The Irish Government intends to cut the Education Budget by €916 million between what it spent in 2010 and what it intends to spend in 2014. That sum is comparable to the exchequer revenue that will be lost as a result of cigarette smuggling even if Customs succeed in executing 50,000 seizures worth a further €1 billion in lost taxes. Less than half of smuggled cigarettes are seized by the authorities according to anecdotal evidence and research.
Last year the Irish Government collected €4.6 billion in excise duties, of which over €1 billion was in respect of cigarettes. The tax component of cigarettes in Ireland is of the order of 80% of the retail price and the price of cigarettes in Ireland is among the highest in the European Union.
The ban on smoking in the workplace introduced in 2004 and the high price of cigarettes combined with rampant smuggling have been a deterrent on demand causing cigarette consumption of duty-paid cigarettes to drop by 41% since the smoking ban became law.
While total tax receipts from cigarette smokers have fallen by just 7%, the Irish Exchequer has lost an estimated €1.6 billion in exchequer receipts since 2004 as a consequence of cigarette smuggling, making this one of the most costly losses to the State. The European Union states are said to lose €10 billion per year as a consequence of the trade in illicit cigarettes.
Our customs authorities have undertaken more than 710 million cigarettes in more than 55,500 seizures in the past five years with an associated revenue loss to the State of over €290 million. But anecdotal and research evidence suggest that non duty-paid cigarettes is equivalent to 23% of total consumption.
Some of this is accounted for by the legitimate importation of cigarettes by bona fide international travellers and by immigrants from countries with a lower incidence of taxation on cigarettes.
The European Court of Justice banned Ireland, France and Austria from imposing State-controlled minimum prices.
The black market price of cigarettes in Ireland can be as low as 40% of the prevailing retail price.
But behind the 54,500 detections and seizures of illicit cigarettes in Ireland is an elaborate criminal complex that is heavily embedded in trafficking because the penalties are lower than is the case for involvement with other contraband and the profits large. The modus operandi ranges from ‘ant’ smuggling when small groups make frequent cross-border visits to large-scale container shipments and the 710 million cigarettes smuggled into Ireland in 2011 would have required seven fully laden 40-foot containers to transport them.
China, Russia and the Commonwealth of Independent States and some Baltic States are major source countries. Transhipment of large volumes before entry into the EU occurs in order to conceal the scale of activity with Middle East duty-free ports being a preferred venue.
Apart from Ireland, other sought after destinations in the EU are Germany, Spain and the UK.
There are various categories of smuggled cigarettes. Some are genuine but another category are known as ‘cheap whites’ – the term for cigarettes produced independently of normal manufacturers. Cheap white are typically cheap brands of reasonable and consistent quality, unlike counterfeits. The most popular ‘cheap white’ brand is Jin Ling, a brand that had not been heard of in 2005 but which is intended to mimic Camel cigarettes, which is manufactured in the Russian seaport enclave of Kalingrad, Ukraine and Moldova. This brand alone accounts for over 20% of the German illicit market. Five Russian illicit cigarette factories are said to have the capacity to make 24 billion sticks per year, equivalent to 7% of annual legal imports into the EU. This brand has no legal legitimacy in any part of Europe. It is distributed and sold exclusively through underground networks. The packs do not even feature the standard health warning on all normal packs.
The United Arab Emirates is another critical source of cheap whites from where they are shipped into Europe via Greece.
China is the largest source of counterfeit cigarettes of well known brands, such as Marlboro and this merchandise is typically shipped into Europe by sea.
There are also illegal cigarette factories in the EU, especially in Poland and some Baltic States with much of the output ending up in Germany. The tobacco is frequently sourced in Ukraine; while other factors are obtained in Lithuania and the manufacture takes place in Poland.
Last year a case was initiated in France that involved five countries: Hungary, Slovak, Czech, Germany and Italy against a large network operating from Ukraine to the United Kingdom. More than 150 personnel were deployed to support local police. This investigation uncovered the existence of a structured criminal organisation based in Ukraine which operated through front companies in several EU Member States. These companies established fictional commercial routes which concealed fraudulent activity using normal shippers. Transhipments were arranged in France through normal logistics companies. Illicit shipments were blended with legal cargoes of vegetables, fish, building supplies, peat moss, cardboard, paper etc. Key personnel were arrested in a coordinated and simultaneous police action on June 21st 2011.
The financial loss arising from cigarette smuggling is borne by governments and taxpayers, not by producers or distributors who make their profit when the product is sold, not when it is taxed at the point of importation.
The response of Ireland’s Revenue Commissioners is to ‘target and confront those who do not comply’ with their obligations under tax and duty regulations. A key objective is to deter smugglers of tobacco products and to reduce the availability of contraband in Ireland. The overall approach includes:
- Educating the public on the negative aspects of contraband and media coverage of prosecutions. There were 14 convictions for customs offences in 2011.
- Ensuring that the legitimate trade remains compliant – excise duty collection; verification of sales figures; testing the legality of products sold
- Visible interventions – through more streamlined deployment of resources; the use of analytics, trend analysis of assessments.
- Improved collaboration with other State entities, including the Criminal Assets Bureau, Gardaí, shippers and others
- Prosecuting cases. There were over 200 formal Revenue criminal investigations in 2011
Philip Morris entered into an agreement with ten Member States of the European Union in 2004,that did not include Ireland, to fight cigarette smuggling and counterfeiting activity by making substantial payments to support additional measures and procedures. This also covered procedures to track and trace its cigarettes.
But smuggling is also sustained by other factors, including:
- The involvement of legitimate cigarette companies in smuggling activities. This has resulted in convictions in Hong Kong and Canada.
- The lack of more secure systems for transporting cigarettes giving smugglers access to large volumes of cigarettes free of all taxes and duties
- Price differentials. The highest prices in Europe are those charged in the UK and Ireland.
- Duty-free sales provides a venue for large volumes of cigarettes and smuggling opportunities
- Lack of resources to tobacco enforcement in most countries make it more difficult to eradicate smuggling
- Some countries tolerate smuggling more than others when enforcement is lax, penalties low, corruption widespread and smuggling is not deemed a serious crime.