CONFRONTING
LLICIT TOBACCO
TRADE:

A GLOBAL REVIEW
OF COUNTRY
EXPERIENCES

TECHNICAL REPORT OF THE WORLD BANK GROUP
GLOBAL TOBACCO CONTROL PROGRAM.

EDITOR:
SHEILA DUTTA
A
CONFRONTING
ILLICIT TOBACCO
TRADE
A GLOBAL REVIEW
OF COUNTRY EXPERIENCES
CONTENTS
AC KNOW L E D GM E NTS VII

EX EC U T I V E SUM M ARY XI

I N T RODUC T ION XXV

THE PROTOCOL TO ELIMINATE ILLICIT TRADE
IN TOBACCO PRODUCTS
A Global Solution to a Global Problem 1

AUSTRALIA, CANADA,
& EUROPE
AU S T RA L I A
Addressing the Illicit Flow of Tobacco Products in Australia 14

C A NA DA
Controlling Illicit Tobacco Trade 50

EU ROPEA N UNION
Confronting Illicit Tobacco Trade: An Update on EU Policies 72

GEORGI A
Controlling Illicit Cigarette Trade 92

I RE L A N D
Addressing the Illicit Flow of Tobacco Products 118

U N I T E D KI NGDOM
Tackling Illicit Tobacco 162

III
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

LATIN AMERICA &
THE CARIBBEAN
ORG AN I ZAT ION OF EAS TE RN
CARI B B EA N S TAT ES ( OE CS ) AND
T RI NI DA D A N D T OBAG O
Regional Reports on Illicit Tobacco Trade 226

CH I LE
Tackling the Illicit Tobacco Trade 254

COLOMB I A
Illicit Cigarette Trade 292

E C UAD OR
Addressing Illicit Tobacco Trade 322

M E XIC O
Controlling the Illicit Cigarette Trade 344

U RUG UAY
Tackling Illicit Tobacco Trade 364

SOUTH ASIA &
EAST ASIA
B ANG L A DE S H
Illicit Tobacco Trade 406

IV // Contents
I N D ON ES I A
Tackling Illicit Cigarettes 438

MA L AYSI A
Addressing the Illicit Flow of Tobacco Products 468

PH I L I PPI N E S
Addressing the Illicit Flow of Tobacco Products 484

SUB-SAHARAN AFRICA
S OU T H E RN AFRICA CUS TOM S UNION
( B O T S WA NA , LE S OTHO, NAM IBIA, S OUTH
A F RIC A , A N D E S WATINI) AND ZAM BIA
Addressing the Illicit Flow of Tobacco Products 506

BO T SWA NA , LE S OTHO, AND
S OU T H A F RICA
An Analysis of Alcohol and Cigarette Prices in Maseru,
Gaborone, and Neighboring South African Towns 550

KEN YA
Controlling Illicit Cigarette Trade 580

S EN EGA L
Addressing Illicit Tobacco Trade 604

V
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

TOBACCO TAX ADMINISTRATION
A Perspective from the IMF 628

C ONC LU S ION 642

VI // Contents
Acknowledgments
This report was prepared under the lead of Sheila Dutta (Senior Health Specialist and
Co-Coordinator, Global Tobacco Control Program, World Bank Group). Patricio Marquez
(Lead Health Specialist and Coordinator, Global Tobacco Control Program, World Bank
Group), Paul Isenman (former World Bank Group Director and Principal Economist) and
Hana Ross (Professor, University of Cape Town) extensively reviewed and commented
upon draft chapters of the report, providing detailed technical inputs and suggestions to
enhance the volume’s robustness, quality, and conclusions. The report benefited from the
editorial contribution of Alexander Irwin.

An international team authored the country/regional case studies and other chapters com-
prising this book, including (by chapter order):

»» Chapter 1: WHO Framework Convention on Tobacco Control Protocol to Eliminate Illicit
Trade in Tobacco Products: A Global Solution to a Global Problem (Vera Luiza da Costa e
Silva, Head of the Secretariat of the WHO Framework Convention on Tobacco Control)

»» Chapter 2: Australia (Robert Preece, Charles Sturt University, Australia)

»» Chapter 3: Canada (Robert Schwartz, University of Toronto, Canada)

»» Chapter 4: European Union (Filip Borkowski and Clare Twomey, European Anti-Fraud
Office, European Commission, Belgium)

»» Chapter 5: Georgia (Hana Ross [University of Cape Town, South Africa] and George
Bakhturidze [FCTC Implementation and Monitoring Center, Georgia]).

»» Chapter 6: Ireland (Alan Cummins, Oliver Gainford, and Peadar O’Lamhna; General
Excise and Tobacco, Indirect Taxes Policy and Legislation Division, Office of the Revenue
Commissioners, Ireland)

VII
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

»» Chapter 7: United Kingdom (Tessa Langley [University of Nottingham], Anna Gilmore
[University of Bath], Allen Gallagher [University of Bath], and Deborah Arnott [Action on
Smoking and Health]

»» Chapter 8: Organization of Eastern Caribbean States (OECS) and Trinidad and Tobago
(Karl Theodore, Althea La Foucade, Christine Laptiste, Ewan Scott, Charmaine Metivier,
Samuel Gabriel, Daren Conrad, and Malini Maharaj; The University of the West Indies)

»» Chapter 9: Chile (Guillermo Paraje, Universidad Adolfo Ibáñez, Chile)

»» Chapter 10: Colombia (Blanca Llorente and Norman Maldonado, Fundación
Anáas, Colombia)

»» Chapter 11: Ecuador (Santiago Trujillo, Servicio de Rentas Internas [SRI], Ecuador)

»» Chapter 12: Mexico (Belén Sáenz de Miera Juárez, Universidad Autónoma de Baja
California Sur, Mexico)

»» Chapter 13: Uruguay (Winston Abascal [International Cooperation Centre for Tobacco
Control, WHO FCTC Secretariat, Uruguay] and Alejandro Ramos-Carbajales (Former
Planning and Research Director at CIET [Research Center for the Study of the Tobacco
Epidemics], Uruguay)

»» Chapter 14: Bangladesh (Sadiq Ahmed, Zaidi Sattar, and Khurshid Alam; Policy Research
Institute of Bangladesh)

»» Chapter 15: Indonesia (Abdillah Ahsan, Vice Director of Center for Islamic Economics and
Business and Lecturer of Faculty of Economics and Business, Universitas Indonesia)

»» Chapter 16: Malaysia (Noraryana Hassan, Subromaniam Tholasy, Norliana Ismail, Hasazli
Hasan, Norashidah binti Mohamed Nor, and Wency Bui Kher Thinng; FCTC and Tobacco
Control Unit, Disease Control Division, Ministry of Health, Malaysia)

»» Chapter 17: Philippines (Kim Henares [Former Commissioner, Bureau of Internal
Revenue, Philippines] and Malou B. Recente [Former Undersecretary, Department of
Finance, Philippines])

»» Chapter 18: Southern African Customs Union (SACU) and Zambia (Michael Eads, Telita
Snyckers, and Ziyaad Butler, Sovereign Border Solutions, South Africa)

»» Chapter 19: Botswana, Lesotho, and South Africa (Kirsten van der Zee and Corné van
Walbeek, University of Cape Town, South Africa)

»» Chapter 20: Kenya (Hana Ross, University of Cape Town, South Africa)

»» Chapter 21: Senegal (Mayoro Diop [formerly with National Agency for Statistics and
Demography, Senegal] and Aboubakry Gollock, [Cheikh Anta Diop University, Senegal])

»» Chapter 22: Tobacco Tax Administration: A Perspective from the International Monetary
Fund (Janus Nagy, Fiscal Affairs Department, International Monetary Fund [IMF])

VIII // Acknowledgments
Additional comments and/or peer reviews of specific chapters were provided by the follow-
ing individuals: Volkan Cetinkaya (World Bank Group), Alberto Gonima (World Bank Group),
Prabhat Jha (University of Toronto), Sher Shah Khan (World Bank Group), Blanca Llorente
(Fundación Anáas), Janus Nagy (International Monetary Fund), Caxton Ngeywo (Kenya
Revenue Authority), Guillermo Paraje (Universidad Adolfo Ibáñez, Chile), Jeremias Paul
(World Health Organization), Nicolas Guerrero Peniche (Secretariat of the WHO Framework
Convention on Tobacco Control), Robert Preece (Charles Sturt University), Belén Sáenz de
Miera Juárez (Universidad Autónoma de Baja California Sur), and Joseph Sirengo (Kenya
Revenue Authority).

Zinaida Korableva (World Bank Group) and Akosua Dakwa (World Bank Group) provided
administrative support to the preparation of this publication.

Overall technical guidance and oversight were provided by Enis Baris (Program Manager,
Health, Nutrition, and Population Global Practice, World Bank Group), and Tim Evans (Senior
Director, Health, Nutrition, and Population Global Practice, World Bank Group).

The preparation of this report was carried out under the World Bank Group’s Global Tobacco
Control Program, supported by the Bill & Melinda Gates Foundation and the Bloomberg

Foundation. The support of Kelly Henning (Bloomberg Philanthropies), Jo Birckmayer
(Bloomberg Philanthropies), Cynthia Lewis (Bill and Melinda Gates Foundation), and Jean
Paullin (Bill and Melinda Gates Foundation) is gratefully acknowledged.

The authors alone are responsible for the views expressed herein and they do not necessar-
ily represent the views, decisions or policies of the institutions with which they are affiliated.

Washington, D.C.
January 18, 2019

IX
EXECUTIVE
SUMMARY
Executive Summary

Why is illicit trade in tobacco products a problem?
Tobacco use results in unparalleled health, economic, and social losses worldwide. It is esti-
mated that 1.1 billion people smoke globally, or 21 percent of the world’s adult population.1
Tobacco kills at least half of long-term smokers, accounting for more deaths each year than
HIV/AIDS, tuberculosis, and malaria combined. As a result, about 7.2 million people die each
year,2 and if the current trend continues, tobacco will kill more than 8 million people annually
by 2030.3 Low- and middle-income countries, where about 80 percent of these premature
deaths occur, disproportionately carry this burden.4 The worldwide economic costs of smok-
ing are estimated to reach at least US$ 1.4 trillion per year, equivalent to 1.8 percent of the
world’s GDP. Almost 40 percent of these costs occur in developing countries.5

Illicit trade in tobacco products impacts average prices of these commodities, therefore their
affordability; it can increase disparity in tobacco use since the illegal products are dispropor-
tionally consumed by low-income populations; it increases the choice of brands, which can
increase overall demand; it enhances the access to tobacco products, particularly for youth,
as the illegal products are often distributed via unregulated channels; it undermines health
warning and ingredients disclosure policies, since the illegal products often do not comply
with the local laws; additionally, tax evasion associated with the illegal tobacco market reduces
government tax revenue7 and can alter attitudes toward paying taxes more generally.8

XI
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

In addition, tobacco business interests often use the presence of illegal tobacco prod-
ucts to advocate for reductions in tobacco control policies and/or to prevent tobacco tax
increases. The tobacco industry commonly argues that higher taxes and prices (as well as
other tobacco control measures), will motivate customers to buy illegal products rather than
smoking less or quitting, and that this will impact tax revenue without a decline in tobacco
use. Numerous empirical analyses, across a diversity of countries – including the case stud-
ies presented in this report – refute this argument.

What is illicit trade in tobacco products?
Illicit tobacco trade refers to any practice related to distributing, selling, or buying tobacco
products that is prohibited by law, including tax evasion (sale of tobacco products with-
out payment of applicable taxes), counterfeiting, disguising the origin of products, and
smuggling. Illicit trade can be undertaken both by illicit players who are not registered with
relevant government agencies, as well as by legitimate entities whose business operations
are contrary to applicable laws and regulations.

In most cases, the prices of illicit tobacco products are lower than the retail price of legal
tobacco products, in order to make them more attractive to consumers. For example, the
average street price of smuggled cigarettes was 50 percent, 50 percent, 60 percent, and
67 percent cheaper compared to the average price of legal cigarettes in Brazil, Argentina,
Uruguay and Paraguay, respectively.10 In Malaysia, the average price of illegal cigarettes
was about 55 percent lower compared to tax-paid cigarettes in 2011.11 Unsurprisingly, the
illegal nature of tax evasion makes the task of measuring its scale extremely difficult. Recent
consensus among experts estimates the annual revenue loss in tobacco taxation worldwide
at US$40–50 billion, that is, about 600 billion sticks (individual cigarettes), or 10 percent of
global consumption12.

Why is it important to address illicit trade in
tobacco products?
As noted above, illicit trade in tobacco products contributes to numerous health, economic,
and governance challenges. However, four are most salient.

»» Illicit tobacco kills. The fundamental reason to confront illicit trade in tobacco products
involves its public health impact. All tobacco products are dangerous to human health,

XII // Executive Summary
including those produced and sold in strict legality. However, illicit tobacco harms individual
and population health in additional ways. From a public health perspective, illicit trade
weakens the effect of tobacco excise taxes on tobacco consumption - and consequently
on preventable morbidity and mortality - by increasing the affordability, attractiveness,
and/or availability of tobacco products.

»» Youth and the poor are most impacted. Illicit cigarettes generally sell for considerably
less than their tax-paid equivalents, as evidenced by the case studies presented in this book.
They inflict the greatest harm to the most price-sensitive population group, reducing prices
to and so encouraging consumption by, in particular, young people and those with low
incomes. The availability of inexpensive illicit cigarettes increases the likelihood of young
ing through
people developing addiction (particularly where illicit imports "glamorize" smok
aspirational brands). It also encourages the poorest quintiles of the population to continue
smoking, rather than choose to quit, even when tobacco taxes and the price of legal ciga-
rettes rise. The poor tend to have higher tobacco consumption levels and consequently are
disproportionately impacted by tobacco-related diseases and premature. deaths, placing
them at higher risk of being pushed into extreme poverty due to costs of treatment and/or
co-related disease. As a
loss of income when an income-earning smoker develops a tobac
result, illicit trade in tobacco products exacerbates equity gaps.

»» Confronting illicit trade in tobacco products supports improved governance. Tobacco
illicit trade, by definition, reduces revenues that would otherwise be paid to government
that could be invested in tobacco control and other priority programs that benefit the
population. It also negatively impacts public welfare in other ways. For instance, illicit
trade in tobacco is not only inconsistent with the rule of law, but often depends on and
can contribute to weakened governance (e.g., through corruption and the presence of
organized criminal networks). In contrast, confronting this issue can yield broader benefits
for governance - tools and capacities developed to address illicit trade in tobacco prod-
ucts can strengthen overall tax administration, compliance, and enforcement (including
for other products subject to excise taxes, such as alcohol and fuel). Controlling illicit
trade in tobacco products and enhanced overall governance are mutually reinforcing.

XIII
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

What causes illicit trade, and what measures can be
used to confront illicit trade in tobacco products?
Contributing factors to illicit trade are complex. However, contrary to tobacco industry
arguments, taxes and prices have only a limited impact on the illicit cigarette market share at
country level.14 Evidence indicates that the illicit cigarette market is relatively larger in countries
with low taxes and prices while relatively smaller in countries with higher cigarette taxes and
prices.15 Non-price factors such as governance status, weak regulatory framework, social
acceptance of illicit trade, and the availability of informal distribution networks appear to be far
more important determinants of the size of the illicit tobacco market.16

Measures controlling the illicit tobacco market are a necessary component of a well-de-
signed tobacco control policy. The degree of government effort to combat illicit trade in
tobacco products is motivated both by the potential tax revenue gain and by public health
gains due to lower tobacco use. Since illicit trade in tobacco products is determined by
multiple factors, an effective strategy to address this issue would need to be explicitly
multi-sectoral, involving all relevant agencies of government. Ideally, ministries of finance,
trade, industry, foreign affairs, justice, interior, customs, education, and health would be
involved, in addition to civil society and the media.17 Vested interests of key stakeholders and
public opinion regarding illicit tobacco trade can influence the degree of tax evasion and,
consequently, also need to be examined.18

Prioritizing and coordinating control of the entire supply chain (from the fields where
tobacco leaves are grown, or the port of entry, to the final purchase by the individual con-
sumer) and enforcement of tobacco regulations have proven to be effective measures in
reducing tax evasion along with the consumption of tobacco products.19 Importantly, the
WHO Framework Convention on Tobacco Control’s (FCTC) Protocol to Eliminate Illicit Trade
in Tobacco Products defines shared global standards for addressing illicit trade. It should be
noted that the approaches to control illicit tobacco trade need to be subject to very regular
surveillance, monitoring, and evaluation due to the inherently dynamic and adaptive nature
of the illicit market. As emphasized in a recent IMF report on tobacco tax administration and
enforcement, even in a single country, solutions that worked once might not work twice.20

What can countries do to successfully confront
illicit trade in tobacco products?
Confronting illicit trade in tobacco products is critical to effective tobacco control in all
countries. However, addressing this issue poses complex political, legal, and technological
challenges. As such, illicit trade is one of the topics on which policymakers and program
implementers responsible for national tobacco control most frequently request information
and technical collaboration from international organizations.

XIV // Executive Summary
The country experiences analyzed in this volume make clear that countries can and do
contain or reduce illicit trade while advancing other effective tobacco control strategies,
including tax increases. Indeed, the opportunities for success are greater now than ever, for
countries prepared to take bold action.

In September 2018, the WHO FCTC Protocol to Eliminate Illicit Trade in Tobacco Products
entered into force. By providing comprehensive norms and a framework for global coop-
eration, the Protocol provides countries a game-changing opportunity to advance progress
against tobacco-related morbidity and mortality by challenging illicit trade in tobacco. By
seizing the opportunity and intensifying action against illicit trade, in line with the Protocol,
countries can harness increasing political momentum, forge global and regional partnerships
for collaboration and knowledge sharing, and score decisive victories against illicit trade in
tobacco in the years ahead.

To fully benefit from the Protocol, policymakers and implementers now seek to connect
its normative guidance with empirical data and analysis on countries’ illicit trade in tobacco
control experiences to date—what has worked, what has not worked, and why. That is where
this book comes in.

What this book offers
The reasons to reduce illicit trade in tobacco products are compelling. The question is
how. In response to demand from senior government officials and other partners, this book
provides practical input and guidance based on diverse country experiences. The volume
adopts a model of practice-oriented case studies designed to complement the guidelines
set forth in the WHO FCTC Protocol, and other normative sources. The aim is to present
hands-on facts/guidance that policymakers and implementers can readily utilize, as appro-
priate. The book also provides resources to inform and empower civil society watchdog
and advocacy organizations.

The core contents of this volume are organized as follows. Chapter 1 provides historical, con-
ceptual, and policy foundations of addressing illicit trade in tobacco products and analyzes
the WHO FCTC Protocol on the Elimination of Illicit Trade in Tobacco Products, discusses
challenges countries will face in implementing the Protocol, and highlights strategies for mini-
mizing tobacco-industry influence over national illicit trade in tobacco products policy.

Part I (Chapters 2-7) looks at illicit trade in tobacco products control efforts in Europe
(Ireland, Georgia, European Union, United Kingdom), Australia, and Canada. Part II
(Chapters 8-13) presents studies from Latin America and the Caribbean, including Chile,
Colombia, Ecuador, Mexico, and the countries of the Organization of Eastern Caribbean
States (OECS) and Trinidad and Tobago. Part III (Chapters 14-17) encompasses East
Asia and South Asia and includes case studies from Bangladesh, Indonesia, Malaysia, and
the Philippines. Part IV (Chapters 18-21) examines at illicit trade in tobacco products in

XV
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Sub-Saharan Africa, including studies from Kenya, Senegal, the Southern African Customs
Union (SACU) countries and Zambia, in addition to a separate analysis of border zones of
Botswana, Lesotho, and South Africa.

Following the detailed exploration of individual country experiences in the case studies,
Chapter 22 steps back to propose broadly applicable lessons on strengthening tax admin-
istration to confront illicit trade in tobacco products, while reducing tobacco use. Providing
a perspective from the International Monetary Fund, the chapter distills lessons from global
experience. Based on comparative analysis of all case studies through the lens of the WHO
FCTC Protocol, the book’s Conclusion identifies key strategic directions that have charac-
terized countries documenting significant advances in the control of illicit trade in tobacco
products. Within this broad agenda, the authors highlight action points policymakers and
implementers can prioritize to initiate/strengthen/sustain progress in confronting illicit trade
in tobacco products.

Strategic steps to reduce illicit trade in
tobacco products
How are countries effectively confronting tobacco illicit trade? The following strategic
steps emerge from the case studies presented in this book, with respect to lessons from
countries that are successfully addressing illicit trade in tobacco products.

»» Diagnose the different forms of illicit trade in tobacco products: The cases studies show
that illicit trade overwhelmingly involves cigarettes, rather than other tobacco products.
Tobacco illicit trade takes a variety of forms, varying in type and severity by country:
smuggling across borders; declaring products as for export (and thus not subject to
domestic tax) and then selling them on the domestic market; selling undeclared production
(e.g. an undisclosed third production shift); producing counterfeits of legitimate brands;
producing low-cost unbranded cigarettes destined for illicit markets (so called "illicit
whites"); using Free Zones to leak cigarettes to the domestic market; and selling tobacco
products via Internet, phone, or mail21. Each form of tax evasion has somewhat different
implications for needed improvements in tax administration and enforcement.

»» Understand the causes and drivers of illicit trade in tobacco products: The case studies
confirm findings from the literature that tobacco illicit trade stems from a wide range
of causes. These include weaknesses in governance and the regulatory framework,
corruption, insufficient capacity of enforcement and judiciary systems, the existence
of informal distribution and of organized crime networks, having a border with another
country suffering from similar problems; and expected profitability of tobacco illicit trade.
The country cases strongly confirm that the most important determinant in illicit trade
of tobacco products is tax administration. Countries as different in levels of economic
and institutional development as the United Kingdom, Kenya, and Georgia have all

XVI // Executive Summary
successfully improved the effectiveness of their tobacco tax administration and, by doing
so, reduced tobacco illicit trade while increasing tobacco taxes and tobacco tax revenues.
Addressing illicit trade and raising tobacco taxes should be viewed as mutually reinforcing
and complementary actions.

»» Strengthen country data, analysis, planning, and implementation processes: Consistent
with Articles 7 and 9 of the Protocol, the UK, Australia, and Ireland case studies visibly
demonstrate the importance of reliable data, analysis, planning, and implementation
oversight. The process should start with mapping of the supply and demand for tobacco
products; what is known about illicit trade in tobacco products; the modus operandi of
actors involved in or facilitating illicit trade; the capacity, commitment, and accountabil-
ity of government agencies; and resultant effectiveness of tax/customs administration.
Illicit trade activities, as well as industry activities, require intensive monitoring. In addi-
tion, having access to high quality local market data, including smoking prevalence and
intensity, is critical. However, not having data regarding the size of the illicit market is not
an excuse for inaction. The absence of such data has not stopped Kenya, Georgia, or the
Philippines, for example, from moving ahead in controlling illicit trade in tobacco products.
Country strategies to reduce illicit trade in tobacco products should establish policies, leg-
islation, and regulations appropriate for specific country contexts. It is critical to note that
having a strong strategy on paper is important but not sufficient, unless such plans can
be operationalized. Additionally, strategies should integrate the strengthening of capacity,
incentives, and accountability needed for effective implementation (including enforce-
ment measures).22

»» Avoid reliance on the tobacco industry: The role of the tobacco industry poses a chal-
lenge to countries seeking to address illicit trade, since the tobacco industry is often linked
to illicit trade in tobacco products, either directly or indirectly.23 The UK and Ireland case
studies emphasize the need to fulfill obligations under Article 5.3 of the FCTC to prevent
the tobacco industry from influencing public policy.24 The case studies, including Colombia,
Australia, Georgia, and Malaysia, also confirm prior findings that the tobacco industry reg-
ularly overstates levels and changes in tobacco illicit trade to oppose tobacco tax reforms.
The Georgia and Uruguay case studies show that when the government responds to
industry pressure and reduces taxes due to fears regarding tobacco illicit trade, the result
is a decline in revenues and an increase in consumption, while the true drivers of illicit
trade in tobacco products remain unaddressed.

»» Build inclusive, political coalitions against illicit trade in tobacco products: Strong
and successfully implemented country strategies require enlisting support and finding
champions at top levels of ministries and governments, as demonstrated in Georgia, the
Philippines and the UK. Another crucial element of gaining political support is to build alli-
ances with key stakeholders in civil society, including NGOs, think tanks, and the media, as
emphasized in the Kenya, UK, Georgia, Columbia, and Bangladesh case studies. Involving
the public in addressing illicit trade both supports enforcement and reduces the demand

XVII
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

for illegal products. Issues of political economy also affect enforcement – the Mexico and
Kenya case studies highlight the importance of the electoral cycle and the overall national
security context on the effectiveness of tax administration and enforcement.

»» Work across sectoral silos: The Colombia, Chile and Kenya case studies identified lack
of integration across sectors at the national and subnational levels as the major obstacle
in controlling illicit trade of tobacco products. These analyses, in conjunction with the
Bangladesh, Australia and Mexico case studies, emphasize that success in adopting and
implementing strong programs to combat illicit trade and implement tobacco tax reform
requires active and coordinated support from numerous ministries/government agencies.
Coordination is particularly important in integrating tobacco illicit trade control into strate-
gies for tobacco tax reform and overall tobacco control programs.

»» Address illicit trade as an integral part of tobacco tax reform and overall tobacco control:
Country cases, including those of the Philippines, the UK and Ireland clearly demonstrate
the complementary nature of addressing tobacco illicit trade and implementing tobacco tax
reform. Confronting illicit trade in tobacco products should be an integral part of a country’s
overall approach to tobacco control. The key elements of tobacco tax reform have recently
been summarized in the World Bank publication Tobacco Tax Reform: At the Crossroads of
Health and Development25 and are summarized below:

›› Go big, go fast. Tax strategies should focus on health gains first, then on fiscal benefits.
This means going for big tobacco excise tax rate increases starting early in the process.

›› Attack affordability. Tobacco taxes only reduce tobacco consumption if they reduce
cigarette affordability.

›› Change expectations. Communication with the public is also critical. Governments
must make sure consumers know that cigarette prices will keep going up.

›› Tax by quantity. Tobacco tax rates should be simplified and based on the quantity of
cigarettes, not their price.

›› “Soft earmarks” can win support. Although earmarking tax revenues through leg-
islation is criticized by fiscal experts as contributing to rigidities, fragmentation, and
eventual distortions in public expenditure, “soft” earmarking of funds (for example,
linking increased taxes to increased health spending) has helped generate grassroots
support for the tax hikes.

›› Regional collaboration can boost results. Momentum for ambitious tobacco tax
reform can be enhanced, and cross-border threats like cigarette smuggling mini-
mized, when countries work together in a regional structure.

›› Build broad alliances. Country leaders face sharp resistance to tax rate increases and
other tobacco control measures from the tobacco industry. Countering these pres-
sures requires reliable data and economic analysis, multi-sectoral policy development,

XVIII // Executive Summary
and strong partnerships among key stakeholders at the local, national, and interna-
tional levels.

»» Encourage and draw on regional and global cooperation/partnerships: As recom-
mended in the Protocol (Articles 20 – 31) and the FCTC, countries also should support
and draw on regional and sub-regional, as well as global, partnership arrangements when
feasible to address illicit trade and to implement tobacco tax reform. This can help, for
example, in reducing substantial disparities in tobacco taxes in neighboring countries by
pulling countries up to a common higher tax level, as well as in coordinating cross-bor-
der/regional efforts to reduce tobacco illicit trade. At the global level, the most effective
way a country can benefit from and contribute to promoting international collaboration
is to join the FCTC Protocol, discussed below. Ratifying the Protocol has advantages that
go beyond knowledge sharing and coordination of enforcement efforts, including access
to technical assistance in implementing the Protocol and establishing track and trace
systems.

Specific actions to confront illicit trade in
tobacco products
The discussion above provided broad, strategic directions for enhancing progress in con-
trolling/preventing illicit trade in tobacco products. However, what specific actions can
decision makers prioritize to rapidly achieve gains? Findings from the country case studies
suggest the following specific actions.

XIX
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

growers, transporters, manufacturers, those who store raw tobacco and/or final products,
importers, wholesalers, retailers, as well as those in possession of manufacturing equip-
ment. Tobacco importers are licensed in Malaysia and the Philippines requires suppliers
of raw materials to the production process, including those providing tobacco papers
and filter components, to be licensed.

»» Require use of secure excise tax stamps and other product markings to facilitate enforce-
ment and tax collection, as required by Article 8 of Protocol. These markings should
possess multiple layers of security (as implemented in Kenya, Georgia, and the Philippines,
for example); they should not be removable; and they should be destroyed when the
pack is opened (also to prevent reuse). The absence of secure excise marking in Southern
African Customs Union countries, Chile, and Mexico weakens the ability of the tax authori-
ties to collect taxes, as noted in the case studies.

»» Establish effective track-and-trace systems to follow tobacco products through the supply
chain from production or import to sale to consumers (Article 8 of the Protocol).
Secure excise stamps are crucial but not sufficient to prevent tax evasion if there is no
downstream verification that cigarettes have tax stamps and that they are authentic.
A track-and-trace system would help address, for example, the challenge posed by
under-declared domestic cigarette production or production declared for export but
then sold on the domestic market. The Mexico, Chile, and Southern African Customs
Union case studies identify the absence of a track-and-trace system as the major obstacle
to controlling illicit trade in tobacco products. Notably, as detailed in the case studies,
Ecuador’s tax track-and-trace system for domestically produced cigarettes, alcoholic bev-
erages, and beer was implemented by its Internal Revenue Service in 2017 and is the first
track-and-trace to comply with the Protocol to Eliminate Illicit Trade in Tobacco Products.

»» Establish effective enforcement teams equipped with automated reporting devices, to
reduce human discretion in tobacco tax administration (Articles 8 and 19 of the Protocol).
This feature played a major role in improving the level of enforcement in Kenya and
Georgia. However, the Kenya case also underlines the importance of enforcement agents
with the power to carry out inspections at any time and at any point in the supply chain,
to seize illicit products on the spot, and to bring immediate charges against offenders.

»» Obtain detection equipment and use it effectively at customs posts (Articles 14 and 19 of
the Protocol). Most countries already have access to detection equipment, although not
necessarily in adequate quantity. Potential governance challenges, with respect to the
use of this equipment, can be further reduced by separating the roles of generating and
interpreting scans (as noted in the Kenya case study).

»» Develop a risk profile to target inspections (Articles 10, 14 and 19 of the Protocol). The
Chile case highlights the use of a risk analysis tool for targeting suspicious cargos and to
generate customs alerts.

XX // Executive Summary
»» Set relatively low duty-free allowances (Article 13 of the Protocol and Article 6.2 of the
FCTC) for tobacco product purchases, both in terms of amounts (e.g. only two packs, as
in Australia) and frequency (e.g. only once every 30 days as in Georgia). Chile shows how
the lack of restrictions on frequency led to substantial but legal small-scale tax avoidance.

»» Regulate or ban trade in tobacco products in free trade and other special economic
zones (Article 12 of the Protocol). The Chile case study illustrates how the relative freedom
from regulation in these zones can make them gateways for domestic sale of untaxed
tobacco products. In contrast, Colombia and Malaysia both established a strict regulatory
framework for free trade zones to prevent this challenge.

»» Provide for secure and environmentally friendly destruction of seized cigarettes, carried out
by the regulatory authorities and not by the tobacco industry (Article 18 of the Protocol).
In Mexico, customs officials destroy seized cigarettes, while in the Philippines approval
and presence of a Bureau of Internal Revenue representative is required. In contrast to this
guidance, in South Africa an industry-representative body is responsible for the destruc-
tion of illicit goods.

»» Educate the public on the impact of tobacco illicit trade. Getting the public involved
supports enforcement and reduces the demand for illegal products. As noted in the case
studies, the Philippines and Kenya introduced apps for the public to verify the authenticity
of cigarette packs, while the UK ran a public awareness campaign explaining how pur-
chasing illegal cigarettes harms the country and local communities.

Complementing and supporting the WHO Framework Convention on Tobacco Control’s
Protocol to Eliminate Illicit Trade in Tobacco Products, the case studies presented in this
book detail the manner in which a diverse range of countries have successfully confronted
illicit trade in tobacco products. Significantly, these case studies demonstrate the importance
- and feasibility - of addressing illicit trade in tobacco products as an integral part of tobacco
tax reform and comprehensive tobacco control.

XXI
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Endnotes
1
Report on the Global Tobacco Epidemic, World Health Organization, 2015
2
GBD 2015 Risk Factors Collaborators. Global, regional, and national comparative risk assessment of
79 behavioural, environmental and occupational, and metabolic risks or clusters of risks, 1990–2015: a
systematic analysis for the Global Burden of Disease Study 2015. Lancet, 2016; 388(10053):1659-1724
3
Expanding the Global Tax Base: “Taxing To Promote Public Goods: Tobacco Taxes”. Summary Report.
World Bank Group, Washington, D.C. May 24, 2016
4
Expanding the Global Tax Base: “Taxing To Promote Public Goods: Tobacco Taxes”. Summary Report.
World Bank Group, Washington, D.C. May 24, 2016
5
Goodchild, Nargis, and Tursan d’Espaignet. Global economic cost of smoking-attributable diseases.
Tobacco control. 2017
6
Tobacco Tax Reform At The Crossroads Of Health And Development. Edited by Patricio V. Marquez
and Blanca Moreno-Dodson. World Bank. October 2017. http://documents.worldbank.org/curated/en/
docsearch/report/119792.
7
Hana Ross, Muhammad Jami Husain, Deliana Kostova, Xin Xu, Sarah M. Edwards, Frank J. Chaloupka,
Indu B. Ahluwalia. Approaches for Controlling Illicit Tobacco Trade — Nine Countries and the European
Union. MMWR Weekly Vol. 64, No. 20 May 29, 2015
8
Patrick Petit and Janos Nagy. How to design and enforce tobacco excises? International Monetary
Fund 2016.
9
Joossens L, Merriman D, Ross H, Raw M. How eliminating the global illicit cigarette trade
would increase tax revenue and save lives. Paris: International Union Against Tuberculosis and
Lung Disease, 2009. Available at http://tobaccocontrol.bmj.com/content/early/2013/01/14/
tobaccocontrol-2012-050788.
10
Alejandro Ramos. Illegal trade in tobacco in MERCOSUR countries. Working Paper, June 2009.
11
Alex C. Liber, Hana Ross, Maizurah Omar, Frank J. Chaloupka. The Impact of the Malaysian Minimum
Cigarette Price Law: Findings from the ITC Malaysia Survey. Tobacco Control 2015; 24:iii83–iii87.
doi:10.1136/tobaccocontrol-2014-052028
12
Patrick Petit and Janos Nagy. How to design and enforce tobacco excises? International Monetary
Fund 2016.
13
Gallagher AWA, Evans-Reeves KA, Hatchard JL, et al. Tobacco industry data on illicit tobacco trade: a
systematic review of existing assessments. Tobacco Control Published Online First: 22 August 2018. doi:
10.1136/tobaccocontrol-2018-054295
14
Patrick Petit and Janos Nagy. How to design and enforce tobacco excises? International Monetary
Fund 2016.
15
National Research Council and Institute of Medicine. Understanding the U.S. Illicit Tobacco Market:
Characteristics, Policy Context, and Lessons from International Experiences. Washington DC: The
National Academies Press. 2015.

XXII // Executive Summary
16
Frank J. Chaloupka, Sarah M. Edwards, Hana Ross, Megan Diaz, Marin Kurti, Xin Xu, Mike Pesko, David
Merriman, Hillary DeLong. Preventing and Reducing Illicit Tobacco Trade in the United States. Centers
for Disease Control and Prevention. 2015. http://www.cdc.gov/tobacco/stateandcommunity/pdfs/illicit-
trade-report-121815-508tagged.pdf
17
Tobacco Tax Reform At The Crossroads Of Health And Development. Edited by Patricio V. Marquez
and Blanca Moreno-Dodson. World Bank. October 2017. http://documents.worldbank.org/curated/en/
docsearch/report/119792
18
Hana Ross. Understanding and measuring tax avoidance and evasion: A methodological guide.
Washington DC 2015. DOI: 10.13140/RG.2.1.3420.0486 http://www.tobaccoecon.uct.ac.za/sites/
default/files/image_tool/images/405/Publications/reports/Understanding-and-measuring-tax-
avoidance-and-evasion-A-methodological-guide1.pdf
19
Tobacco Tax Reform At The Crossroads Of Health And Development. Edited by Patricio V. Marquez
and Blanca Moreno-Dodson. World Bank. October 2017. http://documents.worldbank.org/curated/en/
docsearch/report/119792
20
Patrick Petit and Janos Nagy. How to design and enforce tobacco excises? International Monetary
Fund 2016.
21
Addressed by Article 11 of the Illicit Trade Protocol.
22
On the importance of incentives and accountability as well as capacity in improving institutional effec-
tiveness, see World Development Report 2017, Governance and the Law, World Bank, 2017(b).
23
Gilmore AB, Gallagher AWA, Rowell A. Tobacco industry’s elaborate attempts to control a global track
and trace system and fundamentally undermine the Illicit Trade Protocol. Tobacco Control. 2018
24
Framework Convention on Tobacco Control, WHO, 2003
25
Tobacco Tax Reform: At the Crossroads of Health and Development, World Bank 2017

XXIII
INTRODUCTION
Introduction

Why is Illicit Trade in Tobacco Products a Problem?
Tobacco use results in unparalleled health, economic, and social losses worldwide. It is esti-
mated that 1.1 billion people smoke globally, or 21 percent of the world’s adult population.1
Tobacco kills at least half of long-term smokers, accounting for more deaths each year
than HIV/AIDS, tuberculosis, and malaria combined. As a result, about 7.2 million people die
each year,2 and if the current trend continues, tobacco will kill more than 8 million people
annually by 2030.3 Low- and middle-income countries, where about 80 percent of these
premature deaths occur, disproportionately carry this burden.4 Tobacco-related deaths are
not only tragic because they are preventable - they also impose substantive burdens on
national economies, and in most cases on economies that can least afford it. The world-
wide economic costs of smoking are estimated to reach at least US$ 1.4 trillion per year,
equivalent to 1.8 percent of the world’s GDP. Almost 40 percent of these costs occur in
developing countries.5

Increasing excise tax rates on tobacco to reduce its affordability and, as evidence shows,
lower its consumption is a policy measure that can simultaneously save millions of lives,
reduce poverty, and increase countries’ domestic resources for financing development. A
recent World Bank Group publication, Tobacco Tax Reform: At the Crossroads of Health
and Development, details how this powerful human development and poverty reduction
measure remains largely underutilized, especially in low- and middle-income countries
(LMICs). As that report highlighted, higher tobacco taxes improve public health, increase
tobacco tax revenue, and reduce the economic burden associated with tobacco use.6
Importantly, this publication also emphasizes the continuing extraordinary divergence
between high-income countries, which are increasingly using price and non-price tools to

XXV
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

lower their death rates from tobacco, and LMICs, where the number of tobacco deaths
continues to grow.

Illicit trade in tobacco products undermines global tobacco prevention and control inter-
ventions, particularly with respect to tobacco tax policy. It impacts average prices of these
commodities, therefore their affordability; it can increase disparity in tobacco use since the
illegal products are disproportionally consumed by low-income populations; it increases
the choice of brands, which can increase overall demand; it enhances access to tobacco
products, particularly for youth, as the illegal products are often distributed via unregulated
channels; it undermines health warning and ingredients disclosure policies, since the illegal
products often do not comply with the local laws; additionally, tax evasion associated with
the illegal tobacco market reduces government tax revenue7 and can alter attitudes toward
paying taxes more generally.8 Moreover, tobacco industry documents provide compelling
evidence that the supply of international brands via illegal channels has been an important
component of their market entry strategy in Africa, Latin America and in Asian countries.9

It has been estimated that the illegal cigarette market reduces average cigarette prices
by about 4 percent and is responsible for about 2 percent higher cigarette consumption.
This translates to about 164,000 premature deaths a year.10 There also are concerns about
the relationship between illicit tobacco trade, public safety, and governance, since illegal
networks both thrive in and contribute to weak governance contexts. In addition, tobacco
business interests often use the presence of illegal tobacco products to advocate for reduc-
tions in tobacco control policies and/or to prevent tobacco tax increases. The tobacco
industry commonly argues that higher taxes and prices (as well as other tobacco control
measures), will motivate customers to buy illegal products rather than smoking less or
quitting, and that this will impact tax revenue without a decline in tobacco use. Numerous
empirical analyses, across a diversity of countries – including the case studies presented in
this report – refute this argument.

What is Illicit Trade in Tobacco Products?
There is a substantial literature on issues relating to illicit trade in tobacco products. As a
result, this introductory chapter merely drawing on them, outlines key issues/challenges,
followed by providing an overview of this report’s content. Illicit tobacco trade refers to any
practice related to to the tobacco supply chain, including distributing, selling, or buying
tobacco products that is prohibited by law, including tax evasion. Illegal methods of cir-
cumventing tobacco taxes are called tax evasion, as they intend to avoid paying all or some
tobacco taxes, and include, for example:11,12

»» Smuggling tobacco products across borders;

»» Illegal tobacco product manufacturing by legal operators;

»» Producing counterfeit a, illicit white cigarettes b or unbranded tobacco c;

XXVI // Introduction
»» Distributing and selling any illegal products to the market;

»» Disguising the origin of products to avoid taxes;

»» Selling tobacco products via Internet, phone or mail without paying the appropriate taxes.

Illicit trade can be undertaken both by illicit players who are not registered with relevant gov-
ernment agencies, as well as by legitimate entities whose business operations are contrary
to applicable laws and regulations. Dealing in illicit tobacco products can involve small- or
large-scale operations. Small-scale operations usually involve moving more than the allow-
able tax-exempt volume of products across the border more than the allowable limits and/
or when products purchased “for personal consumption” in one country are sold for profit in
another country, without paying appropriate taxes (i.e., bootlegging).

Large-scale tax evasion generally focuses on avoiding all taxes and involves disguising/hiding
products and organized criminal networks. Counterfeits, genuine products with counter
feit tax stamps, illicit “white” cigarettes, undeclared local production, and unaccounted for
unbranded tobacco have all been identified as part of large-scale tax evasion schemes.
Notably, not all products that have not paid taxes are illegal. Tax avoidance consists of
legal activities and purchases in accordance with customs and tax regulations, but in
a manner that uses loopholes or other legal means to reduce or eliminates taxes. Tax
ance is often conducted by individual tobacco users, for example, frequent border
avoid
crossings to bring in the maximum duty-free tobacco allowance. Tobacco companies can
avoid taxes on a much larger scale by, for example, buying tax stamps or sharply building
up inventories before scheduled tax increases tax occur.

Unsurprisingly, the illegal nature of tax evasion makes the task of measuring its scale
extremely difficult. Recent consensus among experts estimates the annual revenue loss in
tobacco taxation worldwide at US$40–50 billion, that is, about 600 billion sticks (individual
cigarettes), or 10 percent of global consumption15.

a
Counterfeit cigarettes are cigarettes manufactured without authorization of the rightful owners of the
trademarked brand, with intent to deceive consumers and to avoid paying duty
b
Illicit white cigarettes are brands manufactured legitimately in one country but smuggled and sold in another
without duties being paid.
c
Unbranded tobacco is often sold as finely cut loose leaf tobacco. It may involve misrepresentation of the
quality and origin, or failure to obtain a license to grow and produce tobacco, and/or failure to register as an
importer/exporter.

XXVII
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Why Addressing Illicit Trade in Tobacco
Products Matters
As noted above, illicit trade in tobacco products contributes to numerous health, economic,
and governance challenges. However, four are most salient.

»» Illicit tobacco kills. The fundamental reason to confront illicit trade in tobacco products
involves its public health impact. All tobacco products are dangerous to human health,
including those produced and sold in strict legality. However, illicit tobacco harms individ-
ual and population health in additional ways. From a public health perspective, illicit trade
weakens the effect of tobacco excise taxes on tobacco consumption - and consequently
on preventable morbidity and mortality - by increasing the affordability, attractiveness,
and/or availability of tobacco products.

»» Youth and the poor are most impacted. Illicit cigarettes generally sell for considerably
less than their tax-paid equivalents, as evidenced by the case studies presented in this
book. They inflict the greatest harm to the most price-sensitive population group, reduc-
ing prices to and so encouraging consumption by, in particular, young people and those
with low incomes. The availability of inexpensive illicit cigarettes increases the likelihood
of young people developing addiction (particularly where illicit imports "glamorize" smok
ing through aspirational brands). It also encourages the poorest quintiles of the population
to continue smoking, rather than choose to quit, even when tobacco taxes and the price
of legal cigarettes rise. The poor tend to have higher tobacco consumption levels and
consequently are disproportionately impacted by tobacco-related diseases and premature
deaths, placing them at higher risk of being pushed into extreme poverty due to costs of
co-
treatment and/or loss of income when an income-earning smoker develops a tobac
related disease. As a result, illicit trade in tobacco products exacerbates equity gaps.

XXVIII // Introduction
uses inflated estimates of the impact of tobacco taxes on illicit trade to campaign against
tobacco tax increases and misinform public opinion. By accurately measuring and better
controlling illicit trade in tobacco, governments reduce industry’s ability to distort policy pri-
orities supporting improved public health, tax administration, and governance. For example,
as emphasized in the Colombia chapter, an initial study to quantify the true volume of illicit
cigarette trade in the country (notably, the first of its kind not to be sponsored by tobacco
companies) was essential to galvanizing support for increased tobacco taxation.

What Causes Illicit Trade?
Contributing factors to illicit trade are complex. However, contrary to tobacco industry
arguments, taxes and prices have only a limited impact on the illicit cigarette market share
at country level.17 Evidence indicates that the illicit cigarette market is relatively larger in
countries with low taxes and prices while relatively smaller in countries with higher cigarette
taxes and prices.18 Non-price factors such as governance status, weak regulatory framework,
social acceptance of illicit trade, and the availability of informal distribution networks appear
to be far more important determinants of the size of the illicit tobacco market.19

Numerous studies confirm that higher taxes lead to higher prices of legal tobacco products,
and there is some evidence that the prices of illegal tobacco products also increase in
response to higher taxes. Research suggests that a cigarette tax increase can lead to more
small-scale tax avoidance and tax evasion.20,21 However, since the supply of illegal products
via these channels is relatively small, the overall impact on the size of the illicit cigarette
market remains minimal.22,23 Additionally, higher cigarette taxes lead to overall lower cigarette
demand even when illicit products are available.24 As a result, any new tax avoidance/evasion
activities do not eliminate the effectiveness of tobacco tax increases in reducing tobacco
use and raising revenues.25 For example, South Africa raised excise taxes from 38 percent
to 50 percent of the retail price in the 1990s and reported a relatively small response of
the illicit cigarette market, but a two-fold increase in excise tax revenue ((this was despite
a drop in legitimate sales of 20 percent and resultant health benefits).26 Similarly, the illicit
market share in Turkey remained stable at 12 percent five months after a substantial tax
increase in January 2013.27

The decision to supply a market with illegal cigarettes seems largely determined by costs
associated with overcoming legal and regulatory hurdles, as well as delivery costs. These
costs are related to the probability of detection, the certainty of sanction, the size of pen-
alties, the presence of smuggling routes and black markets, and licensing requirements for
distributors.28 Delivery costs seem to play a large role as a factor influencing the supply of
illegal products, since illicit trade in tobacco frequently is viewed as a low risk operation.29
Large-scale tax evasion, which is responsible for most products on illegal cigarette markets,
yields higher profits and is heavily influenced by inadequate governance, existence of crim-
inal networks, and weak tax administration.30,31 Small-scale smuggling (bootlegging) generally

XXIX
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

involves lower profit and is more responsive to the relative price differences between adja-
cent jurisdictions, the distance to travel, and the opportunity costs of time (such as foregone
income).

Measures to Address the Illicit Trade in Tobacco
Products - What Do Countries Do and What Seems
to be Effective?
Measures controlling the illicit tobacco market are a necessary component of a well-de-
signed tobacco control policy. The degree of government effort to combat illicit trade in
tobacco products is motivated both by the potential tax revenue gain and by public health
gains due to lower tobacco use. The revenue gain is positively related to both the size of
the problem and the tax level, while the public health gains depend on overall smoking
prevalence. This implies that a tax increase should intensify the motivation for addressing tax
evasion, while also generating the necessary funds to invest into enforcement of measures
controlling the illicit tobacco market.

Since illicit trade in tobacco products is determined by multiple factors, an effective strat-
egy to address this issue would need to be explicitly multi-sectoral, involving all relevant
agencies of government. Ideally, ministries of finance, trade, industry, foreign affairs, justice,
interior, customs, education, and health would be involved, in addition to civil society and the
media.32 The design of an effective system must start with a detailed analysis of all aspects
of illicit tobacco products supply and demand, as well as related governance strengths and
weaknesses. This analysis (i) should determine any loopholes in existing tax administration,
including the degree of legal tax avoidance; (ii) should analyze gaps in law enforcement,
provide an overview of anticorruption efforts, assess the certainty, swiftness and severity of
punishment if convicted, assess the advantages and disadvantages of using administrative
rather than criminal sanctions; and (iii) evaluate the level of coordination and collaboration
among different authorities and within the government. Vested interests of key stakeholders
and public opinion regarding illicit tobacco trade can influence the degree of tax evasion
and, consequently, also need to be examined.33

Prioritizing and coordinating control of the entire supply chain (from the fields where
tobacco leaves are grown, or the port of entry, to the final purchase by the individual con-
sumer) and enforcement of tobacco regulations have proven to be effective measures in
reducing tax evasion along with the consumption of tobacco products.34 Importantly, the
WHO Framework Convention on Tobacco Control’s (FCTC) Protocol to Eliminate Illicit Trade
in Tobacco Products defines shared global standards for addressing illicit trade (detailed in
Chapter 2). Table 1 (Annex) summarizes common measures aiming to control the supply of
illicit tobacco products, including track-and-trace systems that have been identified by the
Protocol as a central approach.

XXX // Introduction
As noted above, enforcement is a vital component of any system aimed at prevention and
reduction of illicit trade in tobacco products. Table 2 (Annex) summarizes common features
of effective enforcement strategies. In this regard, it is significant to note that tobacco excise
taxes usually perform better in terms of compliance, compared to other taxes (e.g., revenue
losses due to corporate or individual income tax evasion in many countries are much larger
in both absolute and relative terms).35,36

The nature of the illicit trade in tobacco products requires international and cross-border
collaboration and coordination. Table 3 (Annex) lists features of international collaboration
aimed at prevention and reduction of illicit trade in tobacco products. Importantly, the
approaches outlined in these three tables are not intended as stand-alone interventions for
preventing or reducing illicit trade. As with other tobacco control strategies, these measures
are most effective when implemented as part of a comprehensive approach to controlling
illicit tobacco trade.

It should be noted that the approaches to control illicit tobacco trade need to be subject
to very regular surveillance, monitoring, and evaluation due to the inherently dynamic and
adaptive nature of the illicit market. As emphasized in a recent IMF report on tobacco tax
administration and enforcement, even in a single country, solutions that worked once might
not work twice.37

Confronting Illicit Trade in Tobacco: A Tough Fight—
That Countries Can Win
Confronting illicit trade in tobacco is critical to effective tobacco control in all countries.
However, addressing this issue poses complex political, legal, and technological challenges.
As such, illicit trade is one of the topics on which policymakers and program implementers
responsible for national tobacco control most frequently request information and technical
collaboration from international organizations.

Policymakers may have been told, in particular by representatives of the tobacco indus-
try, that high levels of illicit trade inevitably accompany the implementation of aggressive
tobacco control measures, in particular tobacco excise tax increases. This is false. The coun-
try experiences analyzed in this volume make clear that countries can and do contain or
reduce illicit trade while advancing other effective tobacco control strategies, including tax
increases. Indeed, as noted below, the opportunities for success are greater now than ever,
for countries prepared to take bold action.

XXXI
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

countries can harness increasing political momentum, forge global and regional partnerships
for collaboration and knowledge sharing, and score decisive victories against illicit trade in
tobacco in the years ahead.

What This Book Offers
In response to numerous country requests, this report marshals evidence from national and
regional experiences to inform anti-illicit trade strategies for tobacco products. The book
presents country and regional case studies, covering over 30 countries, that detail countries’
illicit trade context, legal and policy frameworks, enforcement strategies (and technolo-
gies used to address illicit trade), results obtained, and recommendations regarding further
strengthening tobacco illicit trade control. Taken together, these studies show:

»» Why illicit trade in tobacco matters to policymakers in all countries

»» What constraints policy makers and implementers face in addressing illicit trade in
tobacco products

»» What works to control illicit trade in tobacco products across a diverse selection of countries

»» What prioritized steps countries can take to initiate/sustain/strengthen action against illicit
trade in tobacco products.

The book presents information, analysis, and options for national policymakers (and their
technical advisers) in the multiple sectors that must work together against illicit trade in
tobacco, including health, finance, trade and customs, and law enforcement. The book also
provides resources to inform and empower civil society watchdog and advocacy organiza-
tions. As the included case studies confirm, civil society’s role in monitoring and combating
illicit trade in tobacco products is crucial.

Illicit Trade in Tobacco Products Case Studies:
Knowledge for Action
As noted above, the reasons to confront illicit trade in tobacco products are compel-
ling. The question is how. In response to demand from senior government officials and
other partners, this book provides practical input and guidance based on diverse country
experiences. The volume adopts a model of practice-oriented case studies designed to
complement the guidelines set forth in the WHO FCTC Protocol, and other normative

XXXII // Introduction
sources. The aim is to present hands-on facts and good practice guidance that policymak-
ers and implementers can readily utilize, as appropriate.

All included case studies are authored by experts with frontline knowledge of illicit trade in
tobacco products control in the respective countries and/or global sub-regions - in some
cases, government officials who have themselves been engaged in designing and imple-
menting illicit trade in tobacco products programs, in other instances independent experts
with deep understanding of the country or region and its tobacco illicit trade challenges.
The case studies adopt varied formats, although each presents data on the following topics:
(i) the jurisdiction’s political, economic, and epidemiological context; (ii) specific forms of
illicit trade in tobacco products; (iii) legal, policy, and institutional measures and reforms
introduced to address illicit trade in tobacco products; (iv) enforcement strategies and tech-
nological solutions; (v) results; and (vi) lessons learned. Each case study offers concluding
recommendations for further strengthening tobacco illicit trade control efforts.

Efforts to confront illicit trade in tobacco products are closely entwined with national and
regional tobacco taxation policies, not least because of the tobacco industry’s consis-
tent instrumentalization of illicit trade in tobacco products to discourage tax increases. To
maintain a clear focus, the case studies in this volume discuss tobacco taxation policies only
to the extent required to understand countries’ illicit trade in tobacco products challenges,
responses, and results.

Structure of This Volume
The core contents of this volume are organized as follows. Chapter 1 provides historical,
conceptual, and policy foundations of addressing illicit trade in tobacco products. Authored
by the Head of the Secretariat of the WHO Framework Convention on Tobacco Control
(FCTC), the chapter analyzes the WHO FCTC Protocol on the Elimination of Illicit Trade in
Tobacco Products, discusses challenges countries will face in implementing the Protocol,
and highlights strategies for minimizing tobacco-industry influence over national illicit trade
in tobacco products policy.

Part I (Chapters 2-7) looks at illicit trade in tobacco products control efforts in Europe,
Australia, and Canada. Australia broke ground in illicit trade in tobacco products control
with its Black Economy Task Force, whose 2017 report analyzed the economic and security
threats posed by illicit trade in tobacco products; confirmed the role of organized crime
in illicit tobacco; and outlined an agenda to reinforce Australia’s detection capabilities and
applicable penalties. The Canada case study addresses the complex political dynamics of
illicit trade in tobacco products in that country, with distinct control models in different
provinces; recurrent tobacco-industry instrumentalization of illicit trade in tobacco products
to resist tobacco tax hikes; and the challenge of addressing illicit cultivation, manufacture,
and sale of tobacco products by some Indigenous communities. The European Union

XXXIII
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

study details political and technical aspects of the EU’s effort to curtail illicit trade in tobacco
products through regional legislative and security collaboration, while supporting Member
States to adopt EU-defined minimum tobacco tax rates. Georgia has brought its illicit
tobacco market under greater control, largely due to a far-reaching reform of the coun-
try’s Revenue and Customs services. The case study documents how, in a relatively short
timeframe, Georgia reduced corruption, set up effective tax administration and enforce-
ment, and instituted more robust border controls. Today, ongoing challenges for Georgia
include countering tobacco-firm tax avoidance strategies such as “forestalling”: i.e., ordering
a larger-than-needed quantity of tax stamps just before a tax increase. Ireland reduced its
illicit trade in tobacco products prevalence over the decade 2007-17 thanks to an aggressive
enforcement program including dissuasive fines and custodial sentences for some con-
victed traffickers, among other features. The country’s average fine for illicit trade in tobacco
products-related offenses rose from around €600 in 2010 to more than €2500 in 2017. In
the first ten years of its illicit tobacco strategy, the United Kingdom cut the illicit market
share for cigarettes from 22 to 12 percent, even as authorities pursued tobacco tax hikes that
have helped substantially reduce smoking rates. Recent threats of a rebound in illicit trade in
tobacco products levels in the United Kingdom underscore, meanwhile, that even high-per-
forming national programs can falter, if governments fail to maintain the needed anti-illicit
trade in tobacco products investments.

Part II (Chapters 8-13) presents studies from Latin America and the Caribbean. Chile’s
average per capita consumption of tobacco products is among the highest in the world.
The country lacks a comprehensive illicit trade in tobacco products control strategy but is
moving forward with the implementation of a national track-and-trace system. The case
study identifies priority actions to strengthen Chile’s anti-illicit trade in tobacco products
efforts, including: signing and ratifying the Protocol; reducing the political influence of the
tobacco industry; producing independent information on the illicit cigarette trade; and
applying harsher sanctions to those convicted of involvement in illicit trade in tobacco
products. Colombia successfully contained illicit trade growth following a major tobacco
tax hike in late 2016. However, wide variations in illicit trade in tobacco products prevalence
across subnational regions call for more effective collaboration between national and local
governments, while plans for a unified national tobacco-product tracking and tracing system
remain on hold—a key pending opportunity to strengthen illicit trade in tobacco products
control capacities. In 2017, Mexico adopted a fiscal mark for cigarettes incorporating unique
identifier codes. The approach could signal a qualitative leap in Mexico’s ability to control
illicit trade in tobacco products. However, the absence of a public bidding process for the
development of the technology used to generate codes has raised concerns about the
system’s vulnerability to manipulation, underlining that rigorous transparency is essential in
all illicit trade in tobacco products lawmaking and enforcement processes. The illicit trade
in tobacco products response in the countries of the Organization of Eastern Caribbean
States (OECS) and Trinidad and Tobago remain in early stages. However, health officials

XXXIV // Introduction
and experts in these countries are actively examining options for regional cooperation in
tobacco tax policy and illicit trade in tobacco products control. Notably, Ecuador’s tax track-
and-trace system for domestically produced cigarettes, alcoholic beverages, and beer, was
implemented by its Internal Revenue Service in 2017. As the first track-and-trace system to
comply with the WHO FCTC Protocol to Eliminate Illicit Trade in Tobacco Products, Ecuador
system has become a benchmark for other countries. After ratifying the WHO Framework
Convention on Tobacco Control in September 2004, Uruguay has put in place a strong
national tobacco control policy implementing a comprehensive set of measures and is
increasing focusing on addressing illicit trade in tobacco products.

