Rampant cigarette smuggling forcing swingeing spending cuts on the Irish Government

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 21^st 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.

Making Sense of The National Recovery Plan 2010-2014

The Irish Government estimated that total tax revenue for 2010 would be €31.05 billion. Government expenditure (capital and current) for 2010 was forecast to be €61.17 billion, a 3% reduction over 2009.

Tax revenue for 2003 was €32.1 billion and total voted Government expenditure that year was €30.74 billion. The exchequer deficit that year was €978,020 million. The National Debt in 2003 was €37.61 billion.

Government expenditure in 2003 and 2010 compares as follows:

	2003	2010	Spending Change
Agriculture, Fisheries & Food	829,787	1,758,806	+929,019
Communications, Energy & Natural Resources	299,015	517,922	+218,907
Community, Equality & Gaeltacht Affairs	257,810	419,195	+161,385
Defence	839,043	964,377	+125,334
Education & Skills	5,680,888	8,883,040	+3,202,152
Enterprise, Trade & Innovation	1,025,054	2,011,370	+986,316
Environment, Heritage & Local Government	2,307,765	2,195,483	-112,282
Finance	1,122,398	1,453,795	+331,397
Foreign Affairs	543,947	754,217	+210,270
Health & Children	7,954,540	15,324,452	+7,369,912
Justice & Law Reform	1,718,131	2,487,484	+769,353
Social Protection	5,611,921	20,959,799	+15,347,878
Taoiseach	127,792	185,819	+58,027
Tourism, Culture & Sport	393,306	504,980	111,674
Transport	2,030,225	2,758,046	+727,821
(MILLIONS of  EURO)	€30,741,622	€61,178,785	€30,437,163

The National Debt is currently €89.5 billion. The 2010 exchequer deficit to October 2010 is €14.37 billion.

The National Recovery Plan 2011 – 2014 provides for overall savings of 11.43% over 2010 expenditure with the greater burden, in percentage terms, falling on Foreign Affairs, Taoiseach, Justice, & Law Reform, Environment, Heritage & Local Government, Full details of the proposed cuts are as follows :

€ Million % Change from 2010 Agriculture, Fisheries & Food 221,000 -12.57% Comms, Energy & Natural Resources 20,000 -3.86% Community, Equality & Gaeltacht Affairs 35,000 -8.35% Defence 106,000 -10.99% Education & Skills 690,000 -7.77% Enterprise, Trade & Innovation 47,000 -2.34% Environment, Heritage & Local Gov 311,000 -14.17% Finance 85,000 -5.85% Foreign Affairs 187,000 -24.79% Health & Children 1,445,000 -9.43% Justice & Law Reform 370,000 -14.87% Social Protection 2,825,000 -13.48% Taoiseach 35,000 -18.84% Tourism, Culture, Sport 76,000 -15.05% Transport 139,000 -5.04% Other Measure 400,000   €6,992,000

Moral hazard of nationalising Anglo Irish Bank

The response of many prominent Fianna Fáil politicians to the result of the elections last Friday was to plead for more effective communication of Government actions. The saga of Anglo Irish Bank must provide a specimen illustration of ineffective communication.

It was nationalised on January 15^th, less than a month after the abrupt resignation of former Chairman, Seán FitzPatrick, fellow director, Lar Bradshaw who has been the Government appointed director of the Dublin Docklands Development Authority, David Drumm former Group Chief Executive, William McAteer, Group Financial Director and Chief Risk Officer, to mention but a few. McAteer is a former partner of PricewaterhouseCoopers. The current chairman of the nationalised bank was managing partner of that firm for a number of years. But the Government has failed to educate and convince the public that maintaining Anglo is in the national interest.

John McManus, has written a very compelling article in today’s edition of The Irish Times that argues the time has come to shut Anglo Irish Bank for good and the argument that it is too costly to close it is false.

No State money was invested since nationalisation but the begging bowl is out now. When the 6-month report to 31 March was issued on 29 May there was an immediate demand for €4 billion of additional capital. It was also signalled that further losses of €3.5 billion are anticipated. Anglo had assets of €101 million when it was nationalised. But the results at 31 Mar have diminished to €88.5 billion in a matter of 75 days since nationalisation.

The nation's capacity to bail out zombie banks is not infinite, nor is there much faith in their capacity to redeem themselves without extensive changes at the top. The National Pension Reserve Fund was valued at €15.5 billion on 31 March, having lost 30.4% of its value in the previous year. €7 billion of this has been invested in AIB and Bank of Ireland and if €4 billion is to be immediately committed to Anglo and a further demand for €3.5 billion is lurking in the shadows, the nation's sovereign wealth will amount to a mere €500 million.

