PARLIAMENTARY COMMITTEE ON LAW ENFORCEMENT

INQUIRY INTO ILLICIT

SUPPLEMENTARY SUBMISSION

AUSTRALIAN GOVERNMENT DEPARTMENT OF HEALTH

APRIL 2016

Introduction The Department of Health (the Department) welcomes the work of the Parliamentary Joint Committee on Law Enforcement in its Inquiry into Illicit Tobacco (the Inquiry). The Department provided a written submission to the Committee on 11 February 2016, and appeared before the Committee (on invitation) to give oral evidence at the first hearing of the Inquiry on Friday 4 March 2016.

The Department would like to further assist the Committee by providing the following supplementary submission, which seeks to clarify and provide some additional detail in relation to particular issues raised before the Committee at the hearing on 4 March 2016.

Developing Policies: Illicit Tobacco as a Consideration Consistent with obligations under the World Health Organization (WHO) Framework Convention on Tobacco Control (FCTC), Australia has in place a comprehensive range of tobacco control measures which address both supply of and demand for tobacco products. Enforcement and compliance aimed at combating illicit trade in tobacco products is a critical element of Australia’s approach to tobacco control, as it ensures that continuing smokers remain in the legal tobacco market where they are exposed to the full range of Australia’s tobacco control measures.

The strength of the enforcement and compliance framework is therefore a central consideration in the development and implementation of tobacco control policy measures generally in Australia. The level of consideration given to enforcement and compliance issues throughout the development of any specific policy is influenced by the presence (or otherwise) of evidence that a measure may have the potential to have relevant unintended consequences, including any impact on illicit trade.

Whole of Government Approach In order to ensure that Australia’s tobacco control framework is as robust as possible, the Department has adopted a whole-of-Government approach to the development and implementation of tobacco control policies, underpinned by a strong collaborative process of cooperative engagement with numerous Commonwealth, state and territory stakeholder agencies. This whole-of-Government approach is augmented and informed by consultation with the public, civil society and the .1

This inclusive and collaborative approach provides (among other benefits) the most effective means of addressing issues relating to illicit tobacco, particularly through the involvement of law enforcement agencies including the Department of Immigration and Border Protection (DIBP), the Australian Taxation Office (ATO), the Australian Federal Police (AFP), the Australian Crime Commission (ACC), the Australian Consumer and Competition Commission (ACCC), and state and territory police.

To this end, the Department is a member of several committees and working groups focussed on tobacco control policy generally and/or on combatting illicit tobacco specifically: • Illicit Tobacco Inter-Departmental Committee • Illicit Tobacco Industry Advisory Group • Tobacco Commonwealth Regulators Meeting

1 Consistent with the Australian Government’s interpretation of Australia’s obligations under Article 5.3 of the WHO FCTC (clarified by the Australian Minister for Foreign Affairs on 5 January 2015 by way of Declaration communicated to the Secretary General of the UN), Australia should interact with the tobacco industry only when and to the extent strictly necessary to enable [it] to effectively regulate the tobacco industry and tobacco products, and should ensure that any such interactions are conducted transparently.

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• Tobacco Stakeholder Group • Tobacco Regulators Forum • Tobacco Policy Officers Group • Intergovernmental Committee on Drugs National Expert Reference Group on Tobacco

All committees apart from the Tobacco Policy Officers Group include the involvement of law enforcement agencies.

Case Study: Tobacco Plain Packaging In 2010 and 2011 the Department convened an Interdepartmental Committee on Tobacco Plain Packaging (the IDC). The IDC oversaw the development of the tobacco plain packaging measure, and the passage and implementation of the Tobacco Plain Packaging Act 2011 (the Act) and relevant regulations. Law enforcement agencies including the Attorney-General’s Department, the then Australian Customs and Border Protection Service, and the Australian Tax Office participated in the IDC.

As part of the development of the measure, targeted consultations were held with the tobacco industry and other key stakeholders, in addition to public consultations. Targeted consultations with tobacco manufacturers canvassed issues relating to illicit tobacco, focussing on anti- counterfeiting measures that could be included on tobacco products, and feedback from these consultations was taken into account in the development of the packaging design.

The Post Implementation Review (PIR) of the measure completed in February 2016 pursuant to Australian Government administrative requirements for best practice regulation considered the potential effects of tobacco plain packaging on illicit tobacco through the Analysis of Costs and Benefits2 – specifically commissioned for the purposes of the PIR.