Part III (Chapters 14-17) encompasses East Asia and South Asia. Tobacco epidemics and
illicit trade in tobacco products challenges vary widely across this vast region, with some
Asian countries reporting adult male smoking rates that are among the highest in the world.
This context makes confronting illicit trade in tobacco products control all the more vital,
particularly given the correlation between inexpensive illicit cigarettes and smoking prev-
alence among youth. In Bangladesh, authorities have successfully engaged civil society
and youth in anti-illicit trade in tobacco products efforts and have used administrative
innovations such as Mobile Courts to strengthen local enforcement and shorten lag times
between illicit trade in tobacco products-related charges, judicial decisions, and the imposi-
tion of sanctions. Indonesia, with male smoking prevalence above 60 percent, has moved
to tighten enforcement against illicit trade, including by raising the weight of anti-illicit trade
in tobacco products activities in work contracts and performance evaluations for Customs
and Excise personnel. The number of enforcement operations in Indonesia aimed at illegal
cigarettes rose from 996 in 2014 to 3,950 in 2017. The estimated share of domestic illicit
trade in tobacco products in the total cigarette market shrank from 12.1 percent in 2016 to
7.0 percent in 2018. The main smuggling modality in Malaysia is under-declaring or mis-de-
claring the quantity or value of transported cigarettes. Key illicit trade in tobacco products
enforcement activities include inspecting goods entering Free Trade Zones. Special oper-
ations, road blocks, and regular land and sea patrols are carried out at strategic locations.
Using pre-defined risk rules, inspectors target high-risk consignments. The Philippines
moved to strengthen illicit trade in tobacco products control in line with the country’s 2012
“sin tax” excise hikes on tobacco products and alcohol. Enforcement tools include revenue
stamps, licensing, monitoring and surveillance of taxpayers and importers, x-ray machines,
audits, and the imposition of stiff penalties for violators. Both the Philippines and Malaysia
cases stress the importance of reinforced regional collaboration to take promising illicit trade
in tobacco products control results to the next level.

Part IV (Chapters 18-21) looks at illicit trade in tobacco products in Sub-Saharan Africa.
Kenya has invested substantially in illicit trade in tobacco products control and reaped
impressive rewards. The country’s new excisable goods management system for tobacco
and alcohol products was introduced in 2013-14 and has proven both more effective and
less expensive than the previous system. This case study emphasizes that the improvement

XXXV
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

in Kenya’s tobacco tax system and enforcement has not been an exclusively technical
endeavor. It involved consensus building, the participation of multiple stakeholders, and
comprehensive approaches to address tax evasion, recognizing that piecemeal mea-
sures have only short-term effects. A review of policies and enforcement capacities in the
Southern African Customs Union (SACU) countries and Zambia identifies strengths of
current control efforts, along with areas for improvement. High-quality tax stamps and track-
and-trace systems are currently lacking across the sub-region, for example. The Senegal
study shows that regional tobacco tax accords can be a double-edged weapon. The West
African Economic and Monetary Union (WAEMU) has set a regional maximum tobacco tax
rate, constraining Member States’ options to attack cigarette affordability. In contrast, the
Economic Community of West African States (ECOWAS), has recently changed its "maxi-
mum" tax rule to a "minimum" one, so that, like the EU, it does not restrain countries from
going higher. This section also includes an original field study comparing cigarette and
alcohol prices and stakeholder attitudes in border zones of Botswana, Lesotho, and South
Africa. Among other findings, the research brings evidence that Botswana’s introduction
of substantial levies on tobacco and alcohol has not led to major increases in cross-border
smuggling. These empirical findings support the argument that higher taxes alone are not
decisive in fueling illicit trade.

Following the detailed exploration of individual country experiences in the case studies,
Chapter 22 steps back to propose broadly applicable lessons on strengthening tax admin-
istration to confront illicit trade in tobacco products, while reducing tobacco use. Providing
a perspective from the International Monetary Fund, the chapter distills lessons from
global experience, emphasizing that illicit trade is a context-specific activity (consequently,
administrative and control measures need to reflect these realities), and that regional and
international coordination can substantially improve the efficiency of national efforts.

Based on comparative analysis of all case studies through the lens of the WHO Framework
Convention on Tobacco Control and its Protocol to Eliminate Illicit Trade in Tobacco
Products, in addition to the International Monetary Fund perspective in supporting country
efforts to control tobacco illicit trade (Chapter 22 of this volume) and the recent World Bank
publication Tobacco Tax Reform: At the Crossroads of Health and Development, the book’s
Conclusion identifies key strategic directions that have characterized countries document-
ing significant advances in the control of illicit trade in tobacco products. Within this broad
agenda, emphasis is placed on crucial strategic steps and specific actions policymakers and
implementers can prioritize to initiate/strengthen/sustain progress in confronting illicit trade
in tobacco products.

In sum, the case studies presented in this work demonstrate the importance, and feasibil-
ity, of addressing illicit trade in tobacco products as an integral part of tobacco tax reform
and comprehensive tobacco control.

XXXVI // Introduction
Annex

Table 1: Measures to Control the Supply of Illicit Tobacco Products

APPROACH DEFINITION

Official authorization for engaging in any activity within the tobacco supply chain, from
tobacco growing to product manufacturing to product transportation, wholesale, retail,
and the import/export of tobacco products. It motivates the licensees to follow legal
business practices under the threat of losing the license. Linking licensing systems with
Licensing
product markings/stamps, recordkeeping, and a tracking and tracing system makes it
more effective. Licensing producers and distributors of acetate tow, cigarette papers,
and manufacturing equipment needed to produce tobacco products could control
illegal manufacturing.
Counterfeit-resistant, affixed images on product packaging that indicate at least date
and location of manufacture, manufacturing facility, and product description. They
should have both overt and covert security features. Markings/stamps serve up to three
Product markings/stamps functions for any party in the supply system and the final buyer: a product authentication
tool, a tracking/tracing tool, and a revenue collection tool. They are particularly helpful
in identifying products on which taxes have been paid. They are usually applied to both
domestic and imported products, but also to export if appropriate.
Systems combining markers with a national record-keeping structure to enable tracking
of tobacco products throughout the supply chain, authentication, and tracing the
movement of products by consulting the tracking data kept in a national information-
sharing database. The system involves systematic, real-time accounting of all products,
random serialization, aggregation, and monitoring of the products' movement through
Track-and-trace
the supply chain. It aids crime-prevention and facilitates investigations by identifying
where the originally legal products were diverted into illicit channels. The system is
less effective controlling illegal manufacturing facilities or counterfeits, even though it
increases the distribution costs of such products and aids their detection in the retail
environment.
Requiring export companies to deposit bonds of the same value as the excise tax on
the exported products in order to create an incentive to ensure legal distribution of
Bond deposit for export their products by reducing the motivation for illegal re-import of exported products,
for example. The bond is released once the proof of goods’ arrival at the intended
destination is provided.
Requiring major credit card companies and PayPal to stop processing internet purchases
Controlling internet, mail
of cigarettes. Collaborate with shipping companies so that they refuse to ship tobacco
and phone order sales
products.
Sales occurring via virtual channels (e.g. internet, mail, phone) needs to be subject to the
appropriate taxes. Eliminating exemptions from tax payments or managing exemptions
Eliminating loopholes/
in a way that prevents their misuse by those involved in illicit tobacco trade. These
exemptions in the tax law
include, for example, policies addressing sales in territories exempt from taxes and in
duty-free shops.
Implementation of effective controls on manufacturing and transactions related to
Control of special tobacco and tobacco products in special economic zones (SEZs) or free trade zones
economic zones (FTZs), including tracking and tracing, and the prohibition of the intermingling of
tobacco products with non-tobacco products in a single container.

XXXVII
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table 1: Measures to Control the Supply of Illicit Tobacco Products, Cont.

APPROACH DEFINITION

Requiring parties engaged in the supply chain of tobacco, tobacco products, and
manufacturing equipment to exercise due diligence in conducting business including
Due diligence
proper identification of customers, monitoring sales to these customers, and reporting
any suspicious activities that could result in law violation.
Requiring all parties engaged in the supply chain of tobacco, tobacco products, and
manufacturing equipment to maintain complete and accurate records of all relevant
Record keeping transactions such as acquiring materials used in production, intended markets of retail
sale and their volumes, the intended shipping routes, volumes kept in stock, under the
transit regime or in duty suspension regime.
Adopt legislation that clearly defines unlawful conduct related to the supply of tobacco
Supportive legal
products, determines what constitutes administrative, civil and criminal offences, and
environment
establishes liabilities for such conduct.
Dissemination of information about consequences of engaging in illicit tobacco trade.
Educating the public about how to distinguish legal from illegal tobacco products.
Dissemination of information about the impact of illicit tobacco trade on society,
Public awareness
including easier access to tobacco products by youth, lost revenue, and support for
other illegal activities. Avoid the "illegal cigarettes are more harmful" message since it
can promote legal tobacco products.

Note: Adapted from Hana Ross, Muhammad Jami Husain, Deliana Kostova, Xin Xu, Sarah M. Edwards, Frank
J. Chaloupka, Indu B. Ahluwalia. Approaches for Controlling Illicit Tobacco Trade — Nine Countries and the
European Union. MMWR Weekly Vol. 64, No. 20 May 29, 2015; and from Frank J. Chaloupka, Sarah M. Edwards,
Hana Ross, Megan Diaz, Marin Kurti, Xin Xu, Mike Pesko, David Merriman, Hillary DeLong. Preventing and
Reducing Illicit Tobacco Trade in the United States. Centers for Disease Control and Prevention. 2015. http://
www.cdc.gov/tobacco/stateandcommunity/pdfs/illicit-trade-report-121815-508tagged.pdf; and Protocol to
Eliminate Illicit Trade in Tobacco Products, World Health Organization 2013; and Chris Holden. Graduated
sovereignty and global governance gaps: Special economic zones and the illicit trade in tobacco products.
Political Geography 59 (2017) 72-81.

XXXVIII // Introduction
Table 2: Enforcement Measures to Control the Illicit Trade in Tobacco Products

APPROACH DEFINITION

This requires, for example:

›› Installing detection equipment at customs posts such as x-ray scanners, endoscopes, mirrors,
night vision equipment, special tobacco detector equipment, cameras, automatic license plate
readers, and use of canines for spot-checks.
›› Applying physical control measures such as the separation of processing operations from
the sealed storage of taxed and untaxed products, presence of an enforcement officer in
the production facility, physical escort of products, inland mobile controls, joint patrols,
Commitment to application of radio or satellite tracking systems such as GPS-enabled devices to goods or
detect illicit trade conveyances/vehicles/containers.
activities
›› Background checks, enhanced retail inspections, and zero tolerance
›› Setting a minimum price and ban of loose sale to aid detection
›› Allowing the use of special investigative techniques such as undercover operations to combat
illicit trade in tobacco products.
›› Staff training focusing on detecting illicit tobacco professionals and anti-corruption programs
supported by a code of conduct.
›› Constantly refining of strategies and using creativity to stay ahead of criminals.
Subject offenders to effective, proportionate, and dissuasive criminal or non-criminal sanctions,
Prosecute including monetary sanctions. Adopt high/escalating and swift penalties, the criminalization of
and sanction excise tax/tobacco fraud, imprisonment, license revocation, confiscation of criminal proceeds,
offenders publicizing cases, and/or other measures that can be aimed at smugglers, retailers, consumers,
and other participants in illicit trade to act as deterrents.
Seizure and Seizure of illegal products, identifying their geographical origin, demanding seizure payments
disposal of covering at least the lost taxes from the guilty party, and destroying the products using
confiscated environmentally friendly methods to the greatest extent possible, or disposing of them in
products accordance with national law. These need to be transparent and documented processes.
Coordination among agencies within the country to support intelligence gathering, joint customs
Agencies’
operations, and sharing of best practices. Formal memoranda of understanding between agencies
coordination
help to define their respective roles.
Dissemination of information about the risks associated with illicit tobacco trade and about tools
Public awareness available to detect illegal products to motivate support for enforcement activities. Setting up
‘hotlines’ to report violations and motivate public to report illegal sales.

Note: Adapted from Hana Ross, Muhammad Jami Husain, Deliana Kostova, Xin Xu, Sarah M. Edwards, Frank
J. Chaloupka, Indu B. Ahluwalia. Approaches for Controlling Illicit Tobacco Trade — Nine Countries and the
European Union. MMWR Weekly Vol. 64, No. 20 May 29, 2015; Frank J. Chaloupka, Sarah M. Edwards, Hana
Ross, Megan Diaz, Marin Kurti, Xin Xu, Mike Pesko, David Merriman, Hillary DeLong. Preventing and Reducing
Illicit Tobacco Trade in the United States. Centers for Disease Control and Prevention. 2015. http://www.cdc.
gov/tobacco/stateandcommunity/pdfs/illicit-trade-report-121815-508tagged.pdf; and Protocol to Eliminate
Illicit Trade in Tobacco Products, World Health Organization 2013; Patrick Petit and Janos Nagy. How to design
and enforce tobacco excises? International Monetary Fund 2016.

XXXIX
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table 3: International Collaboration to Control the Illicit Trade in Tobacco Products

APPROACH DEFINITION

Adjacent jurisdictions agree to cooperate and try to equalize tax rates to prevent bootlegging
as well as legal cross-border shopping. Since a tax reduction due to harmonization could have
Tax harmonization
an adverse impact on public health and revenue that may outweigh any positive effects on
reducing the illicit tobacco trade, setting up a high minimum tax floor is the best approach.
Collaboration and coordination among agencies across borders as well as international
Agencies’ agencies such as Interpol and the World Customs Organization to support intelligence
collaboration and gathering, investigations, joint customs operations, prosecutions, posting of liaison
coordination officers, and sharing of best practices. This may require concluding bilateral or multilateral
agreements/arrangements
Share information related to import, export, transit, tax-paid and duty-free sales, seizures and
modi operandi used in illicit trade. Excise tax bonds on export should be released only after
Information sharing
the tax administration in the receiving country confirms that all appropriate taxes for that
jurisdiction have been paid.
Synchronization of Collaborate in combatting criminal offences related to illicit trade in tobacco by synchronizing
national laws national laws related to money laundering, mutual legal assistance, and extradition.

XL // Introduction
Endnotes
1
Report on the Global Tobacco Epidemic, World Health Organization, 2015
2
GBD 2015 Risk Factors Collaborators. Global, regional, and national comparative risk assessment of
79 behavioural, environmental and occupational, and metabolic risks or clusters of risks, 1990–2015: a
systematic analysis for the Global Burden of Disease Study 2015. Lancet, 2016; 388(10053):1659-1724
3
Marquez, P.V. Expanding the Global Tax Base: “Taxing To Promote Public Goods: Tobacco Taxes”.
Summary Report. World Bank Group, Washington, D.C. May 24, 2016
4
Marquez, P.V. Expanding the Global Tax Base: “Taxing To Promote Public Goods: Tobacco Taxes”.
Summary Report. World Bank Group, Washington, D.C. May 24, 2016
5
Goodchild, Nargis, and Tursan d’Espaignet. Global economic cost of smoking-attributable diseases.
Tobacco control. 2017
6
Tobacco Tax Reform At The Crossroads Of Health And Development. Edited by Patricio V. Marquez
and Blanca Moreno-Dodson. World Bank. October 2017. http://documents.worldbank.org/curated/en/
docsearch/report/119792.
7
Hana Ross, Muhammad Jami Husain, Deliana Kostova, Xin Xu, Sarah M. Edwards, Frank J. Chaloupka,
Indu B. Ahluwalia. Approaches for Controlling Illicit Tobacco Trade — Nine Countries and the European
Union. MMWR Weekly Vol. 64, No. 20 May 29, 2015
8
Patrick Petit and Janos Nagy. How to design and enforce tobacco excises? International Monetary
Fund 2016.
9
Collin J, Legresley E, MacKenzie R et al. (2004). Complicity in contraband: British American Tobacco
and cigarette smuggling in Asia. Tob Control, 13 Suppl 2;ii104–ii111.doi:10.1136/tc.2004.009357
PMID:15564212
10
Joossens L, Merriman D, Ross H, Raw M. How eliminating the global illicit cigarette trade
would increase tax revenue and save lives. Paris: International Union Against Tuberculosis and
Lung Disease, 2009. Available at http://tobaccocontrol.bmj.com/content/early/2013/01/14/
tobaccocontrol-2012-050788.
11
Tobacco Tax Reform At The Crossroads Of Health And Development. Edited by Patricio V. Marquez
and Blanca Moreno-Dodson. World Bank. October 2017. http://documents.worldbank.org/curated/en/
docsearch/report/119792
12
Hana Ross. Understanding and measuring tax avoidance and evasion: A methodological guide.
Washington DC 2015. DOI: 10.13140/RG.2.1.3420.0486 http://www.tobaccoecon.uct.ac.za/sites/
default/files/image_tool/images/405/Publications/reports/Understanding-and-measuring-tax-
avoidance-and-evasion-A-methodological-guide1.pdf http://documents.worldbank.org/curated/en/
docsearch/report/119792
13
Alejandro Ramos. Illegal trade in tobacco in MERCOSUR countries. Working Paper, June 2009.

XLI
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

14
Alex C. Liber, Hana Ross, Maizurah Omar, Frank J. Chaloupka. The Impact of the Malaysian Minimum
Cigarette Price Law: Findings from the ITC Malaysia Survey. Tobacco Control 2015; 24:iii83–iii87.
doi:10.1136/tobaccocontrol-2014-052028
15
Patrick Petit and Janos Nagy. How to design and enforce tobacco excises? International Monetary
Fund 2016.
16
Gallagher AWA, Evans-Reeves KA, Hatchard JL, et al. Tobacco industry data on illicit tobacco trade: a
systematic review of existing assessments. Tobacco Control Published Online First: 22 August 2018. doi:
10.1136/tobaccocontrol-2018-054295
17
Patrick Petit and Janos Nagy. How to design and enforce tobacco excises? International Monetary
Fund 2016.
18
National Research Council and Institute of Medicine. Understanding the U.S. Illicit Tobacco Market:
Characteristics, Policy Context, and Lessons from International Experiences. Washington DC: The
National Academies Press. 2015.
19
Frank J. Chaloupka, Sarah M. Edwards, Hana Ross, Megan Diaz, Marin Kurti, Xin Xu, Mike Pesko, David
Merriman, Hillary DeLong. Preventing and Reducing Illicit Tobacco Trade in the United States. Centers
for Disease Control and Prevention. 2015. http://www.cdc.gov/tobacco/stateandcommunity/pdfs/illicit-
trade-report-121815-508tagged.pdf
20
Merriman D, Yurekli A, Chaloupka F (2000). How big is the worldwide cigarette smuggling problem?
In: Prabhat J, Chaloupka F, eds., Tobacco control in developing countries. Oxford, UK, Oxford University
Press, 1-464.
21
Chernick H, Merriman D (2013). Using Littered Pack Data to Estimate Cigarette Tax Avoidance in NYC.
National Tax Journal, 635–668 (June 2013)
22
Paraje G. Illicit cigarette trade in five South American countries: A gap analysis for Argentina, Brazil,
Chile, Colombia and Peru. Nicotine & Tobacco Research (in print). 2018.
23
Kaplan B, Navas-Acien A, Cohen JE. The prevalence of illicit cigarette consumption and related factors
in Turkey. Tobacco Control. 2017
24
The Economics of Tobacco and Tobacco Control. National Cancer Institute Tobacco Control
Monograph 21. NIH Publication No. 16-CA-8029A. Bethesda, MD: U.S. Department of Health and
Human Services, National Institutes of Health, National Cancer Institute; and Geneva, CH: World Health
Organization; 2016. https://cancercontrol.cancer.gov/brp/tcrb/monographs/21
25
Effectiveness of Tax and Price Policies for Tobacco Control. Volume 14, IARC Handbooks, 2011.
26
Masood Ahmed; Global Health Policy Blog; Tobacco Taxes Need to Be a Much Bigger Part of the
Fiscal Policy Discussion; Views from the Center; Tobacco, taxes, Finance, 5/12/17; https://www.cgdev.
org/blog/tobacco-taxes-need-be-much-bigger-part-fiscal-policy-discussion
27
Kaplan B, Navas-Acien A, Cohen JE. The prevalence of illicit cigarette consumption and related factors
in Turkey. Tobacco Control. 2017
28
Hana Ross. Understanding and measuring tax avoidance and evasion: A methodological guide.
Washington DC 2015. DOI: 10.13140/RG.2.1.3420.0486 http://www.tobaccoecon.uct.ac.za/sites/
default/files/image_tool/images/405/Publications/reports/Understanding-and-measuring-tax-
avoidance-and-evasion-A-methodological-guide1.pdf

XLII // Introduction
29
Tobacco Tax Reform At The Crossroads Of Health And Development. Edited by Patricio V. Marquez
and Blanca Moreno-Dodson. World Bank. October 2017. http://documents.worldbank.org/curated/en/
docsearch/report/119792
30
Joossens L. Smuggling and cross-border shopping of tobacco products in the European Union.
London, The Health Education Authority. 1999.
31
Council of the European Union (2005). Report on cigarette smuggling in the European Union.
Brussels, Council of the European Union.
32
Tobacco Tax Reform At The Crossroads Of Health And Development. Edited by Patricio V. Marquez
and Blanca Moreno-Dodson. World Bank. October 2017. http://documents.worldbank.org/curated/en/
docsearch/report/119792
33
Hana Ross. Understanding and measuring tax avoidance and evasion: A methodological guide.
Washington DC 2015. DOI: 10.13140/RG.2.1.3420.0486 http://www.tobaccoecon.uct.ac.za/sites/
default/files/image_tool/images/405/Publications/reports/Understanding-and-measuring-tax-
avoidance-and-evasion-A-methodological-guide1.pdf
34
Tobacco Tax Reform At The Crossroads Of Health And Development. Edited by Patricio V. Marquez
and Blanca Moreno-Dodson. World Bank. October 2017. http://documents.worldbank.org/curated/en/
docsearch/report/119792
35
Feige, Edgar L. and Cebula, Richard. America’s Underground Economy: Measuring the Size, Growth
and Determinants of Income Tax Evasion in the U.S. Crime Law and Social Change. Apr 2012.
36
Measuring tax gaps 2017 edition. Tax gap estimates for 2015-16. HM Revenue & Customs. October 2017
37
Patrick Petit and Janos Nagy. How to design and enforce tobacco excises? International Monetary
Fund 2016.

XLIII
THE PROTOCOL
TO ELIMINATE
ILLICIT TRADE
IN TOBACCO
PRODUCTS
1

The Protocol to Eliminate
Illicit Trade in Tobacco
Products: A Global
Solution to a Global
Problem
Vera Luiza da Costa e Silva1

Chapter Summary
The Protocol to Eliminate Illicit Trade in Tobacco Products was adopted during the fifth ses-
sion of the Framework Convention on Tobacco Control (FCTC) Conference of the Parties,
in 2012. After obtaining its required fortieth ratification, the Protocol entered into force on
September 25, 2018.

The Protocol has three core elements:

1. Prevention: The treaty aims to secure the supply chain of tobacco products through
a series of measures to be taken by governments. Notably, the Protocol requires the

1
Head of the Secretariat of the WHO Framework Convention on Tobacco Control. The author writes on behalf
of the Convention Secretariat technical team. Special thanks to Nicolas Guerrero Peniche, Patrick Musavuli,
Yoni Dekker, and Martin Grande.

1
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

establishment of a global tracking and tracing regime, comprising national and regional
tracking and tracing systems and a global information sharing point. Other measures
include licensing and record-keeping requirements, as well as regulation of Internet
sales, duty-free sales, and international transit.

2. Law enforcement: The Protocol also establishes the unlawful conduct related to trade
in tobacco products, including criminal offenses.

3. International cooperation: In its third pillar, the treaty aims to boost international
cooperation both among Parties and intergovernmental organizations concerned with
customs, crime, and trade.

One of the Protocol’s most critical measures is the tracking and tracing regime. Its purpose is
to assist Parties in determining the origin and legal status of tobacco products and their point
of diversion, if applicable, and to monitor and control the movement of tobacco products.

The tobacco industry is active in promoting its own tracking and tracing solutions, which
are less rigorous than those stipulated by the Protocol. For example, the industry aggres-
sively promotes its privately developed Codentify tracking and tracing regime. The Codentify
system conflicts with the Protocol and does not meet the treaty’s requirements that the
tracking and tracing system should be “controlled by the Party.” In implementing track-and-
trace, as in all other aspects of tobacco control, country authorities and regional bodies
must maintain an appropriate critical distance from the tobacco industry.

The Protocol will provide the national authorities in charge of fighting illicit tobacco with a
forum in which to exchange best practices, examine new challenges, and consolidate trust.
Implementation will nurture enhanced domestic and international cooperation between agen-
cies from multiple sectors (including health, law enforcement, customs, trade, and others).

In fighting the illicit tobacco trade, some countries struggle with the lack of an adequate
regulatory and legislative framework; weak enforcement mechanisms; insufficient financial
resources and expertise; a high level of corruption; conflict or political unrest; and unpro-
tected or porous borders. These problems will not disappear overnight, but can be reduced
or better managed through international cooperation under the auspices of the Protocol.

1. Historical Background
In 2007, two years after the entry into force of the World Health Organization Framework
Convention on Tobacco Control (WHO FCTC), Parties to the Convention determined that it
was urgent to strengthen supply-reduction measures. Leaders saw illicit trade as one of the
key supply-related areas of the Convention requiring immediate additional attention. Illicit
tobacco trade was both a growing concern among governments and an argument used by
the tobacco industry to hinder implementation of other provisions of the treaty, especially
Article 6.

2 // The Protocol to Eliminate Illicit Trade in Tobacco Products: A Global Solution to a Global Problem
Parties judged that a platform of international cooperation was needed to tackle illicit trade,
a threat that no nation can resolve within its own borders. During the second session of
the WHO FCTC Conference of the Parties (COP2), they established an Intergovernmental
Negotiating Body (INB) tasked to develop an illicit trade Protocol. Following its adoption by
the Conference of the Parties and entry into force, the Protocol would be a treaty in its own
right and a major instrument to eliminate illicit trade in tobacco products.

The INB confirmed that a coordinated global approach was necessary to solve the problem
of illicit trade in tobacco products. There was consensus among the Parties on the need for
a protocol with strong obligations. In five rounds of meetings, a preliminary text was agreed
upon. The final text of the Protocol to Eliminate Illicit Trade in Tobacco Products was then
adopted during the fifth session of the FCTC Conference of the Parties in Seoul, Republic of
Korea, in 2012. This new international legal instrument was the first protocol to be derived
from the WHO FCTC. After obtaining its necessary fortieth ratification by the United Kingdom,
it will enter into force on September 25, 2018. As of the end of August 2018, the Protocol
included 48 Parties.

Throughout the process of developing and ratifying the Protocol, tobacco industry interfer-
ence has never been far away. While the Protocol could in theory be a beneficial instrument
for tobacco firms that operate legally, the tobacco industry has fought to diminish its obliga-
tions under the Protocol and to delay the treaty’s adoption. Notably, the industry has tried to
push for its own tracking and tracing mechanism, Codentify, that is far less transparent than
the tool the Protocol stipulates.2

This chapter will explore the objectives and scope of the Protocol, its status as a young
international treaty, the tracking and tracing system it requires Parties to establish, and the
challenges faced concerning the global illicit trade in tobacco products.

2. Objectives and Scope of the Protocol
The objective of the Protocol is the elimination of all forms of illicit trade in tobacco products.3

Today, the illicit tobacco trade has become a pervasive problem reaching all corners of the
globe. It threatens the health of the population, while fostering criminality and reducing tax
revenues. Some sources estimate that if the global illicit tobacco trade were eliminated over-
night, governments would see an immediate gain of billions of dollars in revenue.4

2
https://tobaccocontrol.bmj.com/content/tobaccocontrol/early/2018/06/13/tobaccocontrol-2017-054191.full.
pdf Accessed August 28, 2018.
3
Article 1 of the Protocol defines, in Paragraph 6, illicit trade as “any practice or conduct prohibited by law and
which relates to production, shipment, receipt, possession, distribution, sale or purchase, including any practice
or conduct intended to facilitate such activity.”
4
Financial Action Task Force/Organization for Economic Co-operation and Development, 2012. http://www.
fatf-gafi.org/media/fatf/documents/reports/Illicit%20Tobacco%20Trade.pdf

3
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Parties to the Protocol enjoy a wide spectrum of benefits, extending from the reinforcement
of national security to increased fiscal revenues. Most importantly, these countries are more
effectively protecting the health of their people, particularly vulnerable groups.5

It is well recognized that the prevalence of smoking is price sensitive, making illicit prod-
ucts particularly attractive to lower-income and younger segments of the population, who
constitute most tobacco-product consumers. Eliminating illicit trade in tobacco products
ensures the market is composed of taxed tobacco products subject to health regulations
and thus reduces tobacco consumption and smoking prevalence, as lower-income and
younger people find tobacco more expensive and less attractive. The public-health impli-
cations are substantial, ranging from lower chronic disease prevalence to saving funds that
would otherwise have been spent on health care for tobacco-related diseases. By acceler-
ating reductions in smoking prevalence among the poor, the fight against illicit trade also
strengthens health equity, since lower-income groups tend to suffer disproportionately from
tobacco-related health problems.

According to the World Customs Organization, growth in the illicit tobacco trade remains a
worrying worldwide phenomenon and an enduring source of funding for illicit activities that
undermine social order, good governance, and the rule of law.6 Eliminating the illicit trade in
tobacco products generates higher revenues from the increase of taxable tobacco products,
while upholding and strengthening national tax policies. This fosters improved national secu-
rity by weakening criminal organizations and reducing corruption.

Key Components of the Protocol
The Protocol has three core elements that together establish the framework of policies for
eliminating illicit trade.

1. Prevention: In order to prevent this illegal trade, the Protocol aims to secure the
supply chain of tobacco products through a series of government measures. It
requires the establishment of a global tracking and tracing regime within five years of
the Protocol’s entry into force, comprising national and regional tracking and tracing
systems and a global information sharing point. Other measures include licensing and
record-keeping requirements, as well as regulation of Internet sales, duty-free sales,
and international transit.

2. Law enforcement: Not only technical requirements are needed, but the Protocol also
establishes the unlawful conduct related to trade in tobacco products, including crimi-
nal offenses.

5
World Health Organization. Illegal Trade of Tobacco Products. What you should know to stop it. Geneva:
WHO, 2015.
6
World Customs Organization. The illicit trade report 2013. Brussels: World Customs Organization, 2014.

4 // The Protocol to Eliminate Illicit Trade in Tobacco Products: A Global Solution to a Global Problem
3. International cooperation: In its third important pillar, the Protocol aims to boost inter-
national cooperation both among Parties and among international intergovernmental
organizations concerned with customs, crime, and trade.

The Convention Secretariat, which will also serve as the Secretariat of the Protocol through
the stipulated monitoring system, will closely follow the implementation of all provisions of
the Protocol. The time-bound provisions foreseen in the treaty are expected to require spe-
cial attention. They include the establishment of a global tracking and tracing regime within
five years7; ensuring that cigarette packaging contains unique identification markings within
five years8; instituting unique marking systems for other tobacco-product packaging within
ten years; and conducting research on the relation between duty-free sales and the extent
of illicit trade, to be completed within five years.9

Like the WHO FCTC, the Protocol includes provisions that raise awareness about potential
tobacco industry interference with treaty implementation. In the Preamble to the Protocol,
Parties are reminded “to be alert to any efforts by the tobacco industry to undermine or
subvert strategies to combat illicit trade in tobacco products.”

3. Status of the Protocol and Plans to Expand
Its Reach
The Protocol is still newborn. The treaty encompasses 47 countries and the European
Union as of its official entry into force on September 25, 2018.10 The initial session of the
Meeting of the Parties is the first opportunity for Parties to discuss priorities and next steps
for implementation.

Considering the ratification from a geographical perspective, one can observe that most
Parties are from the European and African regions. To achieve a more global coverage
of implementation efforts, promoting further ratifications will be key. For the Protocol to
become truly effective and efficient in fighting the global illicit tobacco trade, more Parties
are needed.

4. Tracking and Tracing Tools
One of the Protocol’s most critical measures is the global tracking and tracing regime
described in Article 8. The purpose of a tracking and tracing system is to assist Parties in
determining the origin of tobacco products and their point of diversion, if applicable, and to
monitor and control the movement of tobacco products and their legal status. The Protocol

7
Art. 8.1 of the Protocol to Eliminate Illicit Trade in Tobacco Products.
8
Art. 8.3 of the Protocol to Eliminate Illicit Trade in Tobacco Products.
9
Art. 13.2 of the Protocol to Eliminate Illicit Trade in Tobacco Products.
10
For status updates, consult the UN Treaty collection: https://treaties.un.org/pages/ViewDetails.
aspx?src=TREATY&mtdsg_no=IX-4-a&chapter=9&lang=en

5
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

will allow Parties to obtain information throughout the supply chain, until duties are paid or
other obligations discharged.

Article 8 requires Parties to make an extensive body of information available to assist each
other in determining the origin and legal status of tobacco products and in monitoring prod-
uct movements. An effective tracking and tracing system should capture all relevant tobacco
product data, including:

a. Date and location of manufacture;

b. Manufacturing facility;

c. Machine used to manufacture tobacco products;

d. Production shift or time of manufacture;

e. The name, invoice, order number, and payment records of the first customer not affili-
ated to the manufacturer;

f. The intended market of retail sale;

g. Product description;

h. Any warehousing and shipping;

i. The identity of any known subsequent purchaser; and

j. The intended shipment route, shipment date, shipment destination, point of departure,
and consignee.

Technological Considerations: Unique Identifiers and
Data Carriers
One of the elements of the tracking and tracing regime of the Protocol is the use of unique
identifiers. These consist of a distinctive combination of numbers, letters, or both that are
unique for each pack/item. They cannot be used twice and are not predictable. For instance,
passports use a combination of letters and numbers that is unique for each person. The
attribution of this combination identifies each person and is not predictable. Digital Mass
Encryption is a widely used method to make codes less predictable and prevent unau-
thorized access by establishing a very large population of possible codes, of which only a
proportion are valid and used. Valid codes can only be generated if mathematical formulas
(algorithms) and secret keys that are used for their creation are known. The representation
of the identifier on the package can be readable by the human eye (letters or numbers) or
machine readable (barcodes).11 12

11
FCTC. Analysis of the available technology for unique markings in view of the global track and trace regime
proposed in the negotiating text for a protocol to eliminate illicit trade in tobacco products. FCTC/COP/INB-
IT/4/INF.DOC./1.
12
European Commission. EAHC/2013/Health/ll Final Report Concerning the Provision of an Analysis and
Feasibility Assessment Regarding EU systems for Tracking and Tracing of Tobacco Products and for Security
Features. Brussels, March 2015.

6 // The Protocol to Eliminate Illicit Trade in Tobacco Products: A Global Solution to a Global Problem
In addition to the serialized unique identifier, a data carrier is also required, with a serialized
unique identifier and other information available at the time of manufacturing, such as place
and time of manufacture. The data carrier should comply with quality13 standards (to avoid
extracting incorrect data or to access the data even if a portion of the carrier is damaged), be
readable by authorized agencies of any Party to the Protocol, and be suitable for high-speed
production lines.

Further along the supply chain, any shipping and receiving events should be recorded, for
instance the departure of a pallet from the manufacturing site and its arrival with a specific
trader. International standards should be established and recommended for the capture and
exchange of data and events with due regard to potential tobacco-industry influence on
standardization bodies.

Finally, data and events along the supply chain should be stored in an independent database
controlled by competent government authorities. At the global level, a multitude of national
and/or regional databases need to have the capacity to interrelate to facilitate international
inquiries by competent authorities. Similarly, the Protocol stipulates that access to and
retrieval of this data need to be controlled by each Party.

Maintaining Independence from the Industry: Concerns
about “Codentify”
A very important factor in this system is that generation and encryption linked to a tobacco
industry patent should be excluded. The tracking and tracing of cigarettes and other tobacco
products should be objective and not biased by financial or economic interests. However,
the tobacco industry is active in promoting its own tracking and tracing solutions.

One of these is called Codentify. Strictly speaking, Codentify is not a tracking and tracing
system, but is a code generator system installed on the production line that creates unique
codes on packs.14 Codentify uses elements of production-related information (such as
production line and time of production) to generate, via a secret “key,” an unpredictable and
unique encrypted 12-character combination of letters and numbers. This code can be used to
identify and authenticate a pack of cigarettes. The number, linked to a digital signature, can
be read by a human or by a computer. By capturing the human-readable code or scanning a
machine-readable code, a computer program will determine whether the code is correctly
formed or not. If the code is correctly formed, the program can retrieve associated trace
information from a database (e.g., details of first customer). Meanwhile, cartons, master
cases, and pallets use unique non-encrypted codes to identify the packages, rather than
Codentify codes. This combination of Codentify codes on packs and other codes on the

13
Bialous SA, Yach D. Whose standard is it, anyway? How the tobacco industry determines the International
Organization for Standardization (ISO) standards for tobacco and tobacco products. Tobacco Control,
2001;10:96-104, doi:10.1136/tc.10.2.96.
14
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3897562/ Accessed: August 28, 2018.

7
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

secondary packaging units is presented as a tracking and tracing system and is endorsed by
the major transnational cigarette companies.15

The Codentify system has been criticized as non-transparent. Given that the system is not
open source, some observers have suggested that Codentify may contain hidden fea-
tures known only to the tobacco industry. Codentify is managed and controlled by the
industry and protected by a tobacco industry patent, thus it clearly appears conceived
to serve the industry’s interests.16 In this sense, some analysts argue, choosing Codentify
for track-and-trace operations would be opting for a “black box” system. According to a
study commissioned by the WHO FCTC Secretariat and informally circulated at COP6, the
Codentify system conflicts with the FCTC Protocol and does not meet the requirements of
Article 8.2 that the tracking and tracing system should be “controlled by the Party.”17

Importantly, the Codentify system was designed by the industry specifically to address
the issue of counterfeit tobacco. However, this is only a minor part of the overall illicit
trade problem. A larger proportion of illicit trade consists of tax evasion by the mainstream
tobacco industry itself, along with the cross-border smuggling of cigarettes and other
tobacco products.

In contrast to the case of counterfeit pharmaceuticals, for example, all forms of tobacco are
harmful to human beings, including both counterfeit cigarettes and those that are manufac-
tured and sold in complete legality. Even in its limited role with counterfeiting, Codentify is
an ineffective means of authentication, because the codes are visible and easy to forge. In
fact, the so-called validity codes generated by this system can be easily cloned, recycled, or
migrated, particularly if the tobacco industry itself were involved in the illicit trade.18

Multiple track-and-trace solutions exist for a wide variety of products, but concerns have
been raised about the efficacy and cost of such systems. At the time of writing, Brazil, Kenya,
and Turkey have already implemented specific marking systems for tobacco products, and
their experience will be relevant to next steps in the establishment of a tracking and tracing
system under the Protocol.

15
https://tobaccocontrol.bmj.com/content/tobaccocontrol/early/2018/06/13/tobaccocontrol-2017-054191.
full.pdf Accessed: August 28, 2018.
16
Joossens L, Gilmore AB. The transnational tobacco companies’ strategy to promote Codentify, their
inadequate tracking and tracing standard. Tob Control 2013;050796. doi:10.1136/tobaccocontrol-2012-050796
17
FCTC. 6th Conference of the Parties to the WHO Framework Convention. Secretariat study of the basic
requirements of the tracking and tracing regime to be established in accordance with Article 8 of the Protocol
to Eliminate Illicit Trade in Tobacco Products. Executive Summary, White Paper. Moscow: 2014.
18
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3897562/ Accessed August 28, 2018.

8 // The Protocol to Eliminate Illicit Trade in Tobacco Products: A Global Solution to a Global Problem
5. Challenges Faced in the Implementation of
the Protocol
Although the Protocol will only enter into force at the end of 2018, Parties have already been
reporting on illegal trade through the requirements linked to Article 15 of the WHO FCTC.
The key observations from these progress reports are that:

»» A growing number of Parties confirm having legislation in place to address illicit trade in
tobacco products;

»» The implementation of most measures under this article has improved considerably in the
period 2016-2018.

According to WHO’s 2018 FCTC implementation progress report, over half of all Parties to
the WHO FCTC required monitoring and collection of data on cross-border trade in tobacco
products, including illicit trade. On the other hand, only 18 percent reported having data on
the percentage of smuggled tobacco products within their jurisdiction. Only one-third of
all these Parties had developed or implemented a practical tracking and tracing regime to
secure the distribution system and assist in the investigation of illicit trade.19

Resisting Industry Pressures
Many challenges for implementation of the Protocol are linked to potential interference by
the tobacco industry and alleged front groups, such as the International Tax and Investment
Center (ITIC20). For example, the industry and those that promote its interests have intensi-
fied their advocacy for industry-derived tracking and tracing systems (e.g., Codentify).

Country authorities and regional bodies must maintain an appropriate critical distance from
the tobacco industry. A positive example comes from Lithuania, which initiated a motion to
reject, at European Union level, the Codentify tracking and tracing system proposed by the
tobacco industry. The motion was signed by Lithuania’s Minister of Health, the Chairperson
of the Committee for Health, the Chairperson of the National Health Board, and the
President of the National Alcohol and Tobacco Control Coalition.

It appears that the legal tobacco industry would benefit from measures taken against illicit
trade, since in theory illegal trade in tobacco products causes the legal industry to lose rev-
enue. However, the reality is more complex. Evidence indicates that the tobacco industry is
often one of the biggest suppliers of tobacco products on the illicit market. This way, tax can
be evaded, while the industry can still profit from the sale of its highly addictive products in a
market without controls.21

19
World Health Organization. 2018 global progress report on the implementation of the WHO Framework
Convention on Tobacco Control. Geneva: WHO, 2018.
20
http://seatca.org/dmdocuments/Asia%2014%20Critique_Final_20May2015.pdf
21
https://tobaccocontrol.bmj.com/content/tobaccocontrol/early/2018/06/13/tobaccocontrol-2017-054191.
full.pdf Accessed: August 28, 2018.

9
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Thus, the tobacco industry is not to be regarded as a partner in eliminating the illicit trade in
tobacco products, although some contacts with tobacco companies to implement a track-
ing and tracing system are unavoidable. Some information, in the data carrier for instance,
should be provided by the industry, such as place and date of production. However, con-
tacts with the tobacco industry should be strictly limited and transparent in all cases.

Overcoming Challenges through
International Cooperation
Controlling the supply chain serves to prevent illicit trade. The Protocol also contains pro-
visions regarding unlawful conduct, including criminal offenses, international cooperation,
and finances. Sectors taking a leading role in these provisions may therefore include foreign
affairs, finance, and law enforcement authorities.

Governing systems may vary widely between Parties. To determine the roles and respon-
sibilities of different government agencies, it may be useful to establish a multi-sectoral
mechanism, composed of potentially relevant government sectors, to review the existing
mandate of each sector and determine the roles and responsibilities under the obligations
prescribed in the Protocol.

In fighting the illicit tobacco trade, some countries struggle with the lack of an adequate
regulatory and legislative framework for tobacco products and the tobacco industry; weak
enforcement mechanisms; insufficient financial resources and expertise; a high level of
corruption; conflict or political unrest; and unprotected or porous borders. These problems
will not disappear overnight, but can be reduced or better managed through international
cooperation under the auspices of the Protocol.

6. Conclusion
With the Protocol’s entry into force, the international community has at its disposal a new
set of tools to fight the illicit trade in tobacco products. The Protocol includes innovative and
ambitious mechanisms. At its heart is the tracking and tracing regime, which the Parties have
committed to implement within five years. The establishment of a global information-sharing
focal point, to be located at the Convention Secretariat, will constitute a technical, political,
and financing challenge. However, once operational, this hub will provide Parties with an
essential tool to share information and better understand the structure and paths of illicit trade.

The Protocol will also provide the various national authorities in charge of fighting illicit
tobacco with a forum in which to exchange best practices, examine new challenges, and
consolidate trust. Implementation will nurture enhanced domestic and international cooper-
ation between agencies from multiple sectors (including health, law enforcement, customs,
trade, and others). In this way, the Protocol offers Parties an unprecedented opportunity to
curb a major public health threat while securing multisectoral benefits at the national level.

10 // The Protocol to Eliminate Illicit Trade in Tobacco Products: A Global Solution to a Global Problem
As they seize the opportunity, countries will reinforce the rule of law in their own territo-
ries and globally, strengthen international ties, boost fiscal revenues, and ensure a healthier
future for the generations to come.

11
AUSTRALIA,
CANADA &
EUROPE
AUSTRALIA

CANADA

EUROPEAN UNION

GEORGIA

IRELAND
2 3 4 5 6

UNITED KINGDOM
7

13
AUSTRALIA
2

AUSTRALIA:

Addressing the Illicit Flow
of Tobacco Products
in Australia
Robert Preece1

Chapter Summary
Background and Policy Context
In 2018–19, Australia is taking a number of significant steps to address the illicit trade in
tobacco. In the context of ongoing aggressive tobacco tax increases, the new measures now
rolling out will strengthen the administration of tobacco imports and create a multi-agency
taskforce to increase investigatory and enforcement capability, among other advances.

Australia has earned a reputation for innovation in anti-smoking policy, taking global leader-
ship in areas like plain packaging and the indexation of tobacco excise rates to affordability.
Australia has adopted numerous non-fiscal tobacco-control measures, many of which are
consistent with the Framework Convention on Tobacco Control (FCTC). These strategies
were bought together under the National Tobacco Strategy 2012–2018. They have included
graphic health warnings, advertising bans, and the prohibition of smoking in public spaces.

1
Charles Sturt University, Australia

15
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Meanwhile, tobacco taxation policy continues to play an important role in reducing demand
for tobacco in Australia. The country has accelerated tobacco excise rates, starting with a
25 percent hike in 2010, followed by 12.5 percent annual increases from 2013 through to
2020. These tax increases are additional to the bi-annual indexation of rates each March
and September. The overall effect has been a substantial rise in the tax component of retail
cigarette pricing. While this brings Australia closer to the 70 percent tax target suggested by
the World Health Organization, it may also heighten incentives for criminals to expand the
illicit tobacco market.

Historically, Australia has administered tobacco taxes through a series of licensing and permis-
sion-based regimes that seek to facilitate dealings by lower-risk entities and to prevent or tightly
control commerce involving higher-risk entities. To manage tobacco tax collections, Australia
has a set of regulatory controls administered by its domestic tax agency, the Australian Taxation
Office (ATO). These controls recognize that tobacco could, in principle, be either grown and
manufactured locally, imported as finished goods, or imported as leaf for final manufacture in
Australia. In practice, since 2015, the licit tobacco market in Australia is comprised exclusively
of imported finished tobacco products (e.g., cigarettes). All legal domestic tobacco growing
and manufacture have ceased. Of note, Australia’s tobacco-trade controls do not extend to the
use of fiscal markings such as tax stamps, or to the application of track-and-trace technologies
to confirm the tax status of tobacco products in the supply chain.

Enforcement Agencies and Activities
Tobacco tax administration is supported by enforcement and investigative activity, including
the high-profile actions of the Australian Border Force (ABF) Tobacco Strike Team, recently
credited with Australia’s largest-ever seizure of illicit tobacco. Although imports now represent
the only legal channel for tobacco trade in Australia, enforcement still involves dual legislative
jurisdictions, as illegal domestic cultivation persists. This has led to complexities: for example,
the ABF enforces laws relating to imported tobacco products under customs legislation, while
the ATO enforces laws relating to local cultivation and manufacture under excise legislation.
Further, these dual legislative jurisdictions are often inconsistent in areas such as the level of
intent to be proved and the penalties available. Thus, the origin of suspicious tobacco found in
the supply chain needs first to be established to ensure successful prosecution.

Recommendations and Way Forward
A major development in addressing the illicit trade in tobacco was the recent work of the
Government’s Black Economy Taskforce. The taskforce’s 2017 report clearly acknowledged
the threats posed by Australia’s illicit tobacco market, confirmed the role of organized crime
in illicit tobacco, and recognized that existing detection capabilities and applicable penal-
ties must be reinforced. The report presented specific recommendations for strengthening
action against illicit tobacco, many of which the Government will implement as of July 1,
2019. However, not all Black Economy Taskforce recommendations on illicit tobacco will

16 // Australia: Addressing the Illicit Flow of Tobacco Products
be adopted. Most notably, there will be no introduction of fiscal marking or track-and-trace
systems for tobacco products in Australia.

On the positive side, from 2019, the Australian government will tighten its tobacco tax
administration by eliminating the status of tax-suspended, or “bonded,” tobacco. This will
remove an area of significant fraud risk. In addition, an import licensing regime will be
introduced, and commercial importation of tobacco will be banned without appropriate
licensing. The Government will bolster enforcement capabilities by addressing inconsis-
tencies between import and domestic legislation and will recognize a number of new
tobacco-related offenses. Enforcement will be supported by the creation of a multi-agency
Illicit Tobacco Taskforce. The new force will build on the existing Tobacco Strike Team by
bringing together the legislative powers, intelligence systems capabilities, and resources of
several federal law enforcement agencies.

Part A: What Has Been Done to Address the Illicit
Trade in Tobacco, How Was It Done, and What Are
the Results?
1. Tobacco Control in Australia
Tobacco control began in earnest in Australia in 1992, with the passage of the Tobacco
Advertising Prohibition Act, which introduced a range of restrictions on the marketing of
tobacco products. Since then, Australia has developed a comprehensive range of measures,
both fiscal and regulatory, to address the costs of harm from tobacco consumption. These
include high-profile measures that require tobacco products to be sold in plain packaging
and that impose graphic health warnings covering most of the surface of cigarette packages.
A short summary of key control measures and policy or legislative sources can be found in
Table 1.

Tobacco taxation has also become a central component of Australia’s tobacco control
response. Following an ad hoc 25 percent increase in excise rates in 2010, regular 12.5
percent annual rate increases began in 2013 and will continue through to 2020. In addition
to these staged rate increases, there continues to be bi-annual indexation to the base rates.
As at 2016, Australia’s tobacco excise as a proportion of retail price had reached the range of
52 to 60 percent (DOH 2017; WHO 2017:148). When measured together with the Goods and
Services Tax, the total tax as a proportion of cigarette retail price reaches 61 to 69 percent
(DOH 2017). Thus, tobacco taxation in Australia is quickly moving the country’s tax-to-retail
ratio towards the 70 percent target set in the Guidelines to Implement Article 6.2 of the
WHO Framework Convention on Tobacco Control.

This policy of staged excise tax increases is designed to support the Government’s objec-
tives for consumption as outlined in the current National Tobacco Strategy 2012–2018

17
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

(NTS). These objectives are to reduce adult smoking rates from 19 percent to 10 percent
for the general population and to halve smoking rates amongst Aboriginal and Torres Strait
Islander peoples. Such excise tax increases, however, can work to stimulate the trade in illicit
tobacco products by decreasing the affordability of tax-paid tobacco and increasing profit-
ability for those undertaking illegal activities.

This is recognized by the Government as a risk (Treasury 2016), and funding in recent federal
budgets has been directed towards addressing the issue. The tobacco industry has also raised
concerns, albeit without providing evidence, that illicit tobacco risks from such tax rate rises
will be facilitated by the simultaneous introduction of plain packaging in 2012, which allows
illicit traders to more readily conceal their products (BAT 2011; JTI 2011; PMI 2011).

Table 1. Outline of Australia’s Tobacco Control Framework

POLICY
MEASURES
INSTRUMENT
Tobacco Advertising ›› It is an offence for corporations to publish or broadcast a tobacco advertisement (as
Prohibition Act 1992 defined) unless a prescribed exception applies
›› Two sets of seven health warnings (rotating over a 12-month period) to cover at least
Competition & 75 per cent of the front of tobacco packaging, 90 per cent of the back of cigarette
Consumer (Tobacco) packaging, and 75 per cent of the back of most other tobacco product packaging
Information Standard
›› Warnings in relation to chemical contained in the product
2011
›› Warnings extended to cigars
›› Color and finish of primary and secondary packaging (cigarette and other)
Tobacco Plain
Packaging Act 2011 (and ›› Marks which may appear
Regulations)
›› Use of bar-code, details of manufacturer and brand
›› Protect public health policies from tobacco industry interference
›› Eliminate remaining advertising, promotion and sponsorship of tobacco products
›› Reduce affordability of tobacco products

National Tobacco ›› Increasing smoke free areas in public places
Strategy 2012–2018 ›› Strengthening mass media and public education campaigns
›› Improving access to evidence based cessation services
›› Consider further regulating tobacco product contents
›› Midpoint review of progress
›› Levied on a “per stick” basis or a “per kilogram” equivalent basis from 2000, where a
stick is defined as not being more than 0.8 grams

Excise taxation (and ›› Indexed bi-annually to average weekly ordinary times earnings
excise equivalent taxation ›› 25% one-off increase in April 2010
on like imported tobacco
products) ›› 12.5% increases annually 2013–2017
›› Further 12.5% annual increases 2018–2020
›› $7.7m to form ABF Tobacco Strike Team to intercept illicit tobacco
›› Listing of nicotine replacement therapies (e.g., nicotine patches), bupropion, and
Pharmaceutical Benefits
varenicline for government subsidies, making smoking cessation more affordable for
Scheme
eligible patients

18 // Australia: Addressing the Illicit Flow of Tobacco Products
2. Smoking Prevalence and Trends in Australia
The most recent studies in Australia in relation to smoking prevalence are largely positive,
with key indicators showing reduced consumption, deferred uptake, and increased cessa-
tion. The National Health Survey which since 2001 is conducted every three years (having
been conducted every five years prior to 2001), identifies a downward trend, with 14.7 per-
cent of adults smoking daily in 2014-15, compared to 22.3 percent in 2001 and 27.7 percent
in 1990, when the series started (ABS 2016). The headline smoking prevalence rates can be
seen in Figure 1.

Figure 1. Australian Adult Smoking Prevalence, 1990-91 to 2014-15

30 27.7
Adult Smoking Prevalence (%)

25 23.7
22.3 21.3
20 19.1
16.3
14.7
15

0
1990 1995 2001 2004–05 2007–08 2011–12 2014–15

Source: ABS National Health Survey: First results 2014–15

Consistent with the National Health Survey are data from the study Tobacco indicators:
measuring midpoint progress reporting under the National Tobacco Strategy 2012–2018,
which analyses specific measures undertaken in the NTS to determine progress against
baselines (AIHW 2016). Key results are summarized Table 2.

Table 2 is generally seen as positive. However, in relation to the key or benchmark indicators
of prevalence, while the general population is on course for its reduction targets, prevalence
rates for the indigenous population remain disappointing. High rates within this group are
not falling as quickly as is desired in the NTS.

19
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table 2. Summary of Certain Key Results at NTS Midpoint

TARGET TO BE BASELINE MIDPOINT
INDICATOR TREND REPORTED
REACHED BY... 2012 2016
Benchmark:

›› Adult smoking prevalence Prevalence = 10% 19.1% 14.8% Reduction (on target)
›› Aboriginal & Torres Strait Islander Prevalence halved 44.8% 42.1% Reduction (below
prevalence target)
Uptake:

›› School children trying Reduction 23.3% 19.1% Reduction
›› Adults trying Reduction 62.5% 57.0% Reduction
›› Age of uptake Older when start 15.4 years 15.9 years Older when starting

Exposure to smoke:

›› Women smoking while pregnant Reduction 13.2% 11.7% Reduction
›› Children at home Reduction 6.1% 3.7% Reduction
›› Adults at home Reduction 4.0% 2.4% Reduction

Cessation:

›› Attempting to cease Increase 44.8% 46.7% Increase
›› Adults actually cease Increase 47.4% 51.8% Increase
›› Age when ceased Reduction in age 35.3 years 35.4 years No change

Continuation of smoking:

›› School children into young adults Reduction 3.5% 2.7% Reduction
›› Young adults into adults Reduction 29.4% 23.2% Reduction

Sources: AIHW (2016)

3. Tobacco Taxation
Tobacco and tobacco products are subject to a number of layers of taxation, with the
exact nature of taxes dependent upon where the product originates and where final
manufacture occurs.

3.1 CUSTOMS IMPORT TARIFFS

Customs import tariffs are levied under the Customs Tariff Act. Import tariffs in Australia
are generally applied for the purposes of protecting domestic industry, and for tobacco
import tariffs are now at zero, as there is essentially no longer an Australian tobacco indus-
try. Freeman (2016) describes the end of tobacco growing in Australia by 2006, when the
final contracts between growers and tobacco companies ended and all tobacco growing
licenses were cancelled by the ATO. Between 2006 and 2015, the “Australian industry” was
a simple value-add process, with cigarettes manufactured under bond, using tobacco leaf
imported from Brazil, India, the United States, and Zimbabwe.

20 // Australia: Addressing the Illicit Flow of Tobacco Products
2015 saw the closure of the last Australian cigarette production lines. All cigarettes and
tobacco products lawfully sold are now imported as finished goods. The import tariff, while set
at zero, is actually a composite duty rate and contains what is referred to as an “excise equiv-
alent duty.” This is the current tobacco excise tariff rate that would apply to domestic tobacco
products and which is applied to similar imported products. (Excise and excise equivalent duty
are discussed in Section 3.3 below as Australia’s primary form of tobacco taxation.)

3.2 GOODS AND SERVICES TAX

The Goods and Services Tax (GST) is a broad based, “value-add” consumption tax and so
levied on the sale of most goods and services in Australia. This includes the sale of all ciga-
rettes and tobacco products. The current rate of GST in Australia is 10 percent, irrespective
of whether the products are sourced domestically or imported.

3.3 EXCISE AND EXCISE EQUIVALENT DUTY

Excise is the primary tobacco taxation instrument and is applied through the Excise Tariff
Act for tobacco products manufactured in Australia, including manufacture in Australia from
imported tobacco leaf. Excise is also payable on imports of cigarettes and other finished
tobacco products via the Customs Tariff Act as excise equivalent duty. In this case, the rates
of excise and excise equivalent duties are the same for like goods, as required in Article III.2
of the General Agreement on Tariffs and Trade (GATT), with both rates indexed twice a year.
Prior to 2014, the indexation was based on Consumer Price Index (CPI).

Australia’s tobacco excise has been applied on a specific rate basis since 2000, levied per
stick on cigarettes where a stick contains less than 0.8 grams of tobacco. This move was
designed to increase the excise tax and price on each cigarette, which, when taxed on a per
kilogram basis, had seen manufacturers reduce the weight of each stick to maintain afford-
ability in pricing.2

Tobacco products other than cigarettes in stick form, for example cigars, cigarillos, and
roll-your-own tobacco, are still subject to excise taxation on a per kilogram basis, with new
legislation now transitioning this per kilogram rate to better align with the per stick rate, so as
not to create tax rate differentials between cigarettes and other tobacco products. Over four
years beginning in 2017, the per kilogram rate for tobacco products will be adjusted annually
so that it equates to a 0.7 gram cigarette stick and not the current 0.8 grams.3

3.4 TOBACCO EXCISE POLICY REFORMS SINCE 2010

There have been several significant excise reforms in recent years, beginning on April 29,
2010, with an immediate 25 percent increase in excise tax on all tobacco products. This

2
Explanatory Memorandum Excise Tariff Amendment Bill (No 1) 2000.
3
The Excise Tariff Amendment (Tobacco Duty Harmonisation) Act 2017 (domestic manufacture) and Customs
Tariff Amendment (Tobacco Duty Harmonisation) Act 2017 (imported finished goods).

21
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

followed a recommendation from the National Preventative Health Taskforce (DOH 2018).
In 2012, in a move consistent with Article 6.2 of the WHO FCTC, the duty-free allowance for
arriving passengers was reduced from 250 cigarettes or 250 grams of tobacco, to 50 ciga-
rettes or 50 grams of tobacco, with excise equivalent duties payable on the entire amount of
tobacco, should the passenger exceed this limit (ABF 2012).