The incidence of moral hazard is never far away when a fairy grandmother emerges to bail out an errant entity, and the former discipline of the stock market no longer prevails. It has emerged that Anglo made loans of €175 million to 10 directors and that €31 million of these are impaired. Would this impairment arise if the State was not involved and the stock market had to be impressed by the prowess of the business?

Apart from FitzPatrick who owes €106 million, Bradshaw, Drumm and McAteer the former directors were Tom Browne, Fintan Drury, Noel Harwerth, Anne Heraty, Michael Jacob, Gary McGann, Ned Sullivan, Declan Quilligan and Pat Whelan.  The former board received emoluments of €11.5 million in 2008, a slight reduction on the €12.9 million doled out in 2007.  But these far-sighted people decided that, had they remained, fees for non-executive directors would have been reduced by 20%!

This success of nationalisation is predicated on maximising the collection of outstanding liabilities. What signal is conveyed by a high incidence of impairment in the directors' loan account? There should be no directors loans whatsoever outstanding in a nationalised company.

The immediate call on State support of €4 billion immediately, is apparently to be made before the investigation of the Garda Fraud Squad and Office of the Director of Corporate Enforcement is completed. Impaired loans amount to €10.7 billion and a further €12.9 billion are deemed, at this stage, to be 'past due, but not impaired'. But they could be against this background. Loans of over €300 million, provide by Anglo to its own customers to buy Anglo shares, are now impaired and await the pleasure of the Irish taxpayer.

The cost of running Anglo Irish Bank, now a State enterprise is exorbitant. The average salary for the 1,753 employees for six months was €48,488 (equivalent to €96,976 per annum). A comparison with those public entities that engage with Anglo reveals that the average salary at the Department of Finance in 2009 will be €58,601, while the average salary of staff in the Office of the Director of Public Prosecutions is anticipated to be €64,946.

The Minister for Finance advised that nationalisation would mean "drawing a line under past activities". As the Minister is the only shareholder, why was it even necessary to engage a public relations firm in connection with the publication of the first interim statement since nationalisation? If the intention is to signal the drawing of a boundary with life under the ancient regime, why would the new board of directors and not be bold enough to 'go for change' rather than choose Drury Communications, a public relations firm established by Fintan Drury?  Drury was a former director of Anglo Irish Bank until June 27 2008. He was paid €85,000 in 2008 as a retainer to attend 4 board meetings and 6 meetings of the Anglo Risk and Compliance Committee and 2 meetings of the Nomination and Succession Committee.  Surely there is some due out of a staff of 1,753 that could coherently articulate what is happening, or have all those with these qualities already resigned?

The Government has not done enough to convince the public of the systemic importance of either Anglo Irish Bank or Irish Nationwide Building Society. The McManus article suggests that since it is most unlikely to redeem its reputation. Customer funding has dropped from €47.8 billion on 30 September to €34.1 billion on 31 March – driven by “a market wide aversion to risk”. But is also reflects the decrease of €7.3 billion of customer deposits received from Bowler’s Irish Life Assurance Company that was designed to hoodwink stakeholder at the end of the last financial year – 30 September 2008. 

Customer lending, to existing customers, increased fractionally from €71 million to €72.3 million and €700 million of this concerned capitalised interest and the roll-up of other interest outstanding.  Basically it is a matter of endemic stagnation combined with a ruined reputation and an open-ended drain on public funds.

Ireland’s credit rating was reduced on June 8th to AA negative by Standard & Poor’s on account of the fiscal cost of weakening bank sector asset quality.

Ireland’s Fiscal Tightrope

The Irish Exchequer Statement for the five months ending 31 May 2009 show that the Government has spent €25.6 billion and had an income, from tax and other sources of €15 billion.  This leaves an Exchequer deficit of €10.5 billion, financed by borrowings of €8.9 billion and other deposits of €1.6 billion.  Interest paid on Government debt amounts to €1.58 billion.

The table below summarises the profile of tax receipts and compares these to Profile of Exchequer Tax Revenue Receipts 2009.  The State is €37.2 million ahead of projections in the aftermath of the April 2009 Budget.

Tax Receipts for 5 months to 31 MAY 2009

€ Million	Projected	Actual	+ / -
Customs	92,000	88,280	-3,720
Excise	1,655,000	1,753,832	98,832
Capital Gains	202,000	189,226	-12,774
Capital Acquisitions Tax	116,000	105,890	-10,110
Stamps	315,000	294,370	-20,630
Income tax	4,589,000	4,634,263	45,263
Corporation Tax	1,012,000	1,138,985	126,985
VAT	5,511,000	5,305,559	-205,441
Training and Employment Levy		831
Unallocated	0	18,046	18,046
TOTAL	€13,492,000	€13,529,282	37,282

Spending at the Department of Agriculture & Food is €248 million more than this time last year and should be considered in the context of the output of agriculture and fisheries is a mere €3.88 billion, having dropped from €4 billion in 2005.

