statement of ITIC policies, nor is it intended to endorse the views or policies of any of the contributing organizations or individuals (financially or otherwise), such as the World Customs Organization (WCO), the European Anti-Fraud Office (OLAF) or the tobacco industry. Inputs to this publication, including data and case studies, were provided by tax and customs officials, the World Customs Organization (WCO), industry representatives and various consultants. About the Author Elizabeth Allen, BA from other governments and with private sector stakeholders. Since retiring from HMRC in March Elizabeth Allen, a graduate 2009, Elizabeth selected the technical content of and of Bristol University, has over chaired the ITIC Anti-Illicit Tobacco Trade conference 35 years of management, in Brussels in November 2009 and is also the author operational and policy of an ITIC publication entitled “Guidebook to the experience with Her Majesty’s Successful Introduction of a Specific Excise Tax on Revenue and Customs (UK – Alcoholic Beverages.” She has also carried out 3 policy HMRC) and previously with development reviews for the UK Government’s Office HM Customs and Excise. Her senior civil service of Government Commerce during 2009/10 and given positions included responsibility for the Alcohol and lectures on “The Taxpayer as Customer” as part of a Tobacco Fraud Review, Excise and Inland Customs continuous professional development course for senior Compliance Strategy, implementation of the Excise civil servants from developing countries. Mrs. Allen is Movement and Control System and responsibility for now embarking on an EU sponsored review of the illicit the administration of Environmental Taxes. Mrs. Allen trade in Alcohol and Tobacco Products in the Southern also worked on Customs Policy and Prosecutions. She African Development Community. has wide ranging experience in working with colleagues The Illicit Trade in Tobacco Products and How to Tackle It Table of Contents Foreword 2 Executive Summary 3 1. What is the Illicit Trade in Tobacco Products? 5 2. Size and Measurement 6 3. Global Nature and Dynamics 9 4. The Impact of the Illicit Trade in Tobacco Products 13 5. Causes and Facilitators 16 6. How to Combat the Problem 22 7. Article 15 of the WHO Framework Convention on Tobacco Control 27 Glossary of Terms 29 Interesting Links 30 1 Foreword We live in an extremely fast moving world where global trade is fundamental to the way we live and to our economic development and prosperity. Customs play a significant part in ensuring that global trade conforms to international requirements and that the taxes due are paid to governments to fund public services. Where goods are highly taxed and easily portable criminals, terrorists and insurgents will take advantage of any weaknesses in customs and revenue controls to amass profits. They do not care whether laws are flouted, consumers’ health is damaged, governments lose revenues or legitimate businesses lose trade. We have witnessed an unparalleled growth in illicit trade of tobacco products over recent years, and we need to step up our efforts to tackle the problem. New ideas, questioning, forward planning, learning from others and greater collaboration across enforcement agencies, other national agencies and with the legitimate trade will enable us to modernize and optimize the use of the expensive and scarce resources in tackling the illicit tobacco trade. We need to make governments and the public aware of the implications of illicit trade and gain their full support. An innovative approach, creating and building on partnerships will enable us to transform our efforts and achieve significant reductions both in illicit trade and the number of criminals who benefit from it. This publication builds on the successful ITIC “Anti-Illicit Trade in Tobacco Products” conference in November 2009 and brings together principles and good practice from across the world which I hope will lead to improved partnerships and working practices. Kunio Mikuriya Secretary General, World Customs Organization 2 Executive Summary This publication aims to raise awareness annual government revenue losses of of the growing and evolving illicit trade over US$40 billion.2 in tobacco products. It is a compilation Most governments do not attempt to of facts and views from a wide range of measure the problem on a regular sources including respected academics, basis and remain unaware of the many private sector consultants, journalists, negative effects the illicit tobacco international enforcement organizations, trade can have on their economy and government revenue authorities and society. Without a robust means of industry. It defines the different aspects measuring the extent of the problem, it of illicit trade and provides information is difficult for authorities to assess the on ways of measuring its size. It analyzes effectiveness of strategies to combat it. the nature of the problem, its causes and consequences, and offers authorities Global Nature and Dynamics best practice guidance on implementing In recent years the dynamics of illicit anti-illicit trade strategies. Case studies trade have evolved rapidly. There is are used to provide evidence of good an explosive growth of “illicit white” practice and global efforts to tackle this cigarettes that are made specifically serious problem.1 for smuggling. Another example is the What is the Illicit Trade in increased use of internet sites to sell Tobacco Products? and ship cigarettes worldwide in small quantities by the post to evade taxation. Illicit trade manifests itself in three major Furthermore, research demonstrates ways: smuggled, counterfeit and local that illicit trade has become a tax evaded products. These categories major security challenge in different are interrelated and show that the illicit environments around the world and is trade in tobacco products is a global increasingly used to fund terrorism.3 phenomenon, covering all continents There is also an expansion in distribution and high and low income countries alike. networks used by criminal organizations Cigarettes, being highly taxed, easy to for the illicit trade in a wide range of transport and possessing a lucrative products including tobacco, narcotics, risk to reward ratio, are among the most and human trafficking. illegally trafficked goods in the world. The Impact on Society Size and Measurement Illicit trade has a huge impact on the Despite the lack of robust global data the economic and social fabric of society. overall consensus is that the global illicit In addition to vast amounts of lost trade in tobacco products is unacceptably revenue which undermines the tax base large. Recent studies estimate that of economies, it obstructs economic approximately 11% of the world cigarette development, undermines government market is illicit, representing over 600 policy objectives and the rule of law, billion cigarettes a year and resulting in supports corrupt practices, funds 1 The case studies in this publication have been provided by the industry, consultants, and academics. 2 Framework Convention Alliance (2008). 3 Dr. Louise Shelley, ITIC Conference Paper – “Illicit Trade: A Security Challenge – A Case of Cigarette Smuggling” (2009). 3 organized crime and terrorism and and commitment to achieving the same encourages the expansion of criminal goals. In addition, enforcement authorities activity. It undermines investment in need to be given adequate resources manufacturing, innovation, trade and and encouraged to work closely with the distribution by legitimate industry and other domestic stakeholders to combat negatively impacts employment. the problem. Exchange of information with authorities in other countries and Causes and Facilitators international enforcement organizations The primary drivers for this illicit trade must be the norm, and legislation with are twofold: deterrent penalties and an efficient functioning judiciary are vital. Citizens • Consumers to save money; and must be provided with information on the • Criminals to make money. implications of purchasing illicit products such as unwittingly supporting organized Factors contributing to the problem crime and terrorism. include an unbalanced fiscal policy, disparities in tax driven prices between Article 15 of the World Health jurisdictions, protectionist policy Organization (WHO) FCTC4 measures, corruption, weak enforcement, The critical importance of tackling the lack
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