Tobacco Plain Packaging The Analysis of Costs and Benefits (published as Appendix C to the PIR), concluded that tobacco plain packaging had not had a substantive impact on the illicit tobacco market in Australia, if any at all. Peer reviewed studies aimed specifically at detecting and measuring changes in the illicit tobacco market over the time of the introduction of plain packaging found that there was no change in smokers’ reported use of unbranded illicit tobacco, no evidence of increases in use of contraband , low levels of use of cigarettes likely to be contraband, and no increase in purchases of tobacco from informal sellers.3

On 15 October 2015 the Australian Border Force’s (ABF) Assistant Commissioner Murray stated that the ABF had not detected any discernible impact on the illicit tobacco trade as a result of the introduction of plain packaging.4

2 Siggins Miller (2016) Consultancy services to inform the development of a Post Implementation Review of the tobacco plain packaging measure: Regulatory Burden Measurement & Analysis of Costs and Benefits. 3 The peer-reviewed studies are also consistent with the Australian Institute Health and Welfare (AIHW) National Drug Strategy Household Survey (NDSHS) data that indicates that the reported use of illicit tobacco in Australia declined from 6.1% in 2007 to 3.6% in 2013. M. Scollo, M. Zacher, K. Coomber and M. Wakefield, ‘Use of Illicit Tobacco Following Introduction of Standardised Packaging of Tobacco Products in Australia: Results from a National Cross-sectional Survey’ (2015) 24 Tobacco Control pp. ii76-ii81; M. Scollo, M. Zacher, S. Durkin and M. Wakefield, ‘Early Evidence about the Predicted Unintended Consequences of Standardised Packaging of Tobacco Products in Australia: A Cross-sectional Study of the Place of Purchase, Regular Brands and Use of Illicit Tobacco’ (2014) 4(8) BMJ Open http://bmjopen.bmj.com/content/4/8/e005873.full (accessed 25 May 2015), page 3. 4 ABC news online, Millions of cigarettes smuggled into Melbourne seized in raids; 15 October 2015. Available at http://www.abc.net.au/news/2015-10-15/millions-of-cigarettes-smuggled-into-melbourne-seized-in-raids/6856290 (accessed on 5 April 2016).

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Tobacco plain packaging: Anti-counterfeiting and supply chain security The Tobacco Plain Packaging Act 2011 provides for tobacco companies to use certain anti- counterfeiting techniques, including alphanumeric codes, barcodes and an unlimited number of covert marks (marks that are not visible to the naked eye), on packaging on a voluntary basis.

As noted in the Department’s previous submission to the Inquiry, with regard to Australia’s accession to the WHO FCTC Protocol to Eliminate Illicit Trade in Tobacco Products, a central element of domestic implementation is the establishment of a global tracking and tracing system. It is likely that such a system of track and trace would require additional elements to be placed on tobacco product packaging which would, under current regulations, be prohibited.

Should the Australian Government determine that a track and trace system is appropriate to effectively secure the tobacco product supply chain, amendments could be made to the Tobacco Plain Packaging Regulations 2011 to accommodate the scheme.

Enforcement of Tobacco Plain Packaging Regardless of whether illicit tobacco is plain packaged or not, it should not be available for sale. Tobacco plain packaging was established as a public health measure and as such, compliance and enforcement mechanisms in the Act are designed to ensure that people accessing tobacco products receive the full benefit of plain packaging as a health measure – they are not intended or designed to counter criminal behaviour.

As the primary aim of enforcement and compliance mechanisms under the Act are to achieve compliance with regulatory requirements, activities under the Act are most often undertaken in a conciliatory manner (including educative responses and issue of warning letters) aimed primarily at quickly rectifying non-compliance.

Compliance and enforcement options include educative responses, issuing of warning letters and infringement notices, and civil proceedings and criminal prosecution. Enforcement action is proportionate to the breach identified, and strategic decisions are made on a case by case basis on the investigation of complaints including, where appropriate, referral to law enforcement agencies.

Compliance and Enforcement action taken by the Department All complaints under the Act are actioned. Complaints of alleged breaches of the Act can be 5 made by anyone (including anonymously) by way of a number of avenues.

Compliance with the Act is generally high – of cases investigated to date, over 65% have been closed with the matter recorded as compliant with plain packaging requirements. Of those nearly 35% of complaints that remain open, many await formal closure after being found compliant after initial inspection, and others will be closed and recorded as compliant following re- inspection.