Health expenditure is €200 million ahead of last year and welfare spending is , predictably, €457 million ahead of this time last year, following steep increases in the Live Register.

One item of expenditure that is noteworthy is the €6.33 million paid to the Leaders of the political parties, pruned by 10% but this is partially offset by the overhead to run the Leinster House enterprise - €367,000 more expensive than last year.

The cost of the local and European elections amount to €8.5 million.

Cumulative Fiscal Progress – 2009

 

Month	Total Receipts €	Total Expenditure €	Exchequer Deficit €	Borrowing €
Dec 2008 (Year)	43,021,778	55,735,598	-12,713,820	30,310,525
Jan	4,281,998	5,029,215	-747,217	6,674,212
Feb	6,577,074	8,661,834	-2,084,760	6,398,172
Mar	9,433,404	13,154,149	-3,720,745	10,234,357
Apr	11,645,341	18,961,729	-7,316,388	6,579,469
May	15,090,952	25,678,595	-10,587,643	8,987,279

If the axe really fell on Irish Government spending, where would it be felt?

I was listening to Batt O’Keefe TD, the Minister for Education on RTE radio news this afternoon blathering about the government having a "€54 billion spending commitment to be funded by €34 billion in tax revenue" (if they are lucky!) He had been to the INTO conference in Letterkenny where, it is said, he received a ‘cool reception’ - no applause from the delegates.

What would happen if the Government really did swing the axe and align spending with revenue, as they will inevitably have to? Current outgoings cannot be funded by spiralling borrowings, on top of which provision must be made for extraordinary State borrowing to rescue the dumb, profligate overpaid bankers, after their delusionary programme to convert every dungaree-wearing driver of a Toyota HiAce van to become an Aston Martin owner wearing a navy blue crombie with a suede collar, imploded with an unspeakable deluge of bad debts and hand-washing.

The population of Ireland increased by 11% between 2003 and 2008. Our tax revenue increased by 27%. A growth in public spending of this scale may have been sustainable but our public expenditure actually increased by 60% between 2003 and 2008 - only to be surpassed by the emoluments paid to top bankers.

The Department of Communications, Marine and Natural Resources was the only government department which reduced spending in this 5-year period and this was accomplished by spending €50 million less!

Welfare increases, which outstripped those prevailing the neighbouring jurisdiction, were an important component of the overall increase. Welfare spending increased by €3.7 billion in what was a relatively benign environment from a welfare perspective. Unemployment in 2003 was 88,000 and the Live Register recorded 172,414. The labour force expanded from 1.89 million in 2003 to 2.2 million in 2008. We certainly needed to augment and enhance infrastructure to cater for this unprecedented growth.

IBEC advocated a radical cut-back in welfare spending before the budget. Its director general, Turlough O'Sullivan, is to retire shortly. He will be relieved to be beyond the ambit of socially dysfunctional politicians. But when the time comes for him to reside in a room full of geriatrics, who are sitting in a collective puddle of piss, he might reflect on what it is like to be thought of as nothing more than an inconsequential, voiceless 'demographic entity' in the calculus of Ireland's pertnership movers and shakers. There is nothing like the rasping, self-righteous cadence of a Northern Ireland accent on the media airwaves to emphasise this perspective, whatever one might say about the prudence of our generous welfare system. It is the perfect foil to the 'inheritance brats' as defined by Paul Sweeney, economic advisor at the ICTU.

The April budget was designed to raise €1.8 billion to cope with a collapse in tax income but there was very modest cuts in public expenditure.

If the Government was prune up to €20 billion off its spending to match its income and 2003 spending patterns were adopted as a guide the following cuts are indicative of what would be necessary to balance the budget at a departmental level:

• Agriculture & Food -€866 million
• Arts, Sports & Tourism -€313 million
• Communications, Marine and Natural Resources –no change
• Community, Rural & Gaelteacht Affairs -€235 million
• Defence -€220 million
• Education and Science - €3.35 billion
• Enterprise, Trade & Employment -€409 million
• Environment, Heritage and Local Government - €847 million
• Finance / Revenue Commissioners - €284 million
• Foreign Affairs - €440 million
• Health and Children - €5.8 billion
• Justice -€873 million
• Social and Family Affairs - €3.70 billion
• Taoiseach - €58 million
• Transport -€1.07 billion
  TOTAL €18.46 billion!

But as the Live Register now lists over 370,000 people and and additional €4 billion in welfare expenditure has been provided for in the April budget, the foregoing cuts are nonsensical because, in practice, there would be no €3.7 billion cut in welfare spending and the net additional €7.7 billion to fund welfare would have to be obtained through additional cuts, over and above those indicated here, to reach the €18 - 20 billion spending cut target!