In the 2013/14 federal budget, a new approach to indexing tobacco excise rates was
announced, in addition to four staged annual tax rate increases. Replacing CPI indexation
of rates, tobacco excise was now indexed to Average Weekly Ordinary Times Earnings
(AWOTE). This linked the excise rate to income in current prices rather than just to inflation.
The budget also set out four annual excise rate increases of 12.5 percent to commence
on December 1, 2013 (retrospectively), recurring on September 1 of 2014, 2015, and 2016.
The Explanatory Memorandum for the Excise Tariff Amendment (Tobacco) Bill 2014 and
Customs Tariff Amendment (Tobacco) Bill 2014, which gave effect to this policy, stated that
the measures are designed to make inroads into the affordability of tobacco as a means to
address consumption.

Following the final scheduled 12.5 percent rate increase, the 2016–17 federal budget
extended the policy by applying a further four hikes to take effect on the 1st of September
of each year from 2017 through 2020. In addition, the duty-free passenger concession for
tobacco products was further reduced from 50 cigarettes to an “open pack” of 25 cigarettes
(or 25 grams equivalent) of tobacco product. In a review of the 2016–17 federal budget,
Thomas (2016) quotes government policy as using the 12.5 percent increases which com-
menced back in 2013 and that will continue through to 2020 to both “battle smoking-related
cancer and return the budget to surplus,” indicating the excise rate increases are based on
health and revenue outcomes.

It is also important to note that, in recognition of each of these tobacco excise rate
increases, these 2016/17 budget measures were supported with $7.7 million for enforcement
initiatives. Primarily, the money was allocated to expand the ABF Tobacco Strike Team, as
budget papers acknowledged that, “Changes to taxation arrangements for tobacco have the
potential to increase illicit tobacco activity” (Treasury 2016). This initiative is analyzed further in
Section 6 below.

At the time of writing, tobacco excise tax rates are as follows (ATO 2018):

»» In stick form not exceeding in weight 0.8 grams per stick actual tobacco content -
$0.71046 per stick; and

»» Other - $916.72 per kilogram

These two rates will rise on September 1, 2018, by 12.5 percent plus an indexation against
the relevant AWOTE factor. The rate for “other” tobacco will increase further when the per
kilogram rate is adjusted for a 0.75 gram stick on the path towards equivalence with a 0.7
gram stick.

22 // Australia: Addressing the Illicit Flow of Tobacco Products
Australia’s tobacco excise rates since 1999 are graphed in Figure 2 for cigarettes and Figure
3 for other tobacco products. Both figures show a long period of simple CPI-indexed rate
increases until the 2010 policy introduced accelerated rate increases, which are scheduled
to continue through 2020.

As at 2016, Australia was reported to have the highest price on a 20-stick equivalent pack
of cigarettes amongst the OECD countries (OECD 2016) at USD 12.81 per pack, ahead
of Norway at USD 12.65 and New Zealand at USD 11.85. As outlined above, with current
reforms increasing tobacco excise rates at 12.5 percent per annum, in addition to bi-annual
AWOTE indexation, the ratios of excise and total tax to retail price in Australia are expected to
increase and start to match those of the country’s OECD peers.

Figure 2. Cigarette Excise Rates in Australia 1999–2018

Cigarette Excise Rates, Australia

0.8
$A per Cigarette Weighing

0.7
0.6
Less than 0.8g

0.5
0.4
0.3
0.2
0.1
Dec-13
Nov-99
Aug-00
Aug-01
Aug-02
Aug-03
Aug-04
Aug-05
Aug-06
Aug-07
Aug-08
Aug-09
Apr 29/10
Feb-11
Feb-12
Feb-13

Sep-14
Sep-15
Sep-16
Jul-17
Mar-18

Source: Author adapted from ATO tax rate data (2018)

Figure 3. Other Tobacco (Non-Cigarette) Excise Rates in Australia 1999–2018

Other Tobacco Excise Rates, Australia
tobacco, cigarettes, or cigars

1000
weighing greater than 0.8g
$A per kg of smoking

800

600

400

200
Dec-13
Nov-99
Aug-00
Aug-01
Aug-02
Aug-03
Aug-04
Aug-05
Aug-06
Aug-07
Aug-08
Aug-09
Apr 29/10
Feb-11
Feb-12
Feb-13

Sep-14
Sep-15
Sep-16
Jul-17
Mar-18

Source: Author adapted from ATO tax rate data (2018)

23
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 3 looks at excise rates for tobacco other than in cigarette form. The numbers again
show that, in the 2016 OECD rankings, Australia had the highest excise tax rate (in USD
per kilogram equivalent) on non-cigarette tobacco products, at USD 498.66, well ahead of
Ireland at USD 323.73 per kilogram and the United Kingdom at USD 284.01 (OECD 2016).

4. Framework of Tobacco Taxation Administration
4.1 AGENCIES AND LEGISLATION

The nature of tobacco tax administration in Australia is evolving, due to recent government
decisions to transfer the management of much of the excise equivalent duty function from
ABF to the ATO. Commercial decisions by the tobacco industry to cease local manufacture
have also spurred change. This has led to a somewhat complex administrative arrangement,
especially for importers, and has in some cases opened up areas of risk for smuggling and
revenue leakage. As such, tobacco tax administration will undergo significant reform in 2019
to address these failings. We will analyze the issues in Section 7, below.

In 2006, all tobacco-growing licenses were cancelled by the ATO, as manufacturers
sourced cheaper leaf from off-shore suppliers. Manufacturing then ceased in Australia
altogether during 2015, with the closure of the last local production operations by Philip
Morris International (PMI), then British American Tobacco (BAT) (Scollo and Bayly 2016).
Notwithstanding, all legal provisions which control a domestic tobacco industry remain in
place, should the sector restart manufacturing.

Legislation supporting the administration and enforcement of tobacco taxation falls under
two federal jurisdictions, namely customs law for the importation of tobacco and excise law
for domestic manufacture activities. Customs and excise law is then essentially divided into
two areas. The first involves the taxing instruments, which include the Customs Tariff Act
for imports and the Excise Tariff Act for all domestic manufacture. Both laws provide for the
authority to levy duties and set out the classification of products and relevant duty rates.

The second main legal area is that of the necessary administrative powers for departmental
officials to collect duties and enforce compliance. These powers come primarily from the
Customs Act (and Regulations) for imports of leaf or finished tobacco products, and the Excise
Act (and Regulations) for the manufacturing and packaging of finished tobacco products,
including local manufacture using imported leaf. Given the decline of all forms of domestic
production, the application of the Excise Act has become increasingly limited in duty collec-
tion, but is still very much in use to ensure compliance and in tackling illicit production.

One area of Australian law which differs from other countries is that of the concept of “excise
equivalent duty,” which is a customs duty that is levied on imports of goods which if manu-
factured domestically would be subject to excise. This includes imported cigarettes and other
tobacco products. While this concept of applying identical excise duties to like imports is the

24 // Australia: Addressing the Illicit Flow of Tobacco Products
same in most countries, what may differ here is the administration of much of these excise
equivalent duties over imports by the domestic tax agency, the ATO, and not ABF.

For the importation of excise equivalent goods, including tobacco products, only the initial
importation declaration process (either directly into home consumption or into a bonded
warehouse), ex-warehouse declaration process for tobacco products leaving a bond, and
the actual duty payment, sit with the ABF.4 The ATO then administers all other functions
relating to the importation of tobacco and tobacco products (DOHA 2018) which include:

»» Licensing of the bonded warehouses that will store imported products until delivered to
home consumption;

»» Issue of permissions to undertake movement of bonded tobacco products between
licensed bonded warehouses, or to a place of export;

»» Issue of permissions to deliver tobacco products into home consumption without first
passing an entry, and to report and pay duties on such deliveries weekly;

»» Grant where appropriate remissions of duty for any bonded tobacco damaged or other-
wise made worthless; and

»» The conduct of any or all audit and compliance activities at bonded warehouses.

In addition to taxation, prior to delivery into home consumption, importers of tobacco prod-
ucts are also required to ensure compliance with the Trade Practices (Consumer Product
Information Standards) (Tobacco) Regulations 2004, Competition and Consumer (Tobacco)
Information Standard 2011 and the Trade Practices (Consumer Product Safety Standard)
(Reduced Fire Risk Cigarettes) Regulations 2008, which support Australia’s plain packaging
and graphic health warning policies. Compliance with these provisions is self-assessed with
non-compliance monitored in the market place. Fines up to $1.8 million may be applied by
the Courts for plain packaging breaches, and up to $1.1 million for graphic health warning
breaches (DOH 2015).

4.2 ADMINISTRATIVE CONTROLS OVER TOBACCO TAXATION

A central component of the tobacco tax administrative control framework in an increasing
number of countries is to introduce “sophisticated markers” on tobacco products. These go
beyond simply identifying the tax status of the product, for example tax stamps or ink marks,
towards markers that are able to authenticate product and track it through the supply chain
(Ross 2015: 45). Australia has never adopted the use of any fiscal markings, nor sophisticated
track-and-trace technology, rather it has designed and implemented a set of regulatory con-
trols which are designed to reduce the risk around both those who may deal in tobacco and
the types of activities that they undertake. These regulatory controls include:

4
See Taxation Laws Amendment (Excise Arrangements) Bill 2000.

25
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Licensing of those wishing to grow tobacco, manufacture tobacco, or store
bonded tobacco

Licensing is perhaps the central control applied to reduce risk. Under the Excise Act, manu-
facture of excisable goods can only occur with a license to do so.5 For tobacco, this extends
to the concept of “producing” tobacco material and creates an offense at sub-section 28(1)
as follows:

“A person who does not hold a producer licence must not intentionally pro-
duce material that is tobacco seed, tobacco plant or tobacco leaf knowing,
or being reckless as to whether, the material is tobacco seed, tobacco plant
or tobacco leaf.”

The maximum penalty for unlawful possession of tobacco seed and tobacco plant is
$105,0006 or two years imprisonment, while for tobacco leaf it is the greater of $105,000
and five times the value of the excise duty payable on that leaf, or two years imprisonment.
This is now a significant provision of the law, as with the cessation of all legal tobacco grow-
ing, it is implied that any Australian tobacco seed, plants, or leaf in the market is illicit.

The license for a bonded warehouse to store imported tobacco will be sought by importers
under both the Customs Act and into the Excise Act. Both have identical requirements to
be met in order for the licenses to be issued, and the decision-making process is adminis-
tered by the ATO. To meet the requirements, the applicant must meet general criteria such
as fitness, record keeping, and security as set out in Annex 1. These criteria are designed
to ensure that only low-risk entities are able to enter the excise tax system and carry the
significant duty liabilities.

The excise licensing regime then aims to keep risk levels low by firstly allowing the place-
ment or restrictions and conditions upon the licensee, provided these restrictions and
conditions are necessary to “protect the revenue.”7 One such restriction may include the
ATO requiring the new licensee to deposit a security to cover potential non-compliance. If
required, the amount and manner of payment of such a security will be set by the ATO.

Risk levels are also kept at the acceptable level through provisions around the ability to
suspend and cancel licenses (although such decisions may be appealed). The suspension
or ultimate cancelation of an excise license essentially prevents the business from operating
and is seen as a substantial incentive to maintain high levels of compliance. Licenses are
valid for a three-year period, after which time they must be renewed, a process which is
automatic for licensees with demonstrated compliance.

5
See Part III of the Excise Act 1901.
6
The financial penalty is set out as 500 penalty units, as defined in section 4AA of the Crimes Act, which at the
time of writing was $210.
7
See Excise Act 1901 paragraph 39A(2)(l).

26 // Australia: Addressing the Illicit Flow of Tobacco Products
Permission to move tobacco under bond

An area of considerable risk is the movement of under-bond or “tax-suspended” tobacco
from one location to another, such as from the port of importation to a warehouse,
between warehouses, or from a warehouse to a place of export, including specialty prem-
ises, such as duty-free shops. Such movements are common, and significant volumes can
move in normal distribution arrangements as products are positioned nearer the customer,
or sold as exports. However, this sheer volume is inherently difficult to monitor and leakage
of tax revenue all too common.

Australia has established a permission system to move bonded tobacco products which
attempts to restrict such movements to “lower-risk” entities and relies on post-transaction
audit of commercial records. Applications for the bonded movement of tobacco products
are made to the ATO under the Customs Act or Excise Act (depending on the origin of the
tobacco). The ATO may then approve the types of bonded movements for tobacco, as set
out in Annex 2.

Prior to approving an application for a single bonded movement, the ATO will apply certain
risk criteria, including the size of the duty liability, the compliance record of both parties and
the possibility of diversion into the market (ATO 2015). In cases where a risk is perceived
to the revenue, the application could be denied or else the applicant asked to “deposit a
financial security” in order to protect that revenue (ATO 2018). Exports of tobacco products
will also be subject to an Export Declaration process with ABF, and an approved Export
Declaration is required for the products to be able to leave the country.

In reality, most bonded movement permissions are issued on a “continuing” basis and recog-
nize the commercial reality of high numbers of these tobacco movements between bonded
premises. These continuing permissions, often issued at a “client level” that allows for an
owner to move bonded tobacco between multiple sites (ATO 2015), represent the majority
of all bonded tobacco movements. This is managed on a largely self-assessed basis, with
the stipulation that the applicant raise certain documentation for each individual movement
and make an audit trail available for the ATO. The audit trail is used to confirm dispatch and
receipt of the goods and the appropriate transfer of duty liabilities from one entity to the
other. Instances of non-compliance or increases in duty liabilities in movements may also
result in the ATO’s requesting the deposit of a financial security (ATO 2015).

Significant penalties support the under-bond movement system, including for situations in
which applicants make unintentional errors in the movement of goods or in accounting for
the movement process. The relevant provisions of Customs Act Section 35A give the ATO an
automatic right to recover any duties from goods that cannot be satisfactorily accounted for
before, during, or after a bonded movement, whist Section 33 applies a penalty for “moving,
altering or interfering” with goods under the control of customs. The offense may be one
of “non-intent,” carrying a maximum penalty of $12,600, while a conviction for intentionally
“moving” or “interfering” carries a maximum penalty of $105,000. The Excise Act penalties

27
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

mirror the maximum fines of the Customs Act, although one difference is that, under excise
law, “intent” must be proved.

Permission to deliver goods into home consumption without entering them for
that purpose

Bonded tobacco must be kept in a licensed warehouse and must not enter home con-
sumption without fulfilling certain conditions. These may include providing the ABF with an
“Ex-warehouse Declaration,” with payment of duties for imported goods, or providing the
ATO with an “Excise Return” and payment of duties for locally manufactured goods. Those
distributing tobacco on which duties have not been paid must predict sales and ensure that
sufficient stock is entered for home consumption and duties paid, so that they can supply
customers in a timely manner.

In reality, the Customs Act and Excise Act recognize that this is an inefficient way for busi-
ness to operate and as such both laws allow for the ATO to issue permissions to deliver
without entry, and bring such deliveries to account and pay duties at the end of an account-
ing period (usually seven days).8 These permissions are tightly conditioned to protect the
revenue and link heavily to the record keeping of the owner and operators of the bonded
warehouse from which the tobacco products are delivered. Under these permissions, the
raising of a commercial invoice of sale to a customer effectively becomes an authority to
remove the tobacco from the bonded warehouse, and the date of actual removal is the date
used to calculate the duty payable (ATO 2015). These conditions prevent manipulation of
changes (increases) to excise rates, also known as “forestalling,” as well as making it difficult
for bonded warehouse operators to keep a second set of records, as the legislative process
for authorizing deliveries to home consumption and paying duties is intertwined with the
business’s commercial systems that interact with customers, transport operators, and inter-
nal accounting.

Again, penalties are in place to support the operation of the “delivery without entry” arrange-
ment and include a licensee’s making intentional or unintentional breaches of conditions
in the permission. Perhaps the greatest penalty in this context is the loss of the permission
itself, which in effect requires both the lodgment of returns and pre-payment of excise
before delivery. The Customs Act Section 35A again gives the ATO an automatic right to
recover any duties from goods that cannot be satisfactorily accounted for in terms of deliv-
eries that cannot be reconciled, or shortages of stock in the bonded warehouse. In terms of
actual fiscal penalties on top of duty recovery, in this case the breach or offence is one of
“non-intent.” The maximum penalty can be $21,000, while a conviction for intentional viola-
tions carries a maximum penalty of either five times the excise value or $105,000.

8
See Section 69 Customs Act 1901 and Section 61A Excise Act 1901.

28 // Australia: Addressing the Illicit Flow of Tobacco Products
5. An Overview of Australia’s Illicit Tobacco Market
5.1 NATURE OF THE ILLICIT TOBACCO MARKET IN AUSTRALIA

In its 2015 report on organized crime in Australia, the Australian Crime Commission (ACC)
states that, “Organized crime is now entrenched within the illicit tobacco market” and will
continue to be, as long as the practice is considered “highly profitable and low-risk” (ACC
2015:68–69). The same report indicates that criminal activity is centered on the importation
of genuine and counterfeit brands on which taxes will not be paid. In 2017, law enforce-
ment officials from a range of agencies provided testimony to the Black Economy Taskforce
(Treasury 2017:303) that:

“…the illicit tobacco market is growing and is largely the domain of organized
criminals. This activity is attractive to criminals because it is highly profitable,
the risk of detection is low, and penalties are less severe than for dealing in
illicit drugs.”

The criminal elements behind the importation of illicit tobacco are seemingly transnational
in their organization, and often smuggle both tobacco and narcotics. The significance of
the problem was elevated in the words of a senior Federal Police officer, who expressed
concern that some proceeds of the illicit tobacco trade may be finding their way back to
extremist groups in the Middle East. The officer suggested connections are being made
between Middle Eastern crime gangs driving illegal importations and Lebanese charities
linked with Hezbollah (McKenzie, 2016). If this is indeed the case, then illicit tobacco may be
a national security risk, as well as a tax-revenue and health risk.

The ACC (2015:68) has categorized the illicit tobacco market into three product groupings:

»» "Unbranded” loose leaf product which may also be sold in “tubes” and is often referred to
as “chop-chop”; this may be illegally grown locally, or illegally imported;

»» "Counterfeit” cigarettes, which involve the copying of a registered trademark brand with-
out the owner’s permission; counterfeit products are made available for sale at a much
lower price than the brand being copied, generally without payment of duties and taxes;

»» "Contraband” cigarettes, being any cigarettes on which duties and taxes have not
been paid. This category includes “illicit white” cigarettes, being manufactured legally
in the country of export but not to the legal requirements of the Australian market, in
many cases without lawful plain packaging. This is currently a growing trend, with the
Manchester brand representing the largest-selling product in this illict category.

5.2 ESTIMATES OF THE SIZE OF THE ILLICIT TOBACCO MARKET IN AUSTRALIA

It is apparent that Australia requires credible research to be undertaken, both to set a base-
line tobacco tax gap using appropriately identified measures and then to monitor these
indicators annually, perhaps in a manner similar to the tobacco gap analysis which has been

29
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

published annually since 2013 by HM Revenue and Customs (HMRC) in the United Kingdom.
The methodology applied by HMRC is a “top-down” approach. It begins with deriving total
consumption from the Office of National Statistics’ commissioned Opinion and Lifestyle
Survey, corrected for under-reporting using a measure from the Health Survey for England
(HMRC 2018). From total consumption, lawful consumption is then subtracted, with lawful
consumption comprising official HMRC tax-paid clearances and declared duty-free sales.
This leaves an estimated remainder which is believed to be “non-tax paid” tobacco. Non-
tax paid tobacco is then split between cigarettes and hand-rolled, and both measures are
expressed in bands, with upper and lower ranges accounting for smokers who consume
both types, as well as a central range which represents the longer-term trend.

In terms of an actual attempt at quantifying the Australian illicit tobacco market, government
estimates have provided estimates of 3.4 percent for the year 2013 (DOH 2016), and more
recently 5.6 percent for the fiscal years 2015–16 (ATO 2018). The 3.4 percent figure from the
DOH is included in its most recent report to the WHO on FCTC implementation, citing the
2013 National Drug Strategy Household Survey, which saw 0.8 percent of respondents indi-
cating that they consume illicit products half or more of the time.9 The ATO in its estimates
was concerned that there may have been under-reporting of illicit consumption in this
survey, as respondents may have hidden their use of an illegal product or indeed may not be
aware the product was non-tax paid (ATO 2018).

The ATO instead attempted an estimate by studying the various channels in which tobacco
enters the market, in what may be termed a “supply-side, bottom-up” approach. This
approach analyzed seizures in the import and domestic cultivation channels, as well as
non-reconciliation of stock in bonded warehouses to come up with an estimate of total illicit
activity, to which total formal clearances were added, so that the illicit quantities could be
expressed as a percentage of total consumption, which for 2015/16 was 5.6 percent (ATO
2018). There is, however, very little detail provided by the ATO on how seizures, intelligence,
and other data were extrapolated into a total illicit quantity in each channel.

Industry-based estimates of Australia’s illicit tobacco trade are much higher, with the most
recent estimate for 2017 suggesting that the illicit tobacco market represents 13.9 percent of
total tobacco consumption in Australia (KPMG 2018:6). The KPMG studies which have been
conducted annually since 2012, using an empty-pack survey as part of their methodology.
However, the sampling technique, which showed bias towards collecting “foreign-looking
packaging” in areas more likely frequented by foreign students and tourists, has now been
largely discredited (Cancer Council of Victoria 2014:7; DIBP 2016:3).

9
See National Drug Strategy Household Survey 2013 https://www.aihw.gov.au/reports/
illicit-use-of-drugs/2013-ndshs-detailed/data

30 // Australia: Addressing the Illicit Flow of Tobacco Products
5.3 RECENT ILLICIT TOBACCO SEIZURE ACTIVITY

Seizures are publicly reported by both the ABF and ATO, and media releases on significant
seizures are often made to highlight the problems associated with illicit tobacco. Table 3 is a
summary of seizures by both agencies going back to 2007-08, the ABF making interceptions
as illicit tobacco crosses the border, while the ATO pursued illegal local-based cultivation
and distribution.

Table 3. Australian Illicit Tobacco Seizures, in Tonnes, 2007/8 to 2016/17

DIBP/
TOTAL
YEAR ATO (TONNES) ABF*
(TONNES)
(TONNES)
2007/8 9.9 287 296.9

2008/9 0 180 180

2009/10 5.7 311 316.7

2010/11 31.1 258 289.1

2011/12 26 177 203

2012/13 0 183 183

2013/14 35 183 218

2014/15 16** 182.3 198.3

2015/16 58.2** 146.8 205

2016/17 30.1** 381.5 419.6

2017/18 (YTD) 32.5** N/A N/A

Notes:

*ABF formed 1/1/2015

**Calculated from ATO's new reporting format of revenue loss

Source: DBIP Annual Reports (2015/16; 2016/17); ATO Submission to Parliamentary Inquiry into Illicit Tobacco
(2016); ATO (2018; 2018b)

As would be expected, the largest volumes of illicit tobacco are intercepted in sea cargo
consignments that have been mis-declared to lower the risk profile and the likelihood of
inspection. Consignments may claim to contain items such as “paper cups,” “table tops,” or
“toilet seat covers and trash cans” (ABF 2016; ABF 2018). These tobacco products appear to
originate most frequently from China, Korea, and the United Arab Emirates, with involvement
of nationals of these countries. The ABF points to the involvement of crime syndicates with
links to other forms of serious crime, particularly narcotics. This connection was confirmed
again as recently as May 2018, with the detection of 1.6 tonnes of illicit tobacco declared as

31
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

dates, leading to the seizure of mature cannabis plants and hydroponic equipment at the
premises identified in import documents (ABF 2018c).

The most significant of these sea cargo seizures was 71 tonnes spread over three shipping
containers, with two intercepted in Sydney and a third stopped en route in Indonesia under a
joint operation10 between the ABF and Indonesian Customs (DIBP 2016:5; ABF 2018). Based
on such precedents, the ABF has approached regional agencies to conduct workshops on
addressing and disrupting illicit tobacco supply chains region-wide (DIBP 2017).

Smaller but more frequent seizures are made through international mail centers. For exam-
ple, in 2016–17, some 128 seizures were made from sea cargo consignments, with yields
totaling 264 tonnes, while from international mail there were almost 60,000 seizures yield-
ing a total of approximately 54 tonnes (ABF 2018).

Seizures are also being made from arriving air passengers and imported air cargo consign-
ments, although as yet ABF are not recording these seizures for publication. In some cases,
these operations have yielded notable results (DIBP 2016:5–6), including:

»» July 2015, 1.92 million cigarettes from an airfreight container unpacked in a
bonded warehouse;

»» August 2015, 5.9 million cigarettes in an air freight consignment; and

»» October 2015, 46,000 cigarettes in the baggage of an arriving passenger, reflecting an
emerging threat of “fly in fly out” cigarette smugglers.

The ATO, with its focus on domestically based illicit tobacco, reports conducting 26 raids
under warrant since July 1, 2016, destroying crops and seizing tobacco with a potential tax
revenue loss of $179 million (Kenny 2018). To give a perspective on the ATO’s enforcement
activity, in 2018, the following illicit tobacco seizures were made (ATO 2018a; ATO 2018b):

»» 53 acres, 28 tonnes and 45,000 seedlings in Bundaberg, Queensland ($30 million);

»» 20 acres of crop under cultivation in Telopea Downs, Victoria ($9 million);

»» 16 acres of crop under cultivation in Mooroopna, Victoria ($7 million);

»» 12 acres of crop under cultivation in Dunnstown, Victoria ($6 million);

»» 1.3 tonnes of dried leaf (and re-plantings) in Oaklands Junction, Victoria ($1.3 million)

5.4 ENFORCEMENT FRAMEWORK

The “dual” character of the administration of tobacco taxation is also reflected in enforce-
ment and investigation, which similarly depends upon the origin of the tobacco and
whether it is imported or grown locally. Imported tobacco falls under the Customs Act and
the jurisdiction of the ABF, although once the product is transferred to a bonded ware-
house, responsibility for ensuring compliance shifts to the ATO. In addition, the ATO has

10
Known as Operation Wardite, this collaboration prevented the loss of $27 million in duties.

32 // Australia: Addressing the Illicit Flow of Tobacco Products
responsibility for enforcing the Excise Act in relation to the cultivation and/or manufacture of
tobacco domestically. The framework as summarized on the ATO’s website is reproduced in
Figure 4.

There is a level of coordination between the ABF and the ATO, which also involves interac-
tion with other government policy bodies and law enforcement agencies, as well as with the
tobacco industry, both distributors and retailers.

Figure 4. Tobacco Enforcement Jurisdiction

Administered by Administered by
ATO Department of Home A airs (Australia Border Force)

Domestic Warehouse International International Sea and air
chop-chop Leakage postage passengers cargo

Source: ATO website, accessed 23 May 2018.

The ATO chairs what is known as the Tobacco Stakeholder Group (ATO 2018c), which
meets bi-annually. From the government side, this body includes the Department of Home
Affairs (DOHA, which includes the ABF), DOH, Treasury, and the Australian Competition and
Consumer Commission. From the tobacco industry side, importation and distribution are
represented by PMI Limited, BAT Australia, Imperial Tobacco Australia, and Richland Express.
The Alliance of Australian Retailers and Australian Retailers Association represent the interests
of those involved in the retail sale of tobacco products. The stakeholder group has a wide
Terms of Reference that includes “adding value” to the administration of tobacco taxation.
The issue of tackling illicit tobacco has been on the agenda of the group’s most recent
meetings and has been raised regularly by industry since at least 2015 (ATO 2018c).

Similarly, the DOHA chairs the Illicit Tobacco Industry Advisory Group, which has an identical
membership of government and industry representation. The last documented meeting, in
November 2017, was jointly chaired by the ATO and DOHA and appears to have been a joint
meeting of both stakeholder forums. Previous to this, the Illicit Tobacco Industry Advisory
Group had met bi-annually, with a very specific focus on “continuing to prevent, deter, and
disrupt the illicit trade in tobacco” (DOHA 2018). While the DOHA affirms that this group
is part of a “commitment to work with industry,” the agency states that interactions will be
guided by the obligations of Article 5.3 of the FCTC.

33
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

5.5 THE ABF TOBACCO STRIKE TEAM (TST)

The establishment of the TST from October 1, 2015, was an indication of the priority that
the DOHA placed upon the interception of illicit tobacco being smuggled into Australia.
Early successes, including Australia’s largest illicit tobacco seizure of 71 tonnes, saw the
Government announce a $7.7 million “boost” to the TST as part of the 2016–17 federal
budget (Dutton 2016). The Minister’s announcement shed some light regarding next steps
for the TST, stating that the additional funds were to be used to:

“establish two new specialist investigation teams comprising 14 personnel.
It will also allow the ABF to build stronger ties with key international law
enforcement partners involved in combating tobacco smuggling at various
points along the supply chain.”

Thus the TST was moving beyond a simple interception role at the border and taking on an
investigatory role to identify the criminal elements behind the importation of illicit tobacco.
Further, the team was to look beyond the border and work with countries that are part
of the illicit tobacco supply chain. The TST applies what it refers to as an “intelligence-led
model” (DIBP, 2016:5), suggesting that it identifies risk through various sources, which for
the most part would appear to involve building partnerships with domestic and international
law enforcement agencies and other stakeholders. From the information obtained, the TST
develops appropriate “responses” and “opportunities” for the detection of illicit tobacco and
the undertaking of enforcement activities related to the identified risks and risk responses.

The ABF recently summarized the TST’s results to Parliament. The Commissioner of the ABF
stated that, since its creation in October 2015, the TST had:

»» Seized over 100 tonnes of tobacco leaf;

»» Seized over 247 million cigarettes;

»» Prevented tobacco duty evasion of over $300 million;

»» Charged 115 people with offenses under the Customs Act; and

»» Seen 69 of those people found guilty of the charges.

Further, thanks to the TST, in conjunction with the Criminal Assets Confiscation Taskforce,
some $6 million has been forfeited as “proceeds of crime,” and another $3 million is subject
to a forfeiture process (ABF 2018b).

Meanwhile, however, senior ABF staff expressed the view that the TST did not have sufficient
powers to be fully effective under current legislation. TST officers were, for example, unable
to “use tracking devices, conduct certain types of raids, or make certain arrests” (Mckenzie,
2016). This analysis was supported by the Black Economy Taskforce, which suggested the
formation of a multi-agency taskforce so that a full set of legislative powers could be mar-
shaled to maximize law enforcement responses (Treasury 2017:309).

34 // Australia: Addressing the Illicit Flow of Tobacco Products
Perceived legislative constraints on agencies’ current capacity to investigate illicit tobacco
offenses suggest an agenda for improving Australia’s approach to the illicit tobacco trade.
These issues are at the center of the next part of this case study.

Part B: What Can and Will Be Done in the Future to
Better Address the Illicit Trade in Tobacco?
6. A New Enforcement and Regulatory Framework
This question of “What can be done in the future?” with regard to illicit tobacco is currently
being addressed in Australia, with significant measures being introduced to strengthen both
enforcement capabilities and tobacco tax administration. Following the work of the Black
Economy Taskforce, the Government has responded by announcing a range of new mea-
sures which include:

»» An upgrade of the TST to a multi-agency Illicit Tobacco Taskforce;

»» Heavier penalties for illicit tobacco offenses;

»» Eliminating the requirement to prove the origin of illicit tobacco for prosecution;

»» Creating additional new illicit tobacco offenses;

»» Banning tobacco imports that fail to comply with a new licensing regime; and

»» Moving the taxing point for imported tobacco (i.e., all legal tobacco products in the
market) from ex-bond to point of importation (Treasury 2018:18).

The anticipated revenue return from these measures is $3.6 billion over the four-year
“forward estimates” of the federal budget to fiscal year 2021/22. However, it should be
emphasized that approximately $3.2 billion will be a one-off receipt, obtained as bonded
warehouses holding tobacco products under bond are required to pay their excise duties on
that bonded stock (Budget 2018:12).

The Black Economy Taskforce offered a number of recommendations that have either
been “noted” or explicitly “disagreed with” by the Government, the most salient being the
use of track-and-trace technology (Treasury 2017: 310–311). Regarding track-and-trace, the
Government has opted for a wait-and-see approach, preferring to review at a later date the
success or otherwise of the other control measures just described (Treasury 2018: 35).

6.1 THE ILLICIT TOBACCO TASKFORCE

In May 2018, the Treasurer and Minister for Home Affairs jointly announced the estab-
lishment of the Illicit Tobacco Taskforce (ITT), a new multi-agency force to be headed by
the ABF. The Ministers described this move as reflecting the “marked success of the ABF’s
Tobacco Strike Team.” The new force seeks to build upon and enhance the effectiveness

35
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

of this proven dedicated-team approach. In this case, the enhancement of capabilities will
come through the streamlining of offenses to enable simpler prosecution; the definition of
certain new offenses; and, importantly, the ability to access the greater investigative powers
of the non-ABF agencies joining the ITT.

In relation to the streamlining of offenses, one critical area identified by the Black Economy
Taskforce was that of technical risks to prosecution due to the need to positively identify
the source of intercepted illicit tobacco (Treasury 2017: 307). This reflects an underlying
jurisdictional issue, in that the ABF must limit it role to imports of illicit tobacco and the ATO
to domestically grown illicit tobacco. A seizure of tobacco in the illicit supply chain does
not necessarily reveal that tobacco’s origins, and today the absence of this information can
delay or derail prosecution. This difficulty will now be overcome by a new Treasury Laws
Amendment (Illicit Tobacco Offences) Bill 2018, under which prosecutors will no longer
be required to prove the origin of illicit tobacco. The Bill also aligns penalties between the
Customs Act and Excise Act. Discordance between these laws has meant that two offend-
ers arrested with the same quantities of illicit goods in the same circumstances have faced
different penalties following successful prosecution.11

On the issue of penalties, the Bill will now set “penalties at a level to deter illegal activ-
ity.” Tobacco smuggling and tax evasion had been seen as a “soft crime,” with the Black
Economy Taskforce concerned about the relationship between risk and return for illicit
tobacco, as compared to narcotic drugs (Treasury 2017:306). The Taskforce wrote:

“….We have been informed that cocaine with a street value of $2.3 million
here will have a cost of about $150,000, with heroin being similarly priced.
The penalty for smuggling both is imprisonment. Whereas smuggling tobacco
costing $150,000, with a street value of $10 million here, would, under cur-
rent sentencing practices, generally result in a modest fine…”

In this regard, the Bill will increase maximum penalties and will include a number of pos-
sible custodial sentences of up to 10 years imprisonment, in addition to maximum fines
over $200,000.

There will now also be a new concept of “reasonable suspicion that excise duty was not
paid,” rather than the need to establish criminal intent, as well as a new offense of being in
possession of equipment used to manufacture illicit tobacco. This follows a recommenda-
tion by the Black Economy Taskforce to ban the importation of equipment such as cigarette
tube filling machines that are used to convert domestic “chop-chop” tobacco into stick form
(Treasury 2017:307–308).

In addition to new criminal offenses, there is also a civil offense consisting of the possession
of two kilograms of tobacco without documentary evidence of how that tobacco came

11
See the Explanatory Memorandum to the Treasury Laws Amendment (Illicit Tobacco Offences) Bill 2018.

36 // Australia: Addressing the Illicit Flow of Tobacco Products
into the person’s possession. This civil offense can be dealt with by infringement notice or
summarily. New and revised offenses and their new penalties for illicit tobacco crimes are
listed in Annex 2.

Parallel to the introduction of the Treasury Laws Amendment (Illicit Tobacco Offences) Bill
2018 will be the Customs Amendment (Illicit Tobacco Offences) Bill 2018. This Bill on its
passage will confirm that the changes made to the domestic excise and taxation laws in
terms of offenses and penalties will apply equally to imports of illicit tobacco in customs law.
Of note however, are amendments unique to the Customs Act. For example, authorities can
invoke the concept of “recklessly” importing tobacco without payment of duties, removing
the need for “intent” to be proved, and the new legislation gives ABF officers the power to
arrest without warrant, where there are reasonable grounds to impute a reckless attempt to
import tobacco without payment of duties.

Previously, the ABF could only arrest suspects when, in addition to grounds to impute
criminal intent, officers had plausible reasons to believe suspects might subsequently fail to
appear in court, or that they might interfere with evidence and witnesses. New provisions
will loosen these constraints and assist the ABF in future investigations.

However, the main benefit arising from the creation of an inter-agency ITT is that each
agency brings unique sets of investigatory powers. Under the leadership of the ABF, other
key partner agencies will include the ATO, Australian Federal Police (AFP), Australian Criminal
Intelligence Commission (ACIC), Austrac, and Commonwealth Department of Public
Prosecutions (CDPP), as well as other operational areas of MOHA as required (ABF 2018).

Previously, key investigatory tools such as access to surveillance devices were denied to
the ABF, whose officers either were required to seek external assistance from the AFP or
undertake inefficient and resource-intensive physical surveillance (Maher 2017; Treasury
2017). Under the new partnership, improved surveillance technologies will soon be available
to the ITT. The ACIC, with its immediate access to all law-enforcement databases and power
to coerce evidence, as well as Austrac, with its capacity to monitor movements of cash, will
significantly boost the team’s intelligence and evidence-collecting capabilities (ACIC 2018).

6.2 AMENDMENTS TO TOBACCO TAXATION ADMINISTRATION

In addition to the enforcement initiatives through the new Illicit Tobacco Taskforce there will be
a number of significant changes to the arrangements for the administration of tobacco taxes.

Moving the taxing point from delivery ex-bond to importation

As detailed above, the current taxing point for tobacco is where it is delivered into home
consumption, either from the place of importation or from a bonded warehouse. Given the
extent of excise duties, the taxing point was invariably a delivery from a bonded warehouse
located closest to the customer, to allow for these duties to be deferred as long as possible.
Deliveries from a bonded warehouse are made under the “periodic settlement permissions,”

37
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

also described above, meaning that duties are subsequently reported and paid on the
Monday following the actual delivery of the tobacco products from bond.

This opportunity to bond tobacco into a warehouse will cease from July 1, 2019, date after
which importers will be required to identify their duty liabilities at time of import and bring
that to account immediately (Budget 2018:12). There will be no credit terms available to
importers, and full payment of duties and taxes to the ABF will be made prior to a release of
any tobacco products into the country. This approach was justified on the basis that it will
“reduce the potential for leakage from bonded warehouses in the black market.”12

Despite the cessation of all domestic manufacture, the Excise Act will have a similar amend-
ment to that applied to imports, and excise will be payable upon manufacture at the licensed
manufacturing site. This will prevent any change to distribution arrangements by importers,
such as manufacturing cigarettes with imported leaf to overcome the loss of duty deferral
capacity at the border.

One issue to manage will be that of cigarettes and tobacco products already in bond on July
1, 2019. Measures will include a transition arrangement for such goods that will run for 12
months. It is assumed importers will be required to settle the duties on all bonded stocks on
hand before June 30, 2020.

As of June 30, 2020, there shall be no cigarettes or other tobacco products in the domestic
supply chain that are bonded, and thus opportunities to divert bonded product from these
warehouses without duty payments will disappear. This measure directly targets imports, and
there will be additional resources committed to the illegal local growing and manufacture of
tobacco. For this, the ATO will receive additional resources of $4 million in 2020–21, rising to
$7 million in 2021–22 (Budget 2018:12). This commitment is expected to yield an additional
$12 million and $17 million, respectively, in excise duties that would not otherwise have been
paid for the illicit cultivation during these years.

New import license

In addition to moving the taxing point, there will also be a new requirement for those
wishing to import tobacco to first obtain the proper license. This will be achieved by making
tobacco a “prohibited import,” as of July 1, 2019. There will, however, be an exemption from
the prohibition for travelers who have cigarettes and tobacco products within the prescribed
duty-free allowance limit, which at present is set at 25 grams of tobacco product or ciga-
rette-stick equivalent (MOHA 2017).

Australia’s Customs (Prohibited Import) Regulations are the expected mechanism, as these
instruments set out Schedules of differing prohibitions and restrictions, with tobacco likely to
be prescribed within Schedule 2. Schedule 2 of the regulations is a listing of goods for which
import is banned unless written permission (i.e., a permit or license) has been granted.

12
See Joint Press Release Treasurer and Minister for Home Affairs 6 May 2018.

38 // Australia: Addressing the Illicit Flow of Tobacco Products
This is proposed to make it easier for the ABF to take enforcement action and seize tobacco
on which the proper duties and taxes have not been paid (Budget 2018:13). The effect of this
provision is that any quantities of tobacco intercepted in the supply chain by the ABF or ITT
will need to be accompanied by a license, and where such a license cannot be produced by
the entity in possession of the tobacco, this establishes a “reasonable suspicion” that duties
were not paid.

7. What Else Could Be Considered
There can be no doubt that Australia has affirmed its intent to address illicit tobacco.
However, a number of notable anti-tobacco measures have not yet been adopted, and other
key strategies have not even been openly discussed as potential options. Several of these
measures are contained in the WHO FCTC Protocol to Eliminate the Illicit Trade in Tobacco
Products. The Protocol has not yet come into force, and at the time of writing, a further
four parties must still ratify the Protocol and deposit their ratifying instruments with the
Depositary, in order for the instrument to become law.13 Australia’s last stated position on the
Protocol indicated that the country is unable to accede until certain domestic legislative and
regulatory changes are made, but that a process was underway to “inform the decision as to
whether to accede” (DOH 2016:4).

The main area to consider is that of track-and-trace mechanisms for tobacco products.
These are discussed in Article 8 of the Protocol. While considered and recommended by
the Black Economy Taskforce, track-and-trace was “put on hold” by the Government, while
awaiting the impact of other measures, which some believe might make a track-and-trace
system superfluous. There are, however, multiple potential benefits in introducing a track-
and-trace system. For example, such a system can support the investigative component of
illicit tobacco seizures, given that data held in the track-and-trace tag can be used to confirm
characteristics such as the authenticity of the product, product description, manufacturer,
first customer, and intended market of consumption.14

Notwithstanding, Australia is also part of regional and global tobacco supply chains, albeit
largely at the consumer end. Given the aspirations of Article 8 to build regional and global
tracking and tracing, the lack of a national track-and-trace system in Australia also creates a
gap in the control of global tobacco supply chains.

Another area of interest to the author is that of the concept of “due diligence,” consid-
ered in Article 7 of the Protocol. In the context of Article 7, due diligence imposes greater
responsibility on the tobacco industry itself and makes it more accountable in respect of
commercial decisions by importers and distributors. It is reasonable to expect that importers

13
The Depositary for lodging instruments is the UN. See Article 46 of the Protocol.
14
See paragraph 4.1 of Article 8 of the Protocol

39
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

and distributors could readily identify unusual or suspect business transactions or purchase
requests, and elect not to proceed with those operations. This can extend to regular com-
mercial relationships in which unusual supply requests are made.

The Government could establish guidelines or regulations which may assist by specifying the
nature of transactions to be avoided. These rules might initially be based on the guidance of
the Protocol. They might, for example, include requiring importers or distributors to confirm:

»» Customers hold the appropriate licensing to acquire tobacco products;

»» Bona-fides for first time customers, including whether customers have been black-listed
by authorities;

»» Payments in cash or kind are not permitted;

»» Market of intended sale;

»» Quantities are not irregular or unusual volumes; and

»» Market where product sold is usual market.

The same regulations can also require importers and distributors to report to the appropriate
authority (e.g., ABF or ATO) any business dealings in which problematic points have arisen.

Finally, certain aspects of licensing could be introduced to fully implement Article 6. The
manufacture of tobacco products is subject to a licensing regime, as are tobacco imports,
as of July 1, 2019. However, other aspects of the supply chain are not subject to licensing:
in particular the import and possession of manufacturing equipment, as well as wholesale
and retail sales.

“Possession of equipment being used in the manufacture of illicit tobacco” is now defined
as a specific offense, but this is not tied to a licensing arrangement. The new offense should
facilitate tackling illicit domestic production of cigarettes and “chop-chop.” This is important,
given the unclear fate of cigarette-making equipment following the closure of local PMI and
BAT manufacturing plants. BAT’s 2016 Annual Report discussed the sale of land and buildings
after these closures, but not the actual cigarette manufacturing equipment (BAT 2016:101).

Australia also lacks nationally consistent licensing of wholesale and retail sales businesses.
A DOH-sponsored study in 2002 found that, among Australian states, only South Australia,
Tasmania, and the Australian Capital Territory had wholesale and retail licensing regimes at
that time. Other states simply regulated the activities of such operators.15 Since 2002, Western
Australia has also introduced licensing.16 However, to date, no nationally coordinated whole-
sale and retail licensing approach is in place to ensure that a standard “fit and proper” test is
applied to entities and persons selling tobacco products at the end of the supply chain.

15
The DOH contracted the Allen Consulting Group to study the ‘Licensing of tobacco
retailers and wholesalers’ in 2002. See http://health.gov.au/internet/main/publishing.nsf/
Content/51D4A401FD339C40CA257BF000212035/$File/license.pdf (Retrieved 21 June 2018).
16
See the Tobacco Products Control Act 2006.

40 // Australia: Addressing the Illicit Flow of Tobacco Products
Notwithstanding such gaps, many of Australia’s current and proposed responses to the illicit
trade in tobacco are positive. Yet the country still experiences revenue leakage, as a certain
percentage of tobacco consumed locally has clearly by-passed domestic and import based
controls and found its way into the market without duties and taxes being paid. The next
point to watch in the Australian environment will be the July 2019 tobacco taxation reforms.
At that time, the new Illicit Tobacco Taskforce will have been in operation for 12 months,
with its enhanced investigatory capabilities to prosecute a new range of offenses with
greater penalties.

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House, Canberra. Retrieved 3 May 2018 from https://www.aph.gov.au/Parliamentary_Business/
Bills_Legislation/bd/bd1112a/12bd035

Kenny, M. 2018. Government 'butt-squad' to chase billions in criminal tobacco fraud. The Sydney
Morning Herald 6 May 2018. Retrieved 23 May 2018 from https://www.smh.com.au/politics/federal/
government-butt-squad-to-chase-billions-in-criminal-tobacco-fraud-20180505-p4zdiv.html

Hickey, P. 2018. Perth baker made plenty of dough smuggling two tonnes of tobacco. The Age.
Retrieved 1 May 2018 from https://www.theage.com.au/national/western-australia/perth-baker-made-
plenty-of-dough-smuggling-two-tonnes-of-tobacco-20180314-p4z4b3.html

Hirono, K and Smith. 2017. Australia’s $40 per pack cigarette tax plans: the need to consider equity.
Tobacco Control 0.1136/tobaccocontrol-2016-053608. Retrieved 1 May 2018 from http://tobaccocon-
trol.bmj.com/content/tobaccocontrol/early/2017/04/07/tobaccocontrol-2016-053608.full.pdf

HMRC (HM Revenue & Customs). 2018. Tobacco tax gap estimates. Retrieved 21 June 2018 from
https://www.gov.uk/government/statistics/tobacco-tax-gap-estimates

KPMG. 2016. Illicit Tobacco in Australia: full year report 2015 (Unpublished). Retrieved 3 May 2018 from
https://home.kpmg.com/content/dam/kpmg/pdf/2016/04/australia-illict-tobacco-2015.pdf

Mather, J. 2017. Border Force urges more power to stop illegal tobacco smugglers
Australian Financial Review Retrieved 2 June 2018 from https://www.afr.com/business/legal/
border-force-urges-more-power-to-stop-illegal-tobacco-smugglers-20170824-gy3f4n

McKenzie, N. 2016. A national security risk: Australian Border Force warns illegal tobacco trade
may be fuelling terrorism. Retrieved 7 May 2018 from http://www.abc.net.au/news/2016-12-05/
illegal-tobacco-trade-fuelling-drug-trafficking-and-terrorism/8075174

Ministry of Home Affairs. 2017. Changes to Australia’s Duty Free Allowance Retrieved 2 June 2018 from
https://www.homeaffairs.gov.au/News/Pages/changes-to-australias-duty-free-tobacco-allowance.aspx

OECD. 2016. Consumption Tax Trends 2016: VAT/GST and excise rates, trends and policy issues Retrieved
22 May 2018 from http://www.oecd.org/tax/consumption/consumption-tax-trends-19990979.htm

44 // Australia: Addressing the Illicit Flow of Tobacco Products
Parliament of Australia. 2014. Explanatory Memorandum – Excise Tariff Amendment (Tobacco)
Bill 2014 and Customs Tariff Amendment (Tobacco) Bill 2014 Retrieved 21 May 2018 from: http://
parlinfo.aph.gov.au/parlInfo/download/legislation/ems/r5172_ems_78ed6212-03a3-4669-9947-
c3fc17c8b5e0/upload_pdf/391349.pdf;fileType=application%2Fpdf#search=%22legislation/ems/
r5172_ems_78ed6212-03a3-4669-9947-c3fc17c8b5e0%22%29

Parliament of Australia. 2018. Explanatory memorandum – Treasury Laws Amendment (Illicit Tobacco
Offences) Bill 2018. Retrieved from 1 June 2018 from http://parlinfo.aph.gov.au/parlInfo/down-
load/legislation/ems/r6049_ems_7d941399-f916-400d-b044-97f2830340f8/upload_pdf/663268.
pdf;fileType=application%2Fpdf

PMI (Philip Morris International). 2011. Commoditising tobacco products through plain packaging will
harm public health, violate treaties, and does not meet the test of "evidence-based policy" Parliament
House, Canberra. Retrieved 3 May 2018 from https://www.aph.gov.au/Parliamentary_Business/
Bills_Legislation/bd/bd1112a/12bd035

Ross, H. 2015. Controlling illicit tobacco trade: international experience Economics of Tobacco Control
Project, School of Economics, University of Cape Town and Tobacconomics, Health Policy Center,
Institute for Health Research and Policy, University of Illinois at Chicago. Retrieved 9 may 2018 from
http://tobaccoecon.org/publications/reports/

Scollo M, Zacher, M, Durkin S, et al. 2014. Early evidence about the predicted unintended conse-
quences of standardised packaging of tobacco products in Australia: a cross-sectional study of the
place of purchase, regular brands and use of illicit tobacco. BMJ Open 2014; 4: e005873. doi:10.1136/
bmjopen-2014-005873

Scollo, M, Zacher, M, Coomber, K et al. 2015. Use of illicit tobacco following introduction of -stan-
dardised packaging of tobacco products in Australia: results from a national cross-sectional survey.
Tobacco Control 2015;24: ii76–ii81.

Scollo, M, Bayly, M. 2016. 10.3 The manufacturing and wholesaling industry in Australia—major inter-
national companies. In Scollo, M and Winstanley, M [editors]. Tobacco in Australia: Facts and issues.
Melbourne: Cancer Council Victoria. Retrieved 8 May 2018 from http://www.tobaccoinaustralia.org.au/
chapter-10-tobacco-industry/10-3-the-manufacturing-and-wholesaling-industry-in-australia

Thomas, M. 2016. Tobacco excise increase Budget Review 2016–17 Index, Parliament House, Canberra.
Retrieved 4 May 2018 from https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/
Parliamentary_Library/pubs/rp/BudgetReview201617/Tobacco

Tobacco Asia. 2018. Thailand Tobacco Monopoly bravely soldiering on. Retrieved 6 June 2018 from
http://www.tobaccoasia.com/features/thailand-tobacco-monopoly-bravely-soldiering-on/

Treasurer and Minister for Home Affairs. 2018. New Illicit Tobacco Taskforce and Tobacco Duty
Measures to Fight Organised Crime [Press Release]. Retrieved 7 May 2018 from http://kmo.ministers.
treasury.gov.au/media-release/049-2018/

Treasury. 2016. Promoting health by reducing smoking Tax Fact Sheet 09 Budget 2016 http://budget.
gov.au/2016-17/content/glossies/tax_super/downloads/FS-Tax/09-TFS-Tobacco.pdf

Treasury. 2017. Black Economy Taskforce: Final Report October 2017 The Australian Government, The
Treasury, Canberra

Treasury. 2018. Tackling the Black Economy: Government response to the Black Economy taskforce
final report. The Australian Government, The Treasury, Canberra

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

WHO (World Health Organization). 2011. Guidelines for the Implementation of Article 6.2 of the WHO
Framework Convention on Tobacco Control. World Health Organization, Geneva

WHO (World Health Organization). 2017. WHO report on the global tobacco epidemic, 2017: monitor-
ing tobacco use and prevention policies. World Health Organization, Geneva

WHO (World Health Organization). 2018. Six More Parties Needed for Illicit Trade Protocol
Ratification. Retrieved 10 June 2018 from http://www.who.int/fctc/mediacentre/news/2017/
nine-more-parties-for-protocol-ratification/en/

46 // Australia: Addressing the Illicit Flow of Tobacco Products
Annexes

Annex 1
Licensing Requirements: Manufacture of
Tobacco Products
1. EXCISE ACT CRITERIA TO OBTAIN A LICENSE TO STORE BONDED TOBACCO
PRODUCTS UNTIL 1 JULY 2019

CRITERIA REQUIREMENT

›› In the past 12 months has not been charged with an offence under
the Excise Act or any Commonwealth, State or Territory Acts that
carries a penalty in excess of $105,000
›› In the past 10 years has not been convicted of an offence under the
Excise Act or any Commonwealth, State or Territory Acts that carries a
Fit and proper (person or
penalty in excess of $105,000
corporation)
›› History of compliance under any tax law in past four years
›› No previous cancellation of a licence
›› Sufficient financial resources, and
›› Not in receivership
Skills and experience of
›› Sufficient to run the bonded operations
key staff
›› Appropriate for the nature of the goods
Physical security
›› Appropriate for the type of premises
of premises
›› Procedures in place to secure premises

Plant and equipment ›› Appropriate to support the operations of the business

Market ›› A viable market for the products exists

›› Sufficient for an audit to be conducted which can confirm the duty
Accounts
liabilities have been properly acquitted

Duty payment timing ›› Not solely to store goods so as to defer duty

Source: Author adapted from ATO Industry Guide-lines (2018) for licensing under the Customs Act and
Excise Act.

47
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

2. TYPES OF UNDER-BOND MOVEMENT AVAILABLE FOR TOBACCO UNTIL 1
JULY 2019

TYPE OF MOVEMENT PURPOSE CONDITIONS

Single movement Ad hoc or one-off need May require security

Evidence of relationship
Contractual commercial relationship
Cannot change ownership
Continuing between parties dispatching and
in transit
receiving Intra-company movement
Record keeping
May require security
Ad hoc or one-off sale to overseas
Export (single)
customer
Export Declaration with ABF
Evidence of relationship
Contractual commercial relationship
Export (continuing) Record keeping
with export customer
Export Declaration with ABF
Tobacco seed and plants
Ad hoc or one-off need May require security
(single)
Evidence of relationship

Tobacco seed and plants Contractual commercial relationship Cannot change ownership
(continuing) between grower and manufacturer in transit

Record keeping
May require security
Export of tobacco seed Ad hoc or one-off sale to overseas
and plants (single) customer
Export Declaration with ABF
Evidence of relationship

Cannot change ownership
Export of tobacco seed Contractual commercial relationship in transit
and plants (continuing) with export customer
Record keeping

Export Declaration with ABF

Source: Author based on data/information from ATO website (2018) on movement permissions

48 // Australia: Addressing the Illicit Flow of Tobacco Products
Annex 2
New Offenses and Penalties for Illicit Tobacco Crimes
PROPOSED OFFENSES AND PENALTIES FOR ILLICIT TOBACCO

OFFENCE PENALTY

›› 500 kg or more – five year’s imprisonment, or the higher of
1. The possession, buying or
1,000 penalty units or five times the amount of duty on that
selling by a person in Australia
tobacco, or both;
(excluding the external
territories) of tobacco, in ›› 100 kg or more – two year’s imprisonment, or the higher of
the quantities set out, for 500 penalty units or five times the amount of duty on that
which there is a reasonable tobacco, or both; or
suspicion that excise or excise ›› 5 kg or more – the higher of 200 penalty units or five times
-equivalent customs duty has the amount of duty on that tobacco.
not been paid.
NB: penalty unit currently set at $210 per unit.
›› 500 kg or more – ten year’s imprisonment, or the higher of
1,500 penalty units or five times the amount of duty on that
2. The possession, manufacture
tobacco, or both;
or production by a person
in Australia (excluding the ›› 100 kg or more – five year’s imprisonment, or the higher of
external territories) of a thing 500 penalty units or five times the amount of duty on that
that is tobacco, for which the tobacco, or both; or
full amount of excise duty has ›› 5 kg or more – the higher of 500 penalty units or five times
not been paid. the amount of duty on that tobacco.
NB: penalty unit currently set at $210 per unit.
3. The possession by a person
in Australia (excluding the
external territories) of tobacco ›› Civil penalty of 100 penalty unit.
that equals or exceeds 2kg
without documentation NB: penalty unit currently set at $210 per unit.
indicating how the person
obtained the tobacco.
4. Possessing equipment used ›› One year’s imprisonment or 120 penalty units.
or for use in producing or
manufacturing illicit tobacco. NB: penalty unit currently set at $210 per unit.

Source: Explanatory Memorandum Treasury Laws Amendment (Illicit Tobacco Offences) Bill 2018

49
CANADA
3

CANADA:

Controlling Illicit
Tobacco Trade
Robert Schwartz1

Chapter Summary
The tobacco industry instigated illicit tobacco trade in Canada in the 1990s in response to
tobacco tax increases at both the federal and provincial levels. To illegally avoid these taxes,
tobacco companies exported tobacco products over the border to the United States and
engaged some Indigenous communities adjacent to the border in smuggling these products
back into Canada and selling them untaxed. The tobacco companies admitted to this activity
in an out-of-court settlement with the Canadian government and paid fines totaling $1.7 billion.

To curb illicit tobacco activity in the 1990s, Canadian governments lowered taxes considerably,
resulting in confirmed substantial increases in youth initiation and tobacco consumption.

The involvement of some Indigenous communities makes Canada’s illicit tobacco market
distinctive. Nation-to-Nation sensitivities between Indigenous communities and Canadian
governments and the exemption of First Nations people from paying sales taxes on tobacco
products constitute an important backdrop against which the illicit tobacco market oper-
ates. The Royal Canadian Mounted Police estimates that some 80 percent of illicit tobacco

1
Dalla Lana School of Public Health, University of Toronto.

51
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

originates in border reserves in the provinces of Ontario and Quebec, while most of the
remainder is counterfeit product shipped from ports in Asia to the province of British
Columbia on Canada’s west coast.

Government estimates of the size of the illicit tobacco market are sporadic and outdated.
After control efforts all but eliminated illicit tobacco trade following the initial spike in the
1990s, independent estimates suggest that a substantial increase in illicit tobacco use
occurred between the early 2000s and around 2008, followed by a gradual decline. Official
estimates from Statistics Canada indicate that illicit tobacco reached 39 percent of total
tobacco sales in 2008/9 and decreased to 32 percent in 2010/11. More recent estimates
from independent non-governmental sources suggest that illicit tobacco has decreased to
somewhere around 15 percent of the market in recent years.

Federal and provincial governments have implemented a panoply of policies to curb illicit
tobacco, including: licensing; marking/labeling; export taxation; allocation/quota and
refund/rebate systems for reserves where First Nations people are exempt from sales taxes
on tobacco; tax harmonization agreements with reserves; and, enforcement efforts.

While anti-illicit tobacco measures have done much to reduce and contain the problem,
illicit tobacco continues to constitute a substantial share of the tobacco market. The tobacco
industry uses fears of stimulating illicit activity to dissuade Canadian governments from sub-
stantial tobacco tax increases and from advancing other tobacco control policies.

Canadian governments have been hesitant to adequately address illicit cultivation, manu-
facture, and sale of tobacco products by some Indigenous communities. This is apparently
due to understandable sensitivities around Nation-to-Nation relations and fears of sparking
violent confrontations.

More can be done by Canadian governments to curb the illicit tobacco market, including:
instituting tax refund/rebate systems for on-reserve retailers in Ontario and Quebec to replace
the allocation/quota systems; working with affected Indigenous communities to develop
alternative sources of revenue; enforcing existing stipulations in cooperation with the leader-
ship and enforcement arms of relevant Indigenous communities; implementing an effective
track-and-trace system not influenced by the tobacco industry; and publishing annual
reports on the size of the illicit market and on measures to combat illicit tobacco.