When a complaint is received from a member of the community (including, from time to time, the tobacco industry), the Department does not, as a matter of course, provide information to the complainant on the progress of investigation or enforcement action – to protect the privacy of the subject of the complaint, and confidentiality of investigations.

5 See: http://www.health.gov.au/internet/main/publishing.nsf/Content/report-tpp2011.

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Excise on Tobacco Products Generally, the development of Australian excise policy is the responsibility of the Treasury. However, the Department has a significant interest in the development of tobacco excise policy owing to the public health impact of tobacco excise policies and Australia’s obligation under the WHO FCTC (Article 6) to implement tax and price measures to reduce the demand for tobacco.

Tobacco excise and illicit trade Whilst excise is the primary tool by which many governments influence the price of tobacco products, and in turn, the price of legal tobacco products can (in some circumstances) influence illicit trade, the experience of many jurisdictions throughout the world indicates that there is no direct correlation between high taxes and the size of the illicit tobacco market.6 In fact, in so far as excise influences the price of tobacco products, Table 1 below demonstrates that there was an inverse relationship between price and the size of the illicit cigarette market across low, middle and high World Bank Income Groups in 2007. Table 1 also demonstrates a strong correlation between the size of the illicit tobacco market and World Bank Income Group (with the lowest income group having the largest illicit tobacco market by proportion of the overall tobacco market).

Table 1: Relationship between legal price of cigarettes and illicit trade in 20077 World Bank Income Group Average legal price of a pack of Average percentage of illicit cigarettes in US $ cigarette market Low-income 1.13 16.8 Middle-income 1.89 11.8 High-income 4.89 9.8

Consistent with the relationship between World Bank Income Group and illicit trade demonstrated in Table 1 (above), there is international evidence to suggest that the size of the illicit tobacco market tends to be driven more by factors related to the supply of illicit tobacco than legal price. These include the cost of supply of illicit product to the market (which is high in Australia due to geographical factors), the presence of informal distribution networks and organized crime, the scale of corruption, the level of law enforcement activity, likelihood of detection and the scale of penalties.8,9

Therefore, even in the event that it could be demonstrated that excise rises have influenced the trade in illicit tobacco in Australia, enforcement is the appropriate response, rather than rolling back or limiting measures demonstrated to be highly effective in reducing prevalence.

Excise increases as an effective tobacco control measure The WHO and World Bank recognise that increasing excise (and therefore the price of tobacco products) will reduce the prevalence of smoking, prevent initiation and uptake among young people, promote cessation among current users and lower consumption among continuing

6 World Health Organization, Illegal trade of Tobacco Products: What you should know to stop it (2015) page 7. Available at http://apps.who.int/iris/bitstream/10665/170994/1/WHO_NMH_PND_15.3_eng.pdf?ua=1&ua=1 7 World Health Organization, Illegal trade of Tobacco Products: What you should know to stop it (2015) page 7 (table). Available at http://apps.who.int/iris/bitstream/10665/170994/1/WHO_NMH_PND_15.3_eng.pdf?ua=1&ua=1 8 International Agency for Research on Cancer (2011). IARC Handbooks of Cancer Prevention, Tobacco Control, Volume 14: Effectiveness of Tax and Price Policies for Tobacco Control. Lyon, France: International Agency for Research on Cancer, World Health Organization. All Party Parliamentary Group, APPG Inquiry into the illicit trade in tobacco products, UK, 2013. 9 Joossens L, Merriman D, Ross H, Raw M. How eliminating the global would increase tax revenue and save lives. Paris: International Union against Tuberculosis and Lung Disease; 2009.

5 smokers.10,11 With regard to tobacco consumption specifically, the WHO regards increasing taxes and prices on tobacco products as the single most effective (and cost effective) tobacco control intervention for reducing tobacco use,12 with a 10% price increase on average resulting in a 4% reduction in tobacco consumption in high income countries.13 The WHO Guidelines for Implementation of Article 6 of the WHO FCTC provide that ‘the inverse relationship between price and tobacco use has been demonstrated by numerous studies and is not contested’.14

In recognition of the effectiveness of excise and price based interventions on reducing tobacco use, the WHO technical manual on tobacco taxation administration recommends that tobacco excise (as a subset of ‘total taxes’ which includes GST) account for at least 70% of the retail prices for tobacco products.15 This best practice recommendation is based on over one hundred studies examining the impact of a wide variety of tobacco excise policies and interventions on tobacco use.

