Contraband and counterfeit cigarettes - guide

14 December 2007
by eub2 -- last modified 14 December 2007

The European Commission, together with 26 participating Member States of the European Union, and JT International (JTI) on 14 December 2007 announced a multi-year agreement that includes an efficient system to fight against future cigarette smuggling and counterfeiting. Through the Agreement, JTI will work with the European Commission, its anti-fraud office OLAF, and law enforcement authorities of the Member States to help in the fight against contraband, including the problem of counterfeit cigarettes. The Agreement includes substantial payments by JTI, which total USD 400 million over fifteen years.

How was the agreement with JTI negotiated?

The negotiations lasted for over two years. The EC and the participating Member States were represented in the negotiations by the European Commission. The Legal Service and OLAF conducted the negotiations for the Commission. All Member States were invited to participate. During the negotiations the Commission regularly informed and consulted the participating Member States.

Will the agreement affect the Commission's actions against tobacco consumption or general tobacco control policy?

This agreement is aimed solely at combating illicit trade in cigarettes. It will have no effect on policy to combat tobacco consumption, nor will it hinder the Commission from continuing to regulate the tobacco industry.

What are the similarities with the PMI agreement?

There are similarities as to the problems that need to be addressed as well as their scope. Both agreements target these problems. However, the agreements are tailored to the respective business models of each company.

What are the estimated losses for the EC and the participating Member States from cigarette smuggling?

Hundreds of millions of euros are lost to the national and Community budgets each year due to the smuggling of both genuine and counterfeit cigarettes. On a single 40 foot container of smuggled cigarettes (10 million cigarettes) the average loss of customs duty, excise duty and VAT is € 1.5 million. In the UK the loss would be about three times as big because of the UK’s higher taxes.

What are your estimates of current levels of cigarette contraband in the EC and how will this agreement affect those numbers?

In the past, a key concern was the presence of genuine product in contraband channels. In the meantime European law enforcement efforts, coupled with the policies and technologies of manufacturers such as JTI, have succeeded in greatly reducing the amount of smuggling of genuine product into the EU. However, as the problem of smuggling of genuine product has been reduced, the problem of counterfeit products has increased. Currently the major threat is now the production and smuggling of counterfeit cigarettes.

Annual losses of revenue in the European Union can be estimated, on the basis of seizures of cigarettes notified by the the Member States, at about € 6 billion, of which about 10% would be revenue for the European Union budget. Also, it is estimated that about 65% of the seized cigarettes are counterfeit.

The initiatives in the agreement will help to substantially reduce the total amount of counterfeit cigarettes in the EU, and to reduce even further — and hopefully eliminate completely — the smuggling of genuine cigarettes.

Who are the largest producers of cigarettes on the world tobacco market?

Currently, smokers consume over five trillion cigarettes a year worldwide. China is the world's largest cigarette market with 35% of global volumes, both in terms of production and consumption. Outside China, the largest producers are the following: Altria (Philip Morris) 18.2%, British American Tobacco (BAT) 12.3%, Japan Tobacco (JT) 10.8%, Imperial Tobacco 3.3% and Altadis 2.1% (Source: The Maxwell Report).

Where do counterfeit cigarettes come from?

China is still the biggest source of counterfeit cigarettes, but they also come from countries on the eastern border of the EU (for example, Russia and Ukraine). But many illegal factories have been discovered within the Member States, and they are also a significant source of supply of counterfeit cigarettes.

Where do smuggled genuine cigarettes come from?

Genuine smuggled cigarettes come from a variety of sources. Recent trends show that the current main source countries outside the EU are Russia, Ukraine, Moldova, and Belarus. One component affecting current smuggling trends is the price differential between cigarettes in these markets as compared to the prices within the EU. Large profits can be made by smuggling the cigarettes to markets where prices are higher.

Counterfeit is a different problem, and can be sourced from a variety of illegal manufacturing sites located almost anywhere, both within the EU and abroad in places like China, where we see an increasing problem of counterfeit exports.

Are cigarettes smuggled in large or small consignments?

There are many methods. Counterfeit cigarettes from China can often be discovered in 40 foot containers (containing about 10 million cigarettes). But smuggling in lorries, trains, private cars, by post, and even concealed on the body of individuals is also a serious problem.

Is the smuggling of tax-paid cigarettes from one Member State to another a problem?

