The Two Faces of the Tobacco Industry Shouting about Illicit Trade While Still Complicit in it



Sunday 31 May 2015

A new briefing paper from Action on Smoking and Health, published on World No Tobacco Day (theme: “Stop illicit trade of tobacco products), reports on how the tobacco industry is showing its two faces over the illicit tobacco trade [1]:

• It uses the threat of illicit trade to try to stop Government action to reduce smoking and tobacco consumption, exaggerating its extent in the UK, while still being complicit in the trade itself – particularly in the diversion of genuine tobacco products into illicit channels
• It exaggerates the extent of illicit trade, and distorts the key features of the trade, particularly by inflating the proportion of illicit cigarettes and tobacco products that are counterfeit, and under-estimating the proportion that are genuine
• It uses illicit trade to try to develop inappropriate relationships with Governments, local authorities and enforcement agencies.

According to HM Revenue & Customs, in 2013/14 an estimated 10% of cigarettes and 39% of hand rolled tobacco consumed in the UK were illicit. The estimated lost tax revenue was £2.1 billion. Starting in 2000, HM Customs and Excise, and its successor bodies HM Revenue and Customs and Border Force, have implemented detailed strategies to tackle the illicit tobacco trade. The most recent was published in March 2015. Spending on tackling illicit trade is highly cost effective, and the estimated level of illicit trade has fallen by half since 2000.
The tobacco industry routinely exaggerates the extent of illicit trade and misrepresents the nature of the illicit market. KPMG produces “Project Star” reports on illicit trade in the EU for Philip Morris International. The KPMG estimate of the illicit trade in cigarettes in the UK in 2012 was 16.4% of the total market: HMRC figures for 2012/13 showed a level of 9%. [2] Industry material on illicit trade focusses on counterfeit products and cheap whites and routinely underplays the issue of legitimate products being smuggled back into the UK market.

During the 1990s there was a vast expansion in British cigarettes being sold overseas in bulk to countries like Afghanistan, Moldova, Latvia and Russia and then smuggled back to the UK. In June 2002, George Osborne MP, then a member of the Committee made the following remarks to witnesses from Imperial Tobacco:
“One comes to the conclusion that you are either crooks or you are stupid, and you do not look very stupid. How can you possibly have sold cigarettes to Latvia, Kaliningrad, Afghanistan and Moldova in the expectation that those were just going to be used by the indigenous population or exported legitimately to neighbouring countries, and not in the expectation they would be smuggled?” [3]
In 2000 the European Commission and Member States began legal action against the tobacco industry in the United States. Between 2004 and 2010 Philip Morris International (PMI), Japan Tobacco International (JTI), British American Tobacco (BAT) and Imperial Tobacco Ltd all signed legally binding anti-smuggling agreements with the EU, paying billions of dollars in total to the EU and Member States. The agreements require them to prevent smuggling of their cigarettes, limit sales to volumes commensurate with legitimate market demand and to pay additional amounts if their cigarettes are subsequently found to be smuggled. However, the EU agreements have been strongly criticized as insufficiently strong to deter the industry from continuing complicity in illicit trade, and in particular as under-representing the proportion of illicit trade that is made up of genuine products that have been diverted into illicit channels. [4]

But in November 2013 the UK Parliament’s Public Accounts Committee accused tobacco multinationals of deliberately oversupplying European markets, with the tobacco smuggled back into the UK. Committee Chair Margaret Hodge said: “The supply of some brands of hand-rolling tobacco to some countries in 2011 exceeded legitimate demand by 240 per cent. HMRC must be more assertive with these manufactures. So far it has not fined a single one of them.” In November 2014, British American Tobacco was fined £650,000 by HMRC for deliberate over-supply of cigarettes to Belgium. Trading standards officers across nine English regions recently took part in “Operation Henry”, a programme of search and seizures of illicit tobacco. Between May and November 2014, more than 2.5 million cigarettes were seized together with other tobacco products including hand-rolled tobacco, raw tobacco, and shisha tobacco. More than 70% of the cigarettes seized were genuine products diverted into illicit channels. HMRC estimates of the proportion of genuine products have been as low as 9%.

Action on Smoking and Health strongly supports the HMRC and Border Force strategy for fighting illicit trade, but warns that if funding for enforcement is cut in the next Comprehensive Spending Review, the level of illicit trade will inevitably start to rise. Cuts to local authority trading standards departments across the country also threaten the fight against illicit trade at local and regional level.

ASH Chief Executive Deborah Arnott commented:

“The illicit tobacco trade remains a serious problem in the UK and around the world. But even though the UK has high tobacco taxes, effective enforcement action by HM Revenue and Customs and Border Force nationally, and action at the European and local levels too, has helped halve the level of illicit tobacco in the UK since 2000. Provided we keep funding this work properly, we can continue to make major steps forward in cutting illicit trade. But that won’t stop the tobacco industry from routinely using the threat of illicit trade to try to block tobacco control measures, most recently standardised packaging.

Our briefing paper shows the appalling hypocrisy of the industry: they have been shouting about illicit trade, while remaining up to their necks in it themselves. Nothing the tobacco firms say about illicit trade should be taken at face value. The truth they are trying to hide is that tobacco smuggling can and must be fought while we also cut smoking rates.”

ENDS

[1] ASH Briefing: Illicit Tobacco: What is the tobacco industry trying to do?

[2] Note 9% is mid-point estimate. HMRC’s upper estimate was 13%, still considerably lower than the KMPG figure.

[3] House of Commons Public Accounts Committee. Tobacco Smuggling: Third Report of Session 2002-3.
[4] End European agreements with tobacco industry designed to curb smuggling, urge experts: Tobacco Control, 28/5/2015