1. Introduction
Canada has a non-illustrious history of trade in illicit tobacco and of policy measures to curb
illicit activity. Partially it is a story of tobacco-industry instigation and manipulation. Partially
it is about uninformed, insufficient, and ineffective government policy response. Some of
Canada’s Indigenous communities play a major role in the unfolding drama. Nation-to-
Nation sensitivities between Indigenous communities and Canadian governments constitute
an important backdrop against which the story plays out. Incremental and symbolic policy

52 // Canada: Controlling Illicit Tobacco Trade
solutions have recently yielded some positive results. However, illicit tobacco continues to
affect the Canadian market. Policy players have yet to take the thoughtful and courageous
steps needed to solve the problem, and ultimately to save the lives of tens of thousands of
Canada’s people. Canada has yet to sign the Framework Convention on Tobacco Control
(FCTC) Protocol to Eliminate Illicit Trade in Tobacco Products.

2. Unique Characteristics of Illicit Tobacco
in Canada
Illicit tobacco presents considerable challenges to Canadian tobacco control efforts.
Even conservative analyses estimate that illicit tobacco constitutes some 15 percent of
the market. According to the Royal Canadian Mounted Police (RCMP), the lion’s share of
untaxed tobacco trade occurs in central Canada. Some indigenous communities engage in
manufacture, distribution, and sale of illicit tobacco, “often exploiting the politically sensi-
tive relationship between those communities and various governments and enforcement
agencies” (Royal Canadian Mounted Police 2008). Certain indigenous communities in the
vicinity of the borders of southwest Ontario, southeast Quebec, and New York State are
at the epicenter of this activity. Supply from these areas reaches as far as the Atlantic and
Northwest regions of the country. Counterfeit cigarettes present a much smaller, though
not insubstantial, challenge in British Columbia, where ports facilitate commerce with Asia
(Sweeting, Johnson & Schwartz 2009).

In Canada, a majority of illicit cigarettes are reportedly manufactured on four aboriginal
reserves located in areas that border Ontario, Quebec, and New York State (Physicians for
a Smoke-Free Canada 2010; Non-Smokers’ Rights Association 2009). Government sources
suggest that these manufacturers are the source for over 90 percent of contraband seizures in
Canada (RCMP 2008; Framework Convention Alliance 2008). Cigarettes made and/or sold
on reserves can cost substantially less than those bought from traditional retail outlets: as little
as $6 versus an average of $80 in Ontario and $73 in Quebec for a carton of 200 cigarettes
(Non-Smokers Rights’ Association 2012).

Under Canadian law, First Nations people purchasing cigarettes on reserves are exempt
from direct taxes on personal property which include provincial tobacco taxes (paid by
consumers) and both federal and provincial sales tax. Non-First Nations people purchasing
cigarettes, even on reserves, are subject to all taxes. There is no First Nations exemption
from the Federal Government’s excise tax, paid by manufacturers. In order to regulate the
supply of tax-exempt tobacco products on reserves, Ontario uses an allocation system that
predetermines the quantity of tax-exempt products to be distributed to reserve retailers,
based on population and consumption estimates. However, this policy is often circumvented
by shipment of products manufactured on reserves to reserve retailers (Sweeting, Johnson
& Schwartz 2009). The federal and provincial governments have undertaken measures to

53
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

decrease the supply of illicit tobacco, but the impact and consequences on contraband use
are unknown (Schwartz & Johnson 2010).

3. Estimating and Guestimating the Extent of
the Problem
There are wide variations in estimates of the prevalence of illicit tobacco use in Canada, with
reports using different definitions and a variety of methodologies. No research has examined
potential self-reporting bias associated with contraband tobacco; given its illegality, smokers
may under-report illicit tobacco use. As in other countries, the tobacco industry and its allies
publish estimates which independent review suggests are unreliable. Euromonitor estimates
are also suspect, as studies suggest that they have been adjusted to accord with industry
claims that increases in tobacco taxation have led to increases in illicit tobacco (Guindon,
Burkhalter and Brown 2017).

An independent Canadian source, Physicians for a Smoke-Free Canada, estimates illicit
consumption by comparing government data on tax-paid cigarettes sales with self-reported
survey data on number of cigarettes smoked. According to these estimates, the propor-
tion of illicit cigarettes consumed across Canada grew from 10 percent in the early 2000s,
peaked at some 30 percent in 2007/8, and decreased to as little as 11 percent in 2011
(Guindon, Burkhalter and Brown 2017; Physician for a Smoke-Free Canada 2010). Estimates
from Statistics Canada, the official government agency, suggest a somewhat different trend,
with illicit sales as a share of total tobacco sales increasing to about 39 percent in 2008 and
2009, then decreasing to about 32 percent in 2010 and 2011 (in Guindon, Burkhalter and
Brown 2017). The upward trend to 2007 and 2008 is supported by analysis of survey data
reporting the source of respondents’ last cigarette purchase as being a First Nations reserve.
The proportion of respondents indicating that their last purchase occurred on a reserve
increased from 2 percent in 2002 to 10 percent in 2007/8 (Guindon et al 2014). Guindon,
Burkhalter and Brown (2017) note that:

Recent estimates suggest conflicting trends. One set of self-reported data
suggested a steep increasing trend in cigarette contraband in Canada, and
Ontario in particular, peaking at about 40 percent in late 2014, while other
estimates suggested that cigarette contraband in Ontario actually declined by
more than 1/3 from 2008 to 2012.

A recently published critical re-analysis of data from several sources concludes that Canada
experienced a substantial increase in illicit tobacco use between the early and late 2000s
and that, since then, there has been a decline, particularly in the province of Quebec
(Guindon, Burkhalter and Brown 2017).

In both Ontario and Quebec, the two provinces where the bulk of the problem lies, esti-
mates of the size of the illicit tobacco market vary widely. The population of Ontario and

54 // Canada: Controlling Illicit Tobacco Trade
Quebec combined is 22.6 million, some 62 percent of the entire Canadian population of
36.7 million (Statistics Canada 2018). The number of smokers in these two provinces was
recently estimated to be 3.16 million, compared with 5.04 million across Canada (Ontario
Tobacco Research Unit 2018). In Ontario, estimates of the prevalence of the illicit market
range from 14 to 42 percent of all cigarettes bought by adult smokers (Luk et al. 2009;
Physicians for a Smoke-Free Canada, 2010). One Ontario study found that 11.5 percent
of current smokers usually bought cigarettes on reserves, and 25.8 percent had bought
cigarettes from reserves in the past 6 months (Luk et al. 2009). In Quebec, illicit trade prev-
alence estimates range from 31 percent in 2007 and 20 percent in 2010-11 to 37 percent
(Commission des finances publiques 2012). A representative survey conducted in 2010 by
Institut de la Statistique du Québec (ISQ) estimated illicit tobacco consumption at 13 percent
among those aged 15 and older (Laprise & Bordeleau 2010). This survey showed 52 percent
of contraband users purchased baggies (Ziploc bags of 200 cigarettes) (Laprise & Bordeleau
2010). According to 2010 CTUMS data, 14 percent of Canadian current smokers reported
purchasing cheaper cigarettes on First Nations reserves in the past 6 months and 2 per-
cent reported purchasing smuggled cigarettes in the past six months (Tobacco Informatics
Monitoring System (TIMS) 2012).

Evidence about the role of socio-economic status (SES) and other demographic factors in
illicit tobacco behaviors is mixed and inconclusive. In an Ontario study, smokers of illicit ciga-
rettes were more likely to be over the age of 45, female, have lower educational attainment,
live in a rural area, be highly nicotine dependent, have no intention to quit, and to perceive
themselves as highly addicted (Luk et al. 2009). A Quebec study, however, found that males
were more likely than females to smoke illicit cigarettes (17 percent vs 8 percent). Survey
data suggest that youth may be particularly prone to using illicit tobacco. According to one
survey-based estimate, daily smokers in Ontario of high school age obtained 43 percent of
their cigarettes from illicit sources (Guindon, Burkhalter and Brown 2017).

In 2008, Ontario’s Auditor General found that the illegal tobacco trade cost the province
$500 million in foregone revenue - enough to cover the provincial budget deficit for the
year (Schwartz and Johnson 2010).

Quebec’s relative success in decreasing illicit tobacco consumption has been attributed
to a concerted and coordinated enforcement effort with substantial funding (see below,
Enforcement). The ACCES Tabac (Actions Concertees Pour Contrer les Ecnomies
Souterraines / Concerted Action Program to Counter the Underground Economies)
Tobacco Program initiative aims to dismantle smuggling networks and to reduce tax rev-
enue losses associated with illicit tobacco trade. The Quebec government credits ACCES
Tabac with making substantial inroads in decreasing smuggling and in increasing tobacco
tax revenue. According to the Quebec Ministry of Finance, tobacco tax revenue increased
from $654 million in 2008-2009 to $1,026 million in 2013-2014 – a period during which the
prevalence of tobacco use did not increase (Zhang & Schwartz 2015). The illicit market share
decreased, according to the Quebec Ministry of Finance, from some 30 percent in 2009

55
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

to less than 15 percent in 2012 (Figure 1). It has held steady or declined slightly more since
2012 despite three tax increases (Zhang & Schwartz 2015), providing strong evidence that
efforts to improve tax administration and enforcement are much more important that taxes
in determining the illicit market share.

Figure 1. Change in the Rate of the Specific Tax on Tobacco Products and in the
Market Share of Smuggled Tobacco Products, Quebec, 2002-2015
(dollars per carton of 200 cigarettes and per cent)

15
Speciﬁc tax on
tobacco products
10 ($ per carton of
200 cigarettes)
5 Market share of
smuggled tobacco
products (%)
0
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Sources: Statistics Canada, Sureté du Québec and Ministere des Finances du Québec.

4. Tobacco Control in Canada – A Brief Summary
Since the 1990s, Canada has gradually adopted a fairly robust spectrum of tobacco control
measures. On most of the WHO MPOWER indicators, Canada scores fairly well. MPOWER
consists of six indicators that include monitoring prevalence data (M), smoke-free policies
(P), cessation programs (O), health warnings on cigarette packages and anti-tobacco mass
media campaigns (W), advertising bans (E), and taxation (R). The distribution of power between
national and provincial/territorial governments leaves considerable authority for tobacco
control in the hands of provincial and territorial governments (Canada has 10 provinces
and 3 territories.) The federal government regulates tobacco products, restricts marketing,
and charges excise taxes. It also invests in research, surveillance, and public education and
in promoting cessation and prevention programming. Provinces and territories have taken
the lead in smoke-free policies, cessation programming, prevention measures, and tobacco
sales taxes while also investing in public education. Moreover, municipal governments play
a major role, particularly in relation to protection from second-hand smoke and to a degree
regarding retail sales.

Federal agencies are charged with preventing smuggling across international borders and
work with provincial agencies in combatting illicit tobacco activity.

56 // Canada: Controlling Illicit Tobacco Trade
A 2014 analysis gave Canada a score of 24 out of 29 on an MPOWER scale, demonstrating
that Canada has largely met minimum standards in the areas of monitoring, smoke-free pol-
icies, health warnings on cigarette packages, and advertising bans, but fared somewhat less
well on anti-tobacco mass media campaigns and taxation (Dubray et al. 2014).

Canada has been a pioneer and an early adopter of some of the most important tobacco
control measures that are both included in and go beyond MPOWER. It was one of the first
countries to introduce graphic warning labels and among the first to extend smoking restric-
tions to all indoor public places and workplaces, to ban point of sale promotion, and to
implement retail display bans. Recently, Canada implemented bans on flavored and menthol
tobacco. Plain packaging legislation has passed and will also soon be implemented.

Of note, Canada’s most populous jurisdictions do not meet the minimum MPOWER stan-
dard for taxation. For example, in Ontario, federal and provincial tobacco and sales taxes
combined account for 65.1 percent of the retail price of a carton of cigarettes, well below
the 75 percent required to meet the highest scoring category in the MPOWER scale (Ontario
Tobacco Research Unit 2017).

5. Origins: Tobacco Industry-Induced Illicit Trade
Until the early 1990s, illicit tobacco was not a major challenge in Canada. Trade in illicit
tobacco emerged following substantial tax increases in the year 1991, at both the federal and
provincial levels. Responsibility for the rapid development of Canada’s illicit tobacco market
at this time rests with the legal tobacco industry (Cunningham 1996; Non-Smokers’ Rights
Association 2007-6). It is estimated that illicit tobacco captured more than one-quarter of
the overall tobacco market (Schwartz & Johnson 2010).

Following the tax increases, tobacco companies exploited the lack of an export tax on
cigarettes and Canada’s permeable border with the United States to develop a large-scale
smuggling operation. They legally exported cigarettes to the United States where they were
stored in duty-free warehouses in New York State. Working with networks of criminal groups,
the cigarettes were then smuggled back into Canada and sold illicitly, thus avoiding the
high federal and provincial taxes. This allowed tobacco companies to sell cigarettes more
cheaply to consumers while still reaping considerable profits (Cunningham 1996; Schwartz
& Johnson 2010). Tobacco companies worked primarily with smuggling networks based on
three First Nations reserves: The Akwesasne Mohawk First Nation reserve, which strategi-
cally straddles the borders between the Canadian provinces of Ontario and Quebec and the
US state of New York; the Kahnawake reserve near Montreal, Quebec, and the Six Nations
reserve near Brantford, Ontario (Cunningham 1996).

Importantly, observers even at this stage of Canada’s illicit tobacco history noted that, even
though the government knew where the sources and distribution channels were, officials
“were reluctant to conduct seizures, due to the multi-jurisdictional context of the problem,

57
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

as well as the impact of the ‘Oka Standoff,’ which was a conflict between the Mohawks of
Oka and the Quebec police” (Sweeting, Johnson and Schwartz 2009).

Recognizing the dramatic increase in illicit tobacco, the federal government implemented,
in 1992, a substantial export tax of $8 on a carton of 200 cigarettes. Exports immediately
decreased by 60 percent. In 1992, the tobacco industry exercised considerable political
clout to ensure its ability to continue its illegal practice, and the export tax on cigarettes was
rolled back, enabling the industry to continue its smuggling operations (Cunningham 1996).
Rather than addressing the illegal activity of the tobacco industry and its associates, federal
and provincial governments eventually instituted dramatic tobacco tax cuts. This followed
considerable political pressure, including Quebec vendors’ openly selling illicit tobacco to
dramatize the challenges they faced in not being able to compete with cheap, smuggled
tobacco (Cunningham 1996). Federal tobacco taxes were reduced by $10 per carton and
provinces followed suit with tobacco tax cuts of their own. The tobacco export tax was also
reinstated (Cunningham 1996; Zhang et al 2006).

While these measures effectively ended the illicit tobacco trade of the early 1990s, they had
an overall long-term effect of increasing the prevalence of smoking and cigarette consump-
tion. Epidemiologic studies attribute large increases in tobacco initiation to the domestic
tobacco tax cuts of the mid-1990s (Canadian Cancer Society et al. 1999; Waller et al. 2003;
Zhang et al. 2006). These studies highlight that the tax cut led to increased smoking, particu-
larly among youth.

Moreover, tobacco industry and government actions and inactions throughout the 1990s
allowed for the development of an illicit tobacco supply chain that continues to pose chal-
lenges to this day. Eventually, tobacco companies pled guilty in a lawsuit in which they were
charged with exporting tobacco products in order to smuggle them back into Canada for
sale on the illicit market (Canadian Cancer Society 2017). Claims made by the federal and
provincial governments in the legal proceedings totaled $5,279,631,667 (Canadian Cancer
Society 2017). Eventually, the Canadian government settled for a much smaller amount, and
the tobacco companies paid fines of $1.7 billion to the Government of Canada (Canadian
Cancer Society 2017).

6. Illicit Tobacco in the 21st Century
By the early 2000s, illicit tobacco once again started to emerge as a serious challenge to
Canada’s tobacco control efforts. The epicenter of illicit trade was the same as in the 1990s,
with the border First Nations reserves in Ontario and Quebec being the source of more than
90 percent of illicit tobacco seizures (Schwartz and Johnson 2010). In the new manifestation
of large-scale illicit trade, there is no apparent direct role of the tobacco industry. It does
not involve the tobacco industry’s exporting its own manufactured cigarettes to the United
States and then having them smuggled back into Canada. Rather:

58 // Canada: Controlling Illicit Tobacco Trade
Over the past 20 years the cultivation of tobacco, and the manufacture, distri-
bution and sale of tobacco products on reserves in Ontario has emerged. The
on-reserve tobacco industry has not only emerged but, in some communities,
solidified itself as an important economy. (Lickers and Griffin 2016)

According to the Royal Canadian Mounted Police (RCMP), illegal manufacture of cigarettes
occurs primarily on a handful of First Nations reserves and in particular on the United States
side of the Akwasasne reserve that straddles the borders of the Canadian provinces of
Ontario and Quebec and the American state of New York (RCMP 2011). The RCMP notes
that much of the illicit tobacco activity in the 2000s occurs in the same places it developed
in the late 20th century:

In particular, the vicinity of Valleyfield, Quebec, and Cornwall, Ontario,
which was the centre of tobacco smuggling operations in Canada in the
late 1980s and early 1990s, remains as a critical passageway for the illicit
tobacco trade in Canada; smugglers exploit the geography of the area,
which borders the St. Lawrence Seaway, moving contraband goods from
the U.S. to Canada (RCMP 2011).

While the lion’s share of illicit tobacco sales appear to be in the provinces of Ontario and
Quebec, the RCMP notes that illicit tobacco from these provinces is also sold in the Atlantic
and Northwest regions of Canada and as far west as the Pacific Ocean province of British
Columbia. It is estimated that illicitly manufactured and smuggled cigarettes from this
region constitute over 80 percent of the contraband tobacco market in Canada. Most of the
remainder appears to be counterfeit product shipped from Asia to ports in British Columbia.
In 2010, the RCMP reported seizing 51,000 cartons of counterfeit cigarettes (RCMP 2011).

7. Panoply of Federal and Provincial Policies to Curb
Illicit Tobacco
Federal and provincial governments have adopted and implemented numerous measures to
combat illicit tobacco and, periodically, continue to announce incremental changes. A com-
prehensive report of anti-contraband measures, published in 2009, discusses several such
measures; others are identified in a 2017 Canadian Cancer Society summary of tobacco
control legislation in Canada. They include: 1) licensing, 2) marking/labeling, 3) export
taxation, 4) allocation/quota systems for Indigenous reserves, 5) refund/rebate systems for
reserves, 6) tax harmonization and Indigenous tax agreements/compacts, and 7) enforce-
ment (Sweeting, Johnson and Schwartz 2009, Canadian Cancer Society 2017).

Licensing: Tobacco manufacturers require a manufacturer’s license from the federal
government. Manufacturers in the provinces of Ontario and Quebec also require a license
from these provincial governments (Canadian Cancer Society 2017). In addition, the prov-
ince of Quebec has licensing requirements for tobacco “importers, wholesalers, retailers,

59
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

transporters (including transporters of leaf tobacco), growers, storers/warehousers, and per-
sons in possession of manufacturing equipment” (Canadian Cancer Society 2017). A related
measure, taken by the federal government and by the provinces of Ontario and Quebec,
is restricting the supply of leaf tobacco to licensed manufacturers. As of January 2018,
Ontario has also restricted the supply of cigarette filter materials to licensed manufacturers
(Canadian Cancer Society 2017).

Marking / labeling: Cigarette packages in Canada must bear a tax stamp indicating that
taxes have been paid. Separate tax stamps in different colors indicate that federal and then
respective provincial taxes have been paid. There is a separate marking for cigarette pack-
ages intended for sale on First Nations (Indigenous) reserves for which federal excise tax has
been paid by manufacturers and which are exempt from direct provincial tobacco tax and
sales taxes (see below).

Export taxation: General trade practice is that exported goods are not subject to taxes or
duties. However, Canada, along with some other countries, has imposed an export tax
(federal) on cigarettes to combat the phenomena of untaxed exports of cigarettes being sold
in bordering countries and smuggled back into the country to be sold illicitly (with domes-
tic tax unpaid) (Sweeting, Johnson and Schwartz 2009). Canada maintains its export tax on
cigarettes at the rate of 8 dollars per carton of 200.

Allocation / quota systems for reserves: Canada’s First Nations (Indigenous) people are
exempt from sales taxes on tobacco as part of treaty rights that exempt them from taxation
of personal property, in accordance with Section 87 of the Indian Act (Sweeting, Johnson
and Schwartz 2009). The availability of tax-exempt tobacco product for use by First Nations
people has created an opening for illicit purchases by non-Indigenous people. Each prov-
ince and territory has devised its own system for addressing the purchase by non-Indigenous
people of tax-exempt tobacco intended for consumption by Indigenous people. Five
provinces and one territory (British Columbia, Manitoba, New Brunswick, Nova Scotia, and
Northwest Territories) use quotas, based on formulas that take into account the number of
adult residents and the number of cigarettes per resident, to allocate shipments of tax-ex-
empt cigarettes to each reserve (Canadian Cancer Society 2017). Sweeting et al (2009) note
that quota allocation systems are imperfect mechanisms for controlling the illicit purchase of
non-taxed cigarettes by non-Indigenous consumers:

Allocation systems, where tax-exempt products are limited based on a for-
mula that takes into account population and consumption averages, appear
to be ineffective, because allocation formulas are often generous, and provide
no mechanism to ensure that non-eligible consumers cannot purchase the
product. Key informants in Ontario noted that the allocation system in the
province of Ontario was particularly ineffective, as products manufactured on
First Nations reserves were often shipped to reserves in excess of the allo-
cation formula, therefore undermining the premise of the allocation policy

60 // Canada: Controlling Illicit Tobacco Trade
altogether. If stringent controls and tight allocations cannot be guaranteed,
quota systems become irrelevant.

In 2015, the Government of Ontario commissioned an independent external review of its
allocation system. The resulting report reviews critical perspectives of a variety of stake-
holders. It clarifies that the allocation system does not take into account the emergence of
substantial amounts of tobacco that are now cultivated and manufactured on reserves:

First Nations are able to acquire First Nation manufactured brands through
trading channels that do not depend upon the allocation regime. This
conduct Ontario views as illegal under the TTA (Tobacco Tax Act). There is
currently only one on-reserve manufacturer that is also a licensed wholesaler/
distributor within the current allocation system. First Nation retailers do not
rely upon the allocation amounts to draw against this company's products.
Why deplete their quota when they can secure these First Nation products in
any event (Lickers and Griffin 2016)?

The review outlines several options for improving Ontario’s system. Two years after the
report was written, the Ontario Ministry of Finance website, accessed in August 2018, notes
that, “The Ministry of Finance is currently reviewing the facilitators' final report and carefully
considering each of the recommendations.” (https://www.fin.gov.on.ca/en/tax/tt/fnciga-
retteallocation.html - accessed on 12.08.18)

Refund / rebate systems for reserves: Six provinces and one territory apply a refund/rebate
system to handle tax-exempt sales on reserves (Alberta, Saskatchewan, Manitoba, Quebec,
New Brunswick, Prince Edward Island, and Northwest Territories) (Canadian Cancer Society
2017). Manitoba, New Brunswick, and Northwest Territories combine quota allocation
and refund/rebate systems (Canadian Cancer Society 2017). Refund/rebate systems place
the onus on on-reserve retailers. The price of tobacco products that are shipped to them
includes the amount equivalent to the taxes that would be required of non-Indigenous
consumers. The product is then sold to Indigenous consumers, with appropriate identity
cards, at a price that does not include the taxes. Retailers then send a form to the provincial
government with the amount sold and name of the consumer in order to get reimbursed for
the tax amount (Canadian Cancer Society 2017). Some provinces also restrict the amount of
tax-exempt product that an Indigenous consumer can purchase in an attempt to decrease
their ability to resell to non-Indigenous people (Sweeting, Johnson and Schwartz 2009).

Ontario’s independent review report includes a refund/rebate system as one option for
policy change, noting that it could utilize the “Certificate of Exemption” recently developed
for on-reserve gasoline purchases. The report cautions that an electronic system for real-
time transaction tracking would be expensive and might encounter challenges of internet
connectivity as well as opposition from Indigenous stakeholders (Lickers and Griffin 2016).

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

8. Tax Harmonization - First Nations Tax Agreements
Tax harmonization is an often-mentioned measure to counter illicit tobacco sales.
Harmonization schemes aim to decrease tax avoidance by ensuring similar tax rates in
neighboring jurisdictions so as to reduce or eliminate cross-border trade in cheaper tobacco
(Sweeting, Johnson and Schwartz 2009). The availability of non-taxed tobacco products
for purchase by non-Indigenous people on First-Nations reserves is akin to two provinces,
states, or countries having substantially different tobacco tax rates. Tax harmonization in
this case comes in the form of Tax Agreements between First Nations communities and
Canadian governments.

Three Canadian provinces have negotiated Tax Agreements with First Nations communities.
New Brunswick refunds 95 percent of taxes that First Nations collect on the sale of tobacco
and of gasoline to non-Indigenous people making purchases on reserves (Lickers and
Griffith 2015). In Manitoba, 59 First Nations are party to Tax Agreements under which they
collect tobacco taxes at the province’s rate on tobacco products sold to both Indigenous
and non-Indigenous people. They then receive back from the provincial government the
revenues emanating from purchases by Indigenous people (Lickers and Griffith 2015). Some
British Columbia First Nations collect their own levies on tobacco sales and use revenues
to cover the cost of community services. For example, the Cowichan Tribes have imposed
a levy equivalent to 80 percent of the provincial tobacco tax (Sweeting, Johnson and
Schwartz 2009).

Negotiation of Tax Agreements can be a lengthy process. The Government of Ontario
signed agreements-in-principle with two First Nations communities only after five years of
discussions. Notably, in 2017, an agreement-in-principle was signed with the community
of Akwesasne, which is one of the border reserves identifies as being a major source of
illicit tobacco. The language of the government press release highlights that the agree-
ment-in-principle is far from being an actual Tax Agreement:

… [T]he Mohawk Council of Akwesasne has begun the internal consultation
and legal work to examine how community-based regulation could advance
public health priorities while growing its economy. The purpose of the agree-
ment-in-principle is to guide negotiations as Ontario and the Mohawk Council
of Akwesasne work toward an agreement.2

2
From (https://news.ontario.ca/mof/en/2017/12/ontario-signs-tobacco-agreement-in-principle-with-mohawk-
council-of-akwesasne.html) Archived News Release. Ontario Signs Tobacco Agreement-in-Principle With
Mohawk Council of Akwesasne Province Partnering with First Nations to Support Community Growth and
Prosperity. December 20, 2017 2:30 P.M. Ministry of Finance.

62 // Canada: Controlling Illicit Tobacco Trade
9. Enforcement
Since 2007, the federal government has renewed its efforts to tackle illicit tobacco as part
of the Federal Tobacco Control Strategy (Guindon, Burkhalter and Brown 2017). Measures
taken include the establishment of the “First Nations Organized Crime Initiative,” the RCMP’s
Contraband Tobacco Enforcement Strategy, and the Task Force on Illicit Tobacco Products
(Guindon, Burkhalter and Brown 2017).

Quebec has taken the lead in pioneering considerable efforts at the provincial level. These
include legislation to track and control raw leaf tobacco, increased fines, and empowering
municipal governments (Guindon, Burkhalter and Brown 2017). Noteworthy is Quebec’s
substantial investment in enforcement efforts through the special collaborative initiative
ACCES Tabac cited earlier. Partners in ACCES Tabac include: The Ministry of Finance (MFQ);
The Ministry of Health and Social Services (MSSS); The Sûreté du Québec (SQ); The Police
Service of the City of Montreal (SPVM); Association of Quebec Police Directors (ADPQ); and
the Royal Canadian Mounted Police (RCMP). With an annual budget of $18 million, ACCES
Tabac is able to devote considerable resources to its two strategic activities: 1) Point-of-sale
inspections to ensure that illicit tobacco is not being sold; and 2) investigations to “detect
and dismantle illegal supply and distribution networks for tobacco product” (Ministere de la
Securite Publique Quebec 2018).

Ontario has also been active in announcing measures to curb illicit tobacco. In 2014,
Ontario required new tobacco stamps on cigarette packages and fine cut tobacco to
improve identification of illicit product. In 2015, the Province improved oversight of raw leaf
tobacco, and in 2016 it established a new Contraband Tobacco Enforcement Team in the
Ontario Provincial Police Organized Crime Enforcement Bureau. The aim was to improve
enforcement by increasing capacity to investigate smuggling and trafficking of illicit tobacco
(Smoke-Free Ontario Scientific Advisory Committee 2016). A further enforcement enhance-
ment step is an information-sharing agreement between the Ontario Ministry of Finance and
the Alcohol and Gaming Commission of Ontario, providing for suspension of lottery licenses
to vendors who sell illicit tobacco. Raw leaf tobacco oversight now includes “baling or packag-
ing, labelling, transportation, record-keeping and reporting requirements and exemptions for
raw leaf tobacco registrants” (Smoke-Free Ontario Scientific Advisory Committee 2016)

10. Additional Measures
The Canadian Cancer Society’s (2017) summary of Canada’s legislative stipulations related to
illicit tobacco lists several additional measures that are in place in Canadian jurisdictions:

1. Requiring the provision of a bond/security that could be forfeited in the event of non-
compliance, as some governments have done.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

2. Requiring that importers into a province pay to the government an amount equal to
tobacco tax at the time of importation rather than at a subsequent point, such as at the
point of sale within the province.

3. Allowing local police to keep fines arising from enforcement action, thus providing
greater resources and incentives to local police for enforcement. Quebec has done this.

4. Prohibiting the sale or offering for sale at a price lower than the total amount of federal
and provincial tobacco taxes. Quebec has done this.

5. Authorizing tickets to be issued for infractions. Several provinces have done this.

6. Prohibiting individuals from possessing more than a specified quantity of cigarettes/
tobacco products. Several provinces prohibit possession of more than 5 cartons (1000
cigarettes). As an example, Manitoba’s possession limit is 5 units, with a unit being 200
cigarettes, or 50 cigars, or 200 grams of any other type of tobacco product.

7. Prohibiting the sale or purchase of more than a specified quantity at any one time, or
per day. One or more provinces have done this. At example might be to prohibit more
than 2 cartons (400 cigarettes) from being sold / purchased at any one time.

8. Establishing a maximum daily or weekly tax-exempt purchase limit on reserves, such as
one carton. Saskatchewan has a limit on purchasing of 200 units of tax-exempt tobacco
products per week, and a limit on possessing 800 units of tax exempt tobacco prod-
ucts. A unit includes one cigarette, one cigar, one tobacco stick, or one gram of other
tobacco products.

9. Requiring importing consumers to pay tobacco taxes to the government, but setting
allowable quantity exemptions. For example, Saskatchewan allows importing consum-
ers to bring in tax-free 200 cigarettes, 200 tobacco sticks, 200 grams of tobacco and
50 cigars provided that the products are marked for sale in another province, or the
products are an allowable tax-exempt importation when entering Canada.

10. Cross appointing health inspectors to be inspectors under tobacco tax legislation. This
is useful, for example, so that health inspectors can seize illegal product immediately
without having to call and wait for a tobacco tax inspector (who might even be in a
different city).

11. Requiring a provincial government identification card to be presented to be able to
purchase tax-exempt products on reserve.

12. Requiring record keeping for on-reserve retailers selling tax-exempt tobacco products.
Saskatchewan and some other provinces have done this.

13. Providing for the ability to suspend a driver’s license when a motor vehicle was used as
part of a contraband offence. Several provinces have done this.

14. Providing that seized contraband is forfeited to the government. Several provinces have
done this. (Canadian Cancer Society 2017)

64 // Canada: Controlling Illicit Tobacco Trade
11. Gaps: What is Missing from Canada’s Effort to
Curb Illicit Tobacco?
What is clear to observers of Canada’s illicit tobacco market is that Canadian governments
have largely been unwilling to deploy the tools at their disposal to address the sources and
channels for the bulk of the illicit tobacco supply in Ontario and in Quebec. Licensing, tax
stamps, allocations systems, rebate systems, and enforcement efforts neglect the cultivation
and manufacture of tobacco on some First Nations reserves and its distribution and untaxed
sale through channels on multiple reserves and off-reserve (Lickers and Griffin 2016). First
Nations representatives participating in an Expert Focus Panel in 2009 indicated that First
Nations would oppose government action to control this activity, on the grounds that it is
their right to produce and sell tobacco and that the economic benefits are such that taking
away the revenues from this activity would create severe hardship (Sweeting, Johnson and
Schwartz 2009). This, they agreed, applied equally to efforts at tax harmonization (tax agree-
ments) which they thought “would keep communities trapped in the cycle of poverty.” The
Government of Ontario’s inaction on implementing recommendations of the independent
review of the allocation system which it commissioned, and the fact that after five years
of negotiating with two First Nations communities, it has still not reached Tax Agreements,
demonstrate the challenges to moving forward in this way.

Internationally, tracking and tracing has been a central element in efforts to curb the illicit
tobacco trade. Notably, Canada does not have a tracking and tracing system in place
(Canadian Cancer Society 2017). Tracking and tracing mechanisms use machine-readable
markings on tobacco packages containing information about the product, such as its origin
and destination. In a comprehensive tracking and tracing regime, authorities are able to
track the movement of the product along the supply chain. During inspections or seizures,
inspectors are able to scan the marking on the package, both to trace the origin of the
product and to determine the last point at which the product was scanned. This provides
investigators with a clear view of where the product came from, where it was destined to
go, and at what point the product was diverted from its intended route. Similar to enhanced
tax-paid markings, tracking and tracing markings also allow authorities to quickly determine
whether a package of cigarettes is counterfeit (Sweeting, Johnson and Schwartz 2009).

The absence of a tracking and tracing system in Canada is a major deficiency, that should
be addressed. However, a recent evidence-informed article indicates that many jurisdictions
have relied on the tobacco industry (specifically the Codentify system developed and made
available by PMI) to develop and implement tracking and tracing systems that are highly
suspect in their ability to identify illicit tobacco (Gilmore, Gallagher and Rowell 2018):

Governments should assume the TI seeks to control T&T systems in order
to avoid scrutiny and minimise excise tax payments and that any T&T system
based on Codentify, on intellectual property currently or previously owned

65
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

by the TI, or being promoted or implemented by companies with TI links, is
incompatible with the ITP and would not serve to reduce illicit trade.

12. Industry Harnessing of Illicit Trade Concerns to
Fight Tobacco Control
Canada has seen some success in curbing illicit tobacco trade. Government measures have
undoubtedly contained illicit activity, and global evidence suggests that government spend-
ing on anti-smuggling is effective (Yurelki & Sayginsoy 2010). However, even in the province
of Quebec, where enforcement efforts have been strongest, illicit tobacco still accounts
for some 15 percent of the overall tobacco market (Figure 1). The tobacco industry exploits
the continued illicit tobacco problem in Canada through direct and indirect efforts aimed at
preventing governments from adopting effective tobacco control measures. This particu-
larly applies to substantial tobacco tax increases. Industry spokespersons have been largely
successful in propagating a belief that tax hikes on tobacco products cause (large) increases
in illicit tobacco activity. This perception has likely contributed to Canada’s two most pop-
ulous provinces’ maintaining tobacco tax rates below minimum standards set out in the
World Health Organization’s MPOWER platform. Both international published literature and
a recent analysis of the relationship between tobacco tax rates and illicit tobacco trade have
clearly demonstrated that tax increases do not necessarily lead to substantial and sustained
increases in illicit tobacco consumption (Schwartz and Zhang 2016).

Moreover, Canadian research reveals the tactics employed by the tobacco industry in
spreading myths about the current size of the illicit tobacco market and its expected growth,
should governments raise taxes on tobacco products or adopt other rigorous tobacco
control policies. This happens in three ways: 1) unsubstantiated over-estimates of the size of
the illicit market; 2) influence on media sources; and 3) the industry’s funding think tanks to
publish reports warning that tax increases will lead to high levels of illicit tobacco.

Invalid estimates. The tobacco industry routinely commissions research and publishes
results that inflate, sometimes grossly, the size of the illicit market in Canada. Only partial
descriptions of methods are typically published. What is published has been sharply criticized
by academic researchers (Zhang and Schwartz 2015; Smith et al. 2017).

Influence on media sources. Smith et al (2017) conducted a media analysis of articles
related to illicit tobacco in Canadian newspapers over a five-year period (2010-2015). They
found that illicit tobacco is most commonly presented in ways that favor the tobacco
industry. Articles quote organizations with both known and unrevealed links to the tobacco
industry. Examples are the Canadian Convenience Store Association, the Taxpayer’s
Federation, and the Reason Foundation, all of which receive support from the tobacco
industry (Smith et al 2017).

66 // Canada: Controlling Illicit Tobacco Trade
Purchasing the services of think tanks. In the past few years, reports by two generally
respected think tanks, the Fraser Institute and the C.D. Howe Institute, came out strongly
against raising taxes on tobacco products, citing the risk of large increases in illicit tobacco
sales. Neither organization revealed that it had received funding from tobacco companies.
The evidence in the Fraser Institute Report has been independently assessed and found to
be incorrect or misleading as presented (Zhang and Schwartz 2015).

13. Recommendations
To further decrease the illicit tobacco market in Canada, several measures might be considered:

1. Ontario and Quebec should adopt a refund/rebate system that puts the onus on on-re-
serve retailers for collecting sales taxes on tobacco purchased by people other than
Indigenous people who are entitled by law to not pay these taxes. Technological and
administrative solutions should be sought to minimize challenges that this would pose
to on-reserve retailers.

2. The federal and provincial governments should work with Indigenous communities
where illicit tobacco constitutes an important revenue source to develop alternative
sources of revenue to replace lost income.

3. The federal and provincial governments should enforce existing stipulations regarding
licensing, manufacture, and distribution of tobacco products for which not all taxes
have been paid. Where this involves Indigenous communities, this should be done in
cooperation with their leadership and enforcement agencies. The relative success of
Quebec’s ACCES Tabac efforts, including its larger investments, might serve to inform
action by other jurisdictions, such as Ontario.

4. The federal government should require tobacco manufacturers and distributors to
implement an effective track-and-trace system not related to the tobacco industry.

5. The federal government should publish annual reports on the size of the illicit market
and on measures taken to combat illicit tobacco.

14. Conclusion
Illicit tobacco trade in Canada and efforts to control it have a convoluted history. The
problem has been exacerbated by the encouragement given to illicit trade by the tobacco
industry itself in the 1990s. Ironically, it is now the tobacco industry that fans the flames of
anti-illicit tobacco anxieties in order to dissuade Canadian governments from substantial
increases in taxes on tobacco products and from adopting other effective tobacco con-
trol policies. As the evidence cited above demonstrates, Canadian governments first raised
taxes substantially and then reversed them in light of the contraband problem created by
the tobacco industry in the 1990s. This policy reversal resulted in large numbers of young

67
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

people initiating tobacco use, many smokers refraining from cessation, and ultimately in a
great deal of avoidable morbidity and mortality.

A consequence of large-scale tobacco industry-instigated smuggling of exported tobacco in
the 1990s was the engagement of some First Nations communities in illicit tobacco activ-
ity. Some of these communities have subsequently become centers of the illicit tobacco
market. Canadian governments have been hesitant to adequately address illicit cultivation,
manufacture, and sale of tobacco products by some Indigenous communities. While this is
apparently due to understandable sensitivities around Nation-to-Nation relations and fears
of sparking violent confrontations, there is more that could be done, as discussed above, to
reduce illicit production and sales.

The unfortunate outcome is that illicit tobacco has a negative influence on Canada’s
tobacco control policy: both directly and indirectly, through tobacco industry efforts. It is
important to remember that tobacco use remains a severe health epidemic in Canada. More
vigorous tax and other tobacco control policies could reduce the current annual initiation of
tobacco use by some 50,000 young Canadians – who are price-sensitive and heavy users
of cheap, illicit cigarettes. Stronger tax and other control measures would lead more of
Canada’s 4 million smokers to quit, reducing the billions of dollars in social and healthcare
costs that stem from tobacco use. While a series of incremental measures to curb the illicit
tobacco trade have met with some success, illicit trade continues to constitute some 15 per-
cent of the market, and misinformation disseminated by the tobacco industry has prevented
substantial tax increases that could rapidly and dramatically decrease tobacco consumption
(Jha and Peto 2014).

68 // Canada: Controlling Illicit Tobacco Trade
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the illicit tobacco trade in Canadian newspapers. Cogent Social Sciences 3: 1325054 https://doi.org/10.1
080/23311886.2017.1325054

Smoke-Free Ontario Scientific Advisory Committee, Ontario Agency for Health Protection and
Promotion (Public Health Ontario). 2016. Evidence to guide action: Comprehensive tobacco control in
Ontario. Toronto, ON:

Sweeting J, Johnson T, Schwartz R. 2009. Anti-Contraband Policies: Evidence for Better Practice.
Toronto, ON: The Ontario Tobacco Research Unit, Special Report Series. June 2009.

Statistics Canada. 2018. https://www150.statcan.gc.ca/n1/pub/12-581-x/2018000/pop-eng.htm.
Accessed 290818.

Tobacco Informatics Monitoring System (TIMS). 2012. Ontario Tobacco Research Unit www.tims.otru.org

Waller B J, Cohen J E, Ferrence R, Bull S, and Adlaf E M. 2003. “The early 1990s cigarette price decrease
and trends in youth smoking in Ontario.” Canadian Journal of Public Health Jan/Feb 2003.

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Yurelki A and Sayginsoy O. 2010. “Worldwide organized cigarette smuggling: an empirical analysis.”
Applied Economics 42, 545–561

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the Taxation - Contraband Tobacco Myth. Toronto: Ontario Tobacco Research Unit, Special Report,
February 2015.

Zhang, B., Cohen, J., Ferrence, R. and Jurgern, R. 2006. The impact of tobacco tax cuts on smoking
initiation among Canadian young adults. American Journal of Preventative Medicine 30(6): 474–479.

71
EUROPEAN
UNION
4

EUROPEAN UNION:

Confronting Illicit
Tobacco Trade:
An Update on EU Policies
Filip Borkowski and Clare Twomey1

Chapter Summary
The illicit tobacco trade is of pressing concern to the European Union (EU). It results in
lost revenue for governments and taxpayers, as well as undermining health policies. The
European Anti-Fraud Office (OLAF) estimates that the illicit trade in tobacco products drains
EUR 10 billion annually from EU and national budgets. Despite control efforts, the prevalence
of cigarette smuggling in the EU has remained broadly stable since 2005. Detected illicit
tobacco production within the EU is also on the rise. Meanwhile, the involvement of orga-
nized crime groups in illicit tobacco trade in the EU has become increasingly evident.

The EU has recently taken action to strengthen its institutional framework, specifi-
cally focusing on tackling crime. Enforcement against organized crime when this is
connected to the protection of the EU's financial interests will soon be steered by the
European Public Prosecutor's Office (EPPO). Linked to the establishment of the EPPO, the
European Commission has proposed to adapt and strengthen OLAF's legal framework for

1
See disclaimer at the end of the chapter.

73
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

investigations. Steps have also been taken to strengthen sanctions against those guilty of
defrauding the EU's financial interests, including public officials involved in corruption affect-
ing the financial interests of the Union (for example, in relation to cigarette smuggling).

The EU played a strong role in negotiating the Protocol to Eliminate Illicit Trade in Tobacco
Products. Tackling cross-border smuggling requires international cooperation, and the
Protocol will facilitate this engagement. Along with the Protocol, the EU’s tobacco control
policy has been shaped by the Union’s 2014 Tobacco Products Directive (TPD).

The traceability of tobacco products is envisaged under TPD Article 15. Traceability of fin-
ished products can be construed as the ability to track a product forward through specified
stages of the supply chain down to the consumer, and simultaneously to retrace the history
and locations of the product back to its origin. The newly introduced EU system of tobacco
traceability requires all unit packets of tobacco products manufactured in or imported into
the EU to be marked with a unique identifier and their movements to be recorded through-
out the supply chain. Information on recorded movements will be stored by third-party data
storage providers independent from the tobacco industry. This data will be fully accessible to
EU and Member State authorities for enforcement purposes.

In functional terms, the new EU tracking and tracing system is primarily characterized by its
broad coverage of the supply chain, including the collection of data on the supplies dis-
patched to retail outlets. The system design embeds several elements that together provide
public authorities with full control over operations. In this respect, the key aspects are the
independence from the tobacco industry of the generation of unique identifiers and of the
system’s data storage, along with the independence criteria and rules on structuring and
reporting traceability data. An impact assessment conducted by the European Commission
anticipates multi-billion-euro social and economic benefits from the traceability system.
Expected benefits will stem mainly from (1) better collection of taxes and (2) at least a partial
reduction in the artificially cheap supplies of illegal tobacco products that have been found
to affect the uptake and general prevalence of tobacco consumption.

1. Introduction
The illicit tobacco trade is of pressing concern to the European Union (EU). It results in lost
revenue for governments and taxpayers, as well as undermining health policies. It is closely
linked to organized crime gangs and as such causes significant societal damage.

The EU has been at the forefront in fighting cross-border illicit tobacco trade over the past
years. The illicit tobacco trade tends to have a cross-border dimension, so unified and coor-
dinated action at EU level among various agencies can facilitate the steps taken to tackle the
problem more effectively.

74 // European Union: Confronting Illicit Tobacco Trade: An Update on EU Policies
In this respect, the European Commission published a comprehensive strategy to step up
the fight against cigarette smuggling.2 This report elaborated measures to address the incen-
tives behind the illicit tobacco trade, controlling the legal supply chain and strengthening
enforcement. This was followed by a report on the implementation of these measures and
the impact on the illicit tobacco landscape in Europe.3

This chapter will outline certain aspects of the scope and scale of the illicit tobacco trade at
EU level, as well as the institutional and regulatory framework designed to tackle this phe-
nomenon. The newly introduced EU tracking and tracing system will be outlined in detail.

2. Scope and Scale of the Illicit Tobacco Trade at
EU Level
The illicit tobacco trade encompasses the smuggling of genuine tobacco products (con-
traband), counterfeit tobacco products, and so called “illicit whites,” as well as the illegal
manufacturing of tobacco products within the EU.4

For the purposes of this overview, “contraband cigarettes” refers to authentic goods
imported or exported illegally, evading regulatory duties. “Counterfeit cigarettes” refers to
production under a certain brand without the brand owner's approval. “Illicit whites” are
cigarettes legitimately manufactured in one country and subsequently smuggled into and
sold in another country, typically without a legal distribution network in that country.

The illicit tobacco trade, by its nature, is a clandestine activity which is constantly evolving,
increasing the challenge of estimating its scope with accuracy. A relatively comprehensive
picture of the illicit market is needed at EU level to assist in improving strategic activities,
such as threat assessments. The European Anti-Fraud Office (OLAF) recently launched a
research study tender to identify a methodology for improving the measurement of the illicit
tobacco market.5

OLAF currently estimates that the illicit trade in tobacco products drains EUR 10 billion6
annually from EU and national budgets, relative to the situation if all smuggled tobacco prod-
ucts had been sold legally and appropriately taxed. From a purely economic perspective, the
magnitude of these losses is very significant and deprives governments of the opportunity to
use the foregone revenue for other policies.

2
COM(2013) 324 final.
3
COM(2017) 235 final - Progress report on the implementation of the Commission Communication "Stepping
up the fight against cigarette smuggling and other forms of illicit trade in tobacco products - a comprehensive
EU strategy (Com (2013) 324 final of 6.6.2013)."
4
COM(2013) 324 final – “Stepping up the fight against cigarette smuggling and other forms of illicit trade in
tobacco products – A comprehensive EU Strategy,” p. 4.
5
Supplement to the Official Journal of the European Union, 2018/S 044-095213.
6
The estimation is based on seizures reported by the Member States, which amounted to 4.5 – 4.6 billion
cigarettes per year between 2005 and 2011 – see COM(2013) 324 final, p. 4.

75
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

OLAF monitors tobacco seizures across the EU as reported by Member States. This can
result in a more comprehensive picture of what illicit tobacco is being seized in the Member
States. Seizure reports can give insight into the scale of the problem faced, as well as reflect-
ing and informing the activity of customs and other law enforcement agencies.

Cigarettes remain the most-seized tobacco product at EU level, amounting to 3.78 billion in
2015.7 According to seizures reported by the Member States to OLAF, over a five-year period,
seizures of cigarettes far outweigh seizures of other tobacco products.8 This is perhaps
unsurprising, given that an EU survey conducted in 2017 shows that boxed cigarettes are
clearly the most popular tobacco product in all Member States.9 The European Commission
also found that cigarettes accounted for 24 percent of all detained articles (not just tobac-
co-related articles) at the EU external border in 2016.10

Despite efforts to curb the problem, overall the prevalence of illicit cigarette smuggling in
the EU has remained broadly stable since 2005.11 Smuggling of genuine product in large-
scale seizures has decreased in the past years,12 but does still remain a problem EU-wide. In
the past years there has been an increase in the prevalence of cheap whites, which domi-
nate large-scale seizures reported by Member States to OLAF.13

Detected illicit tobacco production in the EU is also on the rise. This may be a response
to increased controls at the EU border and a lower risk of detection by customs.14 These
illicit factories within the EU itself pose a significant threat and tend to have huge produc-
tion capacities. For instance, an illegal factory dismantled in March 2018 in Ireland had the
capacity to produce a quarter of a million cigarettes per hour, according to a press release
by the Revenue Commissioners in Ireland.15 Illicit factories require access to raw materials,
machines, and expertise. It is clear that law enforcement agencies will have to diversify their
efforts to tackle illicit production, in addition to their focus on the transportation of illicit
goods across the EU border.

For some years now, the involvement of organized crime groups in the illicit tobacco trade
in the EU has become evident. These groups often utilize sophisticated cross-border networks.
The illicit tobacco trade cannot be disassociated from its connections as a major source of
revenue for organized crime groups and even terrorist organizations.

7
COM(2017) 235 final, p. 5.
8
Ibid.
9
Special Eurobarometer 458: Attitudes of Europeans towards tobacco and electronic cigarettes, summary, p. 5.
10
Report on EU customs enforcement of intellectual property rights, Results at the EU border 2016,
Directorate-General for Taxation and Customs Union, p. 10.
11
COM(2017) 235 final, p. 7.
12
COM(2017) 235 final, p. 8.
13
Ibid.
14
Europol and the European Union Intellectual Property Office, “2017 Situation Report on Counterfeiting and
Piracy in the European Union,” p. 38.
15
Revenue Department, Republic of Ireland. "Revenue and An Garda Siochana dismantle illicit cigarette
factory in Jenkinstown, Co. Louth." March 15, 2018. https://www.revenue.ie/en/corporate/press-office/press-
releases/2018/pr-150318-illegal-cigarette-factory-jenkinstown-louth.aspx

76 // European Union: Confronting Illicit Tobacco Trade: An Update on EU Policies
Not only is the illicit tobacco trade funding criminal organizations, but their involvement
can increase the difficulty of detecting illicit tobacco trade. In cases of large-volume smug-
gling, the criminals involved tend to be experienced and go to great lengths to conceal
their activities, including establishing legitimate businesses and various other concealment
tactics. Smuggling of lower-volume amounts is increasing16 and can be even more difficult
to detect.

The deep entrenchment of organized crime groups in the illicit tobacco trade is not yet well
known among the general public in Europe. A Eurobarometer survey in 201617 noted that a
majority of EU citizens surveyed do not realize that smuggled cigarettes are a main source
of revenue for organized crime. The enduring public perception that the illicit tobacco trade
is a victimless crime is cause for concern. This disconnect between perception and reality
needs to be tackled effectively in order to raise awareness of the serious criminal activities
benefitting from the proceeds of the illicit tobacco trade. Greater public awareness should
correspondingly reduce the demand for illicit tobacco products.

The incentives behind the lucrative business of illicit tobacco trade can be largely linked to
its perceived low-risk, high-reward nature as a comparatively safe activity with high profit
yields.18 This risk level is in part linked to substantially divergent administrative and criminal
sanctions for tobacco smuggling at Member-State level.19 High profits are linked to the sub-
stantial price divergence of tobacco products among EU Member States, which smugglers
can exploit. Although prices have converged over the last decade,20 there are still apprecia-
ble differences. The weighted average price for a pack of 20 cigarettes ranges from EUR
2.55 to EUR 10.07.21 This is even more pronounced when considering the price difference
with some of the EU's neighboring countries, where weighted average prices can be as low
as EUR 0.43.22

3. Institutional Framework
In terms of operational activities to tackle the illicit trade in tobacco products, it is clear that
robust enforcement by customs, police, and border forces will always play a central role.
This is primarily the task of customs. However, customs authorities rely on close coopera-
tion with other enforcement agencies, including the police, in tackling organized crime. This
is also reflected at EU level, with several institutions currently involved in fighting the illicit
tobacco trade.

16
Europol and the European Union Intellectual Property Office, “2017 Situation Report on Counterfeiting and
Piracy in the European Union,” p. 43.
17
Special Eurobarometer 443: Public perception of illicit tobacco trade, summary, p. 6.
18
European Union Serious and Organised Crime Threat Assessment, SOCTA 2013, European Police Office, p. 26.
19
COM(2017) 235 final, p. 4.
20
Eurostat: Price convergence in the EU-28 by product groups https://ec.europa.eu/eurostat/statistics-
explained/index.php?title=File:Price_convergence_in_the_EU-28_by_product_groups,_2007_-_2017.png
21
Weighted average price of cigarettes in Bulgaria and Ireland, respectively. See KPMG Project Sun 2017,
Executive summary, p. 13.
22
Weighted average price of cigarettes in Belarus. See KPMG Project Sun 2017, Executive summary, p. 13.

77
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

OLAF has a unique mandate23 to investigate matters relating to fraud, corruption, and other
offenses concerning EU revenue. According to its annual report, OLAF supported the seizure
of over 1 billion cigarettes in 2016 and 2017.24 An example of such support is a complex fraud
scheme involving an international contraband network that OLAF recently uncovered. The
fraud involved the export to non-EU countries of cigarettes that were subsequently smug-
gled back into the EU, to be sold without payment of the applicable EU taxes. OLAF assisted
law enforcement agencies in Italy and Germany in dismantling the network.25

OLAF also engages in Joint Customs Operations (JCOs), which are implemented by national
customs authorities. JCOs are operations of a limited duration targeting smuggling of goods
and can be very effective in coordinating targeted customs checks at European level.26
JCO “Magnum II” is such an example. Organized by OLAF, it involved 14 Member States,
the European Border and Coast Guard Agency (FRONTEX), and the European Police Office
(EUROPOL) and culminated in 11 million cigarettes being seized over a two-month period.27

EUROPOL28 is also active in this area and, upon request, supports the Member States' law
enforcement agencies in combating serious crime against the financial interests of the
Union. This includes fighting against illegal manufacture and distribution of tobacco prod-
ucts in the EU. Tackling excise fraud, with the aim of disrupting the capacity of organized
crime groups involved, is a priority for EUROPOL. EUROJUST29 supports cooperation
between the competent judicial authorities of the Member States in order to render their
investigations and prosecutions of serious crimes more effective. FRONTEX30 also coordi-
nates operations with EU Member States to tackle cross-border crime at the EU border. This
includes working with customs authorities to tackle the smuggling of tobacco products.31

Effective cooperation among these institutions involved in fighting the tobacco smuggling
phenomenon at EU level is of particular importance.

3.1 Strengthening Institutions
The EU has recently taken action to strengthen its institutional framework, specifically
focusing on tackling crime. Enforcement against organized crime will soon be steered by
the European Public Prosecutor's Office (EPPO).32 The establishment of EPPO aims to alter

23
Regulation (EU, Euratom) 2013/883 Official Journal of the European Union L 248, 18.9.2013, p. 1–22.
24
The OLAF report 2017. https://ec.europa.eu/anti-fraud/sites/antifraud/files/olaf_report_2017_en.pdf
25
OLAF Press release 02/2018 https://ec.europa.eu/anti-fraud/media-corner/news/27-03-2018/convictions-italy-
major-international-contraband-case-uncovered-olaf_en
26
https://ec.europa.eu/anti-fraud/policy/joint-customs-operations-jco_en
27
OLAF Press release no. 18/2017 https://ec.europa.eu/anti-fraud/media-corner/news/05-12-2017/joint-
customs-operation-magnum-ii-real-time-intelligence-exchange-leads_en#_ftn1
28
Regulation (EU) 2016/794 Official Journal of the European Union L 135, 24.5.2016, p. 53-114.
29
Regulation (EU) 2017/1939 Official Journal of the European Union L 283, 31.10.2017, p. 1–71.
30
Regulation (EU) 2016/1624 Official Journal of the European Union L 251, 16.9.2016, p. 1.
31
https://frontex.europa.eu/media-centre/news-release/23-smugglers-arrested-drugs-and-cigarettes-seized-
during-frontex-led-operation-PIk7rS
32
Council Regulation (EU) 2017/1939 OJ L 283, 31.10.2017, p. 1–71.

78 // European Union: Confronting Illicit Tobacco Trade: An Update on EU Policies
current patterns, which can involve coordinated operational activities at EU level but frag-
mented judicial prosecutions at national level. The EPPO will be tasked with fighting criminal
offenses against the EU budget. As recognized in the Office’s establishing regulation, inves-
tigation and prosecution of such offenses at national level can be insufficient. At the time of
writing, 22 Member States are participating in the EPPO.

Linked to the establishment of the EPPO, the European Commission recently put forward
a proposal33 to adapt and strengthen OLAF's legal framework for investigations. OLAF will
continue to investigate and cooperate with national authorities and other agencies. These
initiatives aim to ensure a more robust legal framework for tackling fraudulent activities,
including those related to the illicit tobacco trade.

3.2 Strengthening Sanctions
At EU level, steps have also been taken to strengthen sanctions for those involved in
defrauding the Union's financial interests. This is intended to have a deterrent effect on
potential criminals. The Directive on fighting fraud against the Union's financial interests by
means of criminal law (“PIF Directive”)34 contains several provisions which are relevant to
tackling the illicit tobacco trade. The PIF Directive harmonizes sanctions among Member
States regarding crimes affecting the financial interests of the Union, for example estab-
lishing that countries’ maximum prison terms for serious cases must be at least four years.
Moreover, the PIF Directive includes the involvement of organized crime groups in offenses
as an aggravating circumstance. This is frequently the case for the illicit tobacco trade.

The PIF Directive also strengthens sanctions for officials involved in corruption, explicitly
adding the acceptance of bribes to the definition of corruption.35 This is relevant for border
crossings, where corruption may still be an issue, given the high volume of illicit goods
making their way into the territory of the EU. Member States have until July 2019 to adopt
laws in line with the Directive.

4. Regulatory Framework: Tobacco Products
Directive and Protocol to Eliminate Illicit Trade in
Tobacco Products
The EU is now on the threshold of a new phase in its regulatory framework, with some
major initiatives specifically aiming to tackle the illicit tobacco trade. Smuggling by its nature
is a clandestine activity aimed at evading controls. Nonetheless, tightening loopholes in
the regulatory framework has previously had an impact on the illicit tobacco trade, and this
remains an area in which regulatory action is required.

33
COM/2018/338 final.
34
Directive (EU) 2017/1371 of the European Parliament and of the Council. Official Journal of the European
Union L 198, 28.7.2017, p. 29–41.
35
Article 4 (2) a. “passive corruption.”

79
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

4.1 Protocol to Eliminate Illicit Trade in Tobacco Products
The Protocol to Eliminate Illicit Trade in Tobacco Products ("FCTC Protocol"),36 to which the
EU is a Party, is the first tailor-made multilateral treaty to specifically tackle the illicit tobacco
trade and will enter into force on September 25, 2018.

