An Introduction to the Illicit Tobacco Trade Adrian Welsh, Chief Legal and Compliance Officer Illicit Trade a Global Issue
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An Introduction to the Illicit Tobacco Trade Adrian Welsh, Chief Legal and Compliance Officer Illicit Trade a global issue 600 BILLION Non Duty Paid % Market Share% Market 2 Measurement is not straightforward Methods of measurement range from: Robust Best estimate Modelled, multi Market Empty data source Reports Pack reports Surveys Overall trend and direction of travel most informative 3 Duty Paid vs Non Duty Paid Duty Paid Non Duty Paid 4 Not all Non Duty Paid is illegal NON DUTY PAID LEGAL ILLEGAL / ILLICIT ILLICIT WHITES AND DUTY FREE CROSS-BORDER GENUINE COUNTERFEIT UNBRANDED SALES SHOPPING CONTRABAND SMOKING TOBACCO 5 Illicit Product genuine contraband Unlawful movement of genuine tobacco products from one tax jurisdiction to another without the payment of applicable taxes or in breach of laws prohibiting its import or export. 6 Illicit Product counterfeit Illegal manufacturing where product bears a trademark without the owner’s consent. Counterfeit products can be sold in the source country or smuggled into another country. 7 Illicit Product illicit whites These products are typically produced for the purposes of smuggling into countries where there is no prior legal market for them. Legally produced in source country but illegally sold at destination. 8 Illicit Whites a growing problem 20 Other Consumption of illicit white brands 2006 -2013 Premier Minsk 8.7 HMRC note that illicit 15 RGD whites “represent the Raquel 7.7 most significant threat to NZ 6.7 cigarettes) 0.7 legitimate trade and Gold Mount 0.8 bn 10 0.7 0.9 tobacco revenues in the Ducal 0.8 0.6 1 4.8 0.1 0.9 American Legend 0.8 0.8 UK from large scale 2.3 0.4 0.9 Volume ( 0.2 0.7 1.0 Jin Ling 0.9 0.8 0.2 organised criminality.” 5 0.10.2 0.3 0.5 0.5 Fest 1.2 0.4 1.5 0.2 1.9 0.7 1.5 1.6 1 0.9 1.7 2.0 1.5 1.2 2.7 2.2 0.2 2.6 2.1 0.4 1.5 0.7 1.2 0 0.1 0.2 0.5 2006 2007 2008 2009 2010 2011 2012 2013 Graph source: Project Sun 2014 9 Quote source: Home Affairs Committee Tobacco Smuggling Report 2014 Sources and Destinations Counterfeit Illicit Whites 10 It’s all about the money driven by high excise Government ~83% Industry and trade (Tax incidence) 11 It’s all about the money demand vs supply driven £1,300 per £9.03 case £6,500 per car £6.72 £65,000 per white van £4.00 £1.1m per container DEMAND SUPPLY Consumers want to HIGH Criminals able to save money EXCISE make money 12 It’s all about the money facilitators Excise & Price Differentials Lenient Penalties Black Market Infrastructure Weak Border Controls Social 13 Acceptability Follow the money…… Duty & price differential creates opportunity for arbitrage 14 Follow the money…… Sou t h Ko r e a Ch ina AUD 2 . 6 9 Japa n AU D 2 . 6 6 AUD 4 . 8 3 Taiw a n Ind ia My an m a r AUD 3 . 1 0 AUD 2 . 2 9 AUD 2 . 0 7 Laos Bang la d e s h AUD 1 . 8 2 AUD 2 . 2 6 Vie t na m Ph i l ip p in e s Tha i l an d AUD 1 . 2 6 AUD 3 . 0 7 AUD 1 . 0 8 Ca m bod ia AUD 1 . 1 2 Ma la y s ia Sr i Lank a AUD 3 . 9 9 Duty & price differential n/ a Sin g apo r e Indone s ia Papua N e w Gu in e a AU D 10 . 2 9 AUD 1 . 4 3 AUD 5 . 3 7 creates opportunity for To ng a AUD 5 . 0 3 Vanua tu arbitrage AUD 8 . 7 6 Sa m o a Fiji AUD 5 . 6 5 Au st r a l i a AUD 9 . 2 9 AUD 15 . 9 6 Ne w Ze a l a n d AUD 15 . 2 8 15 The impact Deprives economy of excise revenue Harms legitimate business Funds organised crime & terrorism Undermines Public UnderminesHealth Objectives public health objectives 16 Tackling the Problem 17 Role of Government Health Improved Collaboration Strong BALANCED Enforcement Excise Policy Combatting Revenue Deterrent Crime Penalties Smart Regulation 18 Role of Government . Supporting treaty to the Framework Convention on Tobacco Control – aims to curb illicit trade . Protocol contains potentially effective measures to address transnational illicit trade: licencing regime; reporting regime for duty suspended product; T&T; control of manufacturing within Free Trade Zones; regime of offences & sanctions . Must be implemented consistently to be effective 19 Role for Imperial Tobacco Corporate Position The prevention and elimination of tobacco smuggling and counterfeiting is one of our major business priorities. We must never engage in or facilitate illicit trade activities. We must ensure that we only conduct business with companies and individuals that are reputable. We must work with governments, regulators and law enforcement authorities to prevent the illicit trade of our products. The illicit trade of tobacco products has a damaging effect on our company. It is contrary to our commercial interests and harms our business reputation. It materially diminishes the legitimate markets in which we operate to compete for market share. 20 Imperial’s Anti Illicit Trade Strategy Supply Engage with Chain Stakeholders Integrity Support Law Enforcement 21 Supply Chain Integrity Know your Commensurate Compliance Track & Trace Customer Supply Checks Anti Money Staff Training Laundering 22 Supply Chain Integrity EU Cooperation Agreement 23 Support Law Enforcement Technical & Training on Intelligence forensic support industry matters Practical assistance Effective working (sniffer dogs) relationships 24 Engaging Stakeholders Raise awareness Partner with trade bodies through media Provide views Educate on T&T to government 25 Strategy in Action some success stories Machine 18 . May 2012 – Hungary Law Enforcement Authorities make seizure . Cigarette making & packing machine . ITG confirmed as “Machine 18” . Counterfeit Regal, Superkings KS & Classic . 2002-2012: UK 472m sticks or £145m loss 27 Destruction of Machine 18 28 Chinese counterfeit . ITG intel leads to largest EU seizure of product from China . 160m sticks (incl. Marlboro, L&M and West) . Destined for France, Germany and Holland . Potential revenue loss c €26m . Loss in revenue to manufacturers of c €9m 29 Initial Investigations: China 30 Law Enforcement Co-ordination 31 Plain Packs….a Perfect Storm…. failing to strike the balance They told our team how the switch to plain packaging will make their fraudulent trade easier, cheaper and more difficult to detect. He punched the air as he mocked PM Cameron, cheering: “Plain packaging…I support the UK Government” 32 Moving forward awareness and education key Suppliers – look to better control of leaf and non tobacco materials Consumers – look to improve awareness of consequences i.e. social costs and criminality Government – appreciation of the need to administer balanced policy and effective regulation International – effective, consistent and joined-up approach 33 Summary . Strong financial incentives create the market for illicit . Duty/price variance across borders drives the problem . Regulation can improve traction and tighten legitimate environment . BUT….the key is to tackle the illegal environment . A multi faceted, multi party approach is needed . Balanced approach from legislators is key . An issue that can be managed 34 Q&A An Introduction to the Illicit Tobacco Trade Adrian Welsh, Chief Legal and Compliance Officer .