There is abuse in relation to the movement of tax-paid cigarettes between Member States with lower rates of tax and Member States with higher rates of tax (“bootlegging”). Such cigarettes can move freely if they are bought and transported by a person who obtains them for his/her personal consumption. But, in practice, individuals and organised gangs arrange for large-scale purchases of tax-paid cigarettes in a lower-tax Member State and then transport the cigarettes to a higher-tax Member State and sell them there on the illegal market without paying the appropriate taxes and duties. Since taxes are in fact paid on the cigarettes, this is not covered by the today's agreement.

Which brands are smuggled most?

It depends on the market for which the cigarettes are destined. For example, brands which are popular with French smokers tend to be smuggled into France. All the leading brands in each Member State are smuggled or counterfeited.

What are the latest problems?

Genuine production, and subsequent illegal import, of new cheap brands in countries outside the EU is a growing problem. They are an alternative to counterfeit cigarettes, and are popular with consumers.

How many cigarettes are seized by the Member States each year?

The quantities notified to OLAF by the Member States are as follows (the figures do not include the very many seizures of smaller amounts and cannot distinguish between genuine and counterfeit cigarettes):
1996: 3,071,181,000 cigarettes
1997: 2,640,419,000 cigarettes
1998: 4,719,350,000 cigarettes
1999: 5,690,100,000 cigarettes
2000: 6,232,500,000 cigarettes
2001: 3,090,910,000 cigarettes
2002: 2,286,470,000 cigarettes
2003: 2,185,990,000 cigarettes
2004: 3,098,470,000 cigarettes
2005: 3,445,690,000 cigarettes

2006: 3,269,080,000 cigarettes

NB. Figures for 2001-2006 exclude seizures made by the UK.

What percentage of seized cigarettes is counterfeit?

It is not possible to make an accurate estimate, but in the EU as a whole something between 50% and 75% of seizures could be counterfeit. For example, in the port of Antwerp the Customs discovered the following quantities of cigarettes:

• 2004: 250 million cigarettes (78% counterfeit)
• 2005: 239 million cigarettes (94% counterfeit)
• 2006: 120 million cigarettes (82% counterfeit).

What happens to seized cigarettes?

Seized cigarettes are normally initially stored in customs warehouses waiting for the outcome of any judicial proceedings. However, they are then usually destroyed in accordance with national law. All counterfeit cigarettes are destroyed.

What is OLAF’s role in fighting cigarette smuggling?

OLAF has a dedicated group of investigators (the “Task Group Cigarettes”) which deals with cigarette smuggling. These investigators work with the enforcement authorities (customs, police, tax authorities) of the Member States and third countries to combat smuggling and counterfeiting, to find evidence to disrupt the frauds and to allow the Member States to recover evaded taxes and duties and to prosecute the persons responsible for the frauds.

OLAF plays an active coordination role and also takes the lead in investigations. The Hercule programme for 2007–2013 also specifically identifies the possibility for the Commission to fund anti-cigarette-smuggling efforts, and in particular equipment.

What is the Hercule II programme?

The Hercule II programme is a Community programme to fight against fraud affecting the financial interests of the EU. It has been used to finance training and technical assistance, and since 2007 also contains funds which are to be used for anti-fraud purposes, including the fight against cigarette smuggling and counterfeiting. Money can be used for the procurement of anti-fraud equipment, training and grants. This programme will receive € 98.5 million over seven years.

What is being done by OLAF to stem the flow of contraband from third countries?

The Community has mutual assistance agreements with many third countries, including China and the USA, which allows OLAF, the enforcement authorities of the Member States and the competent authorities of third countries to work together and to conduct joint administrative investigations to combat smuggling and counterfeiting.

In addition, a first overseas liaison officer for OLAF will be placed in Beijing, People’s Republic of China, at the beginning of 2008. OLAF’s liaison officers will work closely with the overseas liaison officers of the Member States.

What is the global market share of JTI?

JT International is part of the JT Group, the world's third largest international manufacturer of tobacco products with a current market share of 10.8% globally. Brands include Winston, Camel and Mild Seven, as well as Benson&Hedges, Silk Cut, LD, Sobranie and Glamour. Total tobacco net sales amount to USD 14.4 billion in the fiscal year ended March 31, 2007. JTI is present in over 60 markets with 23,000 employees, and sales activities in over 120 countries. It is also the third largest European manufacturer. European markets where JTI has a share of market greater than 30% are Ireland, Austria, the United Kingdom and Sweden. Other significant markets are Romania, Spain, Italy, France, Greece and the Benelux countries.

Source: European Commission