The Protocol is an international treaty linked to the World Health Organization's Framework
Convention on Tobacco Control. The EU played a strong role in negotiating the Protocol.
Tackling cross-border smuggling requires cross-border cooperation and, in this respect, the
Protocol will facilitate international engagement. The Protocol acts as an additional legal
framework for the exchange of operational information in the form of general information
sharing,37 enforcement information sharing,38 mutual administrative assistance,39 mutual legal
assistance,40 and tracking and tracing information.41

The Protocol offers an excellent framework for international cooperation. However, bilat-
eral engagement with countries remains an important aspect on two levels. Given that low
tobacco prices in some of the EU's neighboring countries can drive smuggling activity into
the EU, engagement to adjust pricing in order to better protect countries’ own fiscal interests
can still be harnessed. Bilateral law enforcement cooperation will remain an important facet
of international engagement.

In terms of supply chain control, the Protocol offers new substantive provisions. The tracking
and tracing provisions42 and establishment of a centralized global information-sharing point
will allow authorities to monitor the legal supply chain and easily identify products being
diverted into the illegal market.

The Protocol also lays down other substantive control mechanisms. For example, it fore-
sees provisions43 to ensure that the movements of tobacco producing machinery will be
controlled. This is another area in which regulation may have an impact on the illicit trade.
Sanctions can also play a role here, as seizure of a tobacco-producing machine or other
manufacturing equipment may be more of a disincentive than simple payment of a fine.
This provision, once implemented by Parties to the Protocol, should prevent the diversion
of tobacco-producing machinery into the illicit market, or at least make such diversion more
difficult, facilitating law enforcement.

36
Council Decision (EU) 2016/1749 Official Journal of the European Union L 268, 1.10.2016, p. 1–5; Council
Decision (EU) 2016/1750. Official Journal of the European Union L 268, 1.10.2016, p. 6–9.
37
Article 20, General information sharing.
38
Article 21, Enforcement information sharing.
39
Article 28, Mutual administrative assistance.
40
Article 29, Mutual legal assistance.
41
Article 8 (4.1).
42
Article 8.
43
Article 6 and Article 8.

80 // European Union: Confronting Illicit Tobacco Trade: An Update on EU Policies
4.2 Tobacco Products Directive
The adoption of the 2014 Tobacco Products Directive (TPD)44 marked a pivotal develop-
ment in tobacco control policy in the EU. The traceability of tobacco products is envisaged
under Article 15 of the TPD.45 The TPD envisages the traceability of cigarettes and roll-your-
own tobacco products as of May 20, 2019, and of all other tobacco products as of May 20,
2024.46 It will allow public authorities in the EU to control the whole supply chain of tobacco
products. The implementation of the traceability system provided for under TPD Article 15
will also enable the EU and its Member States to fulfil their international obligations under
Article 8 of the FCTC Protocol.

4.3 Concept of Traceability
Traceability of finished products can be construed as the ability to track a product forward
through specified stages of the supply chain down to the consumer, and simultaneously to
retrace the history and locations of the product back to its original production line.47

There are two distinct but closely related elements in the concept of traceability. These are
tracking and tracing. Tracking is a part of traceability that consists of monitoring the current
whereabouts of a product and simultaneously creating a time and location record for all
consecutive movements of that product. Tracing is the ability to identify the past locations of
a product, which allows for verifying the product's route, all the way back to its origin.

For proper operation, every traceability system must be able to uniquely identify individual
products. It is only thanks to unique identification, achieved by marking a product with a
unique code (also known as a unique identifier, or UI), that it becomes possible to unam-
biguously register that product's movements. The basic record of a movement can be
reduced to three simple bits of data: the product's unique code, location, and time. Later
on, provided it is stored in a single database system, the history of movements can be easily
recreated by looking at consecutive locations of a given product, sorted by time.

4.4 Specificity of Tobacco Traceability
Traceability of products is a well-established concept. Multiple traceability systems are used
in today's economy, in domains such as pharmaceuticals or food products. The most obvious

44
Directive 2014/40/EU of the European Parliament and of the Council. Official Journal of the European Union
L 127, 29.4.2014, p. 1–38.
45
Article 15 of the TPD required the European Commission to lay down secondary legislation determining
technical details for the establishment and operation of the system of traceability, as well as to ensure its
interoperability across the EU. See Commission Implementing Regulation (EU) 2018/574 and Commission
Delegated Regulation (EU) 2018/573, Official Journal of the European Union, L 96, 16 April 2018.
46
In parallel, Article 16 of the TPD requires the establishment of the system of security features for the tobacco
products as an additional measure to fight the illicit trade. The relevant technical standards for the operations
of such a system are laid down in Commission Implementing Decision (EU) 2018/576, Official Journal of the
European Union, L 96, 16 April 2018.
47
According to the ISO definition coined for the purpose of standardizing quality management systems.

81
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

and best-known examples are provided by parcel services, where each parcel is traceable, and
consumers can easily verify the location of their parcels via the service provider’s web interface.

It is important to distinguish the different reasons for which traceability systems may be
rolled out within a supply chain. For instance, traceability may be introduced for logistical
reasons, to improve supply-chain function, as in the case of parcel services; or for product
safety reasons, to manage potential product recalls; or finally for regulatory reasons, with
goods’ being tracked and traced because of their particular characteristics or status.

The traceability of tobacco products is being implemented for the latter reasons. Given the
comparatively elevated tobacco excise duties applied in many jurisdictions to discourage
consumption, tobacco products are potentially very profitable for illicit traders. Such traders
are able to achieve very high margins by offering the non-taxed product at a substantial
discount from the official post-tax price. High profitability of illicit trade also creates imme-
diate economic incentives for misusing the traceability system, for example by duplicating
identifiers or misreporting logistic events. In addition, the addictive nature of tobacco means
that illicit trade may contribute to creating new demand for legal products. Consumers ini-
tially prevented by their age or economic status from purchasing legal tobacco products can
be initiated with illicit products. But it is also likely that such consumers will eventually turn to
legal tobacco products.

For reasons of good governance, the traceability of tobacco products cannot be entrusted
to the tobacco industry. Moreover, traceability has to take place at the lowest level of a unit
packet of tobacco product, since it is known that, if needed, illicit traders can easily disaggre-
gate any higher level of packaging and distribute the tobacco products in loose unit packets.

4.5 Scope and Basic Description of the EU System of
Tobacco Traceability
The EU system of tobacco traceability requires all unit packets of tobacco products manu-
factured in or imported into the EU to be marked with a unique identifier and their movements
to be recorded throughout the supply chain. Information on recorded movements will be
stored by third-party data storage providers independent from the tobacco industry. This
data will be fully accessible to EU authorities, i.e., the competent authorities of EU Member
States and the European Commission, for enforcement purposes.

Under the EU traceability system, the generation of unique identifiers, as well as of all
other codes required for pre-registration of economic operators, facilities, and machines,
is entrusted to designated “ID issuers,” who are also required to be financially and legally
independent of the tobacco industry. Their role is vital, as they are in fact the guardians of
uniqueness, which is a "must" condition for any traceability system. Each EU Member State is
responsible for the appointment of an ID issuer for its territory.

82 // European Union: Confronting Illicit Tobacco Trade: An Update on EU Policies
Once appointed, ID issuers will receive, from manufactures and importers of tobacco
products, requests to generate the unique identifiers. Manufacturers or importers will have
to supply pre-defined information relating to the product and production line. The ID issuers
will then generate batches of unique identifiers and deliver them to the ordering manufac-
turer or importer.

On the production line, manufacturers will complete the unique identifier with a “time
stamp” (i.e., a marking indicating the date and time of manufacture of the tobacco prod-
uct). The unique identifier will then be applied to the unit packet, after being encoded in
an authorized data carrier. The unique identifier will take the form of a machine-readable,
optical, one- or two-dimensional barcode. Still on the production line, the unique identifier’s
application must be verified to ensure its readability. An anti-tampering device, capable of
creating an unalterable independent record of this verification process, must previously have
been installed. This additional record will be accessible to the public authorities for potential
investigations and inspections.

Correctly marked unit packets can then be tracked and traced throughout the supply chain.
In most cases, these will be aggregated into bigger packages, such as cartons, master cases
or pallets, known as “aggregated packaging.” Tracking at aggregated packaging level is per-
mitted, provided the unit packets remain traceable. This requires separate aggregated-level
unique identifiers, electronically linked to each lower-level unique identifier. Recording prod-
uct movements at aggregated packaging level is intended to alleviate the operational burden
on economic operators (in particular wholesalers and distributors), who would otherwise
need to scan each unit packet being handled.

Transportation between different facilities is also subject to a clear set of rules. Each dispatch
and arrival must be recorded and reported to the repositories system, up to the point of
dispatch to the first retail outlet, i.e., the first place where the products will be made available
to consumers.

All recorded information must be submitted to the independent third-party data storage
facility. Clear timeframes for the transmission of traceability data to the data storage are
laid down: in general, it should take place three hours from the occurrence of a reportable
event, and 24 hours prior in the case of dispatch and trans-loading of tobacco products. To
ensure the correct transmission of traceability information, the transmission messages have
to contain the information pre-defined both in terms of its format and content. For exam-
ple, the message reporting the arrival of tobacco products at a facility has to contain the
“economic operator identifier code” of a submitting party, the “facility identifier code” of that
specific facility, the time of arrival in the pre-specified format, and the list of unique identifiers
received under the delivery in question.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

4.6 Key Characteristics of the EU System
The EU system of tobacco traceability is the first of its kind. It is the first regional system
designed to accommodate a range of distribution structures, both concentrated and
dispersed supply chains. It is a relatively open system, in which multiple providers can offer
competitive technological solutions subject to meeting the set of basic requirements stip-
ulated in the legislation. At the same time, the EU system is characterized by a high level of
protection against any attempts at manipulating the data.

The following characteristics of the EU system of tobacco traceability are particularly
worth highlighting:

As indicated, the EU system of tobacco traceability will span the entire supply chain. The
routine reporting obligations cover all the economic operators involved in the manufacture
and distribution of tobacco products up to the point of dispatch to the first retail outlet. In
practice, this means that the sales of tobacco products at retail outlets will be approximated
with the data from the dispatch messages sent by the suppliers of retail outlets.

The public authorities' control over the EU system is provided by the combination of sev-
eral measures that jointly protect this system against any undue interference:

»» Only independent ID issuers are allowed to generate the unique identifiers necessary
for marking the unit packets. The unique identifiers have two features which will further
strengthen the level of control: at the moment of their generation, the unique identifiers
have to be related to a specific product presentation and a specific production line, and
they have to be preloaded into the repositories system before being delivered to the
tobacco industry. This means that the unique identifiers will contain meaningful informa-
tion from their inception, and the tobacco industry will be constrained in the use of the
identifiers to the pre-declared product presentation and production line.

»» All the data will be stored by independent data storage providers. The repositories
system will include a central dataset which will provide for the full overview of all actions
occurring in the whole system at any given moment. The authorities will be granted full,
uninterrupted, physical and electronic access to the repositories system. The providers
of data storage are required not only to store the data, but also to provide several ser-
vices to the authorities, including a possibility of bulk downloads, executing a full range
of searches, automatic alerts, and regular reports. The authorities will be able to config-
ure and subsequently reconfigure all these services, depending on their actual needs.
In contrast to the full access by the authorities, the tobacco industry will not be allowed
to access the repositories without the authorities' prior permission. Such access will be
granted only in duly justified cases.

»» The flow of traceability data is fully structured in terms of its content and format. The leg-
islation contains a message dictionary that specifies all key messages that the economic

84 // European Union: Confronting Illicit Tobacco Trade: An Update on EU Policies
operators are obliged to send to the repositories system. The repositories system will be
based on a common data dictionary.

»» The legislation also contains a set of rules as to when a given message has to be sent.
Importantly, it will not be possible to dispatch or trans-load any tobacco products
without prior notification of such a logistic event. The high density of reporting events,
including the transactional operations (e.g., issuing of an invoice), guarantees that each
product will have to be reported several times over its life cycle within the supply chain.

»» On the production line, the verification of the marking process will be additionally pro-
tected with an anti-tampering device which will create an independent, auditable record,
which will exist on top of the data stored in the repository system. The EU Member States
will have full access to this record.

»» The high quality of data is further strengthened by the obligatory pre-registration and
coding of all economic operators, facilities (including retail outlets), and machines.
These codes, along with the unique identifiers for unit packets, will provide for "seeding"
of all further data that are required to be reported in the system. In other words, it will be
impossible to successfully report any logistical or transactional operation without making
a reference to the obligatory set of codes and identifiers.

»» Last but not least, ID issuers or data storage providers are required by the legislation to be
independent from the tobacco industry. The legislation indicates a set of rules detailing
the conditions of independence in legal, organizational, decision-making, financial, and
personal terms. These rules are laid down to assist public authorities in the verification of
third-party providers.

Thanks to the structured approach to the management of traceability data, the EU system
will be able to easily export the data to other systems, be it internally, for example as a
means of cross-validation with the Excise Movement and Control System (EMCS),48 or exter-
nally, via the global information-sharing focal point, which the FCTC Secretariat is supposed
to establish under Article 8 of the FCTC Protocol.

As regards the data carriers in which the unique identifiers will be encoded and subsequently
marked on the products, the EU system relies on the international standards, and therefore
other Parties to the FCTC Protocol will be able to decode the data carriers with any standard
equipment, including most modern smartphones.

Finally, it is important to stress an additional fact. Despite the intensity of the design phase,
in which the European Commission took the lead to safeguard the system's full compliance
with European and international law, and to protect the design process from the influence of
vested interests, the EU system does not overburden public authorities. On the contrary, it
presents them with a new and efficient tool of control. The bulk of the initial investment, as

48
EMCS is a computerized system for monitoring the movement of excise goods under duty suspension in
the EU.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

well as the subsequent operational costs, have been shifted to the tobacco industry, in line
with Article 8 of the FCTC Protocol. The European Commission's Impact Assessment, which
was carried out for the purpose of preparing the secondary legislation, indicates multi-bil-
lion-euro social and economic benefits expected from introducing the traceability system.
The two main benefits stem from better collection of taxes and at least a partial reduction in
the artificially cheap supplies of illegal tobacco products that have been found to affect the
uptake and general prevalence of tobacco consumption.49

4.7 Examples of Practical Applications
The EU system will enable public authorities to detect several types of fraud, both within and
outside the legal supply chain. The following cases can serve as examples:

»» Appearance of duplicated unique identifiers, detectable at the central level of the repos-
itories system, which indicates an inflow of illicit products in one of the two suspected
points within the supply chain. Since all the products are tracked, the system can auto-
matically detect when the same unique identifier appears in two distinct locations at the
same time. The tracing functionality will further help in establishing which of the two
products is original and which is a duplicate;

»» Discovery of a marked product outside the legal supply chain, in which case the traceabil-
ity system can assist in finding the point of that product's diversion into the illicit market.
A unique identifier can be used for constructing a basic query to the repositories system
in order to extract all the data relating to that unique identifier, including its last known
location, which in this case is likely to be the point of diversion;

»» Abnormal fluctuations in the manufactured or stored quantities of products, detectable
at the central level of the repositories system, which can guide the public authorities
to potential points of product diversion or other illegal activities. For example, if a given
warehouse accumulates a stock of products without forwarding any products to the next
destination, such a warehouse may warrant an on-spot inspection to verify the anomaly
observed in the traceability data;

»» Abnormal fluctuations in quantities delivered to retail outlets, detectable at the central level
of the repositories system, which can guide public authorities to individual retail outlets
or to geographic clusters of retail outlets where illicit trade may be taking place. The latter
example may be linked to a situation in which illicit traders start distributing their products in
a given geographic area, for example suburban town X, which in turn negatively affects the
sales of the legal outlets in that area as compared to the historic levels of sales.

49
The Impact Assessment can be consulted at: https://ec.europa.eu/health/sites/health/files/tobacco/docs/
tt_ia_en.pdf

86 // European Union: Confronting Illicit Tobacco Trade: An Update on EU Policies
5. Conclusions
In functional terms, the EU tracking and tracing system is primarily characterized by its broad
coverage of the supply chain, including the collection of data on the supplies dispatched to
retail outlets. High priority has been given to the overall design of the system, which embeds
several elements that together will provide public authorities with full control over the sys-
tem's operations. In this respect, the key aspects are the independence of the generation of
unique identifiers and of the data storage from the tobacco industry, along with the indepen-
dence criteria and rules on structuring and reporting traceability data.

The EU system represents a scalable example of a system of tobacco traceability that is suffi-
ciently flexible to be implemented both at the regional and the single-country scale. It avoids
unnecessary reliance on a single provider, which in the long term may paradoxically reduce
public authorities' ability to shape and control the traceability system. It is based on a strong
policy case, where substantial social and economic benefits are expected if the system is
properly rolled out.50

Disclaimer

The information and views set out in this article are those of the authors and do not necessarily reflect the official
opinion of the European Union. Neither the European Union institutions and bodies nor any person acting on
their behalf may be held responsible for the use which may be made of the information contained therein.

50
For further information on the EU system of tobacco traceability and its implementation, see: https://
ec.europa.eu/health/tobacco/tracking_tracing_system_en

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

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European Parliament Progress report on the implementation of the Commission Communication "Stepping
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TXT/?uri=CELEX:52017DC0235 [Accessed 23 September 2018]

4. European Commission (2017). Special Eurobarometer 458: Attitudes of Europeans towards tobacco and
electronic cigarettes, summary, p. 5. Available at: http://ec.europa.eu/commfrontoffice/publicopinion/index.
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5. European Commission (2017). Report on EU customs enforcement of intellectual property rights, Results
at the EU border 2016, Directorate-General for Taxation and Customs Union, p. 10. Available at: https://
publications.europa.eu/en/publication-detail/-/publication/5d6eb531-6b63-11e7-b2f2-01aa75ed71a1 [Accessed
23 September 2018]

6. European Commission (2017). Impact Assessment, SWD(2017) 455 final. Available at: https://ec.europa.eu/
health/sites/health/files/tobacco/docs/tt_ia_en.pdf [Accessed 23 September 2018]

7. European Commission (2018). Study to identify an approach to measure the illicit market in tobacco
products, Supplement to the Official Journal of the European Union, 2018/S 044-095213 Available at: https://
ted.europa.eu/udl?uri=TED:NOTICE:095213-2018:TEXT:EN:HTML [Accessed 23 September 2018]

8. European Commission (2018). Eurostat: Price convergence in the EU-28 by product groups. Available at:
https://ec.europa.eu/eurostat/statistics-explained/index.php?title=File:Price_convergence_in_the_EU-28_by_
product_groups,_2007_-_2017.png [Accessed 23 September 2018]

9. European Commission (2018). Proposal for a Regulation of the European Parliament and of the Council
amending Regulation (EU, Euratom) No 883/2013 concerning investigations conducted by the European Anti-
Fraud Office (OLAF) as regards cooperation with the European Public Prosecutor's Office and the effectiveness
of OLAF investigations - COM/2018/338 final. Available at: https://eur-lex.europa.eu/legal-content/EN/
TXT/?uri=COM%3A2018%3A338%3AFIN [Accessed 23 September 2018]

10. European Commission (2018). OLAF - Policy - Joint Customs Operations. Available at: https://ec.europa.eu/
anti-fraud/policy/joint-customs-operations-jco_en [Accessed 23 September 2018].

11. European Commission. Live, work, travel in the EU - Public Health – Tobacco. Available at: https://
ec.europa.eu/health/tobacco/tracking_tracing_system_en [Accessed 23 September 2018]

12. European Anti-Fraud Office (2018). OLAF report 2017. Available at: https://ec.europa.eu/anti-fraud/sites/
antifraud/files/olaf_report_2017_en.pdf [Accessed 23 September 2018]

13. European Anti-Fraud Office (2018). OLAF Press release 02/2018. Available at: https://ec.europa.eu/
anti-fraud/media-corner/news/27-03-2018/convictions-italy-major-international-contraband-case-uncovered-
olaf_en [Accessed 23 September 2018]

14. European Anti-Fraud Office (2017). OLAF Press release 18/2017. Available at: https://ec.europa.eu/anti-fraud/
media-corner/news/05-12-2017/joint-customs-operation-magnum-ii-real-time-intelligence-exchange-leads_en
[Accessed 23 September 2018]

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15. Europol (2013). European Union Serious and Organised Crime Threat Assessment, SOCTA 2013, p. 26.
Available at: https://www.europol.europa.eu/activities-services/main-reports/eu-serious-and-organised-crime-
threat-assessment-socta-2013 [Accessed 23 September 2018]

16. Europol and the European Union Intellectual Property Office (2017). “2017 Situation Report on
Counterfeiting and Piracy in the European Union,” p. 38. Available at: https://www.europol.europa.eu/
publications-documents/2017-situation-report-counterfeiting-and-piracy-in-european-union [Accessed 23
September 2018]

17. Frontex (2018). Press release "23 smugglers arrested, drugs and cigarettes seized during Frontex-led
operation." Available at: https://frontex.europa.eu/media-centre/news-release/23-smugglers-arrested-drugs-
and-cigarettes-seized-during-frontex-led-operation-PIk7rS [Accessed 23 September 2018]

18. KPMG (2018). Project Sun 2017, Executive summary, Weighted average price of cigarettes in Bulgaria and
Ireland, respectively, p.13. Available at: https://assets.kpmg.com/content/dam/kpmg/uk/pdf/2018/08/project_
sun_exec_summary.PDF [Accessed 23 September 2018]

19. Office of the Revenue Commissioners (2018). "Revenue and An Garda Siochana dismantle illicit cigarette
factory in Jenkinstown, Co. Louth." [Press release] Available at: https://www.revenue.ie/en/corporate/press-office/
press-releases/2018/pr-150318-illegal-cigarette-factory-jenkinstown-louth.aspx [Accessed 23 September 2018]

Legislation:
1. Regulation (EU, Euratom) 2013/883 of the European Parliament and of the Council of 11 September
2013concerning investigations conducted by the European Anti-Fraud Office (OLAF) and repealing Regulation
(EC) No 1073/1999 of the European Parliament and of the Council and Council Regulation (Euratom) No
1074/1999, Official Journal of the European Union L 248, 18.9.2013, p. 1–22.

2. Directive 2014/40/EU of the European Parliament and of the Council of 3 April 2014 on the approximation
of the laws, regulations and administrative provisions of the Member States concerning the manufacture,
presentation and sale of tobacco and related products and repealing Directive 2001/37/EC of the European
Parliament and of the Council, Official Journal of the European Union L 127, 29.4.2014, p. 1–38.

3. Regulation (EU) 2016/794 of the European Parliament and of the Council of 11 May 2016 on the European
Union Agency for Law Enforcement Cooperation (Europol) and replacing and repealing Council Decisions
2009/371/JHA, 2009/934/JHA, 2009/935/JHA, 2009/936/JHA and 2009/968/JHA, Official Journal of the
European Union L 135, 24.5.2016, p. 53-114.

4. Regulation (EU) 2016/1624 of the European Parliament and of the Council of 14 September 2016 on the
European Border and Coast Guard and amending Regulation (EU) 2016/399 of the European Parliament and
of the Council and repealing Regulation (EC) No 863/2007 of the European Parliament and of the Council,
Council Regulation (EC) No 2007/2004 and Council Decision 2005/267/EC, Official Journal of the European
Union L 251, 16.9.2016, p. 1.

5. Council Decision (EU) 2016/1749 of 17 June 2016 on the conclusion, on behalf of the European Union,
of the Protocol to Eliminate Illicit Trade in Tobacco Products to the World Health Organisation's Framework
Convention on Tobacco Control, with the exception of its provisions falling within the scope of Title V of Part
Three of the Treaty on the Functioning of the European Union, Official Journal of the European Union L 268,
1.10.2016, p. 1–5.

6. Council Decision (EU) 2016/1750 of 17 June 2016 on the conclusion, on behalf of the European Union,
of the Protocol to Eliminate Illicit Trade in Tobacco Products to the World Health Organisation's Framework
Convention on Tobacco Control, as regards its provisions on obligations related to judicial cooperation
in criminal matters and the definition of criminal offences, Official Journal of the European Union L 268,
1.10.2016, p. 6–9.

7. Directive (EU) 2017/1371 of the European Parliament and of the Council of 5 July 2017 on the fight against
fraud to the Union's financial interests by means of criminal law of the European Parliament and of the Council.
Official Journal of the European Union L 198, 28.7.2017, p. 29–41.

8. Council Regulation (EU) 2017/1939 of 12 October 2017 implementing enhanced cooperation on the
establishment of the European Public Prosecutor’s Office (‘the EPPO’), Official Journal of the European Union L
283, 31.10.2017, p. 1–71.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

9. Commission Delegated Regulation (EU) 2018/573 of 15 December 2017 on key elements of data storage
contracts to be concluded as part of a traceability system for tobacco products, Official Journal of the
European Union, L 96, 16.4.2018, p. 1-6.

10. Commission Implementing Regulation (EU) 2018/574 of 15 December 2017 on technical standards for the
establishment and operation of a traceability system for tobacco products, Official Journal of the European
Union, L 96, 16.4.2018, p. 7-55.

11. Commission Implementing Decision (EU) 2018/576 of 15 December 2017 on technical standards for
security features applied to tobacco products (notified under document C(2017) 8435), Official Journal of the
European Union, L 96, 16.4.2018, p. 57 - 63.

50
For further information on the EU system of tobacco traceability and its implementation, see: https://
ec.europa.eu/health/tobacco/tracking_tracing_system_en

90 // European Union: Confronting Illicit Tobacco Trade: An Update on EU Policies
91
GEORGIA
5

GEORGIA:

Controlling Illicit
Cigarette Trade
Hana Ross and George Bakhturidze1

Chapter Summary
Georgia represents a success story in the fight against illicit tobacco trade, because it has
managed to substantially increase tobacco taxes while reducing the presence of illicit
tobacco products in its domestic market. Although the official numbers on illicit trade are
incomplete, particularly regarding the border with Russian-controlled areas of Georgia, there
are several reliable indicators pointing to limited domestic trade in illicit tobacco products,
thanks to vigorous action to strengthen the effectiveness of customs and tax administration.

The major risk of large-scale illicit trade in Georgia is related to export/import business,
as Georgia seems to play the role of a transit country for illicit tobacco products, most of
them destined for Turkey. Small-scale smuggling is not an issue, since cigarette prices in
Georgia are roughly similar to those of its neighbors – except for Turkey, where taxes and
prices are far higher. Thus, cross-border shopping does not play a significant role in reducing
tobacco tax revenues in Georgia, whether through smuggling (tax evasion) or legal imports
(tax avoidance). Tax avoidance, however, is a major problem in Georgia, because tobacco
taxes for cigarettes without filters are substantially lower than those for filtered cigarettes,

1
H. Ross (University of Cape Town, South Africa) and G. Bakhturidze (FCTC Implementation & Monitoring
Center, Georgia)

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

and the tobacco industry exploits this administrative loophole. Another tax avoidance tactic
practiced by the industry is forestalling: ordering a larger-than-needed quantity of tax stamps
just before a tax increase in order to use these less-expensive stamps after the tax increase
comes into effect.

The tobacco industry has, at times successfully, argued against tobacco tax increases on
the grounds of illicit trade, pointing to the decline in tobacco tax revenue following a tax
increase. However, a closer look at the data shows that the illicit trade story does not hold.
In fact, the lower revenue was artificially created by the industry’s practice of forestalling.
Since it took the market some time to absorb the packs with the old/lower tax stamps, tax
revenue receipts immediately after the tax increase were lower, allowing the industry to
spread a misleading interpretation of the tax measure’s impact on illicit tobacco trade.

Georgia has recently taken a major step toward compliance with the World Health
Organization Framework Convention on Tobacco Control (WHO FCTC), which it has
signed, by banning tobacco advertising and substantially expanding smoke-free places.
Nevertheless, cigarettes in Georgia are still relatively inexpensive, and smoking prevalence,
particularly among men, is extremely high.

Georgia’s experience supports prior research findings that strengthening the effectiveness of
customs and tax administration is by far the most important step to counteract illicit tobacco
trade. The concluding section of this chapter offers specific recommendations in line with
this result. These recommendations include:

Tackle forestalling. Georgia should adopt measures to prevent firms from buying tax stamps
in anticipation of announced tax increases (forestalling). Adopting anti-forestalling measures
would lead to gains in tax revenue.

Ratify the Protocol. Georgia should also ratify the Protocol on Illicit Trade, since the addi-
tional obligations under the Protocol would be minimal, given that Georgia already uses
modern technology to control its cigarette supply chain. Being a party to the Protocol would
reinforce the progress made to date in improving the effectiveness of customs and tax
administration and allow Georgia to play a role in addressing the transit of illegal cigarettes
via its territory.

Rapidly align with the Protocol. The government should analyze the extent to which its cur-
rent system is compliant with the FCTC Illicit Trade Protocol to be introduced in 2019. The
Protocol, for example, requires licensing of economic operators involved in the tobacco
product supply chain. Georgia should, therefore, reinstitute its licensing requirement, at least
for cigarette manufacturers, importers, and exporters.

94 // Georgia: Controlling Illicit Cigarette Trade
system could be supported by road cameras and mobile X-rays, and integrated with the
e-Transport and the excise marking electronic system.

Reinforce international cooperation. Georgia should consider strengthening cooperation
and information exchange with EU Member States, especially with those bordering Russia
(e.g., Poland, Estonia, Lithuania), since they are facing similar illicit trade problems, and with
its neighbor countries. As in the case of collaboration with the UK Customs office, Georgia
can enhance it interaction with Interpol, the European Anti-Fraud Office (OLAF), and other
relevant agencies in the fight against illicit tobacco trade.

Bring government-tobacco industry relations in line with international norms.
Government should amend its legislation to comply with Article 5.3 of the FCTC regarding
tobacco-industry interference in policy making. The most relevant provisions for controlling
the illicit tobacco market are requirements that the tobacco industry and/or its affiliates
cannot be involved in discussions related to the ITP ratification or a track-and-trace system.

1. Background
Tobacco production and consumption in Georgia: historical trajectory. As the part of
the Soviet Union, the Republic of Georgia was well known for tobacco growing, supplying
leaves both for Georgia’s own domestic cigarette production and for production in other
Soviet territories (Shalutashvili et al. 2007; WB 1996).

The production of raw tobacco and cigarettes collapsed following the fall of the Soviet Union.
In 1993–1994, Georgia’s tobacco crop was only one-third that of what it had been in 1987
(Ciecierski and Chaloupka 2002). This decline continued until the mid-2000s. During 1991–
2005, the size of tobacco fields shrank from 14 thousand hectares to 0.8 thousand hectares,
the production of raw tobacco dropped from 23 thousand tons to 1.5 thousand tons, and
cigarette output fell from 17 billion to 3 billion cigarettes (State Department of Statistics 2006).

Penetration of transnational firms. This was a great opportunity for transnational tobacco
companies to enter Georgia to exploit its extremely high smoking prevalence. In 2001, 53.3
percent of males and 6.3 percent of females smoked. By 2008, the prevalence had risen
to 59.8 percent and 14.9 percent among men and women, respectively (Bakhturidze. et al.
2008; Gilmore. et al. 2004). In 2002, 32.6 percent of boys and 12.1 percent of girls aged 13
– 15 reported being current cigarette smokers (GYTS Georgia, 2002).2 International evidence
shows that roughly half of regular smokers die prematurely as a result of tobacco-related dis-
eases, losing on average two decades of expected life. For the whole population of regular
smokers, life expectancy drops by about a decade.3 Thus, Georgia’s smoking pandemic is a
cause of grave concern for the health and life expectancy of Georgians.

2
2002 Global Youth Tobacco Survey (GYTS), Georgia Report. 2002.
3
Peto and Jha. Global Effects of Smoking, of Quitting, and of Taxing Tobacco. New England Journal of
Medicine. 2014; 370:60-68; https://www.nejm.org/doi/full/10.1056/nejmra1308383

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

By the early 1990s, three major tobacco companies (Philip Morris, British American Tobacco,
Japan Tobacco International) were present in the market, taking advantage of a loose regu-
latory environment that allowed them to run promotional campaigns encouraging smoking.
Only two locally-owned manufacturers out of seven present in 1993 survived the foreign
invasion: Tbilisi Tobacco (previously Georgian Tobacco – GTM), and Omega Group Tobacco
(OGT) (Shalutashvili et al. 2007).

The Georgian government welcomed the tobacco industry by allowing them to sell tobacco
tax-free. Between 1991 and 1997 there was no tax on either locally produced or imported
cigarettes. The situation changed in 1997, when imported cigarettes were levied a specific
excise and customs tax of 0.25 GEL (about US$ 0.19) and 0.19 GEL (about US$ 0.15) per
pack of filter and non-filter cigarettes, respectively. Locally produced cigarettes, on the other
hand, were levied an excise tax worth 100 percent of their production costs. The following
year, both imported and domestic cigarettes were levied a specific excise tax with substan-
tially lower rates for domestic cigarettes. This differential tax treatment of domestic and
imported cigarettes persisted till 2010 (Table 1).

Post 2004: new directions in tobacco policy. Between 1998 and 2004 the tax rates
remained stable, but their values were eroded by inflation, which hovered around 5 percent
most years, with a peak of 19 percent in 1999 (State Department of Statistics 2004). Taking
account of annual growth in per capita income of about 6 percent in that period, cigarettes
became increasingly affordable, by about 10 percent per year. The new government of
Mikheil Saakashvili came into power in 2004 and announced substantial tobacco tax hikes
effective January 2005. This measure was motivated essentially by revenue concerns, rather
than public health. The tax more than doubled on imported filtered cigarettes and more than
tripled for domestic filtered cigarettes (Table 1). As a result, the tax share in the retail price
jumped from 36 percent to 54 percent for imported cigarettes, and from 25 percent to 43
percent for domestic cigarettes. However, the tax rate on non-filtered cigarettes remained
about one-fourth of that on filtered cigarettes.

Tobacco company “forestalling.” Tobacco companies had six months to prepare for the
2005 tax increase. They pre-purchased tax stamps4 at the lower 2004 value for release
in 2005, thus realizing tax savings in 2005 (Krasovsky 2013; Shalutashvili et al 2007). This
resulted in an unexpected increase in tobacco tax revenue in the second part of 2004 and
disappointing revenue in 2005. The tobacco excise tax revenue in 2005 was 72 million GEL,
about 4.4 million GEL less compared to 2004, when the revenue was artificially increased by
firms’ pre-purchasing the tax stamps (Figure 1). The industry, however, blamed illicit cigarette
trade for the revenue shortfall, claiming that the market share of illicit cigarettes went from
10 percent in 2003 to 65 percent after the tax hike (Shalutashvili et al 2007).

4
Georgia adopted excise stamps on both domestic and imported cigarettes on February 1, 1999 (Shalutashvili.
et al. 2007).

96 // Georgia: Controlling Illicit Cigarette Trade
A closer analysis reveals that the combined 2004/2005 tobacco excise tax revenue was 65
percent (148 million GEL) higher than the 2002/2003 revenue (90 million GEL) in nominal
terms, and 47 percent higher in real terms. This demonstrates that the tax increase did bring
significant additional revenue for the government. However, the tobacco industry was able
to manipulate the story about the lower 2005 tax revenue, which the industry itself had
caused, persuading the government to reduce the tobacco excise tax in 2006, “to decrease
smuggling.” This was a sharp blow to Georgia’s tobacco tax policy, and it took the country
almost ten years to return to the 2005 rates (Table 1).

Table 1. Evolution of Georgia’s Excise Rates Per Pack of 20 Cigarettes (GEL)
1991 -

2006
2005

SEPT

2014
2001

2010

2018
1998

2016
2013

2015

2017
1997

1997

MAY
Imported with filter
No tax 0.25 0.25 0.4 0.9 0.6 0.6 0.75 0.75 0.9 1.1 1.7 1.7
(GEL)
Imported without
No tax 0.19 0.19 0.2 0.25 0.15 0.15 0.2 0.2 0.25 0.3 0.6 0.6
filter (GEL)
100% of
Local with filter (GEL) No tax production 0.15 0.2 0.7 0.4 0.6 0.75 0.75 0.9 1.1 1.7 1.7
cost
100% of
Local without filter
No tax production 0.05 0.07 0.15 0.1 0.15 0.2 0.2 0.25 0.3 0.6 0.6
(GEL)
cost
5
Ad valorem rate. % (from 10 10 10
July)
Source: Georgian Tax Code 2000, 2004, 2005, 2006, 2009, 2017; Shalutashvili et al. 2007.

2. Recent Evolution of Georgia’s Tobacco
Control Policies
Tobacco control measures under the FCTC. In 2006, Georgia ratified the WHO Framework
Convention on Tobacco Control (FCTC) and committed itself to carry out a set of measures
to decrease the alarmingly high smoking prevalence in the country.

Since one of the most cost-effective measures to curb tobacco use is increasing tobacco
taxes,5 the government and local NGOs pay particular attention to tobacco tax policy.
Following a challenge by British American Tobacco at the World Trade Organization (WTO),
the government equalized the excise tax rates for imported and locally manufactured ciga-
rettes in 2010 by raising the rate for domestic cigarettes to the level for imported cigarettes
(Table 1). This policy change is in line with the best practice in tobacco taxation. On the

5
Tobacco Tax Reform At The Crossroads Of Health And Development. Edited by Patricio Marquez and Blanca
Moreno-Dodson. World Bank. October 2017

97
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

other hand, the persistent gap between the tax rates on filtered and non-filtered cigarettes
goes against WHO recommendations on tobacco tax policy6 and encourages downward
substitution instead of reduction in smoking.

In addition to its tobacco tax policy, Georgia has implemented other tobacco control
measures following the ratification of the FCTC. The 2008 Tobacco Control Law banned
smoking in educational, medical, sport, and cultural facilities, while other indoor facilities had
to have designated smoking areas. As a result, bars and restaurants allowed smoking in up to
50 percent of their premises. The law also prohibited the sale of cigarettes to/by minors and
the sale of cigarettes in places where toys or children’s clothing were sold. The legislation
banned cigarette sales within 50 meters of schools. Tobacco advertisement was banned on
TV/radio and within 100 meters of schools and bridges. Since 2009, it is prohibited to accept
sponsorship from the tobacco industry (Law on Advertisement of Georgia 2009).

In 2010, the law introduced new packaging regulations requiring health warnings to cover
30 percent of the pack. However, the enforcement of these tobacco control laws was weak,
also due to frequent court challenges against the legislation. In addition, no proof of age was
required to purchase tobacco products (Bakhturidze et al. 2016). As a result, a 2014 survey
showed that 77 percent of Georgian adolescents had no difficulty in buying tobacco prod-
ucts at points of sale.7

Association with the European Union: implications for tobacco control. In 2014, Georgia
signed an association agreement with the European Union (EU-Georgia Association
Agreement 2014). According to the Agreement. Georgia is obliged to harmonize its tax policy,
including tobacco tax policy, with that of the EU. As a result, Georgia adopted a mixed tobacco
tax system in 2015 by adding an ad valorem component to the excise duty. The base for calcu-
lating the ad valorem tax is retail prices set each year by order of the Ministry of Finance (MoF
2017). In addition, substantial tax increases took place in 2015, 2016, and 2017 with the goal of
reaching the current EU tax level (1.8 Euro per pack, or about 5.2 GEL) within about seven or
eight years following the Association Agreement. These tax increases resulted in a higher share
of tax in the retail price and in additional tax revenue. (Figure 1)

As of January 1, 2018, filter cigarettes incur a specific excise tax of GEL 1.70 (0.70 USD)
per 20 cigarettes, and non-filter cigarettes a specific tax of GEL 0.60 (0.25 USD) per 20
cigarettes, independent of their origin. In addition, each pack is also levied 10 percent ad
valorem excise (Tax Code 2018). Excise taxes are also levied on pipe/loose tobacco at GEL
35 (14.5 USD) per kilogram. This translates to GEL 0.50 (0.20 USD) per pack, assuming 0.7 g
of tobacco per cigarette, a rate lower than non-filtered cigarettes.8 Only about 2.5 percent
of smokers in Georgia use roll-your-own tobacco (ISSA 2016). All tobacco products are also
subject to 18 percent VAT.

6
Guidelines for implementation of Article 6, WHO FCTC, 2014.
7
Global Youth Tobacco Survey. Georgia. 2014
8
Hana Ross. Report on Technical Assistance Visit to Georgia. 4 - 12 September. 2017.

98 // Georgia: Controlling Illicit Cigarette Trade
Starting on August 1, 2017, Georgia began to tax e-cigarettes (0.2 Gel, or 0.08 USD, per 1 mg
of liquid) as well as cartridge and iQOS devices (GEL 1.7, or 0.7 USD per piece) (Tax Code 2018).

Figure 1. Tobacco Excise Revenue in Georgia 2002–2017, Nominal and Real
(Million GEL)
Speciﬁc tax rate
was increased
800 by 55%
Speciﬁc rate was increased
700 by 22% and advalorem rate
Tax rate was from 5% to 10%
600 decreased, Since September 549
Tax rate for
but remained 2013 tax rate was
500 local cigarettes
twice as high increased by 25%
was increased
as in 2004
by 50% 378
400 Large tax 349
increase 303
300 267

316
248 232

274
200 151 180 175

192
185
165
104 145

145
125
100 76 72
114

109
106

42 48
79
69

60
42

0
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017
Tobacco Excise Revenue,
nominal mln GEL
Tobacco Excise Revenue,
real (inﬂation-adjusted)
mln GEL, base 2002 Source: Revenue Service of Georgia, 2002 – 2017.

Forestalling continues. The tobacco industry is still engaged in forestalling. Figure 2
demonstrates this behavior in 2013. A tax increase was announced in June 2013, effective
September 1, 2013. The excise revenue from local cigarettes reached 23.4 million GEL in
September 2013, three times more than the previous month, reflecting tax stamp purchases
just before the tax increase. The tax receipts for the rest of the year amounted to only 63
million GEL. Despite industry tax avoidance, total excise tax revenues reached 303 million
GEL in 2013, 13 percent more than in 2012.

Similar behavior was recorded in 2017, when the industry requested 14.6 percent fewer
excise tax stamps compared to 2016 (Table 2). Despite this pattern, 2017 excise revenue
increased by 123 million GEL compared to 2016, thanks to the higher tax rate (Figure 1).

Maneuvers by the industry makes it challenging to study the reaction of the market to recent
tax increases. As noted, rather substantial tax increases occurred in September 2013 and
then each January in 2015, 2016, and 2017. The tobacco industry responded to the 2013
tax increase by an overproduction/over-importation of cigarettes (Figure 2) before the tax
increase. Therefore, a drop in the size of the market was expected in 2014. The demand for
tax stamps declined in 2014, but the size of the market actually increased in that year, based
on official statistics concerning local production, import, and export (Table 2). The 2015 tax
increase kept the demand for tax stamps almost constant, but the size of the market shrank.
Comparing the size of the market and the demand for tax stamps in 2013 with 2016, we

99
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 2. Monthly Excise Tax Revenue in 2013, Nominal, Million GEL

35 32.8
Excise tax increase
30 entered into force
26.5
25 Excise tax 23.4
increase 21.4
announced 20
20
17.2
15.5
15
14.7 14.9 14.8
12.8 13.6
12.3
10

7.2 7 8.4 7.7 8 4.4 Local tobacco products
5 6.2 6.6
5.4
0.3 Imported tobacco
0 2.0 products

I II III IV V VI VII VIII IX X XI XII

Source: Revenue Service of Georgia, 2014.

observe a decline in both statistics, signaling that the decline in the number of cigarette sold
after the 2013 tax increase was real. However, the size of the cigarette market in 2017 was
almost identical to its size in 2013 (Table 2). This is likely related to the affordability of ciga-
rettes, explored below.

The cigarette re-export phenomenon. In 2017, the gap between the market size and the
number of cigarettes based on the excise marks sold increased dramatically. This is likely
related to cigarettes for re-export, a phenomenon that began in 2014. These cigarettes,
imported to Georgia to be re-exported to a third country, are not featured in the import/
export statistics, but are recorded in a separate line (Table 2). The import for re-export is
not taxed, but it incurs a service fee for processing, bringing additional revenue to Georgia.
Re-exported cigarettes are likely to escape excise taxation in the destination country, thus
supplying the black market.9 The primary destination for the re-export used to be Turkey,
where cigarettes are more expensive compared to Georgia. However, the recent collabo-
rative agreement between Georgia and Turkey, adopted in 2017, successfully blocked this
pathway.10 Therefore, the top destinations for re-export in 2017 were Azerbaijan (1,218.5
million sticks), Kazakhstan (1,146.4 million), and Singapore (249.4 million) (National Statistics
Office of Georgia 2018).

Another interesting development was a massive decline in domestic production and an
increase in imports during 2010 - 2017. Domestic production represented about 33 percent
of the total market in 2013, but its share had dropped to about 18 percent by 2017. Legal
exports tend to fluctuate but do not represent a significant portion of the market (Table 2).

9
Interview with the former head of Georgia Customs Service and a representative of the Georgia
Revenue Service.
10
Interview with a representative of Georgia Customs Service conducted March 18, 2018.

100 // Georgia: Controlling Illicit Cigarette Trade
Table 2. The Cigarette Market in Georgia, 2010–2017, Million Sticks

MILLION PIECES/
2010 2011 2012 2013 2014 2015 2016 2017
YEARS

A: Domestic production 5,002.0 4,429.0 3,813.0 3,463.7 3,128.1 1,888.3 1,670.6 1,857.4

B: Export 21.0 0 1.0 10.1 151.9 352.8 68.5 149.2

C: Import 4,492.0 5,261.0 5,991.0 6,953.4 8,242.2 7,968.5 8,441.1 9,206.0

Market Size (=A-B+C) 9,473.0 9,690.0 9,803.0 10,407.0 11,218.4 9,504.0 10,043.2 10,914.2

Re-export 0 0 0 0 27.4 402.3 704.8 2,764.2

Number of cigarettes based
NA NA NA 9,898.4 9,717.9 9,745.7 9,296.9 7,943.3
on the excise marks sold

Source: National Statistics Office of Georgia 2018 and the Revenue Service 2018.

Evolution of the domestic cigarette market: unexpected directions. Given the tobacco
excise tax increases in recent years and the declining size of the population,11 one would
expect the Georgian market to shrink. However, Table 2 shows otherwise. To investigate the
issue, Table 3 presents the estimates of affordability of three different types of cigarettes sold
in Georgia. We have used a standard method to measure affordability, calculating it as the
share of per capita GDP needed to purchase 100 cigarette packs in one year.12 Results show
that the affordability is increasing, with a declining percentage of per capita GDP needed to
purchase 100 cigarette packs.

The affordability of all cigarette types increased between 2000 and 2017. It took 6.48 percent
of per capita GDP to buy 100 imported cigarette packs in 2000, but only 3.77 percent of per
capita GDP to do so in 2017, for example. This is not a positive development from a public
health perspective, since the affordability of products, which captures the impact of both
prices and income, is an important driver of consumption. The affordability trend explains
the limited impact of higher taxes on the size of the market in Georgia. On a positive note,
the affordability of cigarettes declined in 2017 compared to the previous year, though this
trend is likely not to be sustained since no tax increase took place in 2018.

A quick market observation in September 2017 revealed that the cheapest (non-filtered)
cigarettes cost GEL 1.25 per pack (about $0.50), while the prevailing price of a non-filtered
cigarette pack was GEL 1.30 per (about $0.54). Premium cigarettes were sold for about
GEL 4 per pack ($1.65). The substantial tax increases in recent years, together with the
persistence of the price difference between filtered and non-filtered cigarettes due to the
two-tiered tax system, motivated some consumers to switch to the cheaper non-filtered

11
United Nations, Department of Economic and Social Affairs, Population Division. World Population Prospects:
The 2017 Revision.
12
Blecher, C and P van Walbeek. International analysis of cigarette affordability. Tobacco Control 2004;13:339–
346. doi: 10.1136/tc.2003.006726

101
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table 3. Cigarette Affordability in Georgia, RIP, 2000–2017

AFFORDABILITY LOCAL AFFORDABILITY AFFORDABILITY
YEAR
WITHOUT FILTER LOCAL WITH FILTER IMPORTED WITH FILTER

2000 1.84% 3.30% 6.48%

2001 1.54% 4.81% 6.64%

2002 1.29% 4.75% 5.77%

2003 1.06% 3.86% 4.77%

2004 1.13% 3.77% 4.51%

2005 1.31% 5.00% 5.51%

2006 1.15% 3.34% 5.31%

2007 0.90% 3.43% 4.25%

2008 0.79% 2.73% 3.70%

2009 0.84% 2.74% 3.86%

2010 0.89% 2.50% 3.46%

2011 0.87% 2.31% 3.08%

2012 0.82% 1.97% 3.39%

2013 0.85% 2.11% 3.52%

2014 0.86% 2.13% 3.19%

2015 0.92% 2.25% 3.20%

2016 0.99% 2.38% 3.13%

2017 1.21% 2.98% 3.77%

Source: Authors' calculation based on data from the Statistical Office of Georgia. RIP = relative income price

cigarettes. According to the Revenue Service of the Ministry of Finance, the sales of excise
tax stamps for non-filtered cigarettes doubled in 2017.

A 25-gram bag of loose tobacco sold for GEL 3, a pack-equivalent of GEL 1.7 ($0.71).13 This is
slightly more compared to non-filtered cigarettes, despite lower tax rates on loose tobacco.
Nevertheless, only 2.5 percent of smokers roll their own cigarettes. Cheap devices for rolling
cigarettes costing GEL 3 (about $1.25) are available on the market (ISSA 2016).14

Getting around the regulations: enforcement falls short. Despite a ban, sale of single ciga-
rettes is easily observed on the streets of Tbilisi. The prices range from 7.5 to 10 tetri (about

13
Hana Ross. Report on Technical Assistance Visit to Georgia. 4 - 12 September. 2017
14
Hana Ross. Report on Technical Assistance Visit to Georgia. 4 - 12 September. 2017.

102 // Georgia: Controlling Illicit Cigarette Trade
3 – 4 US cents), a pack-equivalent of 1.5 – 2 GEL, which means that there is a premium
charged for selling single cigarettes.15 The possibility of acquiring a cigarette so inexpen-
sively reduces the economic barrier to smoking initiation, even though the premium should
reduce the number of cigarettes smoked per day. The Code of Administrative Offenses
effective since May 1, 2018, allows the revenue authority to issue a penalty on the spot in the
amount of GEL150 ($61) for single cigarette sales (Law on Tobacco Control 2018, Law on
Advertisement 2018). Implementation and enforcement of the law are still low priorities.

Even though tobacco advertising has been banned since 2009, tobacco companies have
found ways to advertise new brands through banners, sponsorship programs, and displays at
checkouts. As recently as September 2017, the Georgian capital was flooded with billboards
promoting cigarettes. This changed on May 1, 2018, when Georgia amended its tobacco
control legislation to cover all tobacco products including e-cigarettes and hookahs, for
example. The new law bans smoking in public places (with only a few exceptions, such
as casinos, cigar bars, and private taxis) as well as all forms of advertising and promotions.
(Outdoor displays will be banned from September 1, 2018, while indoor displays will be
banned from January 1, 2021.) Pictorial health warnings covering 65 percent of the front of
the pack will become obligatory from September 1, 2018, and plain packaging will enter into
force from December 31, 2022. Proof of age is now required to purchase tobacco products
(Law on Tobacco Control 2018).

Stubbornly high prevalence rates and tobacco-related mortality. As result of the high
affordability of cigarettes and the fact that major tobacco control policy advances have for the
most part occurred recently, the effort to reduce smoking prevalence has had only moderate
success. In 2016, 57 percent of men and 7 percent of women reported current smoking, while
a cotinine test suggests that close to 12.2 percent of women smoke (STEPS 2016). The major-
ity of smokers (90.5 percent) are daily smokers. About 16.5 percent of boys and 7.8 percent of
girls aged 13–15 years consume tobacco products.16 These statistics put Georgia on the list of
countries with the highest smoking prevalence, both in Europe and worldwide.

The death toll from tobacco use in Georgia is correspondently large – about 11,400 deaths
or 22 percent of all deaths in the country are attributable to smoking every year. Tobacco
use imposes a substantial economic burden on society, amounting to about 825 million GEL
(345 million USD) per year, equivalent to 2.4 percent of GDP. Out of this amount, 327 million
GEL (135 million USD) are related to healthcare. This represents 13 percent of Georgia’s total
public healthcare expenditures (UNDP 2018).

15
Hana Ross. Report on Technical Assistance Visit to Georgia. 4 - 12 September. 2017.
16
Global Youth Tobacco Survey. Georgia. 2014.

103
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

3. Tax Avoidance and Tax Evasion
The transition period toward democracy after the collapse of the Soviet Union was charac-
terized by several conflicts with Russia that resulted in the separation of regions of Abkhazia
and South Ossetia from Georgia. High levels of corruption also marked this period.

Conflict, corruption, and illicit trade. This situation created fertile soil for illicit trade in
tobacco products. Smugglers took advantage of the vulnerable borders between Georgia,
Abkhazia, and South Ossetia. Domestic manufacturers evaded paying taxes by declaring
cigarettes for export while selling them tax-free in Georgia. The authorities regularly detected
false excise tax stamps and noticed excise tax stamps being used just on cartons instead of
on individual packs. Illegal cigarettes, mostly with Russian excise tax stamps and/or Russian
health warnings, were easily found (Shalutashvili et al. 2007).

A 2002 survey revealed that only two-thirds of the cigarettes on the market had the correct
excise mark, with only one-third of imported cigarettes falling into that category. The majority
of non-compliant imported cigarettes had a Russian tax stamp.17 In addition, about 62.5 per-
cent of the domestic cigarettes on the market were produced in non-registered facilities.18

A survey conducted one year later, in 2003, reported that only 32.5 percent of the cigarette
brands sold in Georgia were legal. About 31 percent of brands were sold without an excise
stamp or with an excise stamp from a foreign country, while the remaining 36 percent of
brands were sold both legally (with the proper excise stamp) and illegally (without the excise
stamp or with an excise stamp from another country) (Kobeshavidze et al. 2003). One study
estimated that, from 1997 to 2003, illicit cigarettes represented 50 percent and 30 per-
cent of the cigarette market in rural and urban areas, respectively (Shalutashvili et al. 2007).
Euromonitor reported similar figures (Table 4).

Post-2004 reforms: reining in illicit tobacco. The reforms initiated in 2004 by the new
government focused on economic revival while addressing corruption and widespread tax
evasion. Large-scale changes at the Ministry of Finance and the Georgia Customs Services
(which falls under the Ministry of Finance) improved tax administration so that, by 2005,
the number of registered cigarette manufacturers doubled compared to 1995, as formerly
unregistered entities were forced to enter the ranks of registered companies (Shalutashvili
et al. 2007). Georgia's ranking in the Corruption Perceptions Index by Transparency
International improved strikingly, from rank 133 in 2004 to 67 in 2008 and further to 51 in
2012, surpassing several EU countries. The economy began to grow, and the state budget
increased by 300 percent between 2004 and 2007.19 A doubling of tobacco excise tax reve-
nue contributed to this progress, thanks to a higher tobacco tax rate and improved tobacco
tax administration (Figure 1). The World Bank named Georgia as the leading economic

17
Supply and Use of Tobacco Goods in Georgia. State Department for Statistics of Georgia. Tbilisi, 2002.
18
Supply and Use of Tobacco Goods in Georgia. State Department for Statistics of Georgia. Tbilisi, 2002.
19
Mikheil Saakashvili. Wikipedia. https://en.wikipedia.org/wiki/Mikheil_Saakashvili Accessed June 6, 2018.

104 // Georgia: Controlling Illicit Cigarette Trade
Table 4. Illicit Trade Market Share in Georgia

YEAR SHARE OF ILLICIT % (2016) SHARE OF ILLICIT % (2017)

2001 40.60 NA

2002 40.30 51.63

2003 36.70 47.84

2004 34.40 45.41

2005 36.90 48.08

2006 12.20 18.06

2007 7.20 10.98

2008 4.20 6.53

2009 1.50 2.41

2010 0.80 1.34

2011 0.60 0.88

2012 0.60 0.88

2013 0.30 0.42

2014 0.30 0.40

2015 0.30 0.42

2016 NA 0.44

Source: Euromonitor 2016 and 2017.
Note: The reliability of Euromonitor data has been questioned,20 and the data for Georgia are not consistent
between 2016 and 2017 reports. However, the trend reported by Euromonitor has been corroborated by
other reports.

reformer in the world and noted that "Georgia's transformation since 2003 has been remark-
able. The lights are on, the streets are safe, and public services are corruption-free."21

Because of these changes, the illicit trade in cigarettes declined dramatically, despite the
increasing tax and even though cigarette prices in Georgia became for some period of time
higher compared to neighboring countries (Krasovsky 2013). According to Euromonitor,
the largest drop in the illicit cigarette market occurred between 2006 and 2009 (Table 3). By
2017, the Head of the Healthcare Committee of the Georgian Parliament reported that the
illicit cigarette market share was less than 3 percent of total consumption (Commersant 2017-
I), a truly remarkable reduction from the high levels discussed above and shown in Table 4.

20
Evan Blecher, Alex Liber, Hana Ross, Jo Birckmayer. Euromonitor data on the illicit trade in cigarettes.
Tobacco Control 2015. 24:100-101
21
Mikheil Saakashvili. Wikipedia. https://en.wikipedia.org/wiki/Mikheil_Saakashvili Accessed June 6, 2018.

105
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table 5. Nominal Prices (GEL) for Selected Cigarette Brands, 2014 and 2017

BRAND GEORGIA RUSSIA ARMENIA AZERBAIJAN TURKEY

Year 2014 2017 2014 2017 2014 2017 2014 2017 2014 2017

Marlboro 3 4 2.8 4.5 2.3 3.2 4 5 9.5 11

Winston 2.2 3.5 2.2 4 1.8 2.6 3 4 7.5 10

Pall Mall 2 3 1.8 3.5 1.6 2.2 2.8 3.5 7 9

Source: https://worldcigaretteprices.com; MPOWER 2015; WHO Global Tobacco Control Report. 2017;
tabacum.ru

Figure 3. Prices of Winston Brand Cigarettes in Georgia and Its Neighbors, 2014
and 2017

2 2017
2014
0
Georgia Russia Armenia Azerbaijan Turkey

Note: Winston is the most popular imported brand in Georgia and Turkey.

Figure 4. Cigarette Excise Tax Rates in Georgia and Neighboring Countries, 2016–
2018, in GEL

2
2018
1 2017

0 2016
Georgia Russia Armenia Azerbaijan Turkey

Source: Tax Laws of Georgia, Russia, Turkey, Armenia, and Azerbaijan. Data in GEL provided by
Konstantin Krasovsky.
Note: Minimum specific excise tax rates are shown; tax in Georgia does not include the ad valorem component.

106 // Georgia: Controlling Illicit Cigarette Trade
This would be in line with the estimates of the MoF (about 2 percent of the total market in
201722) and Euromonitor (Table 4).

Cross-border dynamics. The motivation for cross-border shopping varies from country
to country, but the recent excise tax increases in Georgia made this activity less profitable
(Table 5, Figure 3, and Figure 4). Georgia has four land neighbors: Turkey, Russia, Armenia,
and Azerbaijan. Cigarette prices in Turkey are about three times higher than in Georgia, due
to substantially higher excise taxes. As a result, Turkey does not pose a threat to the Georgian
domestic cigarette market, but cigarettes seem to be smuggled from Georgia to Turkey.
There are some reports that the proceeds from this business are funding the Kurdistan
Workers’ Party (PKK), recognized as a terrorist organization by Turkey, the EU, and the United
States (Daily Sabah 2015; Eurasianet 2014; Hurriyet Daily News 2015; Panorama 2015). To
address the issue, Georgia, in collaboration with Turkey, adopted strengthened control mea-
sures in 2017, preventing organized crime groups from smuggling cigarettes from Georgia to
Turkey and other countries surrounding the Black Sea.23

Russian excise tax rates are similar to those in Georgia, but cigarette prices are higher in
Russia.24 However, the Georgian territories Abkhazia and South Ossetia, controlled by Russia,
could potentially be a source of illicit tobacco products (discussed below).