Tobacco excise in Australia As of 1 September 2015, tobacco excise and excise equivalent customs duty in Australia accounted for 51.88% of the total retail price of the most popular brand of cigarettes (Winfield 20 pack). The total of all taxes (excise plus goods and services tax) accounts for 60.98% of the total retail price.

As at mid-2014, Australia’s total taxes applied to cigarettes were sixth highest among the 106 countries who reported average cigarette taxes and prices to the WHO pursuant to their obligations under Article 6 of the WHO FCTC (see Table 2 below). Australia is the only country in the world to index tobacco excise to wage inflation (average weekly ordinary time earnings) meaning that tobacco products do not become relatively more affordable over time.16

As at mid-2014 Australia had the seventh highest after-tax cigarette prices in the world.17 Excise can influence price, and is the primary method by which the Australian government regulates the price of tobacco products. However, recent increases in the price of tobacco products in Australia have not been driven solely by excise increases. Studies have found that when tobacco excise increases, retail prices of tobacco products increase above the level resulting from increases in excise/customs duty even at the lowest-priced end of the Australian market.18

10 International Agency for Research on Cancer (2011). IARC Handbooks of Cancer Prevention, Tobacco Control, Volume 14: Effectiveness of Tax and Price Policies for Tobacco Control. Lyon, France: International Agency for Research on Cancer, WHO. 11 Jha P, Chaloupka F. J. (1999). Curbing the epidemic: Governments and the economics of tobacco control. Washington, DC: World Bank. 12 Chaloupka, FJ, Cummings KM, Morley CP and Horan JK, Tax, price and cigarette smoking: evidence from the tobacco documents and implications for tobacco company marketing strategies. Tobacco Control, 2002. 11:i62-i72. 13. IARC handbooks of cancer prevention: tobacco control. Volume 14: effectiveness of tax and price policies for tobacco control. Lyon, France: International Agency for Research on Cancer; 2011. 14 WHO, Guidelines for implementation of Article 6 of the WHO FCTC: Price and tax measures to reduce demand for tobacco; Adopted by the Sixth Session of the Conference of the Parties to the WHO FCTC in 2014, page 4. 15 WHO Technical Manual on Tobacco Tax Administration. Geneva: World Health Organization, 2010, page 21 and 104. Available at: http://www.who.int/tobacco/publications/tax_administration/en/index.html 16 See discussion of this in WHO Report on the Global Tobacco Epidemic, 2015, page 39. Available at http://apps.who.int/iris/bitstream/10665/178574/1/9789240694606_eng.pdf?ua=1 17 WHO Report on the Global Tobacco Epidemic, 2015, Appendix IX, Table 9.1, Graph 9.2.0, available at http://www.who.int/tobacco/global_report/2015/appendix_ix/en. The prices reported are for a pack of 20 of the most sold brand of cigarettes, in international dollars (at purchasing power parity) as at mid-2014. 18 Michelle Scollo, Megan Bayly, Melanie Wakefield, ‘The advertised price of cigarette packs in retail outlets across Australia before and after the implementation of plain packaging: a repeated measures observational study’ (2015) Tobacco Control;24:ii82-ii89. Available at: http://tobaccocontrol.bmj.com/content/24/Suppl_2/ii82.fullb

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For example, the average price of a single cigarette increased by 34¢ from February 2008 to March 2014: and 15¢ of this increase went to tobacco companies and retailers. A pack of British America Tobacco Australia’s (BATA) Winfield 25’s increased in price from $16.55 in August 2011 to $18.75 in February 2013. Of that $2.20 increase, only 44¢ was attributable to increases in excise – the remaining $1.76 represented an increase in profit margins for BATA and retailers.19

Table 2: Average total taxes applied to a pack of 20 cigarettes as at 31 July 201420 Rank Country Average total taxes in international dollars (at purchasing power parity) 1 United Kingdom 9.11 2 Ireland 8.68 3 Singapore 8.15 4 New Zealand 7.96 5 Norway 6.25 6 Australia 6.21

19 Neil Chenoweth, ‘Tobacco companies’ $2.2b payday’, Australian Financial Review, 2 July 2014 – citing data provided by the Cancer Council Victoria. 20 Source data - WHO, Report on the Global Tobacco Epidemic 2015, Appendix 9, Table 9.5. Available at http://www.who.int/tobacco/global_report/2015/appendix_ix/en/

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