Cigarettes in Armenia are the most tempting for cross-border shopping (which could be either
legal or illegal, depending on the quantity), because cigarette prices in Armenia are about 20
– 25 percent lower than in Georgia. The price difference stems from the difference in excise
taxes – the Armenian excise is around 50 percent lower than that applied in Georgia.

Authorities’ current concerns. Officials of the Georgia Revenue Service, which includes the
Customs Service, have stated that the main issues that currently worry them are (a) small-
scale cigarette smuggling related to other criminal activities and (b) transit of illicit cigarettes
through Georgia.25 Small-scale cigarette smuggling usually involves small trucks or cars and
takes the form of bootlegging or “ant smuggling” (frequent cross-border movement of small
amounts of cigarettes). This is considered a comparatively minor problem. The movement
of illegal cigarettes from Russia, Armenia, Azerbaijan, or Ukraine via Georgian territory to
third-country destinations (often Turkey) is of greater concern.

The tax-avoidance challenge. Even though tax evasion is a minor issue in Georgia, the
country has a problem with tax avoidance. In addition to forestalling, tobacco companies are
taking advantage of the tax differential between filtered and non-filtered cigarettes. In 2015,
in response to the growing gap between filtered and non-filtered cigarettes, local manufac-
turers began to manufacture non-filtered cigarettes with an elongated empty end suitable for

22
Hana Ross. Report on Technical Assistance Visit to Georgia. 4 - 12 September. 2017.
23
An interview with a representative of Georgia Customs Service conducted March 18, 2018.
24
Federal Tax Service of Russia. http://service.nalog.ru/tabak.do
25
Customs Service presentation during the Georgia mission of the European Network for Smoking and
Tobacco Prevention (ENSP), December 2017.

107
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

inserting filters. The filters are offered separately at the point of sale free of charge. This tax
avoidance saves a company 1.1 GEL (USD 0.45) on a pack of cigarettes (based on 2018 tax
rates) and encourages downward substitution that increases the affordability of cigarettes. This
industry behavior would explain the doubling of non-filtered cigarette sales in 2017.

4. Measures to Control Tax Avoidance and
Tax Evasion
Tax stamps. All tobacco products sold in Georgia are subject to taxation and must bear an
excise tax stamp, except for pipe tobacco. Excise tax stamps were first introduced in 1999 as a
tax-collection instrument, meaning that manufacturers and importers pay taxes by purchasing
these fiscal stamps. The security features on the stamps were initially minimal, making them
vulnerable to counterfeiting. The authorities also reported multiple uses of single tax stamps.26
Since their introduction, tax stamps have evolved substantially, making them much more
secure, as described below in the section on the tracking and tracing system.

Excise duties and VAT are payable when the goods are supplied to the final consumer or
upon removal from the warehouse facility for sale. Importers pay these taxes at the time of
import (Revenue Service of Georgia 2018; Tax Code of Georgia 2018).

The Department of Standards, in charge of the content of tobacco products, was dissolved
in 2005. In the same year, raw tobacco was excluded from the Ministry of Agriculture’s regu-
latory jurisdiction (Petriashvili et al. 2016). Raw tobacco intended for manufacturing tobacco
products is exempt from excise taxes.

Shifts in the approach to licensing. Georgia introduced licensing of tobacco manufactur-
ing and packaging in 1999 (Law on Licensing of Production of Food and Tobacco Products
2010). Unfortunately, the law was suspended towards the end of 2005 (Law on Licensing
and Permissions 2005) and abolished by 2009 (Law on Licensing of Production of Food and
Tobacco Products 2010). Therefore, no license is currently required to import, export, or
distribute tobacco products in Georgia.

Duty-free shops selling tobacco products must have a license issued by the Revenue Service
of Georgia and are obligated to assist Customs in executing their control authority (Revenue
Service of Georgia 2012). The retail sale of tobacco products via Internet or mail is prohibited
since May 1, 2018 (Law on Tobacco Control 2018).

Customs Service enforcement activities. The Georgia Customs Service has already imple-
mented several measures to control illicit trade in tobacco products. For example, it runs a
risk analysis and assessment system to select suspicious trucks for inspection. It uses X-ray

26
Alexander Shalutashvili, Hana Ross, Judith Watt, Stephanie Hilborn, George Bakhturidze, Gela Kobeshavidze,
Zaza Grigalashvili. Tobacco Economic Study in Georgia since the Fall of the Soviet Union. Editor: George
Magradze. Open Society Institute. Tbilisi, Georgia, November 2007.

108 // Georgia: Controlling Illicit Cigarette Trade
scanners at all border crossings and at the postal sorting center27 to detect suspicious cargos
and packages. It employs trained dogs that can recognize nicotine. However, only about
2 percent of containers with imported excisable goods are being randomly inspected. If a
container has cigarettes, 2 percent of cartons are chosen, and then 2 percent of packs from
those cartons are selected for inspection.28

As of January 2018, international travelers can bring either 200 cigarettes (reduced from
the previous 400 cigarettes) or 50 cigars or 50 cigarillos or 250 grams of other tobacco
products or 10 capsules for e-cigarettes to Georgia tax free (Tax Code of Georgia 2018). For
those using a land border, this limit applies for a period of 30 calendar days to prevent “ant”
tax avoidance.29

There are penalties for selling illegal cigarettes. The first offense calls for a fine ranging from
1000 to 2000 GEL (USD 400 to 800). The second offense within the same year is subject to
a penalty of 10,000 GEL, or USD 4,000.30

Implementing an integrated control system. In November 2011, the Georgia Revenue
Service launched a competitive bid for an “Integrated System of Movement and Registration
of Products.” Seven companies submitted proposals, and in the end the contract was
awarded to SICPA, a company based in Switzerland.31 The system, which became oper-
ational in March 2013, requires all packs intended for the domestic market to carry a
paper-based fiscal stamp with a high level of security features (overt, semi-covert, and
covert). These stamps are unique, secure, and non-removable. Each stamp contains
information stored in a serialized code intended for tracking and tracing and for a data
management system. This information includes the name of producer or importer, product
name, time and place of production, and volume. The data management system is located
at the Georgia Revenue Service, and the information sent to the data center is transmitted
in near real time. A web application allows domestic producers and importers to order, fore-
cast, pay, and activate the fiscal stamps. This electronic system of excise marking imposes
an immediate control by identifying the producer, the product, and how the product entered
the market.

Even though the system is capable of both tracking and tracing, it is currently used only for
tracing. The Georgia Revenue Service is currently satisfied with its performance. Revenue
Service field officers carry hand-held inspection devices allowing them to authenticate prod-
ucts in retail distribution.

27
X-rays at post offices are not a high priority due to the low prevalence of tax evasion via those channels.
28
Hana Ross. Report on Technical Assistance Visit to Georgia. 4 - 12 September. 2017.
29
“Ant” tax avoidance is defined as making frequent journeys across the border with the legally allowed
amounts of tobacco products for the purpose of making profit.
30
Hana Ross. Report on Technical Assistance Visit to Georgia. 4 - 12 September. 2017.
31
Information provided by a SICPA representative on 25 January 2017.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Packs intended for export carry a bar code indicating the destination country.32 An additional
benefit of strengthening tobacco tax administration was spillover to tax administration of
other products. In 2012, the SICPA system was expanded to cover alcohol and beer, then
further extended to non-alcoholic beverages in 2016. The cost of the system (5 Euro/1000
stamps) is just a bit more than the previous simple tax stamp system. These expenses are
initially covered by the government, but starting in 2018 the industry must cover the costs.33

International collaboration. Regarding international collaboration, Georgia is a member
of the World Trade Organization, and its Ministry of Finance has a memorandum of
understanding with the UK Customs office to share intelligence regarding large-scale
smuggling operations.34 Even though Georgia was involved in the negotiations related to the
FCTC’s Protocol to Eliminate Illicit Trade in Tobacco Products, which was adopted by the
Conference of Parties in 2012 (WHO 2012), unfortunately it has yet to ratify the Protocol.

Recent seizures of illicit cigarettes. The Investigative Services unit of the Ministry of
Finance seized 61,419 and 557,685 packs of illegal cigarettes in 2016 and 2017, respectively.
Simultaneously, the Customs Service of Georgia reported 96,896 and 228,071 cigarette
packs that were not declared in those two years, respectively, even though only a portion of
them were intended for sale in Georgia (Ministry of Finance of Georgia, 201835). For example,
in October 2017, Customs seized 113,600 packs of Armenian cigarettes destined for Russia
(Sputnik – Georgia, 2017). Based on the health warnings, these cigarettes were produced
in Armenia for export to Iraq, but “got lost” on their way.36 The growing number of seizures
can be linked to the growing re-export business, which makes the county vulnerable to
leaks from trade volumes not intended for the domestic market. The seized cigarettes are
destroyed, but the Ministry of Environment and National Resources Protection has yet to
establish an environmentally friendly method to dispose of these products.

Given the number of cases of seizure and the revenue loss estimated at 950,000 GEL in
2017 (tobacco excise revenue reached 672 million GEL in that year), the Ministry of Finance
does not suspect any systematic violation of the tobacco excise tax law, except for the situ-
ation near the uncontrolled territories (Abkhazia and South Ossetia) and near the border with
Armenia (Ministry of Finance of Georgia, 2018). The Georgian Ministry of Interior Affairs (MIA)
reported only five criminal cases related to illicit tobacco trade in 2016, while it investigated
seven such cases in 2017 (MIA of Georgia 2018). The MIA Border Police reported no criminal
violations during the period 2013–2017 (Border Police of Georgia, 2018).

32
Tobacco Products Taxation Policy, National Diseases Control Center. 2016.
33
Hana Ross. Report on Technical Assistance Visit to Georgia. 4 - 12 September. 2017.
34
Hana Ross. Report on Technical Assistance Visit to Georgia. 4 - 12 September. 2017.
35
Despite the Rise of Smuggling, Cigarette Sales Did Not Fall. Commersant, April 2018;
https://commersant.ge/en/post/despite-the-rise-of-smuggling-cigarette-sales-not-fell
36
A resident of Georgia found almost 30 thousand packs of contraband
cigarettes in the attic.Black Sea Press, 16 May 2017. https://www.newsgeorgia.
ge/u-zhitelya-gruzii-obnaruzhili-na-cherdake-pochti-30-tysyach-pachek-kontrabandnyh-sigaret/

110 // Georgia: Controlling Illicit Cigarette Trade
Misinformation on seizures and illicit tobacco flows. Despite the remarkable record of
Georgia’s authorities in controlling illicit trade, the tobacco industry and associated groups
persist in drawing attention to illicit cigarette trade. Industry spokespersons commented, for
example, on the higher number of seizures in 2017, erroneously claiming that illicit trade in
cigarettes increased 18-fold (Commersant 2017-II). In this context, it is important to note that
seizures are not the best indicator of the level of illicit trade activity, since they are also a func-
tion of the intensity and the level of law enforcement.

The industry’s multipronged strategy. The tobacco industry continues to interfere with
Georgia’s excise tax policy. It organizes seminars for both high- and mid-level MoF officials,
particularly focusing on the Central Administration, Revenue Service, and Investigation
Units (Academy of MoF, 2013). Even though since 2009 it is prohibited to receive sponsor-
ship from the tobacco industry (Law on Advertisement of Georgia 2009), the transnational
tobacco companies provide funding to various public agencies (e.g., Rondeli Foundation,
the Police Academy), as well as several universities (e.g., Caucasus School of Business, Tbilisi
State University, Sokhumi State University, Free University).

5. Conclusions
Georgia is an example of a country that successfully brought the illicit market in tobacco
products under control, thanks to progressive economic reforms targeting, among other
institutions, its Revenue and Customs services. In a relatively short period of time, Georgia
managed to reduce corruption, set up effective tax administration and enforcement, and
institute strong border control as key components of its strategy to control illicit trade in
tobacco products. As a result, Georgia has managed to substantially decrease tax avoidance
through various administrative measures, while pursuing a policy of regularly increasing
cigarette excise taxes.

The data reveal the highest level of tax evasion during 1997 – 2003, when excise tax rates
were about four- and eight-times lower on imported and domestic cigarettes, respectively,
than in 2017. Yet the illicit cigarette market in 2017 is reported to be negligible. This confirms
the empirical evidence from other countries pointing to the relatively small role of cigarette
taxes as drivers of illicit cigarette trade. Georgia’s experience adds to the growing body of
evidence that tobacco tax increases can boost revenue even as vigorous enforcement keeps
the illicit tobacco trade under control.37

The remaining issues for the Georgian authorities to address are related to weak adminis-
trative borders with Abkhazia and South Ossetia, occupied by Russia, cross-border activities

37
The Economics of Tobacco and Tobacco Control. National Cancer Institute Tobacco Control Monograph
21. NIH Publication No. 16-CA-8029A. Bethesda. MD: U.S. Department of Health and Human Services.
National Institutes of Health. National Cancer Institute; and Geneva: World Health Organization; 2016. https://
cancercontrol.cancer.gov/brp/tcrb/monographs/21

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

along the Armenian border, and possible movement of illegal goods across Georgian terri-
tory to other countries. Ratifying the Illicit Trade Protocol would provide Georgia with more
tools to address these loopholes in its system.

Only the substantial excise tax increase in 2017 achieved the policy “win-win”: revenue
increased, and the affordability of cigarettes was reduced. The moderate tax increases
in previous years were beneficial from the revenue perspective but had less impact on
public health. However, the excise tax on tobacco products, and especially on non-filtered
cigarettes, is still low compared to Georgia’s neighbor, Turkey, or to the EU. The excise tax
was supposed to increase in January 2018, but the government planned to adopt a strong
tobacco control bill in May of that year and decided to postpone the tax increase. It is also
possible that the tobacco industry played a role in this decision, as it continues to influence
government agencies and their officials. Further tax increases are urgently needed, since the
affordability of the largest cigarette market segment increased from 2010 to 2017.

The recent changes in the tobacco control law are in line with Georgia’s commitments
under the FCTC and under the 2014 Association Agreement calling for a gradual approx-
imation of Georgia’s national legislation with the tobacco control legislation of the European
Union (2014). Four main tobacco control measures hold greatest promise for Georgia: regular
tax increases, smoke-free policy, advertising bans, and labeling/packaging rules. If Georgia
implements these measures aggressively and durably, the country could avoid 3.6 billion
GEL (1.5 billion USD) in economic losses caused by tobacco use over the next 15 years,
obtaining a return on investment of 357 GEL (143 USD) for every 1 GEL invested (UNDP,
2018). The tobacco industry in Georgia is engaging in at least two forms of tax avoidance:
forestalling and exploiting the tax difference between filtered and non-filtered cigarettes. This
can be addressed by changing the tax law according to the international best practice (e.g.,
taxing existing inventories at the new tax rate once it becomes applicable) and by equalizing
the tax rate for filtered and non-filtered cigarettes.

Recommendations
Tackle forestalling. There are many ways to deal with forestalling by industry. Many coun-
tries apply the new tax rate on all existing inventory by, for example, applying an additional
tax stamp. Other countries prevent sale of cigarettes with old tax stamps within days after
a tax increase. In the UK, for example, the tobacco companies cannot order tax stamps
in excess of their average sales prior to a tax increase. Adopting anti-forestalling measures
would lead to gains in tax revenue.

Rapidly align with the Illicit Trade Protocol.. The government should analyze the extent
to which its current system is compliant with the ITP. The ITP, for example, requires licensing
of economic operators involved in the tobacco product supply chain. Georgia should, there-
fore, reinstitute the licensing requirement, at least for cigarette manufacturers, importers,

112 // Georgia: Controlling Illicit Cigarette Trade
and exporters. Licensing requiring background checks would further aid enforcement. The
ITP also requires marking of all tobacco products, including those intended for export. This,
together with regular exchange of enforcement data with other countries, would enhance
Georgia's contribution to the global effort to control international illicit trade in tobacco
products. In this regard, Georgia should ratify the ITP. The effort needed to comply with the
ITP would be minimal, since Georgia already meets most of the ITP requirements.

Reinforce international cooperation. Georgia should consider strengthening cooperation
and information exchange with EU Member States, especially with those bordering Russia
(e.g., Poland, Estonia, Lithuania), since they are facing similar illicit trade problems, and with
its neighboring countries. Georgia can enhance it interaction with Interpol, the European
Anti-Fraud Office (OLAF), and other relevant agencies in the fight against illicit tobacco trade.

Reinforce border protections and product movement control systems. Georgia should
enhance the protection of its vulnerable border with Abkhazia and Ossetia by video monitor-
ing of all trucks entering and leaving the country from those territories. Such a surveillance
system could be supported by road cameras and mobile X-rays, and integrated with the
e -Transport and the excise marking electronic system. Further, a system resembling the
EU’s Excise Movement and Control System (EMCS) or the Monitoring System for the Road
Carriage of Goods (MSRCG) implemented recently in Poland should be considered, given
the trade flows and the Agreement with the EU. These systems assist risk assessment and
information exchange across relevant stakeholders. The MSRCG, for example, requires that
all parties to a transaction involving transport of "sensitive goods" such as fuels, alcohol, and
tobacco products (i.e., the sending entity, the receiving entity, the carrier and the driver)
notify the Customs service authorities in advance about the movement of the goods.

Ensure that legislation adequately supports enforcement actions. To enhance compli-
ance, Georgia should revisit its anticorruption laws, the criminal code, the codes of conduct,
and the conflict of interest regulations so that they support the enforcement efforts of the
Georgia Customs Services and the National Revenue Agency.

Accelerate plain packaging. The implementation of plain packaging, planned for December
31, 2022, could be speeded up. Even though the industry is pointing to a threat of illicit trade,
there is no research evidence to justify such concerns (Evans and Reeves, 2015; Joossens,
2012; Scollo et al., 2014). Plain packaging could help to reduce the high smoking prevalence
and in fact make identification of illicit cigarettes from other countries easier (Brennan et al.,
2015; Durkin et al., 2015; Scollo et al., 2015; Wakefield et al., 2015).

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

The administrative effort to control illicit trade in tobacco products should be supported by
enhanced monitoring, a comprehensive surveillance system, and data analysis, so that policy
making is backed up by solid research evidence and does not have to rely on data generated
by the tobacco industry.

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117
IRELAND
6

IRELAND:

Addressing the
Illicit Flow of
Tobacco Products
Alan Cummins, Oliver Gainford, and Peadar O’Lamhna1

Chapter Summary
Ireland is committed to a policy of high tobacco taxation to encourage people to quit
smoking. A high rate of tobacco excise, and the consequent high price of tobacco prod-
ucts, make Ireland attractive to those involved in the illicit tobacco trade. The supply of
cheap illicit tobacco lessens the effectiveness of demand reduction strategies, including
by enabling greater youth smoking uptake and continued tobacco use by price-sensitive
consumers. However, Ireland’s comprehensive and effective system of customs and tax
enforcement, alongside strong regulatory control of the tobacco market, has contained
the illicit flow of tobacco products onto the Irish market.

This chapter sets out the context of tobacco consumption within Ireland and details the
operational and specific processes followed by Ireland in addressing the challenge of illicit
tobacco, with particular focus on tax administration reforms. The chapter addresses the
legal, institutional, and enforcement mechanisms which control legal supply chains and
the marketing of tobacco products, as well as measures to identify and disrupt the supply
of illicit products.

1
General Excise and Tobacco, Indirect Taxes Policy and Legislation Division, Office of the Revenue
Commissioners, Ireland

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

The chapter illustrates the fact that illicit tobacco trade remains a complicated phenomenon,
and that even the estimation of its size is methodologically challenging. Effective action
to inhibit the illicit tobacco trade requires a multi-pronged approach by agencies within a
country, along with international cooperation.

1. Situation Description
1.1 Overview
Tobacco consumption is a recognized danger to human health, and tobacco policy in
Ireland is informed by public health policy. Smokers lose an average of ten years of life
compared with otherwise similar non-smokers.2 Department of Health research indicates
that smoking remains the leading cause of preventable death in Ireland, accounting for
nearly 19 percent of the country’s preventable deaths annually.3 Health inequalities are also
associated with smoking, with prevalence higher in lower socio-economic groups,4 contrib-
uting to marked differences in mortality rates by socio-economic group. In March 2013, the
Healthy Ireland framework5 outlined national public-health objectives, including reducing the
country’s smoking prevalence to 5 percent by 2025. This target was reconfirmed in Tobacco
Free Ireland: Report of the Tobacco Policy Review Group, published by the Department of
Health in October 2013.6 Government policy is to reduce harm through reducing tobacco
consumption and smoking prevalence in Ireland.

The World Health Organization (WHO) advocates raising tobacco prices through increased
taxation as an effective approach to control the spread of tobacco use.7 Tobacco tax is rec-
ognized as a key policy instrument in reducing tobacco consumption in Ireland.8 The WHO
considers that higher prices prevent initiation of tobacco use, induce cessation, and reduce
relapse among those who have quit. Ireland currently imposes the highest duty rates in the
European Union on tobacco products, including on cigarettes and roll-your-own tobacco,9
resulting in relatively high retail prices for tobacco products.

2
Jha et al, 2018, https://www.bmj.com/content/361/bmj.k1162
3
Howell F R, Shelley E, Mortality attributable to tobacco use in Ireland. The Faculty of Public Health Medicine
RCPI Winter meeting; Dublin (2011).
4
Hickey, P., Evans, D.S., Smoking in Ireland 2014: Synopsis of Key Patterns, 2015, National Tobacco Control
Office.
5
Healthy Ireland: https://health.gov.ie/wp-content/uploads/2014/03/HealthyIrelandBrochureWA2.pdf
6
Tobacco Free: https://health.gov.ie/wp-content/uploads/2014/03/TobaccoFreeIreland.pdf
7
WHO: Tobacco Free Initiative (TFI): Taxation, http://www.who.int/tobacco/economics/taxation/en/, accessed
05 February 2018
8
Joint Committee on Health and Children, Report on Hearings in relation to the General Scheme of the Public
Health (Standardised Packaging of Tobacco) Bill, Volume 1, April 2014, p 63
9
European Commission, Excise Duty Tables, Part III – Manufactured Tobacco, 2018. https://ec.europa.eu/
taxation_customs/sites/taxation/files/resources/documents/taxation/excise_duties/tobacco_products/rates/
excise_duties-part_iii_tobacco_en.pdf

120 // Ireland: Addressing the Illicit Flow of Tobacco Products
Figure 1. Smoking Prevalence in Ireland, 2007 to 2017

28.00% Source: Health
Service Executive,
Smoking
26.00%
Prevalence
Tracker Half
24.00% Year - 2017
Infographic,
22.00% available at:
https://www.
hse.ie/eng/
20.00% about/who/
tobaccocontrol/
18.00% research/tracker-
2017-update.pdf,
accessed 18 May
16.00%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

A sustained increase in excise taxation has coincided with and contributed to reductions in
smoking prevalence in Ireland (Figure 1). Tax on tobacco products has been increased in nine
of the last ten years. Analysis by the World Bank suggests that overall elasticity of demand
lies between 0.3 and 0.8, meaning that a 10 percent increase in cigarette prices should lead
to a 3 to 8 percent decline in consumption.10 Over the period from 2007 to 2017, the Irish
Consumer Price Index rose by 2.4 percent. During that period, the tax-inclusive price of ciga-
rettes in the Most Popular Price Category (MPPC) has increased by 60.8 percent, an increase
in real terms of 57.1 percent.

Figure 2 shows the decrease in affordability between 2006 and 2016, taking account of two
key determinants: inflation and growth in per capita income, both in current market prices.
The Relative Income Price (RIP) is the percentage of per capita income required to purchase
100 packs of cigarettes. Affordability is expressed as a percentage, where higher percentages
indicate less affordable cigarettes as a greater proportion of income is required to purchase
the same quantity of cigarettes. Blecher11 used per capita GDP as measure of income,
however this chapter adopts per capita modified gross national income (GNI*) as more
appropriate to the measurement of domestic economic activity for Ireland.12

The tax content (excise plus Value-Added Tax (VAT)) of the cigarette retail price has increased
by 62.6 percent, a real increase of 58.8 percent, while the non-tax element of retail price
has risen by 54.6 percent, an increase of 51 percent in real terms. The tobacco industry has
applied price increases in addition to tax increases. The total tax as a percentage of the retail
price increased marginally from 77.5 percent in 2007 to 78.3 percent in October 2017.13 At

10
World Bank, Tobacco Tax Reform: At the Crossroads of Health and Development, 2017, p 35.
11
Blecher, E., Targeting the affordability of cigarettes: a new benchmarking for taxation policy in low-income
and-middle-income countries, 2010.
12
Report of the Economic Statistics Review Group, Central Statistics Office, 2016.
13
Calculations based on a current price of a pack of 20 cigarettes of €11.50.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 2. Affordability (Relative Income Price) of Cigarettes, 2006 to 2016

3.50%

3.00%

2.50%

2.00%

1.50%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

A ordability (Relative Income Price)

the same time, smoking prevalence in Ireland has fallen by 9.66 percentage points since
2007, from 27.26 percent14 to 17.6 percent (as of June 2017).15 Fewer people are smoking
than ten years ago, and those that smoke are smoking less.

Economic theory suggests that the quantity demanded of a product depends on multiple
factors including its price, the price of related goods, incomes and unemployment.16 The
nature of tobacco products introduces other demand variables. The addictive nature of
tobacco products implies that current consumption levels depend upon past consumption,
and potentially upon an idea of future prices and other determinants of demand.17 Setting
expectations of continuing substantial increases in taxes is an important demand suppres-
sant tool, particularly so for lower-income smokers and for young people who have not
yet become confirmed tobacco addicts.18 In addition, tobacco consumption is influenced
by tobacco control policies,19 including the mandatory presence of warning labels, bans on
tobacco marketing practices, and access to cessation treatments and services.20 Moreover,
traditional variable-demand relationships have changed over time. Previously, increases in
income would have been expected to give rise to increases in tobacco consumption; more
recently, however, as knowledge about the health consequences of smoking has increased,
this relationship has either disappeared or been reversed.21

14
Smoking Trend Data 2003-2013, available at: https://www.drugsandalcohol.ie/22499/1/Smoking%20Trend_
Data_2003%20-%202013.pdf, accessed 18 May 2018.
15
Health Service Executive, Smoking Prevalence Tracker Half Year - 2017 Infographic, available at: https://www.
hse.ie/eng/about/who/tobaccocontrol/research/tracker-2017-update.pdf, accessed 18 May 2018.
16
Walsh et al, Economics of Tobacco: An Analysis of Cigarette Demand in Ireland, 2015, p 13.
17
Chaloupka, FJ and Tauras, JA, The Demand for Cigarettes in Ireland, 2011, p 8
18
World Bank, Tobacco Tax at the Crossroads of Health and Development: A Multisectoral Perspective, 2017, p 86
19
Chaloupka, FJ and Tauras, JA, The Demand for Cigarettes in Ireland, 2011, p 13
20
Ibid.
21
Jha P, Chaloupka FJ (1999). Curbing the Epidemic: Governments and the Economics of Tobacco Control.
Washington D.C.: The International Bank for Reconstruction and Development/The World Bank.

122 // Ireland: Addressing the Illicit Flow of Tobacco Products
Opportunities for tax avoidance are also relevant variables.22 Such opportunities include con-
sumers purchasing tobacco products in non-EU countries from duty free shops or in other
EU countries at prices that include local taxes but are well below prices in Ireland. Other
examples involve distributors and retailers stockpiling cigarettes to avoid an anticipated tax
increase. Such practices are affecting the demand for Irish duty-paid tobacco products by
permitting substitution by non-Irish duty-paid (NIDP) products.23

Differences in the relative prices of tobacco products tend to lead to some substitution
among products by consumers.24 This has prompted the World Bank to recommend
maximum use of uniform specific excise taxes, in preference to ad valorem taxes or
specific excises for different price tiers.25 Alternatives to cigarettes may include cigars,
roll-your-own (RYO) fine-cut tobacco for the rolling of cigarettes, other smoking tobacco
and, more recently, electronic cigarettes,26 all of which have lower incidence of taxation.27
Finally, substitution of illicit for licit tobacco products affects demand for Irish duty-paid
tobacco products.

Whereas, at first glance, there appears to be a correlation between tax increases and
reduced consumption, the causal factors behind any reduction require careful analysis.
In addition, due to the nature of the illicit tobacco market and the difficulty in deriving an
agreed figure for the size of the illicit market, the nearest measure of total consumption avail-
able is based on Irish duty-paid sales. Furthermore, these figures are themselves a proxy and
not actual consumption.28 As these figures reflect the payments of excise taxes at the whole-
sale level,29 they do not include non-Irish duty-paid tobacco products, whether legally acquired
or illicit, and are distorted, relative to actual consumption, by the operational choices made
by tobacco companies as to the timing of inventory releases. Data on actual tobacco prod-
uct consumption simply does not exist for the Irish market.30

The illicit tobacco trade avoids State regulation and taxation and jeopardizes tobacco
control policies. Simultaneously, the illicit tobacco trade enables greater consumption by
lowering the effective cost of tobacco products. It also shrinks tax-financed public funding
available to the health care system,31 including monies collected in respect of tobacco-prod-
uct taxes and earmarked for the Ministry for Health.32 While the illicit trade in tobacco is a
global problem, it is particularly so for countries, including Ireland, that pursue a policy of

22
Chaloupka, FJ and Tauras, JA, The Demand for Cigarettes in Ireland, 2011, p 13
23
Walsh et al, Economics of Tobacco: Modelling the Market for Cigarettes in Ireland, 2011, p iii.
24
Chaloupka, FJ and Tauras, JA, The Demand for Cigarettes in Ireland, 2011, p 6
25
World Bank, Tobacco Tax at the Crossroads of Health and Development: A Multisectoral Perspective, 2017, p 14
26
Walsh et al, Economics of Tobacco: An Analysis of Cigarette Demand in Ireland, 2015, p 8
27
Tobacco Products Tax is not applied to electronic cigarettes
28
Walsh, Economics of Tobacco: An Analysis of Cigarette Demand in Ireland, 2015, p 14
29
Chaloupka, FJ and Tauras, JA, The Demand for Cigarettes in Ireland, 2011, p 11
30
Chaloupka, FJ and Tauras, JA, The Demand for Cigarettes in Ireland, 2011, p 11
31
Calderoni, F, Rotondi, M, Favarin, S, The Factbook on the Illicit Trace in Tobacco Products Issue 3: Ireland,
Transcrime, 2013, p 61
32
Section 3 of the Appropriation Act, 1999

123
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 3. Cigarette Consumption and the Price of Cigarettes in the Most Popular
Price Category (MPPC) in Ireland, Expressed in Current Market Prices

5.5 €12.00
Cigarettes Released for Consumption (bn)

5 €11.00

4.5 €10.00

4 €9.00

3.5 €8.00

3 €7.00

2.5 €6.00
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Cigarettes (bn)
Price

high tobacco taxes.33 However, the most recent survey results show that, while trend data
for illicit cigarette use show an increase in the most recent year, the general trend over the
period 2007 to 2017 in the prevalence of the illicit trade has been downward.34 This has
occurred even as the price of cigarettes has risen, suggesting that, while the illicit trade has
not been eliminated, Revenue’s extensive program of enforcement35 has contained it. This
would be consistent with the general finding from the World Bank (2017), suggesting that
the main driver of illicit flows is not relative levels of price or taxation but the effectiveness of
customs and tax enforcement.36 The most recent survey evidence suggests that 13 percent
of cigarette consumption in Ireland is illicit.37

33
Joint Committee on Health and Children, Report on Hearings in relation to the General Scheme of the
Public Health (Standardised Packaging of Tobacco) Bill, Volume 1, April 2014, p 63
34
Revenue, Illegal Tobacco Products Research Surveys 2017, available at: https://www.revenue.ie/en/
corporate/documents/research/illegal-tobacco-survey-2017.pdf
35
Revenue, Annual Report 2017, available at: https://www.revenue.ie/en/corporate/press-office/annual-
report/2017/ar-2017.pdf, p 29
36
World Bank, Tobacco Tax at the Crossroads of Health and Development: A Multisectoral Perspective, 2017, p 18
37
IPSOS MRBI, Illegal Cigarette Research 2017, April 20188

124 // Ireland: Addressing the Illicit Flow of Tobacco Products
Figure 4. Illicit Cigarettes and the Price of Cigarettes in the Most Popular Price
Category (MPPC) in Ireland

€12.00 24%

€11.50

€11.00 20%

€10.50

€10.00 16%

€9.50

€9.00 12%

€8.50

€8.00 8%
2009 2010 2011 2012 2013 2014 2015 2016 2017

MPPC (€)
Illicit Cigarettes %

There are three main types of illicit tobacco of most concern to the Irish authorities:38

CONTRABAND: genuine tobacco which has been smuggled or diverted due to
discrepancies in price between jurisdictions;

COUNTERFEIT: tobacco products which have been manufactured covertly and
smuggled into the country;

CHEAP WHITES: tobacco products which are produced independently of the
International Tobacco Manufacturers and then smuggled into the country
avoiding tax.

1.2 Context of Tobacco Control
In the context of public health policy, tobacco control and regulation in Ireland are governed
primarily by the Public Health (Tobacco) Acts 2002 to 2013. These Acts include provisions
which prohibit tobacco advertising and sponsorship and restrict the marketing and sale of
tobacco products.

38
Joint Committee on Health and Children, Report on Hearings in relation to the General Scheme of the
Public Health (Standardised Packaging of Tobacco) Bill, Volume 1, April 2014, p 64

125
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Some of the key legislative measures introduced in recent years include the workplace
smoking ban, the ban on the sale of cigarettes in packs containing less than 20 cigarettes,
the ban on point-of-sale advertising, the introduction of graphic warnings on tobacco pack-
aging, the introduction of standardized packaging, and the ban on smoking in cars carrying
a child.

The illicit trade presents a number of different challenges to government policies, and the
fight against the illicit trade is a priority for several reasons:

1. The availability of illicit tobacco products undermines public health policies, including
demand-reduction strategies regarding tobacco. As illicit tobacco is available outside the
normal regulatory framework, it may fail to comply with regulations regarding, avail-
ability, advertising, appearance and the presence of appropriate health warnings. Such
regulations aim to reduce the appeal of cigarettes and smoking, enhance the salience
of health warnings on packs, and address the use of packaging elements that mislead
smokers about product harm. Illicit tobacco products that fail to comply with such
regulations undermine policy initiatives aimed at reducing consumption by vulnerable
persons, including low-income groups and minors. In addition, illicit tobacco may fail to
comply with regulations regarding the reporting of ingredients and emissions and may
contain additional harmful substances, including “asbestos, mold, dust, dead flies, rat
droppings, and even human excrement.”39

2. The illicit trade in tobacco results in losses to national finances through
uncollected tax.

3. The illicit trade damages compliant taxpayers, including retailers and distributors, when the
legitimate product they deal in is substituted by cheaper illicit tobacco products.

4. Finally, criminal groups, and in some cases terrorist groups, are financial beneficiaries
of the illicit trade,40 and the profits they acquire may be used to fund further activities
harmful to society.

Since 2004, cigarette manufacturers and the European Union have cooperated in compre-
hensive initiatives, including traceability operations, aimed at limiting illicit activity. These
agreements have been criticized for lacking transparency, serving the interests of tobacco
companies, failing to align with the requirements of Article 5.3 of the WHO’s Framework
Convention on Tobacco Control (FCTC), having inadequate penalties, and for generally

39
Gabe Jagger, The Times, Illegal tobacco tainted by asbestos and rats, 16 May 2017
40
UK Parliament, Northern Ireland Affairs Committee, Third Report: Fuel laundering and smuggling in Northern
Ireland, 20 March 2012, para 28; Transcrime, The Factbook on The Illicit Trade in Tobacco Products: Issue 3
Ireland, 2013, p 88; Independent Monitoring Commission, Twenty-fifth Report of the Independent Monitoring
Commission: Presented to the Government of the United Kingdom and the Government of Ireland under
Articles 4 and 7 of the International Agreement establishing the Independent Monitoring Commission, October
2010, p 12, p 17

126 // Ireland: Addressing the Illicit Flow of Tobacco Products
threatening progress in tobacco control.41 However, they have coincided with a drastic
reduction in the smuggling of major brands.42

Better control of the major cigarette supply chain appears to have changed the nature of
the illicit market. Whereas previously the illicit trade mainly involved large-scale container
smuggling of well-known brands of cigarettes, recent years have seen a relative decline of
such activities, replaced by counterfeiting, illegal production, and cheap whites.43 However,
the majority of the illicit cigarette market in Europe still comprises tobacco industry product
and well-known brands.44

SECURITY SITUATION

The illicit trade in tobacco is, by its nature, a criminal undertaking, and quantifying a clandes-
tine activity is inherently difficult. However, the trade appears to be dominated by organized
crime groups (OCGs) operating across borders.45

OCGs operating within the EU are highly diverse and range from large, “traditional” OCGs
to smaller groups and loose networks supported by individual criminals, who are hired and
collaborate in an ad hoc manner. More than 5,000 OCGs operating on an international level
are currently under investigation in the EU, involved in many areas of criminality.

In 2012, the then Garda Commissioner (highest ranking officer in the Irish police force)
indicated that there were approximately 25 organized crime groups operating throughout
the State and that, while most were domestically orientated, five had a significant interna-
tional dimension.46 The Netherlands, Spain, and the UK were described as the main locations
for such links.47 The OCGs operating in Ireland tend to be Irish, but there is also evidence
of Chinese and Eastern European groups.48 Not all OCGs are involved in the illicit tobacco

41
Luk Joossens, Anna Gilmore, Michal Stoklosa and Hana Ross. An assessment of European Union’s
agreements with the four major Transnational Tobacco Companies to address the illicit cigarette trade.
Tobacco Control 2016; 25:254–260
42
European Commission, Technical Assessment of the experience made with the Anit-Contraband and Anti-
Counterfeit Agreement and General Release of 9 July 2004 among Philip Morris International and affiliates, the
Union and its Member States, Brussels, 24.2.2016 SWD(2016) 44 final, pp 19–22
43
European Commission, Communication from the Commission to the Council and the European Parliament:
Stepping up the fight against cigarette smuggling and other forms of illicit trade in tobacco products – A
comprehensive EU Strategy, 06 June 2013, COM(2013) 324 final, p 4
44
Gilmore AB, Rowell A, Gallus S, et al., Towards a greater understanding of the illicit tobacco trade in Europe:
a review of the PMI funded ‘Project Star’ report, Tobacco Control 2014;23:e51-e61; Gilmore AB, Gallagher AWA,
Rowell A, Tobacco industry’s elaborate attempts to control a global track and trace system and fundamentally
undermine the Illicit Trade Protocol Tobacco Control Published Online First: 13 June 2018. doi:10.1136/
tobaccocontrol-2017-054191
45
European Commission, Communication from the Commission to the Council and the European Parliament:
Stepping up the fight against cigarette smuggling and other forms of illicit trade in tobacco products – A
comprehensive EU Strategy, 06 June 2013, COM(2013) 324 final, p 4
46
Commissioner Martin Callinan, Joint Committee on Justice, Defence and Equality, 21 November 2012
47
Ibid.
48
Transcrime, The Factbook on The Illicit Trade in Tobacco Products: Issue 3 Ireland, 2013, p 87

127
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

trade, but they feature prominently and often have extensive networks on both sides of the
border with Northern Ireland which allow them to partake in numerous illegal ventures,
often working in partnership with each other.49

In 2017, 34.2 million cigarettes were seized in Ireland by Revenue, compared to 44.6 million
in 2016 and 67.9 million in 2015.50 Seizures of illicit tobacco in any given year can be affected
by a range of factors, including the disproportionate impact of one or more particularly large
seizures and the adaptation by smugglers to successful enforcement measures. Revenue
is aware that smugglers are constantly looking for new ways to avoid detection, and that it
needs to be agile and adaptable in responding to emerging threats. Revenue is continuously
reviewing the ways in which it acts against the illicit trade and carefully monitors trends and
patterns so that its response can be adjusted accordingly.

Figure 5. Cigarette Seizures in Ireland, 2009 – 2017

200,000,000 12,000

180,000,000
10,000
160,000,000

140,000,000
8,000
120,000,000

100,000,000 6,000

80,000,000
4,000
60,000,000

40,000,000
2,000
20,000,000

0 0
2010 2011 2012 2013 2014 2015 2016 2017

Quantity Seized
No of Seizures

49
British-Irish Parliamentary Assembly, Report from Committee A (Sovereign Matters) on Cross-border Police
Cooperation and Illicit Trade, 2015, p 6
50
Revenue, Annual Report 2017, Table 20: Excisable Products Seized, p 63, available at: https://www.revenue.
ie/en/corporate/press-office/annual-report/2017/ar-2017.pdf; Revenue, Annual Report 2016, Table 23:
Excisable Products Seized 2016, p 102, available at: https://www.revenue.ie/en/corporate/press-office/annual-
report/2016/ar-2016.pdf; Revenue, Annual Report 2015, Table 20: Excisable Products Seized in 2015, p 79,
available at: https://www.revenue.ie/en/corporate/documents/statistics/annual-report-2015.pdf.

128 // Ireland: Addressing the Illicit Flow of Tobacco Products
In 2017, 88 people were convicted for illicit tobacco offenses, and Irish courts imposed cus-
todial sentences in 18 cases. Of these, three people were sentenced to an average sentence
of three months for smuggling offenses and six months for selling offenses, while 15 had
their sentences suspended. A suspended sentence involves the judge imposing a prison sen-
tence but suspending some or all of it on certain conditions. If the convicted person breaks
any of the conditions set during the period for which the sentence is suspended, they will
have to serve the term of imprisonment originally suspended. Average fines of €2,580 were
imposed in 69 cases.

Figure 6. Convictions and Sentences Imposed for Illicit Tobacco Offenses in
Ireland, 2009 – 2017

10 Suspended
Total Custodials
0
2009 2010 2011 2012 2013 2014 2015 2016 2017

Figure 7. Convictions and Fines for Illicit Tobacco Offenses in Ireland, 2009 – 2017

€3,000 180
160
€2,500 140
120
€2,000
100
80
€1,500
60
€1,000 40
20 Average Fine
€500 0 Convictions
2010 2011 2012 2013 2014 2015 2016 2017

RATES OF FISCAL REVENUE

Despite a decline in Ireland’s cigarette consumption, Tobacco Product Tax receipts rose in
nominal terms from €568 million in 1994 to peak at €1,217 million in 2009. By 2016, receipts
had slipped to €1,098 million. However, provisional figures show that receipts for 2017 rose
to €1,397.4 million, exceeding the 2016 yield by €299.7 million. As these figures reflect the

129
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

payments of excise taxes, they are distorted, relative to actual consumption of legitimate
tobacco products, by the operational choices made by tobacco companies as to the timing
of inventory releases.

Figure 8. Receipts of Tobacco Products Tax in Ireland Since 2004, Expressed in
Current Market Prices
1,400
Receipts €million

Total
Cigarettes
1,200
RYO
1,000 Cigars

800 Other Tobacco

600

400

200

0
4

09
05

16
14

17
11
0

20
20
20

20
20
20
20
20

20
20

RELEVANT INSTITUTIONS

The Office of the Revenue Commissioners (Revenue), the Department of Health, and the
Department of Finance are the main institutional actors in the regulatory field, controlling the
supply and sale of tobacco products in Ireland.

Revenue is responsible for the administration and collection of tobacco products tax and
has, additionally, prioritized combating the illegal tobacco trade. Revenue’s strategy as
regards the illicit trade includes a range of measures to identify and target the supply of illicit
tobacco products, with a view to seizing illicit products and prosecuting those responsible.
In this role, Revenue cooperates with An Garda Síochána (Irish police force) and with the
other relevant agencies in the State.

The Department of Health is responsible for tobacco control legislation in Ireland in the
context of public health. These laws include restrictions on the sale of tobacco products to
minors, restrictions on the advertising and marketing of tobacco products, restrictions on
point-of-sale displays, and the prohibition of smoking of tobacco products in workplaces.
They also encompass measures controlling the appearance of cigarette packages, including
text and photographic warnings (in line with EU Directives), and standardized packaging. The
Health Service Executive enforces most of the tobacco control legislation in the context of
public health.

The Department of Finance is responsible for fiscal policy advice to Government in relation
to tobacco products.

130 // Ireland: Addressing the Illicit Flow of Tobacco Products
POLITICAL SITUATION

Ireland is a multiparty parliamentary democracy with an executive branch headed by a prime
minister (An Taoiseach), a bicameral parliament (the Dáil and Seanad), and a directly elected
president. Political support for regulating the control and supply of tobacco products in
Ireland is evidenced by a number of key legislative measures introduced in recent years:

»» The enclosed workplace smoking ban (2004), which means that pubs and restaurants,
shops, and public transport, as well as other workplaces, are smoke-free;

»» The ban on the sale of cigarettes in packs of less than 20 (2007);

»» The ban on point-of-sale advertising (2009);

»» The introduction of graphic warnings on tobacco packaging (2013);

»» The introduction of standardized packaging (2017); and

»» The ban on smoking in cars carrying a child (2016).

INTERNATIONAL COOPERATION

Ireland is a Member State of the European Union. The current rates and structures of
excise duty on tobacco products are harmonized across the European Union through
Directive 2011/64/EU (Tobacco Products Tax Directive). Directive 2014/40/EU (Tobacco
Products Directive) seeks to approximate the laws, regulations, and administrative provi-
sions of Member States concerning the manufacture, presentation, and sale of tobacco
and related products.

Ireland is a party to the WHO Framework Convention on Tobacco Control (FCTC) and a
signatory to the Protocol to Eliminate Illicit Trade in Tobacco Products (FCTC Protocol).
The FCTC was developed in response to the globalization of the tobacco epidemic, and it
places an obligation on Parties to “develop, implement, update and review comprehensive
multi-sectoral national tobacco control strategies, plans and programmes.”51 The FCTC
Protocol requires Parties to adopt effective measures to control and regulate the supply
chain of tobacco products in order to prevent, deter, detect, and prosecute the illicit trade in
such products. The European Union is a party to both the FCTC and the FCTC Protocol.

Ireland pursues extensive cooperation with other tax administrations and with the
European Anti-Fraud Office (OLAF) and the European Multiagency Platform Against
Criminal Threats (EMPACT).

51
Article 5(1), WHO Framework Convention on Tobacco Control

131
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

2. Tobacco Tax Policy
2.1 Overview of the Legal Framework
Ireland classifies tobacco products for fiscal purposes as follows:

»» Cigarettes

»» Cigars or cigarillos

»» Fine-cut tobacco for the rolling of cigarettes (commonly known as “roll your own” or
RYO tobacco)

»» Other smoking tobacco (for products containing smoking tobacco that do not fall into
the above categories) 52

Section 72 of the Finance Act 2005 provides for the charging of excise duty on tobacco
products. The rates of duty are set down in Schedule 2 of the Finance Act 2005. The current
rates of Tobacco Products Tax, in force from 10 October 2018, are as follows:

DESCRIPTION OF
RATE OF TAX
PRODUCT
Rate of tax at-

a. except where paragraph (b) applies, €327.10 per thousand together
with an amount equal to 9.04 per cent of the price at which the
Cigarettes cigarettes are sold by retail, or

b. €376.82 per thousand in respect of cigarettes sold by retail where
the rate of tax would be less than that rate had the rate been
calculated in accordance with paragraph (a).

Cigars Rate of tax at €375.058 per kilogram.

Fine-cut tobacco for the
Rate of tax at €360.827 per kilogram.
rolling of cigarettes

Other smoking tobacco Rate of tax at €260.199 per kilogram.

The manner in which Tobacco Products Tax is calculated for each type of tobacco product
is outlined below.

CIGARETTES

Tobacco Products Tax on cigarettes consists of two separate elements:

i. An ad valorem element, which is a percentage of the retail selling price.; plus

ii. A specific amount of tax calculated per 1,000 cigarettes.

52
Section 71 Finance Act 2005

132 // Ireland: Addressing the Illicit Flow of Tobacco Products
EXAMPLE: 20 PACK CIGARETTES WITH A RETAIL PRICE OF €12.00

Specific Duty (€327.10 ÷ 1000) x 20 = €6.542

Ad Valorem Duty €12.00 x 9.04% = €1.0848

Total Tobacco Products Tax due = €7.63

CIGARS OR CIGARILLOS

Tax is to be charged on the net weight of taxable product in kilograms per case, with some
allowance for rounding.

EXAMPLE: A CASE OF CIGARS WEIGHING 5.60KGS

Tobacco Products tax payable: 5.60kg x €375.058 = €2,100

FINE-CUT ROLL-YOUR-OWN TOBACCO

Tobacco Products Tax is to be charged on the total net weight per case.

EXAMPLE: A POUCH OF ROLL-YOUR-OWN TOBACCO WEIGHING 30G

Tobacco Products Tax payable: 0.03kg x €360.827 = €10.82

OTHER SMOKING TOBACCO

Tobacco Products Tax is to be charged on the total net weight per case.

A 20KG BOX OF TOBACCO NOT FALLING WITHIN ANY OF THE
ABOVE CLASSIFICATIONS

Tobacco Products Tax payable: 20kg x €260.199 = € 5,203.98

VALUE-ADDED TAX (VAT)

VAT at the standard rate, currently 23 percent, is applied to all tobacco products, on the
excise-inclusive price. To ensure the VAT charged remains proportional to the pre-VAT price,
an adjustment is required in its calculation, as such the 23 percent standard rate is reported
as 18.7 percent.53

53
23/(123x100) = 18.7

133
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

EXAMPLE: 20-CIGARETTE PACK WITH A RETAIL PRICE OF €12.00

Specific Duty (€327.10 ÷ 1000) x 20 = €6.542

Ad Valorem Duty (€12.00 x 9.04%) = €1.0848

VAT (€12.00 x 18.7) = €2.2439

Total Tax due = €9.87

UNMANUFACTURED TOBACCO

Unmanufactured tobacco is not liable to Tobacco Products Tax but it is subject to control.
Any unmanufactured tobacco found in the state must comply with the requirements of
Section 78A of the Finance Act 2005, which requires that unmanufactured tobacco can
only be kept, under a specified customs procedure, for use as a raw material either for the
production of tobacco products in a tax warehouse or for the production of something
other than a tobacco product, and not for any other reason. Any unmanufactured tobacco
found in the State contrary to Section 78A would be prohibited goods and liable to seizure.
As unmanufactured tobacco is not a harmonized excisable product, its movement is not
controlled under the EU-wide Excise Movement and Control System (EMCS).

TOBACCO GROWING

A license is required to grow, cure, or re-handle tobacco.54 In addition, the area which may
be planted with tobacco in any one year in Ireland is regulated. In 2017, the maximum
number of hectares permissible to plant with tobacco was set at 5 hectares, while the maxi-
mum by any one person was set at 0.5 hectares.55

EXEMPTIONS: WITHIN THE EU

As a Member State of the European Union, Ireland is bound by Article 32 of Directive
2008/118/EC,56 which allows a private individual to acquire tobacco for his or her own use in
one Member State and to transport that tobacco to another Member State. In order to deter-
mine whether the excise goods are intended for the own use of a private individual, Member
States are allowed to set indicative levels. Article 32(3) sets a lower bound on all of the levels.

Irish law has transposed these EU principles and sets out a range of circumstances to be
considered when determining whether quantities of tobacco are to be considered as being for
the personal use of individuals travelling within the EU, including the frequency with which the
person brings tobacco products into the State. The following indicative levels are applied:

54
Regulation 1, Statutory Instrument. (S.I.) No. 3/1933 - The Tobacco Growing Regulations, 1933
55
Regulation 2, S.I. No. 41/2017 - Tobacco (Areas for 2017) Order 2017
56
Council Directive 2008/118/EC concerning the general arrangement for excise duty repealing Directive
92/12/EEC

134 // Ireland: Addressing the Illicit Flow of Tobacco Products
»» 800 cigarettes;

»» 400 cigarillos;

»» 200 cigars;

»» 1 kg smoking tobacco.57

Where it is determined that the tobacco products in question are for the personal use of the
individual, no further Irish duty is payable. Where it is determined that the tobacco products
were brought into Ireland for commercial purposes, then Irish duty at the appropriate rate
must be paid.

EXEMPTIONS: OUTSIDE THE EU

For individuals arriving in Ireland from outside the European Union, the following personal
allowances of tobacco apply:

»» 200 cigarettes;

»» 100 cigarillos;

»» 50 cigars; or

»» 250g smoking tobacco.58

An individual may split his or her allowance on a fractional basis, for example: 100 cigarettes
and 50 cigarillos.

DISTANCE SALES

Retailers established in Ireland who intend to engage in cross-border distance sales of
tobacco products or electronic cigarettes to consumers located in the European Union, and
retailers established in another Member State who intend to engage in cross-border distance
sales of tobacco products or electronic cigarettes to actual or potential consumers located
in Ireland, must register with the Health Service Executive (HSE).59

In the case of tobacco products sold to consumers located in Ireland, the retailer in question
must appoint a tax representative, established in Ireland, who is liable for the payment of
Excise Duty and Value-Added Tax.60

57
Regulation 25 of S.I. No. 146/2010 - Control of Excisable Products Regulations 2010
58
Regulation 5(1) of .I. No. 480/2008 - European Communities (Tax Exemption for Certain Non-Commercial
Goods Imported in the Personal Luggage of Travellers from Third Countries) Regulations 2008; Article 8(1) of
Council Directive 2007/74/EC of 20 December 2007 on the exemption from value added tax and excise duty
of goods imported by persons travelling from third countries
59
Regulations 23 and 25 (3) of the European Union (Manufacture, Presentation and Sale of Tobacco and
Related Products) Regulations 2016 (S.I. No. 271 of 2016) as amended by the European Union (Manufacture,
Presentation and Sale of Tobacco and Related Products) (Amendment) Regulations 2017 (S.I. No. 252 of 2017).
60
Section 109U, (1) Finance Act, 2001

135
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

USE OF TAX STAMPS

Ireland uses tax stamps for fiscal purposes and to identify tax-paid tobacco products. A tax
stamp must be affixed to all packets of cigarettes and roll-your-own tobacco. The tobacco
tax stamp has a range of sophisticated security features to minimize the risk of counterfeit-
ing. In addition, a newly designed tax stamp is held in reserve by Revenue should security be
breached on the current stamp.

It is an offense to sell cigarettes and roll-your-own tobacco which do not carry an Irish tax
stamp. The penalties currently available in Ireland on conviction for these offenses were
increased in 2010.

In Ireland, offenses may be dealt with by a judge of a lower court (the District Court) sitting
alone without a jury, and in such cases the offense is referred to as a summary offense.
Where the offense is tried before a judge and jury, it is an indictable offense.

On conviction following summary prosecution for tobacco tax stamp offenses, a court may
impose a fine of €5,000, or a term of imprisonment not exceeding 12 months, or both a fine
and imprisonment. A fine of up to €126,970, or a term of imprisonment not exceeding five
years, or both a fine and imprisonment, may be imposed on conviction following a prosecu-
tion on indictment.

COMBINED HEALTH WARNINGS

Combined health warnings are required on all packages61 of tobacco products placed on
the market. The tar, nicotine, and carbon monoxide yields of cigarettes must be printed on
one side of the cigarette packet in both the Irish and English languages. A general warning
as to the adverse health effects of tobacco must be printed. In addition, a combined text and
photo warning is required.

STANDARDIZED/PLAIN-PACK CIGARETTES

All tobacco products for sale in Ireland from 30 September 2017 must be presented in
standardized retail packaging.62 There is a wash-through period so that any products placed
on the market before that date will be permitted to be sold for a 12-month period, i.e., until
September 30, 2018.

Standardized packaging will mean that all forms of branding, including trademarks, logos,
colors, and graphics, are no longer present on tobacco packs. The brand and variant names
are to be presented in a uniform typeface, and the packs are to be in one plain neutral color.
The aim of standardized packaging is to decrease the attractiveness of tobacco packs to
consumers, increase the effectiveness of health warnings, and prevent packaging from mis-
leading consumers as to the harmful effects of smoking.

61
Public Health (Tobacco) (General and Combined Warnings) Regulations 2011 (S.I. No. 656/2011)
62
Public Health (Standardised Packaging of Tobacco) Act 2015

136 // Ireland: Addressing the Illicit Flow of Tobacco Products
2.2 Overview of the Institutional Framework
Revenue is responsible for the administration and collection of tobacco products tax63 on
tobacco products. In addition, tackling the illicit tobacco trade remains a high priority for
the agency.64

As Revenue is a fully integrated tax and customs administration, it is not possible to dis-
aggregate resources deployed exclusively at any given time on regulation of the tobacco
trade, including action against smuggling and other illicit tobacco-trade activities. Revenue
currently has approximately 2,000 staff engaged on activities that are dedicated to target-
ing and confronting non-compliance. These frontline activities include anti-smuggling and
anti-evasion, investigation and prosecution, audit, assurance checks, anti-avoidance, returns
compliance, and debt collection.

The legislation governing excisable products, and offenses regarding same, is consolidated
in the Finance Act 2001. Sections 133–144 set out the powers of officers with regard to
excisable products. In addition, tobacco products are subject to the provisions contained in
Chapter 3 of Part 2 of the Finance Act 2005. Section 1078 of the Taxes Consolidation Act
1997 is also relevant, insofar as it creates offenses in relation to duties of excise.

Revenue Officers, authorized by a Commissioner, have powers to stop,65 examine, search,
and take samples from vehicles.66 However, such powers are exercisable only to the extent
necessary to control excisable products. For instance, Officers have the power to search a
vehicle,67 but only in order to establish: (a) whether the vehicle contains anything liable to for-
feiture under excise law;68 (b) that excisable products are being transported in compliance with
the rules on intra-EU movement of goods under a suspension arrangement or the intra-EU
movement of duty-paid excisable products;69 or (c) that the vehicle itself is goods registered
for Vehicle Registration Tax.70

For all excisable products including tobacco, Section 136 of the Finance Act 2001 provides that
an authorized officer may, at all reasonable times, enter a premises (with the exception of a
dwelling) in which excisable products are being processed, held, stored, kept, imported, pur-
chased, packaged, offered for sale, sold, or disposed of,71 and may there carry out a search and
investigation, take samples without the need for payment, inspect and copy records, question
persons present, and detain or seize vehicles or goods.72 Powers to search dwellings derive
from powers conferred on Revenue Officers through search warrants issued by the Courts.

63
Chapter 3 of Part 2 of the Finance Act 2005
64
Revenue Commissioners, Annual Report 2016, p 37
65
Section 134(1), Finance Act 2001
66
Section 135(1), Finance Act 2001
67
Section 135(1)(b), Finance Act 2001
68
Section 135(1)(b)(i), Finance Act 2001
69
Section 135(1)(b)(ii), Finance Act 2001
70
Section 135(1)(b)(iii), Finance Act 2001
71
Section 136(1)(a), Finance Act 2001
72
Section 136(3), Finance Act 2001

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

In relation to offenses connected with the operation of the tobacco tax stamp system, as
provided for under Section 78 of the Finance Act 2005, an Authorized Officer has the power
to question and require information from persons.73 Furthermore, an Authorized Officer has
the power to arrest without warrant a person reasonably suspected of evading or attempting
to evade excise duty74 or committing an offense connected to the operation of the tobacco
tax stamp system.75

Separate provisions also apply to Customs Officers, and these include:

»» The power to stop vehicles where there is a belief smuggled goods are being transported;76

»» The power to search stopped vehicles for smuggled goods.77

The Department of Health oversees the implementation of Ireland's tobacco control policy,
Tobacco-Free Ireland under the Healthy Ireland framework.78

The Department of Health is responsible for introducing a number of measures in recent
years in the area of tobacco control. These include prohibiting the sale of tobacco products
to minors,79 setting a minimum pack size of 20 for cigarettes,80 the mandatory registration of
retail outlets to sell tobacco,81 restrictions on the advertising of tobacco products82, bans on
displays of tobacco products in shops,83 restrictions on certain types of promotional activi-
ties,84 restricting smoking in workplaces (the smoking ban),85 and introducing standardized
packaging for tobacco products.86

In line with Directive 2014/40/EU concerning the manufacture, presentation, and sale of
tobacco and related products (“the Directive”), the Department of Health introduced legis-
lation providing for the setting of technical standards in relation to the content of tobacco
products,87 reporting of ingredients and emissions by tobacco manufacturers,88 a minimum

73
Section 138(1), Finance Act 2001
74
Section 139(1)(a), Finance Act 2001
75
Section 139(2)(a), Finance Act 2001
76
Section 26, Customs act 2015
77
Section27 (3), Customs Act 2015
78
http://health.gov.ie/wp-content/uploads/2014/03/TobaccoFreeIreland.pdf
79
Section 45 of the Public Health (Tobacco) Act 2002
80
Section 38 of the Public Health (Tobacco) Act 2002, as inserted by section 9 of the Public Health (Tobacco)
Act 2004
81
Section 37 of the Public Health (Tobacco) Act 2002, as inserted by section 8 of the Public Health (Tobacco)
(Amendment) Act 2004; Public Health (Tobacco) (Registration) Regulations 2009 (S.I. No. 41 of 2009)
82
Section 33 of the of the Public Health (Tobacco) Act 2002, as amended by Section 5 of the Public Health
(Tobacco) (Amendment) Act 2004
83
Section 33A of the of the Public Health (Tobacco) Act 2002, as inserted by Section 5 of the Public Health
(Tobacco) (Amendment) Act 2004
84
Public Health (Tobacco)(Control of Sales Promotion) Regulations 2013 (S.I. No. 530/2013)
85
Section 47 of the Public Health (Tobacco) Act 2002, as inserted by section 16 of the Public Health (Tobacco)
Act 2004
86
Part 2 of the Public Health (Standardised Packaging of Tobacco) Act 2015
87
Regulation 4 of the European Union (Manufacture, Presentation and Sale of Tobacco and Related Products)
Regulations 2016
88
Regulation 4 of the European Union (Manufacture, Presentation and Sale of Tobacco and Related Products)
Regulations 2016

138 // Ireland: Addressing the Illicit Flow of Tobacco Products
weight of 30g for roll-your-own tobacco packs,89 combined health warnings on packages,90
and traceability and security features systems for tobacco products.91

The Health Service Executive is the enforcement authority for the public health provisions of
tobacco control legislation. Section 48(4) of the Public Health (Tobacco) Act 200292 provides
that authorized officers, appointed by the Health Service Executive93, have the power to:

»» Enter a specified premises or place;

»» Inspect and take copies of any books, records, other documents or extracts;

»» Remove any such books, records, or documents and detain for a reasonable period;

»» Carry out, or have carried out, such examinations, tests, inspections, and checks of the
premises, any tobacco product, or any article or substance, and any equipment, machin-
ery, or plant at the premises as may be reasonably necessary;

»» Require any person at the premises to give assistance and information as may be reason-
ably required;

»» Take samples;

»» Direct that such tobacco products are not to be sold, distributed, or moved from the
premises, without consent;

»» Secure for later inspection any premises or part of any premises for such period as may
reasonably be necessary;

»» Take possession of and remove from the premises for examination and analysis any
tobacco product, or any substance or article, and detain them for such a period as is
reasonably necessary

Section 48(7) of the Public Health (Tobacco) Act 2002 provides that a judge of the District
Court may issue a warrant to an authorized officer to enter a dwelling and perform the func-
tions listed under Section 48(4) of the Public Health (Tobacco) Act 2002. The Environmental
Health Officer (EHO) may be accompanied by members of An Garda Síochána or Revenue
officers, as necessary.

Section 48(9) of the Public Health (Tobacco) Act 2002 provides that, where an authorized
officer has reasonable grounds to believe that a person has committed an offense under

89
Regulation 13(1) of the European Union (Manufacture, Presentation and Sale of Tobacco and Related
Products) Regulations 2016
90
Regulation 14 of the European Union (Manufacture, Presentation and Sale of Tobacco and Related Products)
Regulations 2016
91
Regulations 20 and 21 of the European Union (Manufacture, Presentation and Sale of Tobacco and Related
Products) Regulations 2016
92
Section 48 of the Public Health (Tobacco) Act 2002, as inserted by section 23 of the Public Health
(Standardised Packaging of Tobacco) Act 2015
93
Section 48(1) of the Public Health (Tobacco) Act 2002

139
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

this Act, the authorized officer may require that person to provide his or her name and the
address at which he or she ordinarily resides.

As part of their enforcement operations, EHOs carry out test purchases in retail stores.94

STATUS OF ADMINISTRATIVE MECHANISMS

Licit

With regard to interactions with tobacco companies as taxpayers, Revenue ensure that
such interactions respect the Framework Convention on Tobacco Control (FCTC) and the
Guidelines for implementation of Article 5.3 of the FCTC on the protection of public health
policies with respect to tobacco control from commercial and other vested interests of the
tobacco industry.

Control Officers employed by Revenue have specific responsibility for interacting with indi-
vidual tobacco companies, and their role includes oversight of the reporting and payment
of tobacco products tax, the taxation of new tobacco products, supervising delivery of Irish
tax stamps from the tax stamp manufacturer to tobacco company stores, conducting stock
checks of those stores, and supervising any destruction of Irish tax stamps and damaged
or waste tobacco products. Revenue also interact with individual tobacco companies and
the wider tobacco industry in order to source information in relation to trends and develop-
ments in the illicit tobacco trade.

Under EU legislation, excise duties are paid on alcohol, tobacco, and energy products at the
final point of consumption. While in transit to their final destination, these goods are in duty
suspension, i.e., no excise duty has yet been paid on them. Member States use an electronic
system, the Excise Management and Control System (EMCS), to monitor the movement of
these goods in real time, in order to ensure that the duties are properly levied at the final
destination.95 As there are no tobacco manufacturing facilities in Ireland, the movements
of tobacco products into Ireland through the legitimate supply chain are controlled, as
excisable goods, under EMCS and under cover of the appropriate excise Administrative
Document (eAD). Interventions are based on a risk-profiling assessment, or may be intelli-
gence led.

EMCS. Under EMCS, a movement of excise goods is documented at every stage through an
electronic Administrative Document (eAD).

»» The eAD is issued by the original consignor, containing information on the consignment
and the planned movement within the EU.

94
465 tobacco sales to minors test purchases were carried out in 2016: HSE Annual Report and Financial
Statements 2016, p 106 http://www.hse.ie/eng/services/publications/corporate/hse-annual-report-and-
financial-statements-2016.html
95
The legal framework for the Excise Movement Control System (EMCS) is laid down by Council Directive
2008/118/EC of 16 December 2008 concerning the general arrangements for excise duty and repealing
Directive 92/12/EEC

140 // Ireland: Addressing the Illicit Flow of Tobacco Products
»» The eAD is validated in the Member State of dispatch. A European register of operators
(SEED) is used to check the excise numbers of the consignor and consignee.

»» The eAD is electronically transmitted by the Member State of dispatch to the Member
State of destination.

»» The Member State of destination forwards the eAD to the consignee.

»» The consignee submits a "report of receipt" once he/she has received the excise
goods. This report should mention any anomalies, such as shortages or excesses in
the consignment.

»» The report of receipt is sent to the consignor, who can then discharge the movement and
recover the financial guarantees they had to make for the excise products.

Illicit

Revenue strategy towards combatting the illicit trade includes a range of measures designed
to complement each other in identifying and targeting the supply of illicit tobacco products,
with a view to disrupting the supply chain, seizing the illicit products and prosecuting those
responsible. Key elements of Revenue’s strategy include:

Figure 9. EMCS System

TRADER TRADER
EXCISE
MOVEMENT
GOODS
COSIGNOR COSIGNEE
3 6
1 7

10 5
2

4 8
MEMBER MEMBER
STATE OF STATE OF
DISPATCH DESTINATION
9

1. The cosignor submits the e-AAD 6. The excise goods arrive at destination.
2. The Member State of dispatch validates 7. The cosignee submits a report of receipt.
the e-AAD and sends it back to the cosignor 8. The Member State of destination
(including the AAD Registration Code - ARC). validates the report of receipt and sends
3. The cosignor dispatches the it back to the cosignee.
excise goods. 9. The Member State of destination transmits
4. The Member State of dispatch the report of receipt to the Member State
transmits the e-AAD to the Member of dispatch.
State of destination. 10. The Member State of dispatch transmits
5. The Member State of destination the report of receipt to the consignor.
forwards the e-AAD to the cosignee.

Source: European Commission, EMCS: How it Works, available at: https://ec.europa.eu/taxation_customs/
business/excise-duties-alcohol-tobacco-energy/excise-movement-control-system/emcs-how-it-works_en,
accessed 14 May 2018

141
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

»» Using risk analysis and profiling to screen cargo, vehicles, baggage, and postal packages
to intercept the supply of illicit tobacco products;

»» Post-importation intelligence-based operations and random checks at retail outlets, mar-
kets, and private and commercial premises; and

»» Extensive cooperation between Revenue and An Garda Síochána, other relevant State
agencies, and counterparts in Northern Ireland, as well as cooperation with other tax
administrations and with the European Anti-Fraud Office (OLAF) in ongoing international
programs of action to tackle the illicit trade.

Revenue works closely with EU partners to identify source countries, share intelligence on
illicit shipments of tobacco products into Ireland, and monitor shipping and passenger traffic.
Revenue also deploy scanning equipment and sniffer dogs and conduct regular street-level
exercises to tackle illicit cigarette sales.

In March 2018, a commercial illicit cigarette production plant was discovered, along with 40
tonnes of tobacco, all the pre-cursor components for the manufacture of cigarettes, and
approximately 25 million cigarettes. This was the first time a commercial illicit cigarette pro-
duction plant was discovered in the State. The factory was closed down by Revenue officials
and members of An Garda Síochána, and eleven men were arrested at the site. Investigations
are ongoing, nationally and internationally.96

Offenses

Persons contravening tobacco control regulations tobacco may face prosecution under tax
and excise law and under health legislation. They may also face prosecution under other
criminal legislation. Prosecution Guidelines require that the prosecutor not “over-charge,”
that is prefer charges more serious than are justified by the evidence, and that the prosecu-
tor should avoid pursuing too many charges arising out of the same set of facts.97 As such,
not all potential charges will be brought in response to a particular set of facts.

Persons involved in the smuggling and sale of illicit tobacco will generally be prosecuted
for offenses under tax and excise law, including the evasion of excise duty,98 the keeping
for sale or delivery of tobacco products without a tax stamp,99 or for dealing in counterfeit
tax stamps.100 Where OCGs are involved, offenses related to organized crime101 and money
laundering102 may also be relevant. Furthermore, a body of health legislation supports the

96
Revenue, Revenue and An Garda Síochána dismantle illicit cigarette factory in Jenkinstown, Co. Louth,
15 March 2018, https://www.revenue.ie/en/corporate/press-office/press-releases/2018/pr-150318-illegal-
cigarette-factory-jenkinstown-louth.aspx
97
Director of Public Prosecutions, Guidelines for Prosecutors, 4th Edition, 2016, p 23
98
Section 119 of the Finance Act 2001
99
Section 78(3) of the Finance Act 2005
100
Section 78(3) of the Finance Act 2005
101
Criminal Justice Act 2006
102
Criminal Justice (Money Laundering and Terrorist Financing) Act 2010

142 // Ireland: Addressing the Illicit Flow of Tobacco Products
maintenance of controls over the wider regulatory environment, including the display, sale,
and regulation of tobacco products in the State.

TOBACCO COMPANY AGREEMENTS

As a method of addressing the illicit tobacco trade, the European Union signed cooperation
agreements with four major transnational tobacco companies.

Agreements were signed with Philip Morris (PM) in 2004, with Japan Tobacco International
(JTI) in 2007, and with both British American Tobacco (BAT) and Imperial Tobacco Limited
(ITL) in 2010.103

The agreements set out obligations for the tobacco companies, including in respect of:

»» Their manufacturing, sales, distribution, storage and shipment practices;

»» The marking and the “tracking and tracing” of their products;

»» Providing information to the Commission and Member States; and

»» Cooperation in the event of significant seizures of products bearing their trademarks in
order to determine whether the products were genuine or counterfeit.104

Each of the agreements provided for two types of payments: annual payments totaling
US$1.9 billion over 20 years and supplementary payments equivalent to the taxes evaded in
the event that genuine product was seized.105 In 2016, the European Commission decided
not to renew its agreement with Philip Morris. The agreements with JTI and BAT do not have
to be renewed until at least 2022.106

PROCESSES

Supply chain controls

The EU-wide Excise Movement and Control System (EMCS) is a computerized, paperless
system that is used by businesses when moving duty-suspended excise goods (alcohol,
tobacco, and certain mineral oils) between EU Member States as part of their commercial
activities. Its purpose is to combat fiscal fraud by providing tax authorities and the traders
involved with real-time information and checks on individual consignments of excise goods
along the supply chain. As a standardized, electronic system for the whole EU, it also simpli-
fies procedures and reduces administrative costs for businesses and tax authorities.

103
Joosens, L, Gilmore, AB, Stoklosa, M, Ross, H, Assessment of the European Union’s illicit trade agreement
with the four major Transnational Tobacco Companies, Tob Control, 2016; 25:254–260, p 254
104
Heyward, M. Legal Analysis of the agreements between the European Union, Member States, and
multinational tobacco companies, New York, 2010
105
Joosens, L, Gilmore, AB, Stoklosa, M, Ross, H, Assessment of the European Union’s illicit trade agreement
with the four major Transnational Tobacco Companies, Tob Control, 2016; 25:254–260, p 254
106
Robinson, D, Financial Times, EU to end anti-tobacco smuggling deal with Philip Morris, 05 July 2018,
available at: https://www.ft.com/content/1724b620-42b9-11e6-b22f-79eb4891c97d, accessed 21 May 2018

143
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Revenue has a number of staff appointed as Control Officers to help control the supply
chain of tobacco within the State. Tobacco Traders must inform their designated Control
Officer in advance of certain processes taking place, and Revenue Control Officers have the
power to enter premises where tobacco is stored at any time to carry out spot checks on
the amount of tobacco being kept in storage. Revenue Control Officers must also witness
the destruction of tobacco products as required by European Union legislation.

Revenue officers may enter premises where tobacco is being sold within the State to check
that products have the correct tax stamp affixed. Stamps may be checked during scheduled
compliance visits or random audits of businesses. Revenue Officers are empowered to con-
duct random checks in retailers and may seize products where tax is deemed not to have
been paid.107 Revenue Officers have also been active in seizing tobacco products on sale
illegally, including at street markets within the State.108

National public-health legislation concerning the sale and use of tobacco is enforced by
Environmental Health Officers employed by the Health Service Executive. The laws include
the mandatory registration of retailers selling tobacco products, the restriction of advertising
and marketing of tobacco products, restrictions on the point of sale, and the prohibition of
the smoking of tobacco products in certain places. Environmental Health Officers carry out
random test purchases to make sure that retail outlets are abiding by tobacco control legisla-
tion, including the prohibition on selling tobacco products to minors.

International cooperation

Revenue works very closely with OLAF, EUROPOL, and with the authorities of other coun-
tries to tackle the problem of illicit tobacco entering Ireland. Regular development and
exchange of intelligence and joint operations are the norm. There is an ongoing review of
operational action in the light of emerging trends, new detection technologies, and iden-
tification of best practice. As a result of Revenue’s cooperation with other countries and
agencies, seizures of illicit tobacco occur not only in Ireland but also in other jurisdictions.

In June 2014, over 32 million cigarettes and 4,500 kg of water pipe tobacco were seized at
Drogheda Port, as was the cargo vessel MV Shingle, following dedicated work and interna-
tional cooperation involving Revenue and authorities across several jurisdictions, including
Slovenia, Portugal, and Ireland.109 The seized cigarettes and tobacco represented a potential
loss to the Exchequer of nearly €13 million. Cooperation between authorities regularly takes
place across both sides of the border with Northern Ireland.110

107
Revenue, Revenue seizes tobacco products, alcohol, prohibited drugs and cash, 08 January 2018, available
at: https://www.revenue.ie/en/corporate/press-office/press-releases/2018/pr-080118-tobacco-products-
alcohol-prohibited-drugs-and-cash.aspx, accessed 18 May 2018
108
Revenue, Revenue seizes over 11,000 cigarettes on Moore Street, 03 July 2017, available at: https://www.
revenue.ie/en/corporate/press-office/press-releases/2016/pr-121216-cigarettes.aspx, accessed 18 May 2018
109
Revenue, Revenue seizes over 32m cigarettes in Drogheda Port, the largest seizure in Europe to date this
year, 24 June 2014, available at: https://www.revenue.ie/en/corporate/press-office/press-releases/2014/
pr-240614-cigarettes.aspx
110
The Guardian, 2m cigarettes seized in Northern Ireland raids, 04 February 2015, available at: https://www.
theguardian.com/uk-news/2015/feb/04/cigarettes-seized-northern-ireland-raids

144 // Ireland: Addressing the Illicit Flow of Tobacco Products
A key factor in the successful cooperation between agencies and states has been the leg-
islation enacted by the EU, such as the Convention on Mutual Assistance and Cooperation
between Customs Administrations (Naples II), which ensures that Member States of the EU
have a legal basis when providing assistance and information through formal mutual assis-
tance requests.

As a Member State of the EU, Ireland works very closely with its EU partners to tackle
source countries and apply the maximum pressure on the governments concerned. This
includes working with other Member State law enforcement agencies, including OLAF
and EUROPOL, with which Revenue has a very close relationship. Revenue currently has
five officers assigned abroad who are directly involved with the international exchange of
information and intelligence. These officers work with Revenue’s Customs Division and the
Investigations and Prosecutions Division. Two officers are assigned to Ireland’s permanent
Representation to the EU in Brussels, one officer is assigned to the Irish Embassy in London,
one officer is assigned to Europol headquarters in The Hague, and one is assigned to the
Maritime Analysis Operations Centre (Narcotics) in Lisbon.

The land frontier continues to feature as a focal point for those involved in smuggling of
tobacco products into both jurisdictions. Revenue has traditionally worked very closely
with Her Majesty’s Revenue and Customs (HMRC), the United Kingdom’s tax, payments,
and customs authority, and continues to do so on specific projects. For example, in July
2015, a joint operation involving Revenue, HMRC, and the Police Service of Northern
Ireland seized more than four million cigarettes along with a suspected mobile fuel laun-
dering plant in County Tyrone.111

Investment in systems

Revenue continually invests in its resources for tackling the illicit tobacco trade in the State.
A number of resources are used, including scanning equipment at ports and airports within
the State. A state-of-the-art mobile x-ray scanner was acquired in 2017, partly funded by the
EU Hercule III program administered by OLAF.112 Revenue also has a team of highly trained
sniffer dogs that can be deployed nationwide in uncovering consignments of tobacco in
properties, vehicles, and boats.

Intelligence-led interventions

Revenue conducts risk analysis to profile cargo, vehicles, baggage, postal packets, and
passengers entering the State. These risk analyses are constantly monitored, updated, and
refined to ensure that Revenue is consistently on top of any threat to the legitimate tobacco
market in the State.

111
https://www.revenue.ie/en/corporate/press-office/press-releases/2015/pr-280515-cigarettes.aspx
112
https://revenue.ie/en/corporate/press-office/press-releases/2017/pr-150617-scanner.aspx

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Tobacco stamp

A tobacco tax stamp for cigarettes and roll-your-own tobacco products was introduced in
1994 and must be affixed to products for retail sale in Ireland. The stamp serves as proof
to both Revenue and consumers that tax has been paid on the product. In the majority of
cases, tobacco products not bearing a tax stamp are seized by Revenue officers and sellers
prosecuted in the Courts. In certain cases, such as duty-free shops and diplomatic sales,
products may be sold without a tax stamp, as tax will not have been paid on these products.

Offenses

Revenue benefits from a comprehensive legislative framework to support its work against
those who sell or smuggle excisable products. It is an offense to evade tax on, that is to
smuggle, excisable products, and it is an offense to sell cigarettes and roll-your-own tobacco
products which do not carry an Irish tobacco tax stamp.

The specific penalty to be applied in any particular case is entirely a matter for the courts
and, where a fine is imposed, the amount is at the judges’ discretion and may be miti-
gated. In addition, the Court may choose to impose a term of imprisonment, a suspended
sentence, or a community service order in lieu of a fine. Revenue, on an ongoing basis,
monitors closely the outcome of cases prosecuted and the severity of the sanctions and
penalties imposed upon conviction.

3. Enforcement Solutions
3.1 Tobacco Tax Stamp
Tax stamps are labels issued by Revenue under Section 73 Finance Act 2005 for the purpose
of collecting the Tobacco Products Tax on cigarettes and fine-cut tobacco for the rolling of
cigarettes. They are applied directly to cigarette packs beneath the cellophane wrapper. Each
stamp measures 19.05 mm x 44.45 mm. Tax stamps are supplied in sequentially numbered
batches containing 30,000 numbered stamps.

Tobacco Products Tax on cigarettes and fine cut tobacco for the rolling of cigarettes (RYO) –
described as “specified tobacco products” in section 71 Finance Act 2005 - shall be payable
by means of tax stamps issued by Revenue. Each pack of cigarettes or RYO, intended for
sale, delivery, or consumption in the State, must have a tax stamp affixed to it in respect of
which the appropriate duty has been paid. Revenue shall issue tax stamps only on payment
of an amount equivalent to the duty represented by such stamps, although the operation of
the systems allows for deferred payment, usually for a period of two months. This amount is
known as the tobacco tax stamp charge.

The Irish tobacco tax stamp is highly sophisticated with a number of overt, semi-covert, and
covert layered security features. Revenue has a role in preventing the contamination of the
supply chain with illicit tobacco products and counterfeited tax stamps, and Revenue control

146 // Ireland: Addressing the Illicit Flow of Tobacco Products
officers and enforcement officers are trained to carry out checks on tobacco products to
detect counterfeit stamps. Each stamp has a unique printed code which correlates to the
brand and price point of product to which it is affixed. The code on the stamp is an overt
security feature and is used by Enforcement officers as a means of identifying the trader,
quantity of cigarettes/rolling tobacco, retail selling price, when the product was released,
and the production specifics of the stamp itself. Revenue owns the code. Revenue officers
are trained to identify the overt security features of the stamp and have handheld verification
tools to identify the semi-covert security features. There are contingency plans in place such
that, should a counterfeit stamp be found, the current stamp can be replaced by a backup
design which is ready to go into production immediately.

Tobacco traders may purchase tax stamps and hold stocks of stamps subject to strict
Revenue control. Anti-forestalling measures may be imposed including by placing restric-
tions on the release of tobacco tax stamps in the three-month period prior to a Budget,
where the quantity of cigarettes or tobacco involved exceeds the expected requirements for
the period.113 The granting of permission to purchase and store stamps will be subject to the
acceptance by the trader of any conditions, including security, as set out in legislation or laid
down by Revenue.

Deliveries of the tobacco tax stamps are made using door-to-door delivery by secure Cash-
in-Transit114 from the printers’ premises to the tobacco traders’ secure premises. Revenue
officers attend at deliveries of tax stamps to secure stores. On delivery of stamps, an offi-
cial of the authorized trader and a Revenue Officer will compare the number and details
of stamps received with the details contained in the delivery docket. Batches found to be
incomplete or damaged are to be returned to the printing contractor and the delivery docket
endorsed. Delivery dockets are to be signed by an authorized company official and the
Revenue Officer.

Tobacco traders must provide a secure store for stamps, which must be capable of being
placed under Revenue lock. Responsibility for the security of stamps delivered to a trader’s
premises rests solely with the trader. Traders must notify their designated Revenue Officer if
stamps are discovered to be damaged or unusable after receipt.

Stamps are to be affixed directly to tobacco packs beneath the cellophane wrapper and
in a position on the pack that does not obscure or interfere with health warnings or other
markings required by law. Physically affixing the tobacco tax stamps is for the tobacco man-
ufacturer or importer, and mainly this takes place at the manufacturing plant.

It is important that each stamp be affixed solidly to a pack so that it cannot be removed
without damage to the stamp itself or to the packaging material which contains the
tobacco products.

113
Section 18 of the Finance Act 1939 (as amended)
114
National Standards Authority of Ireland, Cash-in-transit Services, I.S. 998:2006

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Revenue staff will carry out a stocktake of tax stamps in the secure store in conjunction with
the tobacco trader each month. This allows for any discrepancies to be managed appropri-
ately by Revenue.

Tax stamps damaged or otherwise rendered unusable during the packaging process are to
be made available for inspection by the Revenue Officer. Suitable arrangements are made
for the destruction of the stamps in the presence of the Revenue Officer, where required.
Stamps destroyed under supervision will qualify for a refund of excise paid.

DESIGN

The design of the tax stamps is governed by Regulation 21 of The Tobacco Products Tax
Regulations 2006 (S.I. 261/2006), which provides that the tax stamp shall include:

»» A continuous background printing of the words “The Revenue Commissioners” and “Na
Coimisinéirí Ioncaim”;

»» A representation of the (Official) Irish Harp containing 12 strings in a vertical plane
encircled by a ring on which are printed the words “Ireland,” “Éire,” “Excise Duty,” and
“Dleacht Mháil”;

»» Three lines of encoding printed in black containing such combination of characters as
Revenue have authorized for the tobacco products to which the stamp relates; and

»» Such security or other features as Revenue may from time to time direct.

Figure 10. The Current Irish Tobacco Tax Stamp Design

The paper specification currently utilized is an ungummed coated security paper to the
following specification:

148 // Ireland: Addressing the Illicit Flow of Tobacco Products
Coated Substance 72±5 gm²

Base stock 62±3 gm²

Coat weight 10±1 gm²

Caliper (microns) 80±5

Parker Roughness (microns) 2.5 max

Gloss % 30 ± 5

I.G.T. cm/sec LVO 135 min

Ink Absorption (K+N units) 15 ± 5

Brightness (%) 80 (min)

Security fibers Yes - (not for disclosure)

CONTRACT

Within the framework of Regulation 21, Revenue outsources the design, production, print-
ing, and delivery of the tobacco tax stamp. Currently (July 2018), the tobacco tax stamp
contract is held by the DLRS Group.115 In order to select a third-party supplier, the Office of
Government Procurement, on behalf of Revenue, conducts a competitive tendering pro-
cessing comprised of two stages:

i. Stage 1 - Short-listing (invites responses and short-lists all the prospective suppliers that are
compliant and meet selection criteria); and

ii. Stage 2 - Tendering and Award.

The purpose of the first stage is to obtain sufficient information from candidates to enable
Revenue to evaluate suppliers based on their economic and financial standing and their
technical and professional ability. Revenue apply a pre-defined list of selection criteria to
the responses received during the first stage in order to arrive at a short-list of candidates to
proceed to the second stage. At the second stage, those suppliers who were successfully
short-listed will be invited to submit tenders for the work involved.

The two-stage process allows Revenue to limit the availability of the full details of the speci-
fications, requirements, and other contractual provisions to the second stage of the contract
award process, and so protect the confidential nature of the tobacco tax stamp.

The final contract will cover the design, supply of all materials, and printing of high-security
tobacco tax stamps, and the secure delivery of those stamps on behalf of Revenue. The

115
https://dlrsgroup.com/

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

three-year contract is extendable by periods of one year, with a maximum of three such exten-
sions. The estimated quantity of stamps required in a year is between 150 and 200 million.

To ensure continuity, successful suppliers are required to supply, on an interim basis, quan-
tities of the tobacco tax stamp in its current design for a transition period of no more than
six months, before supplying a new tobacco tax stamp incorporating new and/or additional
features and enhancements as designed by the supplier. The supplier is also required to
provide a second design along with a quantity of such stamps – sufficient to meet immedi-
ate requirements – to act as an emergency back-up stamp in case of a force majeure event
or a breach of security compromising their new stamp design. Where no force majeure or
breach occurs, the second design will become the tobacco tax stamp after the elapse of
three years, at the discretion of Revenue, and a third design will be required to act as an
emergency back-up to that stamp.

Each enhancement must provide added multi-layered security and enhanced features to its
predecessor while remaining within the terms set for the design of tax stamps as governed
by Regulation 21 of The Tobacco Products Tax Regulations 2006 (S.I. 261/2006) and the
contractual requirements as set by Revenue. This process of ongoing enhancement ensures
that the tobacco tax stamp remains cutting-edge.

There are limitations to the design of such enhancements. For instance, Revenue requires
that the specification for the existing paper substrate, or its exact equivalent, must be
retained for reasons of functionality on cigarette packaging machinery. There are limitations
to the inclusion of certain features to the surface of the tobacco tax stamps imposed by the
functional characteristics and mechanical restrictions of the tobacco tax stamp applicators
on cigarette packaging equipment. The application of overt surface security measures that
are applied to only part of the surface of the tobacco tax stamp and/or have a partially raised
profile will not be appropriate due to irregular or uneven pilling of tobacco tax stamps in the
cigarette packaging equipment applicators. Watermarks are not considered practical due
to the weight of the paper, totality of ink coverage, and practicality of application. Similarly,
intaglio printing is also not suitable, since it cannot be read under cellophane.

However, Revenue will consider solutions if the supplier can provide evidential proof that
the suggested proposal is currently in mainstream tobacco production and utilizes the same
process and packaging machinery as currently utilized by the tobacco manufacturers who
supply the Irish market.

TRACEABILITY AND SECURITY FEATURES

The revised Tobacco Products Directive 2014/40/EU concerning the manufacture, presenta-
tion, and sale of tobacco and related products (TPD) provides for, amongst other measures,
the introduction of mandatory traceability and security feature systems for tobacco prod-
ucts. Implementing and delegated acts to lay down the technical details necessary for the
systems of traceability and security features for tobacco products were adopted by the

150 // Ireland: Addressing the Illicit Flow of Tobacco Products
European Commission on December 15, 2017, and published in the Official Journal of the
EU on April 16, 2018.116

The proposed system involves the marking of individual packs of tobacco products with
a “Unique Identifier” which allows for individual packs and aggregated packages to be
recorded in a “Primary Repository,” exclusive to the manufacturer or importer concerned.
This data is then copied to a “Secondary Repository” which allows for surveillance by compe-
tent authorities as packs move through the supply chain.

The governance model aims to ensure the required level of integrity by ensuring the systems
operate independently of the tobacco industry, as envisaged by the Protocol and the TPD.

Figure 11. Traceability – Operational System Structure

UI generation

3 RD party ID OPTIONAL
Issuer
Logistic Chain

distributors &
Requests by

wholesalers
Aggregation Aggregation
level UI level UI
Requests by

Unit packet
level UI
MF / IM

(anti-tampering

Aggregation First
Veriﬁcation
Time Stamp
Application

WH/ DS retail
device)

Dispatch

outlet
Receipt

MF / IM T1 Aggregation T2

Production Line

Router
Data Capture

Copy
Primary Primary
Repositories Repositories
MS user
interfaces

Source: European Commission, EU systems for traceability and security features of tobacco products,
Presentation: Regional Workshop No. I Stockholm, 25 January 2018, available at: https://ec.europa.eu/health/
sites/health/files/tobacco/docs/ev_201801252_ag_en.pdf

Enhanced supply-chain controls, alongside traceability and authentication systems that
could operate globally and include source and transit countries, have real potential to assist
in the control of the illicit tobacco market. An impact assessment prepared by the EU antici-
pates that implementation would increase collected taxes (i.e., VAT and excise duties) by €2
billion per year throughout the EU.116 However, this estimate is generic in that it is based on

European Commission, Impact Assessment accompanying Commission Implementing Regulation (EU)
116

2018/574 on technical standards for the establishment and operation of a traceability system for tobacco
products and Commission Implementing Decision (EU) 2018/576 on technical standards for security features
applied to tobacco products, Brussels, 15 December 2017, SWD(2017) 455 final, p 35

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

the EU-wide tobacco market and does not take into account the particularities of the Irish
tobacco market. As Ireland currently operates a robust tax stamp system and controls the
movement of legitimate tobacco arriving in Ireland, a more specific study would be needed
to measure the exact effects on the illicit tobacco market in Ireland of the proposed system.

Revenue and the Department of Health are working together to devise the best method of
implementing the envisaged traceability and security feature systems in Ireland, so that they
may be incorporated into the existing regulatory framework for the distribution and sale of
tobacco in Ireland. A competent authority for the implementation of the traceability and
security feature systems in Ireland will be designated by the Government.

4. Results
Measuring the illicit tobacco trade is methodologically challenging for a number of reasons,
and similar challenges are faced when measuring the success, or otherwise, of control mea-
sures intended to inhibit the illicit tobacco trade. As an illegal activity, participants are unlikely
to record their activities in a manner that provides easy proof of their criminality. Where
authorities have data on the activities of those involved in the illicit tobacco trade, they may
prefer not to share this data for security reasons. In addition, all methods to estimate the
illicit tobacco trade have limitations.

The three most commonly used methods to measure the illicit trade are:

»» Comparison of tax-paid sales and individually reported consumption measures;

»» Survey of tobacco users’ purchase behaviors; and

»» Observational data collection.

Overall smoking prevalence, including the smoking of licit and illicit tobacco, has declined
in Ireland from 27.6 percent in 2007 to 17.6 percent in 2017. Over the same period, excise
receipts from tobacco products has remained relatively stable between €1 billion and €1.4
billion per year.

The quantity of tobacco demanded depends on multiple factors, economic and societal, but
is also influenced by the interaction of the dual licit and illicit tobacco markets. Estimating
the percentage of overall tobacco consumption captured by the illicit market is fraught with
difficulties. Both smoking prevalence and the size of the licit market are important indicators,
and certainly trends within the licit market which may indicate that consumers are seeking
cost-effective alternatives are particularly relevant. However, such figures must be consid-
ered within the broader context.

In 2017, 34.2 million cigarettes were seized, compared to 44.6 million in 2016 and 67.9
million in 2015. These figures continue to show a decline, especially considered against the
178.3 million cigarettes seized in 2010. These figures reflect a response by OCGs to enforce-
ment activities and successful interception of larger consignments, resulting in a move away

152 // Ireland: Addressing the Illicit Flow of Tobacco Products
from very large consignments in favor of smaller volumes. Where possible, those involved
in smuggling, distributing, or selling illicit cigarettes are prosecuted. In 2017, 88 people were
convicted for illicit tobacco offenses, and Irish courts imposed custodial sentences in 18
cases and average fines of €2,580 in 69 cases where fines were imposed.

Seizure figures may be distorted by the seizure of a small number of atypically large consign-
ments, while figures for convictions, sentencing, and the imposition of fines may be affected
by judicial processes not directly relevant to the illicit tobacco trade. As such, survey results
indicating the penetration of the illicit market are considered an important measure of the
incidence of illicit consumption,117 and therefore an important gauge of the success, or oth-
erwise, of measures to control the illicit tobacco trade.

The KPMG Project Sun report, produced on behalf of the Royal United Services Institute for
Defense and Security Studies (RUSI) in the UK, estimated that Ireland had the third-highest
rate of illicit tobacco consumption in the EU at 17.5 percent.118 The KPMG methodology is
principally based on a calculation of legal domestic sales (from which outflows of legal sales
to other countries are subtracted and inflows from other countries are then added back in)
to give an estimate for the total consumption, combined with data from an Empty Pack Survey
(EPS) to provide a measurement of the share of non-domestic packs.119 The EPS method relies
upon the random collection of empty packs of any brand and market variant from streets and
easy access bins. The following should be noted in relation to EPS survey data:

»» They assess non–domestic products, which include legitimately purchased cigarettes;

»» Figures are based on packs of cigarettes and exclude other products, such as RYO
or cigars;

»» They do not identify domestic contraband cigarettes; and

»» The sample is collected at the street level and does not consider homes and workplaces.120

While all estimation methodologies have their limitations, in Ireland the best estimate of
the scale of the illicit tobacco problem comes from the IPSOS-MRBI surveys conducted
for Revenue and the National Tobacco Control Office.121 In addition, the consistency of the
methodology allows for changes in illicit consumption levels to be tracked over time. The
most recent survey, conducted in late 2017, found that 13 percent of cigarette consumption
was illicit. This compares to a figure of 10 percent in the comparable survey for 2016. The

117
Moran, G, Revenue Commissioners, evidence to the Oireachtas Joint Committee on Health and Children, 23
January, 2014
118
KPMG, Project Sun: A study of the illicit cigarette market in the European Union, Norway and Switzerland,
2016 Results, p 80
119
KPMG, Project Sun: A study of the illicit cigarette market in the European Union, Norway and Switzerland,
2016 Results, p 174
120
Transcrime, The Factbook on The Illicit Trade in Tobacco Products: Issue 3 Ireland, 2013, footnote 15, p 64
121
Moran, G. Revenue Commissioners, evidence to the Oireachtas Joint Committee on Health and Children,
23 January, 2014

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2017 survey also found that a further 9 percent of consumption was accounted for by ciga-
rettes purchased abroad and brought into Ireland legitimately for personal consumption.

5. Methodology
The purpose of this case study is to describe the illicit flow of tobacco products in Ireland
and the counter-measures taken to halt that illicit trade. It is important to state that all data
relied upon in the compilation of this case study are publicly available.

The primary assumption underlying the case study is that there are dual licit and illicit
tobacco markets in Ireland, the former closely regulated and controlled, and the latter operat-
ing at the margins, or entirely outside, such controls.

The existence of a separate illicit market, outside the controlled licit market, gives rise to
difficulties in estimating the size of shadow economy activities. In addition, criminal actors in
the illicit tobacco trade are found to be dynamic and responsive, and this demands a similar
attitude on the part of the authorities, necessitating a multi-pronged approach to the control
of the illicit tobacco trade.

As such, two related evidential problems arise in relation to the illicit tobacco trade: (i)
estimating the illicit tobacco share of overall tobacco consumption, particularly given the
influence of other variables on tobacco consumption; and (ii) disaggregating the effect
of particular control measures on the illicit tobacco trade, as can be seen by attempts to
estimate the future effects of EU-wide traceability and security feature systems on the illicit
tobacco trade in Ireland.

Literature exists concerning the multiple influences on demand for illicit tobacco, however
the authors discovered less literature addressing the impact of specific control measures on
the illicit trade in Ireland.

In deciding upon the selection of data concerning these dual markets and their interactions,
the authors prioritized data which were: (i) publicly available, (ii) acknowledged as reliable,
and (iii) capable of being tracked over time.

The authors’ purpose was to gain an understanding of the existence of the illicit tobacco
trade in Ireland and to describe the responses of the Irish authorities. It is hoped that the
case study will both provide insights into the problem and help to develop ideas or hypotheses
for potential additional research.

6. Recommendations
The illicit tobacco trade is a complicated phenomenon and requires a multi-pronged
approach for its control and suppression. As outlined, the authorities in Ireland devote con-
siderable resources to the control of the licit tobacco market and supply chain. In addition,

154 // Ireland: Addressing the Illicit Flow of Tobacco Products
substantial resources are also deployed to suppress the activities of the illicit tobacco trade,
the scale of which has been successfully contained.

The case study makes the following recommendations:

1. Additional research should be conducted in the area of tobacco generally and illicit
tobacco specifically. Areas of special interest would be:

›› The overall tobacco market;

›› Drivers of illicit trade; and

›› Optimal taxation point for tobacco products.

2. Ireland’s comprehensive and effective system of customs and tax enforcement, and the
resultant relatively low rate of illicit flows, suggest that Ireland retains the opportunity
to further increase real and affordability-corrected taxes on tobacco. Appropriate tax
increases and improved structure can continue to help drive down tobacco consump-
tion and save Irish people from disease and premature death.

3. There should be continued efforts to improve tax and customs enforcement, building
on strong progress and good results to date.

4. Consideration should be given, at an EU-wide level, to greater controls over unman-
ufactured tobacco, a potential ingredient of illicit tobacco products, which is not
currently controlled under the Excise Movement Control System (EMCS) or other
EU-wide control mechanism.

5. An assessment should be undertaken of the impact of EU-wide traceability and security
feature systems, post-introduction in May 2019.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Annex

Tax and Excise Legislation
Section 119 Finance Act, 2001 provides for an offense of evading excise duty by taking
possession, custody, transporting or concealing excisable products with intent to defraud
the State of Excise Duty.

Persons found guilty of an offense under this section are liable on summary conviction to
a fine of €5,000 or a term of imprisonment of 12 months or both. On indictment, a person
found guilty of an offense under this section is liable to a fine of €126,970 or where the
value of the excisable goods concerned, including any duties or taxes chargeable on them is
greater than €250,000, the maximum penalty is three times the value of those products. The
Courts have discretion in imposing a prison sentence of up to five years.

Section 121 Finance Act, 2001 provides for an offense of failing to comply with the rules
and regulations relating to the production, processing and holding of excisable products.

Section 122 Finance Act, 2001 provides for an offense of submitting a fraudulent claim,
return, statement or accounts or to furnish any incorrect information.

Section 123 Finance Act, 2001 provides that any person who resists, obstructs or impedes
an officer of Revenue in the exercise of these powers shall be guilty of an offense. The pen-
alty for an offense committed under Sections 121–123 on summary conviction is €5,000.

Section 124A Finance Act, 2001 provides that any authorized ware housekeeper who con-
travenes or fails to comply with any condition or requirement imposed on him by legislation
is liable to a penalty of €1,500 for each contravention or failure.

Section 125 Finance Act, 2001 provides that any excisable products in respect of which an
offense has been committed (or any goods packed with and/or vehicles used in concealing
the excisable products in question) are liable to forfeiture.

Section 136 Finance Act, 2001 provides that an authorized officer of Revenue may at all rea-
sonable times enter premises on which the manufacture of tobacco products is reasonably
believed by the officer to be carried on, and may there make such search and investigation
and take such samples of materials, tobacco products and partially manufactured tobacco
products as the officer shall think proper, and may inspect and take copies of or extracts
from any books or other documents there found and reasonably believed by the officer to
relate to the manufacture of tobacco products.

156 // Ireland: Addressing the Illicit Flow of Tobacco Products
Section 78(3) Finance Act, 2005 provides that any person who in the State offers for sale
or delivery, other than under a duty-suspension arrangement, cigarettes otherwise than in
a pack or packs to which a tax stamp, on which Tobacco Products Tax at the appropriate
amount has been paid, is affixed in the prescribed manner, is guilty of an offense and shall
be liable on summary conviction to a fine of €5,000 and/or a maximum of twelve months
imprisonment, or on conviction on indictment to fine of up to €126,970 and/or a maximum
of five years imprisonment. The cigarettes in respect of which an offense has been com-
mitted and any goods packed with or used to conceal the said cigarettes and any vehicle or
conveyance in which the said cigarettes are found in, on, or in any manner attached to, are
also liable to forfeiture.

Section 78(4) Finance Act, 2005 provides that any person who counterfeits, alters or other-
wise makes fraudulent use of, or who is knowingly concerned in holding, selling or dealing
in counterfeited or altered tax stamps is guilty of an offense and shall be liable on summary
conviction to a fine of €5,000 and/or a maximum of twelve months imprisonment, or on con-
viction on indictment to fine of up to €126,970 and/or a maximum of five years imprisonment.

Section 79 Finance Act, 2005 provides that any person who offers to treat, offers for sale or
sells by retail any packet of cigarettes at a price higher than, in the case of cigarettes sold or
to be sold by means of a coin-operated vending machine, the nearest multiple of five cent
to the price, or in all other cases, the retail price, shall be guilty of an offense and shall be
liable on conviction to an excise penalty of €60 in respect of each such offense.

Section 78A Finance Act, 2005 provides that any person who produces or possesses any
illicit tobacco product or attempts to produce or process is guilty of an offense. An illicit
tobacco is defined as a tobacco product that has not been produced or processed in the
State in a tax warehouse contrary to section 108A Finance Act 2001. It is also an offense
to knowingly deal in any illicit tobacco product, to keep prohibited goods on any premises
or other land or on any vehicle or to deliver or to be in the process of delivering, any illicit
tobacco product or prohibited goods. Penalties for these offenses can be up to a maximum of
€5,000 or 12 months imprisonment on summary conviction or €126,970 or 5 years in prison
on indictment. Illicit tobacco products are liable to forfeiture and if they are found within a
vehicle, the vehicle is also liable to forfeiture. Where any unmanufactured tobacco is found
in the State and where that unmanufactured tobacco is not shown to the satisfaction of
Revenue to be kept or in the course of delivery under a customs procedure, for use as raw
material for the production of tobacco products in a tax warehouse, for use as raw material
for the production of any product or thing other than a tobacco product or for any other use
that is not contrary to the legislation, it shall be presumed until the contrary is proved that
the unmanufactured tobacco is prohibited goods.

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Health Legislation
Section 33 Public Health (Tobacco) Act, 2002 provides that a person who advertises, or
causes the advertisement of, a tobacco product in contravention of the Directive of 2003
shall be guilty of an offense and shall be liable on summary conviction to a fine not exceed-
ing €3,000, imprisonment of 3 months or both. On indictment, a person found guilty of an
offense under this section is liable to a fine not exceeding €125,000 or two years imprison-
ment or both.

Section 33A Public Health (Tobacco) Act, 2002 provides that the advertisement of tobacco
products in premises in which the business of selling tobacco products by retail is carried on
in whole or in part is prohibited. A person found guilty on summary conviction shall be liable
to a fine not exceeding €3,000, imprisonment of 3 months or both. On indictment, a person
found guilty of an offense under this section is liable to a fine not exceeding €125,000 if
convicted on indictment or 2 years imprisonment or both.

Section 36 Public Health (Tobacco) Act, 2002 provides that a person who engages in
sponsorship in contravention of the Directive of 2003 shall be guilty of an offense and shall
be liable on summary conviction to a fine not exceeding €3,000 on summary conviction,
imprisonment of 3 months or both. On indictment, a person found guilty of an offense
under this section is liable to a fine not exceeding €125,000 if convicted on indictment or 2
years imprisonment or both.

Section 37 (13) Public Health (Tobacco) Act, 2002 provides that a person who, knowingly
or recklessly provides information or a particular [when registering] that is false or misleading
in a material respect, or who believes any such information or particular provided by him or
her, not to be true, shall be guilty of an offense. A person found guilty on summary convic-
tion shall be liable to a fine not exceeding €3,000, imprisonment of 3 months or both.

Section 37 (14) Public Health (Tobacco) Act, 2002 provides that it shall be an offense for a
person to sell a tobacco product, or cause a tobacco product to be sold, by retail unless the
person is registered. A person found guilty on summary conviction shall be liable to a fine
not exceeding €3,000, imprisonment of 3 months or both. On indictment, a person found
guilty of an offense under this section is liable to a fine not exceeding €125,000 if convicted
on indictment or 2 years imprisonment or both.

Section 38 Public Health (Tobacco) Act, 2002 provides that it shall be an offense to sell
cigarettes in packs less than 20, to manufacture, import, supply, sell or offer for sale an oral
smokeless tobacco product, to sell confectioneries that resemble in appearance a type of
tobacco product, to import, sell, or supply tobacco products which does not conform to
the standardised packaging legislation to import, sell or supply tobacco products which do
not contain a batch number to ascertain date and place of manufacture, to supply tobacco
products free of charge to promote consumption of tobacco products, to supply or sell
vouchers or coupons to the Public to pay or exchange for a tobacco product, or to sell a

158 // Ireland: Addressing the Illicit Flow of Tobacco Products
tobacco product where consideration is a gift, token , stamp, coupon or other thing that
may be exchanged for or used as part payment for the goods. A person found guilty of an
offense under this section on summary conviction shall be liable to a fine not exceeding
€3,000, imprisonment of 3 months or both. On indictment, a person found guilty of an
offense under this section is liable to a fine not exceeding €125,000 if convicted on indict-
ment or 2 years imprisonment or both.

Section 39 Public Health (Tobacco) Act, 2002 provides that it shall be an offense to fail to
comply with regulations regarding standards and requirements relating to their manufacture,
importation, distribution and sale. A person found guilty of an offense under this section
on summary conviction shall be liable to a fine not exceeding €3,000, imprisonment of 3
months or both. On indictment, a person found guilty of an offense under this section is
liable to a fine not exceeding €125,000 if convicted on indictment or 2 years imprisonment
or both.

Section 40 Public Health (Tobacco) Act, 2002 provides that it shall be an offense to fail to
abide by requirements to provide information to the HSE relating to tobacco products when
required to by the HSE including information relating to composition and properties and sale
and/or marketing, to fail to carry out tests specified by the HSE, to fail to allow an official to
attend the tests, to fail to provide notice of the results to the HSE within 14 days of the results
of the test. A person found guilty of an offense under this section on summary conviction
shall be liable to a fine not exceeding €3,000, imprisonment of 3 months or both. On indict-
ment, a person found guilty of an offense under this section is liable to a fine not exceeding
€125,000 if convicted on indictment or 2 years imprisonment or both.

Section 42 Public Health (Tobacco) Act, 2002 provides that where the packaging or any
printed material attached to a tobacco product bears an assertion that smoking does not
cause life-threatening illnesses, smoking a particular brand is less harmful than another, that
smoking of tobacco products is not addictive, that filters or other additives or ingredients
render the product less harmful than others, then the manufacturer, importer, distributor,
and if the tobacco product is sold by retail, the retailer, shall be guilty of an offense. A person
found guilty of an offense under this section on summary conviction shall be liable to a fine
not exceeding €3,000, imprisonment of 3 months or both. On indictment, a person found
guilty of an offense under this section is liable to a fine not exceeding €125,000 if convicted
on indictment or 2 years imprisonment or both.

Section 43 Public Health (Tobacco) Act, 2002 provides that it is an offense to sell or to
make available for sale tobacco products by way of self service, other than in conformity
with regulations made by the Minister. A person found guilty of an offense under this section
on summary conviction shall be liable to a fine not exceeding €3,000, imprisonment of 3
months or both.

Section 45 Public Health (Tobacco) Act, 2002 provides that it is an offense to sell tobacco
to a person under 18 years of age. A person found guilty of an offense under this section

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

on summary conviction shall be liable to a fine not exceeding €3,000, imprisonment of 3
months or both.

Section 46 Public Health (Tobacco) Act, 2002 provides that it is an offense to fail to display
a sign in a premises to which the public have access identifying the parts of the premises
in which smoking is permitted or prohibited. A person found guilty of an offense under this
section on summary conviction shall be liable to a fine not exceeding €3,000, imprisonment
of 3 months or both.

Section 47 Public Health (Tobacco) Act, 2002 provides that it is an offense to smoke a
tobacco product in a specified place, being a workplace, a school, college, public building,
or other building listed in the section. A person found guilty of an offense under this section
on summary conviction shall be liable to a fine not exceeding €3,000.

Section 48(8) Public Health (Tobacco) Act, 2002 provides that it is an offense to obstruct,
or interfering with an authorised officer, a member of An Garda Síochána, or Revenue offi-
cers when they are exercising a power under the Act. The section also provides that it is an
offense for a person to falsely represent themselves as an authorised officer of the HSE. A
person found guilty of an offense under this section on summary conviction shall be liable to
a fine not exceeding €3,000, imprisonment of 3 months or both.

Section 53 Public Health (Tobacco) Act, 2002 provides that it is an offense to forge doc-
uments or to have forged documents, or to aid or abet in the commission of a forgery. A
person found guilty of an offense under this section on summary conviction shall be liable
to a fine not exceeding €3,000, imprisonment of 3 months or both. On indictment, a person
found guilty of an offense under this section is liable to a fine not exceeding €125,000 if
convicted on indictment or 2 years imprisonment or both.

Other relevant criminal offenses
Organised crime offenses (Part 7 of the Criminal Justice Act 2006, as amended by the
Criminal Justice (Amendment) Act 2009). These offenses comprise conspiracy to commit
a serious crime (s.71), direction of a criminal organisation (s.71A), participation in, or contri-
bution to, certain activities (s.72) and commission of an offense for a criminal organisation
(s.73). The penalties range between life imprisonment for the direction of a criminal organ-
isation to a maximum of 15 years of imprisonment for participation in and commission of an
offense for a criminal organisation.

Conspiracy is agreement to commit an offense and is an offense in common law. The
penalty for conspiracy is at the discretion of the court. In practice, however, conspiracies
are punished less than the predicate offenses.122(3) Fraudulent application or use of trade-
mark in relation to goods (Section 92 of the Trade Marks Act 1996). The penalty on summary

122
Law Reform Commission, Report: Inchoate Offenses, 2010 (LRC 99–2010), pp 17–18

160 // Ireland: Addressing the Illicit Flow of Tobacco Products
conviction is a fine to a maximum of €1,270 or a term of imprisonment not exceeding 6
months or both. On indictment, it is imprisonment for a term not exceeding five years or a
fine to a maximum of €126,970, or both.

Money laundering (s.7 Criminal Justice (Money Laundering and Terrorist Financing) Act
2010): the penalty on summary conviction for a money laundering offense is a fine of up to
€5,000 and/or imprisonment of up to 12 months. The penalty on conviction on indictment
is a fine and/or imprisonment of up to 14 years.

161
UNITED
KINGDOM
7

UNITED KINGDOM:

Tackling Illicit Tobacco
Tessa Langley 1, Anna Gilmore 2, Allen Gallagher 3, and Deborah Arnott 4

Chapter Summary
Background
The United Kingdom (UK) has implemented a comprehensive package of tobacco control
measures in the last 20 years and has seen significant decreases in smoking prevalence. In
2016, adult smoking prevalence was 16 percent. A crucial component of UK tobacco control
policy has been high tobacco taxation, which has been implemented as both a public health
and a tax revenue-generating measure. Following a series of tax rises, the illicit tobacco trade
increased rapidly in the 1990s. This trend was due in particular to well-documented tobacco
industry practices: tobacco manufacturers increasingly produced and exported cigarettes in
volumes much greater than the known demand in their stated markets. These products were
then smuggled, with no duty paid, into the UK (This type of illicit tobacco is known as “tobacco
industry (TI) illicit.”) The revenue losses associated with the illicit tobacco trade were significant,
equivalent to 25 percent of all tobacco revenue due, and the availability of tobacco at a frac-
tion of the usual price undermined the public health impact of the tax increases.

1
University of Nottingham
2
University of Bath
3
University of Bath
4
Action on Smoking and Health (ASH), UK).

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Approach to Tackling the Illicit Tobacco Trade in the UK
In 2000, the UK embarked on a comprehensive strategy to reduce the illicit tobacco
trade. The strategy focused on supply-side measures, investing in a range of operational
responses including disrupting the supply and distribution chains for illegal tobacco prod-
ucts and reducing the rewards from smuggling by increasing sanctions. The strategy has
been regularly revised since 2000, in response to ongoing TI involvement in the illicit market
and newly emerging threats, such as counterfeit products and cheap whites. The UK illicit
tobacco strategy is underpinned by the principle that smuggling is an enforcement issue,
rather than being caused by high tobacco prices.

The UK’s customs and immigration authorities (HM Revenue and Customs and Border
Force) currently share responsibility for tackling the illicit tobacco trade. Responsibilities
include detecting and disrupting the supply of illicit tobacco and arresting and investigating
those suspected of smuggling offences. Abroad, a team of Fiscal Crime Liaison Officers is
responsible for liaising with international fiscal and law enforcement agencies and devel-
oping intelligence to intercept illicit tobacco destined for the UK market. In some regions,
partnerships between stakeholders have been effective in raising awareness of key issues
relating to illicit tobacco such as its links to crime and its availability to children. At the local
level, local governments are responsible for local intelligence, and for detecting and seiz-
ing illicit tobacco products. Recent developments include the introduction of a registration
scheme for anyone carrying out activities using raw tobacco and a tobacco machinery
licensing scheme.

A number of enforcement mechanisms are in place. Supply chain legislation places a legal
obligation on tobacco manufacturers not to facilitate smuggling. Sanctions to punish indi-
viduals linked to the illicit trade include seizure of goods, criminal prosecution with custodial
sentences, and fines. Fiscal marks and anti-counterfeiting technology aid the identification of
illicit products.

Strong governance including effective implementation of Article 5.3 has helped to ensure
the success of the illicit tobacco strategy and its full independence from the TI. Key gov-
ernance processes include the publication of monitoring data to ensure transparency, and
reports on progress in tackling illicit tobacco published by parliamentary committees. Activity
to combat the illicit tobacco trade in the UK is supported by action at the international level.
This includes legal agreements between the EU and all the major multinational tobacco
companies, which independent reviews suggest have not served their intended purpose.
The UK is a Party to the Illicit Trade Protocol of the World Health Organization Framework
Convention on Tobacco Control (WHO FCTC), which comes into force in September 2018,
with a first Meeting of the Parties in October.

164 // United Kingdom: Tackling Illicit Tobacco
Results of Measures to Tackle the Illicit Tobacco Trade
The UK government collates data on the illicit market share, revenue losses associated
with the illicit trade, seizure volumes, and the number and results of criminal investigations.
During the first ten years of the illicit tobacco strategy, the illicit market share for cigarettes
was nearly halved, falling from 22 percent to 12 percent (central estimates). The illicit market
share of handrolling tobacco (HRT) saw a drop from 61 percent to 44 percent (central esti-
mates) during the same period. The strategy has continued to have some success in recent
years, with continued decreases in the illicit market share of HRT. However, while smoking
prevalence has decreased, the illicit market for cigarettes has become a larger proportion of a
declining market. This may reflect cuts in funding for local-level enforcement in recent years.

The scale and success of the enforcement effort is also indicated by the large volumes of
seizures of both cigarettes and HRT. In 2015/16, an estimated 1.7 billion cigarettes and nearly
300 tonnes of HRT were seized, representing a total revenue value of over £600 million.
Furthermore, significant revenue losses have been prevented as a result of enforcement activity.

A formal evaluation of the financial costs and benefits of the illicit tobacco strategy has not
been published; however, data published in the public domain indicate that funding mea-
sures to tackle the illicit trade have delivered a significant return on investment.

The Ongoing Role of the Tobacco Industry in Illicit Trade
and the Importance of Civil Society
Government data suggest a recent decline in the proportion of illicit tobacco that is TI illicit.
However, a range of UK and international data sources indicate that these data significantly
underestimate the proportion of the illicit market that consists of TI illicit, and that TI illicit
remains the single largest problem. There is evidence that the industry has continued to
oversupply its products, and fines in response to this practice have to date been small.
Furthermore, the tobacco industry has repeatedly presented misleading data and arguments,
including claims that tax increases and standardized tobacco packaging drive the illicit trade,
with many of these data being collected and communicated by individuals and organiza-
tions paid by the industry itself.

Civil society has played a central role in exposing tobacco-industry misconduct and misleading
data and arguments, and has thereby enabled the advancement of evidence-based govern-
ment policy. For example, independent analyses have been able to counter industry claims
around tobacco tax and standardized packaging; high taxes on tobacco remain a key compo-
nent of UK tobacco control policy, and standardized packaging was implemented in 2016.

What Else Can Be Done?
The strategy is widely regarded as having been a success, but further action is needed. The
collection and publication of detailed data on tobacco sales, profits, marketing, and research

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

would allow analysis of market developments and inform tobacco control policy. Anti-illicit
trade partnerships between stakeholders across regions have been successful in parts of the
UK, and should be rolled out nationally. Positive supply chain licensing schemes are arrange-
ments whereby businesses have to demonstrate that they meet required standards. To apply
such schemes to the whole tobacco supply chain could help drive out those involved in the
supply of illicit tobacco at all levels.

Lessons Learned and Implications for Other Countries
The UK experience demonstrates that the illicit tobacco trade can be addressed effectively
even in the presence of high tobacco taxes. The overarching approach of focusing on
supply-side measures has proved successful, although demand side measures may also be
appropriate where there is cultural acceptance of illicit tobacco and/or a lack of awareness
of its implications.

The fundamental components of an illicit tobacco strategy are improved detection and
enforcement and penalties for those involved. While some technology – such as x-ray scanners
and anti-counterfeiting technology – is required, investment in human resources is essential in
developing intelligence, detecting illicit products, and undertaking criminal investigations.

Several studies have highlighted the association between corruption and the illicit tobacco
trade; good governance and government commitment are essential for a successful illicit
trade strategy. The ongoing role of the tobacco industry and its repeated efforts to mislead
the public and decision makers in relation to the causes, effects, and scale of illicit trade
demonstrate that strategies to tackle this problem must be developed and implemented
independently from the tobacco industry. While significant upfront investment is required,
the substantial long-term return on investment in activity to combat the illicit trade is a key
incentive for government intervention and enforcement.

1. What Has Been Done to Address the Illicit Trade
in Tobacco? What Are the Results?
1.1 Background
OVERVIEW OF TOBACCO CONTROL POLICY IN THE UNITED KINGDOM

Despite evidence of the health harms caused by tobacco use, implementation of policies to
reduce smoking prevalence in the United Kingdom (UK) was slow until the late 1990s. The
first comprehensive UK tobacco control policy document, Smoking Kills, was published in
1998.(1) It defined a package of population- and individual-level policies and interventions,
and since then the UK has implemented comprehensive measures to support quitting,
reduce uptake, and reduce the harms caused by secondhand smoke exposure.

166 // United Kingdom: Tackling Illicit Tobacco
Table 1. Summary of Tobacco Control Policies in the UK

POLICY AREA SUMMARY OF MEASURES

›› Legislation prohibiting smoking in public places introduced in Scotland in 2006, then in
Restrictions on Wales, NI, and England in 2007
smoking ›› Ban on smoking in private cars in the presence of children in October 2015 in England and
Wales and December 2016 in Scotland

Tobacco tax ›› High levels of taxation have been a feature of tobacco control policy in the UK

Illicit trade ›› Strategy to tackle illicit tobacco trade implemented from 2000

Mass media ›› Large-scale MMCs have been a key component of UK tobacco control strategy since the
campaigns (MMCs) early 2000s, although funding has been much reduced in recent years

›› Text warnings became a legal requirement in the UK in 1971
›› From 2008, graphic pictorial warnings covering 40% of the back of the pack, and text
Health warnings warnings covering 30% of the front of the pack were required
›› From 2016, picture and text warnings covering at least 65% of the front and back of
tobacco packaging

›› Television advertising for tobacco products banned in 1965
›› UK Tobacco Advertising and Promotion Act 2002 banned print media and billboard
advertising from February 2003, tobacco direct marketing from May 2003, and
sponsorship in July 2003
Advertising and
promotion ›› Point-of-sale displays in large retailers banned in England, NI, and Wales in 2012 and in
Scotland in 2013
›› Point-of sale displays in smaller shops prohibited across UK in 2015
›› Standardized tobacco packaging implemented in May 2016

›› Minimum age of sale raised from 16 to 18 in 2007 in England, Scotland, and Wales, and NI
in 2012
Youth access ›› Vending machine ban implemented between 2011 and 2013
›› Ban on proxy purchasing by adults in Scotland in 2010, England and Wales in 2015, and NI
in 2016

›› Extensive provision of free stop-smoking services providing counselling and access to
pharmacotherapy from 2000 onwards
›› Nicotine replacement therapy (NRT), bupropion and varenicline, available on prescription;
Treatments to help
NRT available on general sale
smokers quit
›› E-cigarettes available on general sale. National smoking cessation guidance states that the
evidence suggests that e-cigarettes are substantially less harmful to health than smoking
but are not risk free (3)

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Powers for health in the UK are devolved to national governments (England, Scotland, Wales,
and Northern Ireland (NI)). As a result, many measures have been implemented at different
times within the UK. UK tobacco control policy is also guided by the Framework Convention
on Tobacco Control (FCTC, ratified in 2004) and the European Union (EU). In 2016, the UK
led the European Tobacco Control Scale, a ranking of country-level activity on tobacco
control.(2) The key tobacco control policy measures which have been implemented in the
UK are summarized in Table 1.

Figure 1. Adult (16+) Smoking Prevalence in Great Britain, 1974-2016

40
(%)

20
Men
10 Women

0 All adults 16+
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016

Source: Office for National Statistics. Adult smoking habits in the UK: 2016 (Adult Smoking Habits in Great
Britain dataset)(4)

Figure 2. Prevalence of Adolescent (11-15 Years) Smoking in England, 1982-2016

40
(%)

10 Ever Smoked

0 Current Smokers
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016

Source: Health and Social Care Information Centre. Smoking, Drinking and Drug Use Among Young People in
England – 2016 (Chapter 2 tables - smoking prevalence)(10)

168 // United Kingdom: Tackling Illicit Tobacco
TRENDS IN TOBACCO USE IN THE UK

Adult prevalence. Over the past four decades, there has been a significant decline in
rates of adult smoking in the UK (Figure 1).(4-6) In 2016, smoking prevalence in the UK
was 15.8 percent.(6)

Smoking prevalence has consistently been higher in men than in women (Figure 1) and is
highest among low socioeconomic groups.(4)

Youth prevalence. Smoking prevalence among adolescents in England has declined over
time, with 6 percent of 11-15 year olds in England reported to be current (regular or occa-
sional) smokers in 2016 (Figure 2). Youth smoking prevalence has also fallen in other parts of
the UK.(7-9)

Types of products. The majority of smokers in Britain smoke exclusively manufactured cig-
arettes (55 percent).(4) While only one-third smoke exclusively hand-rolling tobacco (HRT),
and 10 percent smoke both, the proportion of smokers using HRT has increased over time,
in line with a trend of more smokers smoking cheap tobacco.(11, 12) Younger and low-SES
smokers are more likely to smoke HRT.(11) The sale, purchase, and use of electronic ciga-
rettes (e-cigarettes) are legal in the UK. The prevalence of current e-cigarette use among
adults in Britain is in the region of 6 percent, with use almost entirely restricted to current
and ex-smokers.(13)

OVERVIEW OF THE HISTORY OF TOBACCO TAXES IN THE UK

Summary. In the 1990s, a policy of increasing tobacco taxes above inflation was imple-
mented by the UK government, designed both to increase government revenues and reduce
smoking prevalence (Table 2). Between 2001 and 2008, the Government increased taxes in
line with inflation. From 2009 onwards tobacco taxes were again increased above inflation.
Tobacco affordability has now dropped to its lowest level since the mid-1960s (Figure 3).

Tobacco tax policy since the 1990s. In the mid- to late twentieth century, tobacco became
increasingly affordable in the UK, as tax increases failed to keep pace with income growth.
Affordability reached its peak in 1989-90 (Figure 3). In the 1990s, a policy of increasing tobacco
excise taxes above inflation was implemented by the UK government. To begin with, this was
on an ad hoc basis, but in the 1993 Budget, the Government announced that tobacco duties
would rise by “at least 3 per cent a year in real terms (i.e., above inflation) in future Budgets.”
Increasing tax above the rate of inflation is known as a tax escalator. This was explicitly a health
as well as revenue measure, with the Chancellor stating that, “I believe that the approach we
are adopting in Britain is the most effective way to reduce smoking.”(14)

Illicit trade also increased rapidly during this period, particularly as a result of the tobacco
industry (TI) facilitating the evasion of UK duty (see section 1.5).(15) In 2000, the government
therefore announced the introduction of a comprehensive strategy to tackle tobacco smug-
gling, asserting that, “The Government is determined that criminal activity will not undermine
its policies to improve the nation’s health.”(16) Despite TI pressure, between 2001 and 2008,

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

the Government increased taxes in line with inflation while the illicit market was brought
under control. The strategy had immediate impact. It did not simply halt the rapid growth
of the illicit market, but drove it downwards (see section 1.4). In the 2009 Budget, tobacco
excise taxes were once again increased above inflation.(17)

Figure 3. Tobacco Affordability Index, 1965-2016

120

100

0
1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

Source: Beyond Smoking Kills, 1965-1980 [England] (19), NHS Digital, 1980-2016 [UK] (20)

Table 2. Timeline of Tobacco Tax Increases for Manufactured Cigarettes and Hand-
Rolling Tobacco (HRT) in the UK

YEARS TOBACCO TAXES

1989 Spring: No increase (Retail Price Index (RPI) increased by 7.8%)

1990 Spring: 10% (RPI increase = 9.5%)

1991 Spring: 15% (RPI increase =5.9%)

1992 Spring: 10% (RPI increase = 3.7%

Spring: 6% (RPI increase = 1.6%)
1993
Autumn: 7.3%. Authorities committed to introduce an annual tobacco tax escalator of a minimum of
3% above projected RPI

1994 Autumn: 7.3% (RPI increase = 2.4%)

1995 Autumn: 3% above projected RPI for cigarettes, tax on HRT frozen (RPI increase= 3.5%)

1996 Autumn: 3% above projected RPI for cigarettes, increase at projected RPI for HRT

Commitment to annual tobacco tax escalator of 5% above projected RPI. Took effect in December
1997-1998
1997 and December 1998.

1999 Spring: 5% above projected RPI for cigarettes, no increase for HRT (RPI increase = 1.5%)

170 // United Kingdom: Tackling Illicit Tobacco
Table 2. Timeline of Tobacco Tax Increases for Manufactured Cigarettes and Hand-
Rolling Tobacco (HRT) in the UK, Cont.

YEARS TOBACCO TAXES

2000 Spring: Escalator abolished. Tobacco tax increased by 5% above projected RPI

2001-2008 Spring: annual increases in line with projected RPI

2009 Spring: 2% increase [NB RPI increase = -0.5%, so effective increase of 2.5%]

Spring: 1% above projected RPI with commitment to escalator of 2% above RPI for all tobacco
2010
products for remainder of the parliament (2011-2015)

2011 Spring: 2% above projected RPI plus additional 10% increase on hand-rolled tobacco (HRT)

2012-2013 Spring: 2% above projected RPI

Spring: 2% above projected RPI with commitment to continue tax escalator for the subsequent
2014
parliament from 2015-2020

2015 Spring: 2% above projected RPI

2016 Spring: 2% above projected RPI with additional 3% for HRT

Spring: 2% above projected RPI

20 May 2017: Introduction of Minimum Excise Tax (MET) of £268.63 per 1,000 cigarettes, setting a floor
below which taxes cannot fall (see section 1.2).
2017
Autumn: one-off additional 1% for HRT. MET set at £280 per 1,000 cigarettes.

A commitment to an annual escalator of 2% above projected RPI for all tobacco products for
remainder of current parliament (until 2022).

Note: UK budgets are usually annual events, in Spring or Autumn (usually March or November).
Sources: (17, 21-50) See also ASH. Timeline of tobacco tax increases in the United Kingdom.(51)

The tax escalator has since been sustained in line with the Government’s commitment
to “maintain high duty rates for tobacco products to make tobacco less affordable.”(18)
Reducing affordability, rather than just increasing price, is the key to reducing consumption
and smoking prevalence. Prices therefore need to rise more than incomes and the level of
inflation. A tax escalator is a simple way of achieving this. Tobacco is now no more afford-
able than it was in the mid-1960s (Figure 3), and the tax escalator will ensure that it becomes
less and less affordable over time.

CURRENT STRUCTURE AND RATES OF TOBACCO TAX IN THE UK

Tobacco products duty is currently payable on:

»» Cigarettes

»» Cigars

171
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

»» Hand-rolling tobacco

»» Other smoking tobacco, for example pipe tobacco

»» Chewing tobacco

»» Cigarette rag and expanded tobacco, if it can be smoked without further processing

»» Herbal smoking products that do not contain tobacco or tobacco substitute (52)

The current duty rates are summarized in Table 3. Cigarettes are taxed using either a com-
bination of a specific tax and an ad valorem tax or, since May 2017, using a Minimum Excise
Tax (MET) – whichever is higher. A specific tax alone is applied to all other products. In 2017,
the weighted average price for a pack of 20 cigarettes in the UK was £7.81.(53)

Table 3. Tobacco Tax Rates in the UK as of November 2017

TYPE OF PRODUCT EXCISE DUTY RATE MINIMUM EXCISE TAX (MET)

Either £217.23 per 1,000 cigarettes
Cigarettes Or £280.15 per 1,000 cigarettes*
plus 16.5% of retail price*

Hand rolling tobacco £270.96/kg Not applicable

Cigars £221.18/kg Not applicable

Other smoking and
£119.13/kg Not applicable
chewing tobacco

Source: Guidance: Excise Duty - Tobacco Duty rates(55) *Excise duty formula or MET – whichever is higher.

A MET sets a minimum level of excise duty for any packet of cigarettes, i.e., a floor below
which tax on cigarettes cannot fall. MET was introduced in the UK in 2017 with a view to
reducing the availability of very cheap cigarettes, which in turn encourages quitting, and to
increase tax revenues.(54) The UK government has stopped short of introducing a Minimum
Consumption Tax, to include VAT as well as excise tax, which would raise tax levels at the
lower-priced end of the HRT market and limit the opportunity for downtrading within the
HRT category.

Products become liable to the duty when they either enter the UK from overseas or reach
a smokeable condition during manufacture. Products may be stored duty-suspended in
approved excise warehouses. When goods are released from an excise warehouse for
consumption, the excise duty must have been paid or accounted for before they leave the
warehouse.(56)

172 // United Kingdom: Tackling Illicit Tobacco
EU law on tobacco tax. EU law imposes minimum rates of tobacco duty with a view to min-
imizing variation in the price of tobacco products between EU countries (Directive 2011/64/
EU).(57)

For cigarettes, this minimum rate must consist of:

»» A specific component of between 7.5 percent and 76.5 percent of the total tax burden – a
fixed amount per 1000 cigarettes

»» An ad valorem component - a percentage of the maximum retail selling price

In addition, the overall excise rate must be:

»» At least €90 per 1000 cigarettes

»» At least 60 percent of the weighted average retail selling price (unless excise duty ≥€115)

For HRT, Member States can apply a specific component (€54 per kilogram) or an ad
valorem component (46 percent of the maximum retail selling price), or a combination of
the two. The Directive also sets out minimum duty rates for other types of tobacco.

The UK is due to leave the EU in March 2019, and the implications of this for tobacco duty
rates are as yet unconfirmed, although there is a commitment to increase tobacco taxes by
2 percent above RPI per annum until the end of the current parliament in 2022. However,
the UK has historically implemented tobacco duty rates far in excess of EU-imposed minima,
and it is therefore to be expected that tobacco taxes in the UK will remain high. In January
2018, the UK had the highest overall excise duty as a percentage of weighted average price
in the EU (72.13 percent).(53)

The Problem of Smuggling Prior to Introduction of
Measures to Reduce Illicit Trade: Evolution of the
Illicit Trade in Tobacco in the 1990s
Sustained above-inflation tax increases were designed to reduce tobacco consumption,
which threatened tobacco manufacturers’ sales. The tobacco manufacturers’ solution
was to facilitate the growth of a parallel illicit market. This undermined the impact of the
Government’s tax strategy by ensuring that smokers -- particularly younger and poorer,
thus more price-sensitive smokers -- had access to untaxed and therefore much cheaper
tobacco products.

In the early 1990s, the illicit tobacco trade in the UK consisted mostly of small-scale ciga-
rette smuggling from lower-tax jurisdictions in Europe. However, during the 1990s, tobacco
manufacturers increasingly produced and exported cigarettes in volumes much greater than
the known demand in their stated markets. These cigarettes were then smuggled, with no
duty paid, back into the UK.(15) For example, the number of UK cigarettes exported to Andorra
grew over a hundred-fold between 1993 and 1997, from 13 million to 1,520 million, enough for

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

every man woman and child in Andorra to smoke 140 cigarettes a day.(58) This was just one of
many destinations where the supply massively outstripped plausible demand. As a Member of
Parliament said to the chief executive of 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
neighboring countries, and not in the expectation they would be smuggled?”(15)

This form of cigarette smuggling – involving shipping-container loads diverted from the
legal to the black market while in international transit, with no duty paid - grew dramati-
cally throughout the 1990s.(15) The share of the UK cigarette market accounted for by illicit
manufactured cigarettes rose from only 3 percent in 1996-97 to 18 percent in 1999-2000.
Most of these illicit cigarettes were estimated by Customs to be “duty not-paid” genuine UK
brands (also referred to as tobacco industry illicit – representing 85 percent of seizures in
2000-01).(16, 59) The proportion of HRT which was illicit rose even faster, to reach nearly 80
percent by 1999.(16) HRT smuggling was largely of duty-paid product, smuggled into the UK
from lower-tax European jurisdictions, in particular the Benelux countries.(60, 61)

The tobacco manufacturers were selling to intermediaries at the ex-tax price, still making
their profits on the sales, but government revenues were undermined, as taxes were not
paid.(15, 16) Indeed, as a study for the World Bank showed, the tobacco industry benefits
from the existence of smuggling of its products, as smuggling reduces the average price
(thereby increasing sales) and can provide access to closed markets.(62) In addition, the
industry can use the increase in size of the illicit market to argue for reductions in tobacco
taxes, an argument that industry spokespersons continue to deploy regularly.(63-65)

By 1999, the revenue losses associated with all forms of tobacco smuggling were estimated
to be £2.5 billion, equivalent to 25 percent of all tobacco revenue (excise duty and Value-
Added Tax (VAT)) due.(16) Furthermore, government projections suggested that the market
share of illicit cigarettes would increase to over a third by 2003-04, in the absence of any
action. The street price for a premium-brand pack of 20 illicit cigarettes was in the region of
£2.50, compared with £4.20 for a legal pack (16). Given that, in 2000, the tax as a percent-
age of price among licit products in this price category was 80 percent, significant profits
were clearly being made from smuggling.(66)

Summary of Approach to Reducing Illicit Tobacco in the
UK since 2000
In response to the significant problem of tobacco smuggling, the UK customs authority
(HM Revenue and Customs, HMRC) and economic and finance department (HM Treasury)
introduced the UK’s first anti-smuggling strategy in 2000.(16) This move coincided with
widespread public exposure of the tobacco industry’s involvement in tobacco smuggling,

174 // United Kingdom: Tackling Illicit Tobacco
Box 1: Types of Tobacco Products Available in the UK

LICIT TOBACCO

GENUINE PRODUCT: Legally manufactured product of a tobacco manufacturer
which owns all trademarks and branding featured on the product. The product is
sold in compliance with all applicable laws.

ILLICIT TOBACCO

TOBACCO INDUSTRY ILLICIT: Genuine product of tobacco manufacturer that was
en route to, imported into, distributed in or sold in a jurisdiction in violation of the
applicable laws of that jurisdiction. The fact that this product was manufactured by
a tobacco company does not imply that company is always responsible when its
product ends up on the illicit market. Tobacco industry illicit comprises genuine UK
brands on which UK duty is not paid and genuine non-UK brands.(74)

COUNTERFEITS: Products bearing a trademark of a tobacco manufacturer that
are actually manufactured by a third party without the consent of the authorized
cigarette manufacturer.

CHEAP WHITES (ALSO KNOWN AS ILLICIT WHITES): Cigarettes that are legally
produced (usually not by a transnational tobacco company (TTC)), but have no
legitimate market and are manufactured with the intent of being smuggled and
sold outside of their country of production. These are defined by the European
Commission as: “brands manufactured legitimately in one market, either taxed
for local consumption or untaxed for export, and sold knowingly to traders who
transport them to another country where the products are sold illegally without
domestic duty paid.”(75)

Source: Adapted from Gilmore et al.(73)

prompting government inquiries and court cases (15, 67-72). As a result, the nature of the
illicit market began to change. The tobacco industry began to alter its practices, and levels
of tobacco-industry illicit declined. While tobacco industry illicit remained the leading source
of illegally traded cigarettes in the country, other forms of illicit – cheap whites and counter-
feit – emerged (Box 1).(73) The UK anti-smuggling strategy has been renewed and refreshed
several times since 2000 in response to emerging threats and seeks to tackle each of these
forms of illicit.

The UK’s initial strategy was a comprehensive approach which included:

»» Estimating the size of the illicit market

»» Analyzing the problem

»» Investing in a range of operational responses to the problem identified:

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›› Making it harder for criminals to source tobacco products

›› Disrupting the supply and distribution chains for illegal tobacco products

›› Reducing the rewards from smuggling by increasing the criminal and civil sanctions

›› Reducing demand by raising public awareness to discourage purchases of illicit
tobacco products

»» Committing to review the effectiveness of the strategy over time.

The strategy set a target of preventing the illicit market from increasing, stabilizing and
then beginning to drive down the smuggled share of the cigarette market. Investment
was weighted towards tackling the problem at source on the supply side, and in particular
preventing illicit tobacco from entering the UK market. £209 million was invested over three
years in 1000 more frontline and investigative staff and additional x-ray scanners to detect
high volume cigarette smuggling in freight. The strategy also included the introduction of
fiscal marks on UK duty-paid products and increased use of criminal and civil sanctions to
deter smuggling and reduce its profitability. The strategy very explicitly set out that eradicat-
ing smuggling was an issue of enforcement, and that the arguments used by some that the
solution was to cut duty were erroneous. The strategy’s authors pointed out that many other
countries in Europe with relatively low taxes suffer significant smuggling, indicating that low
tax rates do not protect against smuggling.

The strategy had an immediate effect. Within three years, the market share of illicit cigarettes
was on a steep downward trend (see section 1.4). The approach was so successful that a
tougher target was introduced, of reducing the illicit market share to 17 percent by March
2006.(76) However, the illicit market evolved in response to the strategy, and the need for
regular revision was clear. The market share of illicit HRT remained stubbornly high at 63
percent in 2000-01 and 55 percent in 2003-04.(77) Furthermore, smokers were increasingly
downtrading from factory-made cigarettes to HRT, and HRT consumption was primarily
of smuggled, non-UK duty-paid product. In addition, as the supply of smuggled genuine,
UK-manufactured cigarettes (tobacco industry illicit) was increasingly brought under control,
counterfeit cigarettes began to emerge as a problem.

Therefore, in 2006, a new strategy was launched, with investment in an additional 200 staff
to focus on HRT and a 30 percent increase in the network of Fiscal Crime Liaison Officers
(FCLOs) responsible for intelligence gathering and liaison between the UK and government
investigators in other countries.(78) A specific new target was set of reducing the size of the
illicit HRT market by 1,200 tonnes, the equivalent of around 20 percent of the market, by
2007-08. Memoranda of Understanding (MoUs) were signed with the tobacco manufactur-
ers committing them to only sell their products in brands and amounts consistent with the
legitimate demand in the export market. These commitments were backed up by legislation
placing a legal duty on tobacco manufacturers and importers not to facilitate smuggling,
with a penalty of up to £5 million for failure to comply.(79)

176 // United Kingdom: Tackling Illicit Tobacco
In 2008, the UK Border Agency (the UK’s immigration authority, now known as the UK
Border Force) took over responsibility for the frontier work of HMRC. In recognition of this
shift, an updated anti-smuggling strategy was developed.(80) Meanwhile, the illicit trade was
continuing to evolve in response to enforcement approaches. Postal smuggling, particularly
from China, emerged as a new threat. Although the overall size of the illicit HRT market was
going down, counterfeit HRT was a growing problem, as the anti-smuggling strategy started
to reduce the oversupply of genuine HRT to overseas markets. In addition, a new problem
had emerged: non-UK branded cigarettes, manufactured for smuggling into the UK, known
as “cheap/illicit whites,” began to appear on the UK market.

By 2011, the size of the illicit market had been cut by almost half; however, tobacco fraud
was still costing the government over £2 billion in tax revenues every year. A revised strat-
egy was published, which committed to: increase resources; introduce new technology,
intelligence, and detection capability; pursue proceeds of crime while applying new powers
of assessment and penalties; and reduce the minimum indicative levels for personal imports
from 3200 cigarettes and 3 kg HRT to 800 cigarettes and 1 kg HRT.(81) These are only indic-
ative limits, so are not a legal maximum, but imports above this level have to be justified to
customs as genuinely for personal use.(82)

A new strategy, the most recent, was published in 2015.(83) It outlined a continuation of the
broad cross-government approach previously adopted, and placed increased emphasis on
international engagement, undermining the profitability of illicit trade, and changing public
perceptions of the illicit tobacco trade. It also set out plans for a review of sanctions for
perpetrators, along with the introduction of a registration scheme for raw tobacco by the
end of 2016, to tackle the growing problem of diversion into the illegal market in the form of
counterfeit HRT.

Figure 4 summarizes the key challenges and responses over time. The approach has consis-
tently focused on reducing the availability of illicit tobacco and punishing those involved in
the illicit supply chain; while it is illegal to purchase illicit tobacco in the UK, enforcement has
focused on suppliers as opposed to identifying and punishing consumers of illicit tobacco.

Tobacco industry involvement in the illicit trade has been and remains a particular challenge
in the UK context (see section 1.5).

Overview of the Current Approach to Tackling the Illicit
Tobacco Trade in the UK
While the illicit tobacco strategy has been regularly updated, the general approach remains
weighted towards addressing the supply of illicit, covering both large- and small-scale smug-
gling, and aiming to tackle the problem both at home and abroad. Estimates of the size of
the illicit market and analysis of the nature of the problem continue to inform activity.

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The 2015 strategy emphasized the need for a strong focus on HRT with a view to reversing
an upward trend in the illicit HRT market share. While the share of illicit HRT within the total
market for HRT has decreased since then, recent data suggest that illicit cigarettes account
for an increasing share of a declining cigarette market, indicating a need for renewed effort
to tackle illicit cigarettes.

Developments since the 2015 strategy include the introduction of:

»» a registration scheme for anyone carrying out activities using raw tobacco (April 2017)

»» a tobacco machinery licensing scheme (August 2018)

The details of the current approach, including the legal and institutional frameworks,
enforcement mechanisms, and packaging technology used are summarized in sections 1.2
and 1.3.

The UK is due to leave the European Union in 2019, and it is currently unclear what the
implications of this for the illicit tobacco strategy and wider tobacco control will be. The UK
is a frontrunner in the implementation of the FCTC and is a Party to the Illicit Trade Protocol
(ITP) which comes into force in September 2018. Furthermore, UK tobacco regulation has
generally exceeded EU minimum requirements. It is therefore unlikely that the UK’s com-
mitment to tobacco control will be diminished by departure from the EU. However, the
UK’s withdrawal may create barriers to collaborating with European partners to combat illicit
trade. For example, UK officials may lose access to EU systems that support the reduction in
illicit trade, such as the Excise Movement and Control System. Furthermore, at the time of

Figure 4. Timeline of Key Challenges and Responses to Illicit Tobacco Trade in
the UK
Cuts in funding to support local enforment of illicit tobacco strategy (Trading Standards)
THE PROBLEM

HMRC estimates that
one in ﬁve cigarettes Genuine
smoked in the UK are non-UK Majority of large Majority of illicit
smuggled. cigarette Counterfeit UK cigarette seizures cigarettes are cheap Illicit market for
brands and brands of consists of whites; illiicit HRT cigarettes has
Most illicit cigarettes cheap whites hand-rolling counterfeit, market split become a higher
are TI illicit smuggled begin to tobacco begin non-UK brands between di erent proportion of
from the EU. appear to appear and cheap whites types of illicit declining market

2000 2001 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

First illicit Fiscal New Anti- New illicit New civil New illicit New illicit Implementation of
tobacco marks for illicit counterfeit- tobacco penalties tobacco tobacco Raw Tobacco
strategy duty-paid tobacco ing techno- strategy for handling strategy strategy Approval Scheme,
products strategy logy (HMRC & illicit goods implmentation of
THE SOLUTION

(cigarettes*) UK Border tobacco machinery
Introduction of Force) licensing scheme
scanners to indentify Supply announced
smuggled tobacco* chain legislation Anticounterfeiting
technology (HRT*)

*Technology developed/provided by tobacco industry

Source: Adapted from National Audit Office. Progress in tackling tobacco smuggling. (85) Tackling Tobacco
Smuggling. 2011.(81) Tackling illicit tobacco. 2015.(83)

178 // United Kingdom: Tackling Illicit Tobacco
writing, the UK has committed to leaving the European customs union. The disruption this is
likely to cause could provide opportunities for those engaged in the illicit trade.

The illicit tobacco trade is by no means the only type of illicit trade in the UK; the coun-
try’s total tax gap for 2015-16 was estimated at £34 billion (6 percent of tax liabilities), with
tax evasion accounting for an estimated £5.2 billion.(84) Tobacco excise duties and VAT
accounted for £2.4 billion of the tax gap. Efforts to reduce illicit tobacco therefore sit amidst
wider efforts to tackle illicit trade in the UK.

1.2 DESCRIPTION OF CURRENT APPROACH TO REDUCING ILLICIT TRADE

Overview of Legal Framework for Tobacco Products

Regulation of tobacco manufacturers. Tobacco manufacturing has ceased in the UK; how-
ever, tobacco manufacturers who supply the UK market must comply with the full range of
relevant legislation, including tobacco product regulations (86, 87) and supply chain legislation.

Licensing of wholesale and retail licensing. Wholesale and retail tobacco sellers are cur-
rently not licensed in the UK. Retailers are legally required to comply with a range of retail
laws including age restrictions (minimum age of sale 18 years), standardized packaging, and
point of sale tobacco display bans. These are enforced by local government.

Regulation of raw tobacco. Raw tobacco is not subject to excise duty, and there is therefore
a risk of illegal manufacture of tobacco products and excise duty evasion. Since April 2017,
businesses and individuals are prohibited from carrying on any activity involving raw tobacco
unless they have obtained approval from HMRC.(88)

Tobacco machinery licensing. Since April 2018, a registration scheme has been in operation
to license manufacturing machinery used to make tobacco products. From August 2018,
anybody manufacturing, purchasing, acquiring, owning, or in possession of tobacco-manu-
facturing machinery must hold a license issued by HMRC. The scheme has been introduced
to reduce the risk of excise duty evasion and prevent the illegal manufacture of tobacco
products. The creation of such a scheme was required to make the UK compliant with the
WHO FCTC Illicit Trade Protocol.(89)

Excise Movement and Control System. Under EU law, excise tax is paid in the country of final
consumption. The Excise Movement and Control System (EMCS) is an EU-wide computer
system which records duty-suspended movements of excise goods taking place within the
EU.(90) Since January 2011, all movements of goods under duty suspension are monitored
by the EMCS. The system records in real time the movement of tobacco and other excise
products for which excise duties have still to be paid, and helps to ensure that the appropri-
ate duties are paid at the final destination.

Internet and overseas sales. Buying some types of tobacco over the internet from another
EU country for personal use is permitted; however, UK VAT and excise duty must be paid on
the products prior to their entering the UK, and cigarettes and HRT may not be purchased in

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this way, due to UK fiscal mark requirements. Sellers are required to register by completing a
form which is submitted to HMRC, charge customers the relevant amount of tax, and make
arrangements for these taxes to be paid.(91)

Tax is not required to be paid on tobacco products brought into the UK by travelers, as long
as they are transported by the individual, they are for the traveler’s own consumption or will
be given away as gifts, and tax has been paid in the country of purchase. Travelers may bring
in an unlimited amount of tobacco; however, guide levels are provided to help Customs offi-
cers distinguish between genuinely private imports and commercial importation.(92, 93) The
guide levels for shoppers from within the EU are 800 cigarettes and 1 kg HRT.(94) Travelers
from outside the EU may bring in up to 200 cigarettes or 250 g HRT.(95)

Current requirements for tobacco packaging in the UK. The appearance of tobacco pack-
aging in the UK is determined by national and EU legislation. A recent EU Tobacco Products
Directive (TPD) set out rules for the presentation of tobacco products, but stopped short
of requiring standardized packaging of tobacco products (SPoT).(96) The UK government
implemented UK-level SPoT from May 2016.(86) SPoT applies to manufactured cigarettes
and HRT. The UK implementation of SPoT is too recent to assess whether it has had an
impact on the illicit market; however, prior to its implementation, HMRC published an analysis
which concluded that it was unlikely to have a significant impact.(97)

For all tobacco products, there are packaging requirements intended to avoid misleading
customers. For example, the products must not feature information about the tar, nicotine, or
carbon monoxide content or an indication that the product is less harmful than other products.

In addition, all tobacco products must carry combined health warnings (CHW) comprising a
text warning, graphic warnings, and smoking cessation information. There are general condi-
tions applicable to health warnings, such as that the health warning must cover the entire area
that is reserved for it and that the exact wording prescribed must be used.

Packaging requirements are summarized in Tobacco Packaging Guidance published by the
Department of Health.(98) The key requirements for cigarettes and HRT are summarized here.

All cigarette packs and individual cigarettes must be in standardized packaging, as follows:

»» external packet color Pantone 448C (a drab dark brown) with a matt finish

»» cuboid shape (rounded edges allowed)

»» a minimum of 20 cigarettes in each pack

»» packet made of carton or soft material

»» smooth surface with no texture or embossing

»» specified picture and text health warnings

Cigarette packs may not have

»» any other colors or markings

180 // United Kingdom: Tackling Illicit Tobacco
»» promotional images or logos

»» inserts / onserts

»» slim packets (but slim individual cigarette sticks are allowed)

»» indication of flavor of cigarette

»» non-standard noises or smells

»» features which change after sale

Similar, to cigarettes, HRT packs must be a non-shiny, drab dark brown and adopt a pre-
scribed shape. There are specifications as to featured text and internal packaging. HRT packs
must be either a pouch, cylindrical, or cuboid in shape, and a unit pack must contain a
minimum of 30 g of tobacco.

Brand names and variant names are permitted on cigarettes, cigarette packs, and HRT packs,
but these must be in a standardized format (font, size, color, etc.).

CHWs on both cigarette packs and HRT packs must cover 65 percent of the front and back of
pack (the same CHW on both sides), appear at the top edge of the surface, be positioned in
the same direction as any other information on that surface, have minimum dimensions of
52 mm wide and 44 mm high, and have a graphic health warning taken from an approved
set of images which are rotated annually.

Fiscal marks are required on both cigarette and HRT packs. An alphanumeric code is permit-
ted. Packaging security features used in the UK are described in section 1.3. There are also
requirements for the appearance of cigarette sticks and internal pack features (e.g., wrappers).

Overview of Institutional Framework for Tackling the Illicit Trade

National agencies. Since 2008, HMRC and the UK Border Force (previously Border Agency)
have shared responsibility for tackling the illicit tobacco trade in the UK. They share responsi-
bility for developing intelligence and reducing revenue losses, with distinct roles.

HMRC has responsibility for:

»» Collecting and enforcing tobacco duties

»» Investigating and disrupting criminal offences

»» Detecting and disrupting the supply of illicit tobacco inland

»» Excise and customs powers and legislation (80)

The UK Border Force has responsibility for

»» Detecting and seizing smuggled tobacco at the border

»» Arresting those suspected of smuggling offences and referring them to HMRC for
investigation (80)

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table 4. Full-Time Equivalents of Staff Employed on Tackling Illicit Tobacco,
2005-2010

HMRC UKBA* TOTAL
DETECTION & FULL-TIME
YEAR DETECTION INVESTIGATION INTELLIGENCE
INTELLIGENCE EQUIVALENTS
2005/06 1407 319 279 n/a 2005

2006/07 1557 278 295 n/a 2130

2007/08 1574 287 264 n/a 2125

2008/09 1500 395 255 n/a 2150

2009/10 153 360 172 1504 2189

2010/11 130 399 172 1504* 2205

*Note: For the UKBA, the figures provided are for staff assigned to detection and intelligence duties combined.
n/a denotes “not available.” The UKBA figures for 2010/11 and therefore the total for both agencies are
estimates, since the UKBA has not yet released these data.
Source: ASH. UK Tobacco Control Policy and Expenditure. (99)

Table 5. Expenditure on Staff Employed on Tackling Illicit Tobacco, 2005-2010*

HMRC UKBA* TOTAL
DETECTION &
YEAR DETECTION INVESTIGATION INTELLIGENCE
INTELLIGENCE
2006/07 £61,351,790.69 £13,246,434.95 £12,246,665.35 n/a £86,844,890

2007/08 £65,037,870.02 £14,243,597.55 £11,271,899.07 n/a £90,553,366

2008/09 £64,257,196.50 £19,998,544.53 £12,244,642.47 n/a £96,500,383

2009/10 £ 5,362,740 £20,840,605 £ 7,946,658 £61,100,000 £95,250,003

2010/11 £ 5,504,241 £20,270,831 £ 6,152,047 £58,735,712 £90,662,831

2011/12 n/a separately £25,636,005* £ 8,143,109 n/a n/a

*Note: includes detection, criminal investigation, and specialist civil investigation. Data from UKBA are not
available for 2011/12.
Source: ASH. UK Tobacco Control Policy and Expenditure. (99)

The UK takes an “end-to-end” approach to disrupting the illicit supply chain, which requires
activity both inland and overseas. Key to HMRC’s efforts to tackle the illicit trade is its inter-
national network of Fiscal Crime Liaison Officers (FCLOs). The FCLOs are responsible for
liaising with international fiscal and law-enforcement agencies and developing intelligence
to intercept illicit tobacco destined for the UK market.

National staffing and expenditure. From 2000, a total of £209 million was invested over
three years in 1000 more frontline and investigative staff, and additional x-ray scanners to
detect high-volume cigarette smuggling in freight. Detailed data on levels of staffing and

182 // United Kingdom: Tackling Illicit Tobacco
expenditure are generally not published; some information was provided in response to a
series of Parliamentary Questions. This information is summarized in Table 4 and Table 5.
Since 2010/11, the Government has refused to provide this information, so more recent data
are not available.

Local government. In the UK, Trading Standards are local government departments that
promote and enforce fair, safe, and legal trading practices. Trading Standards are responsible
for developing local intelligence and detecting and seizing illicit tobacco products.

The Trading Standards staff, who cover a wide range of consumer protection responsibilities
and are crucial to effective collaborative working on illicit trade, are increasingly under threat.
During the last six years, total spend nationally on Trading Standards has fallen from £213m in
2010 to £124m in 2016.(100) The National Audit Office (NAO) has calculated that the number
of full-time equivalent Trading Standards staff decreased by 56 percent in seven years, from
3,534 in 2009 to 1,561 in 2016, with 81 percent of services considering that funding reductions
have had a negative impact on their ability to protect consumers in their area.(85)

Figure 5. The Illicit Tobacco Program Strategic Framework
Illicit Tobacco Programme Strategic Framework

Aim: To reduce the supply of and demand for illicit tobacco
as part of broader strategies to reduce smoking prevalence

Objective 2 Objective 3 Objective 5 Objective 6 Objective 7
Objective 1 Objective 4 Deliver Work with Protect Objective 8
Engage Gather and Assess
Develop Deliver Marketing and Retailers and Policies from
Frontline Develop Progress
Partnerships Enforcement Communica- Other Tobacco
Workers Intelligence
tions Businesses Industry

Output 2 Output 5 Output 6
Output 1 Output 3 Reduced Output 7 Output 8
Engaged Output 4 Better
Stronger Better Demand Alignment Continuous
Frontline E ective Informed
Partnerships Intelligence Increased with FCTC Improvement
Workers Enforcement Retailers and
Intelligence Businesses

Result: Reduced Illicit Tobacco Market

Regional partnerships. Local government departments are well placed to tackle illicit trade,
but need to work across wider geographical boundaries and with key stakeholders. In the
UK, multi-agency regional partnerships designed to tackle the supply of illicit tobacco prod-
ucts in a coordinated way have been successful.

The North of England Tackling Illicit Tobacco for Better Health program was initially a part-
nership between public health, local, and national enforcement authorities. With the Illicit

183
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Tobacco Partnership (a collaboration of Fresh, Action on Smoking and Health [ASH], and the
UK Centre for Tobacco and Alcohol Studies [UKCTAS]5), the group has adopted an eight-
strand strategic framework for reducing illicit tobacco as part of broader tobacco control
measures. The strategy was refreshed and updated in 2016 (Figure 5).

In response to the results of research at the launch of the program, a number of policy
responses were developed and delivered:

»» England’s first sub-national demand-reduction social marketing campaign, “Get Some
Answers,” was launched in 2010, designed to inform the public of issues relating to illicit
tobacco, for example, its links to crime and its availability to children.

»» Successful evaluation and evidence that the public had been “warmed up” to these issues
led to the campaign’s evolution into the “Keep It Out” campaign, which had a stronger
call to action – if you know where illicit tobacco is being sold, report it. The campaign
provided clear channels for reporting intelligence. It was refreshed and re-launched in the
North East in 2017.

»» Local trading standards teams, based within local government, were provided with elec-
tronic handheld scanners to scan the anti-counterfeit marking on cigarette packs, helping
determine the authenticity or otherwise of suspected illicit tobacco products. A regional
post, working across the North East, also enhanced local enforcement capability and
encouraged collaboration across boundaries.

»» Enhanced partnership working between local enforcement colleagues in trading stan-
dards and national partners in HM Revenue & Customs.

»» A commitment was made to track the size of the illicit tobacco market, and public opin-
ion on the topic, every two years from the 2009 baseline.

»» Regular North East and national meetings to discuss illicit tobacco are convened, in line
with obligations under Article 5.3 of the WHO FCTC.

The first two years of the North of England program were evaluated, and the partnership was
deemed to be “an exemplar of partnership working … and deserves to be widely dissemi-
nated.”(102) This recommendation was supported by the National Audit Office (NAO), which
scrutinizes public spending for Parliament.(82) Unfortunately, due to lack of funding, this has
not been possible to date.

Enforcement Mechanisms

Supply chain legislation. Memoranda of Understanding (MoUs) between HMRC and
tobacco companies have been consistently used as a means of restricting the availability of
tobacco industry illicit; however, MoUs are voluntary agreements and are not legally binding.

5
Fresh is the UK's first dedicated regional tobacco control program. ASH is a campaigning public health charity
that works to eliminate the harm caused by tobacco. UKCTAS is a network of universities conducting research,
teaching, and policy work on tobacco and alcohol.

184 // United Kingdom: Tackling Illicit Tobacco
In 2006, the UK government introduced supply chain legislation (SCL) legally obligating
tobacco manufacturers not to facilitate smuggling. The purpose of the legislation is to
restrict the supply of genuine tobacco products to lower-tax EU countries with a view to
these products’ being smuggled back into the UK and becoming tobacco industry illicit. The
legislation allows for penalties of up to £5 million for manufacturers that do not adequately
control their supply chains.

In its 2013 report examining HMRC’s progress in tobacco smuggling, the NAO highlighted
that over-supply of genuine TI products was still a major concern and concluded that
HMRC had not applied the full range of sanctions available under supply chain legislation.
(85) Section 1.5 of this chapter describes the extent to which tobacco industry illicit (genuine
product on the illicit market) remains a problem.

Sanctions. A range of sanctions are in place to punish individuals linked to all levels of the
illicit tobacco trade. These include:

»» Seizure of goods

»» Seizures of vehicles/vessels and possible non-restoration

»» Seizure of cash under the proceeds of crime

»» Criminal prosecution with custodial sentences up to seven years

»» Confiscation of assets under the proceeds of crime

»» Assessment for the loss of duty

»» Financial wrongdoing penalties of up to 100 percent of the duty due

»» Civil action

»» Fines of up to £5000 for selling illicit tobacco not bearing appropriate fiscal marks

»» Prohibition on the sale of tobacco products for up to six months

»» Referral for withdrawal of haulier’s licence

»» Naming & Shaming (83)

Governance processes in relation to tackling illicit tobacco in the UK

The UK government’s anti-smuggling strategies are published in the public domain. The
magnitude and impact of the illicit market is made public through annual publication of data
about the size of the illicit market and quarterly reports on tax revenues and the quantity
of tobacco released for sale.(103, 104) The Government also publishes information on the
delivery of the objectives of its anti-smuggling strategies, including seizures and enforce-
ment activity, although at the time of writing this had not been updated since July 2016.(105)

In addition, the NAO scrutinizes public spending for Parliament and helps Parliament hold the
government to account and improve public services. The NAO published a report on HMRC’s
progress in tackling the illicit tobacco trade in 2013.(85) Parliamentary oversight is provided by

185
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

parliamentary select committees. The primary committee with oversight of HM Revenue and
Customs performance is the Public Accounts Committee, which published specific reports on
tobacco smuggling in 2002 and 2013.(15, 106) However, Inquiries covering issues relating to
the illicit trade in tobacco were also carried out by the Health Select Committee in 2000 and
the Home Affairs Select Committee in 2014.(107, 108) The Government is required to respond
to Select Committee Inquiry reports and recommendations.

The UK government has also committed to fulfilling its obligations under Article 5.3 of the WHO
FCTC to protect its public policy with respect to tobacco from the commercial and vested
interests of the tobacco industry.(18, 109, 110) It has committed to publishing the details of all
policy-related meetings between the tobacco industry and government departments. However,
this excludes meetings to discuss operational matters to reduce the illicit trade in tobacco and
bilateral meetings between tobacco manufacturers and HM Revenue & Customs.(111)

The oversight and scrutiny provided by these mechanisms has been helpful in ensuring
that the Government’s anti-illicit strategies have been regularly reviewed in the light of the
evidence. The Finance Ministry works collaboratively with the Department of Health and
with civil society to ensure that government policies take into account not just the need to
protect revenues but also public health.(83) The publication and regular updating of govern-
ment strategies on tackling the illicit trade in tobacco and the outcomes of these strategies
ensure that the action taken by government to tackle the illicit trade can be subjected to
public scrutiny.

International Action to Tackle Illicit Tobacco

Activity to combat the illicit tobacco trade in the UK is supported by action at the interna-
tional level, in particular, legal agreements between the EU and all the major multi-national
tobacco companies. The first Agreement, in 2004, was with Philip Morris International in
settlement of legal action in the US courts to recover excise duties lost through smug-
gling. (112) Philip Morris International (PMI) committed to paying the EU £1.25 billion over
twelve years and to control its supply chain in future, with financial penalties due if it were
found not to have done so. Similar agreements were subsequently signed with Japan
Tobacco International (JTI) in 2007 (expiring 2022), and with British American Tobacco
(BAT) and Imperial in 2010 (expiring 2030).(112-114) The UK was not originally a party to the
Agreements but signed up in 2009.(115)

An independent evaluation suggests these agreements have not served their intended
purpose and instead have tended to benefit the industry.(72) Fines (referred to as payments),
for example, have been tiny and an insufficient deterrent to ongoing TI involvement in illicit
trade. The total paid out by TTCs as a result of the agreements between 2004-12 amounted
to only 0.08 percent of the estimated loss of revenue in the EU caused by illicit trade during
this period.(72, 73) Meanwhile, the industry’s own data suggest that TI product accounted for
the vast majority of the illicit market during that period (Figure 9). Following criticisms of its
effectiveness, the PMI Agreement was not renewed when it came to an end in 2016.(72, 73)

186 // United Kingdom: Tackling Illicit Tobacco
The UK is a Party to the Illicit Trade Protocol of the WHO FCTC, which comes into force
in September 2018, with a first Meeting of the Parties in October. A cost-benefit analysis of
implementing the Protocol suggested that it could reduce smuggling in the UK by up to 80
percent, save 760 lives a year, and be worth £5.7 billion to the UK in net present value.(116)

1.3 INNOVATIVE AND TECHNOLOGICAL SOLUTIONS (FOR PACKAGING)

Fiscal Marks

A fiscal mark is required on cigarettes and HRT imported into the UK to indicate that UK duty
has been paid (Note: this also applies to products produced in the UK, but UK-based pro-
duction has recently ceased). Other tobacco products are exempted. The products must be
marked before they enter the UK, and there are penalties for supplying or selling non-com-
pliant products. The requirements for the mark are clearly specified.(117) In brief, the words
“UK DUTY PAID” are required in Helvetica black bold type against a white background, and
must be written indelibly, clearly, and legibly. The mark must not be hidden or obscured, nor
must the mark obscure any health warning or other written or pictorial matter.

Anti-Counterfeiting Technology

An anti-counterfeit marking scheme has been in place in the UK since 2007, with a view
to deterring and detecting counterfeit products, and to prevent legitimate retailers from
being unfairly disadvantaged. The marks consist of a covert (not visible with the naked eye)
taggant. A taggant is a chemical element which is added to the ink, and is detectable using
hand-held scanners.(118, 119) The implementation of anti-counterfeiting technology was the
result of a voluntary agreement between the industry and the UK government. The marks
were introduced for cigarettes in October 2007 and extended to HRT in October 2008.(81)
The UK government has also allowed the tobacco industry to trial its Codentify system in
the UK as a means for testing product authenticity, so that it could examine whether it could
provide a useful additional tool to enable product authentication. Given (1) the TI’s attempts
to promote Codentify as a track-and-trace system and (2) widely held concerns about
Codentify, it is important to note that the trial is concerned only with the use of Codentify
for product authentication. No other aspect of the system is being used or evaluated, and
the government has made clear that it does not endorse this product in any way.(120-122)

Tracking and Tracing

Tracking and tracing involves monitoring the production, movement, and trade of tobacco
products using secure and unique identifiers on such products. The new EU Tobacco
Products Directive (2014/40/EU) requires EU member states to introduce an EU-wide track-
ing and tracing system by May 2019.(96) The Illicit Trade Protocol, to which the UK is a Party,
also requires the implementation of a tracking and tracing system.(123)

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

1.4 RESULTS OF REFORMS TO ADDRESS ILLICIT TRADE - GOVERNMENT DATA

The UK government makes a concerted effort to collate data on the illicit tobacco trade,
both to measure revenue losses and to evaluate its anti-illicit strategy. This is essential in
understanding the size and nature of the problem, identifying emerging issues, and assessing
the effectiveness of the strategy. This section gives an overview of the methods of measure-
ment used by government to measure the illicit trade and the data they provide to evaluate
the illicit tobacco strategy:

»» The illicit market share

»» Revenue losses associated with the illicit trade

»» Seizure volumes

»» Number and results of criminal investigations

Illicit Market Shares and Associated Revenue Losses

Measurement methods. HMRC publishes tax gap estimates for cigarettes and HRT each
year. Up-to-date survey data currently allow HMRC to publish these in a timely fashion, with
a lag of around six months.

The general approach has remained consistent since the first publication in 2001, but the
methodology has been modified over time to take account of changes to data collection.
Each year, previous estimates are re-estimated using the revised methodology, to ensure
that they are comparable over time.

The most recent data on illicit market shares and associated revenue losses were published
in 2017. The methods used are made public in a detailed methodological annex and are
summarized here.(124)

Calculating illicit consumption and market share. HMRC adopt a top-down approach to
measuring tax gaps for tobacco, whereby they estimate total consumption and subtract
legitimate consumption to estimate illicit consumption:

ILLICIT CONSUMPTION = TOTAL CONSUMPTION – LEGITIMATE CONSUMPTION

Illicit market share is calculated as:

ILLICIT MARKET SHARE = (ILLICIT CONSUMPTION/TOTAL CONSUMPTION) * 100

Total consumption per year is calculated using:

»» Estimates of prevalence of cigarette and HRT use and levels of consumption based on
national survey data

188 // United Kingdom: Tackling Illicit Tobacco
»» Estimates of the adult population

»» An uplift factor to account for under-reporting (see below)

Legitimate consumption is calculated as:

LEGITIMATE CONSUMPTION = UK DUTY PAID CONSUMPTION + CROSS-BORDER
SHOPPING + DUTY FREE

Estimates of UK duty paid are taken directly from HMRC returns. Cross-border shopping is
based on a survey of air and sea passengers, while duty free estimates are based on com-
mercial data.

Calculating revenue losses. Revenue losses are calculated by combining illicit market data
with information on duty rates and VAT:

REVENUE LOSS = (SPECIFIC DUTY + (AD VALOREM + VAT FRACTION)*AVERAGE
PRICE) * ILLICIT VOLUME

VAT fraction is the portion of the retail price that is VAT. HMRC acknowledge that because
some illicit product is sold in legitimate outlets, assuming that the VAT fraction is lost on all
purchases overestimates the losses.

The average price used is the weighted average price (WAP) of all cigarettes/HRT that were
UK duty paid. The WAP is calculated by weighting the retail price of each product by the
share of clearances in the cigarette/HRT market.

Measuring illicit market shares and associated revenue losses - limitations. A key limitation
of the way that HMRC calculates the tax gap is that the approach relies heavily on self-re-
ported survey data on prevalence and consumption; an uplift factor is used to account for
underreporting. The uplift factor applied to estimates of consumption is based on estimates
of consumption in a base year in which there is believed to have been little or no illicit
market, i.e. legitimate consumption accounts for all consumption.

There is uncertainty about some of the estimates that contribute to the calculations of illicit
market magnitude and revenue losses. HMRC publishes a range for the tobacco tax gap to
reflect the extent of this uncertainty.

Results. The government’s tax gap estimates indicate that during the first ten years of the
illicit tobacco strategy, from 2000-01 to 2009-10, the illicit market share for cigarettes was
nearly halved, dropping from 22 percent to 12 percent (central estimates) (Figure 6). The
illicit market share for HRT fell less consistently, but saw a drop from 61 percent to 44 per-
cent (central estimates) during the same period (Figure 7).

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

The estimated range for the revenue losses associated with illicit cigarettes and HRT is large,
and the estimates need to be considered in the context of changes in smoking prevalence,
changes in duty rates, and of the overall size of tax evasion in the UK. However, the estimates
for cigarettes suggest a significant fall during this period (Table 6). The trend for HRT is less clear.

Overall, these estimates demonstrate the success of the illicit trade strategy during this period.

Figure 6 suggests that, contrary to the first ten years of the strategy, the illicit market share of
cigarettes increased between 2010-11 and 2016-17. Due to a decline in smoking prevalence,
the size of the illicit market remained fairly stable during this period at around 5 billion ciga-
rettes per year (Table 6) (125); taken together, these estimates indicate that the illicit market
for cigarettes has become a larger proportion of a declining overall cigarette market.

Figure 6. Cigarettes: Estimated Range of Illicit Market Shares, 2000-01 - 2016-17

30%

25%

20%

15%
Note: Dotted lines
10% represent range
of estimate.
5% Source: HMRC. Tobacco
tax gap tables. (125)
0%
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17

Figure 7. HRT: Estimated Range of Illicit Market Shares, 2000-01 - 2016-17

80%
70%
60%
50%
40%
30% Note: Dotted lines
represent range
20%
of estimate.
10% Source: HMRC. Tobacco
tax gap tables. (125)
0%
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17

190 // United Kingdom: Tackling Illicit Tobacco
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
CIGARETTE ILLICIT MARKET VOLUMES (BILLION CIGARETTES)
Upper
20.0 19.5 16.5 18.0 14.5 12.5 12.0 9.5 9.5 9.0 7.5 6.5 7.0 6.5 5.0 7.0 7.0
estimate
Central
17.0 16.5 13.5 15.5 12.5 10.0 9.5 7.5 7.5 7.0 5.0 4.0 4.5 4.5 3.0 5.0 5.5
estimate
Lower
14.0 13.5 10.5 12.5 10.0 7.5 7.5 5.5 5.0 5.0 3.0 1.5 2.5 2.5 1.5 3.0 4.0
estimate

CIGARETTE REVENUE LOSSES (£ MILLION)
Upper
3200 3200 2800 3200 2600 2400 2300 1900 1900 1900 1700 1600 1900 2000 1500 2200 2300
estimate
Central
2800 2700 2300 2700 2200 1900 1800 1500 1500 1500 1200 1000 1300 1400 900 1600 1800
estimate

Source: HMRC. Tobacco tax gap tables. (125)
Lower
2300 2200 1800 2200 1800 1400 1400 1100 1100 1000 700 400 600 800 400 1000 1200
estimate

HRT ILLICIT MARKET VOLUMES (THOUSAND KG)
Upper
7,000 7,400 7,300 6,600 7,700 7,200 6,800 5,700 6,500 5,600 5,200 4,900 5,200 5,500 4,400 4,000 3,400
estimate
Central
5,600 5,900 6,000 5,400 6,700 6,100 5,700 4,700 5,500 4,700 4,200 4,000 4,200 4,700 3,700 3,300 2,700
estimate
Lower
4,200 4,500 4,700 4,200 5,800 5,000 4,500 3,700 4,600 3,800 3,200 3,100 3,300 3,800 3,000 2,500 2,100
estimate

HRT REVENUE LOSSES (£ MILLION)
Upper
800 900 900 900 1000 1000 1000 800 1000 900 900 1000 1100 1200 1000 1000 900
estimate
Central
700 700 700 700 900 800 800 700 800 700 700 800 900 1100 900 800 700
estimate
Lower
500 600 600 500 800 700 600 600 700 600 500 600 700 900 700 600 500
estimate
Table 6. Illicit Market Volumes and Associated Revenue Losses, 2000-01 - 2016-17

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

During the same period, the illicit HRT market continued to decrease, both in terms of
market share (Figure 7) and in terms of volume. The market volume of illicit tobacco was
estimated at 4,200,000 kg in 2010-11 and 2,700,000 kg in 2016-17 (Table 6).(125)

These findings suggest that, while the strategy has continued to have some success, this may
have been undermined by cuts in funding for local-level enforcement in recent years; how-
ever, the reasons for the change in trend have not been comprehensively evaluated. (126)

Volume and Composition of Products Seized

Measurement methods. The volumes of seizures reported by HMRC and Border Force are
based on estimates made at the point of seizure. While seizure volumes can reflect levels
of illicit, they more clearly reflect the scale of the enforcement effort and fluctuations in the
ease of detection resulting from changes in the nature of the illicit market.

The composition of seizures – in terms of the proportions of the illicit trade which consist
of TI illicit, cheap whites, and counterfeit - is an indicator of the success of efforts to control
the supply chain, particularly supply chain legislation. However, these data are only compiled
on large seizures (250,000 cigarettes or more from 2004-05 to 2006-07 and 100,000 or
more cigarettes thereafter).

Results. UK government data indicate the high volume of seizures since the implementation
of the strategy in 2000. During the first 10 years of the illicit tobacco strategy, more than 20
billion cigarettes and 2700 tonnes of HRT were seized.(81) Table 7 summarizes the volume
and revenue value of seizures since 2008-09.

Between 2008-09 and 2015-16, cigarette seizures were relatively constant; the illicit market
share declined during much of that period, indicating an increase in the interdiction rate (the
volume of goods seized as a proportion of the total volume of illicit goods targeted at the
UK).(85) HRT seizures fluctuated between 259 tonnes and 572 tonnes. In 2012-13, over two-
thirds of cigarettes seized were seized abroad, while approximately three-quarters of HRT
was seized at the border.(85)

Data on large seizures suggest that the share of the illicit cigarette market accounted for
by genuine UK brand cigarettes has declined under recent supply-chain legislation, from 31
percent in 2004-05 to 5 percent in 2012-13.(85) For HRT (based on large seizures consisting
of 50 kg of HRT or more), the proportion fell from 75 percent in 2007-08 to 17 percent in
2012-13, but this proportion has fluctuated significantly over time.(85)

Significant concerns have been raised about the accuracy of seizure data. In particular,
experts have questioned the practice of basing seizure composition reports entirely on data
from large seizures.(73, 122) The UK government has therefore recently invested in compil-
ing comprehensive seizure data.(127, 128)

192 // United Kingdom: Tackling Illicit Tobacco
Table 7. Total Illicit Cigarette and HRT Seizures by HMRC and Border Force, 2008-
09 - 2015-16

2008-09

2009-10

2014-15
2013-14

2015-16
2010-11

2012-13
2011-12
CIGARETTES
Volume (billion) 1.8 1.7 1.7 1.7 1.9 1.4 1.7 1.7

Revenue value (£ million) n/a n/a n/a n/a n/a 410 542.7 561

HRT
Volume (tonnes) 259 403 389 572 483 330 313 286

Revenue value (£ million) n/a n/a n/a n/a n/a 74.6 73.8 70
*Note: NAO report did not report value of seizures.
Source: 2008-09 – 2012-13: National Audit Office. Progress in tackling tobacco smuggling. (85); 2013-14 –
2015-16: HMRC Tackling tobacco smuggling: outputs(105)

Number and results of criminal investigations

Measurement methods. HMRC publishes a range of data on levels of criminal enforcement
activity and civil penalties related to the illicit tobacco trade, including numbers of prosecu-
tions and the revenue loss prevented as a result of criminal enforcement activity. These data
provide a further indication of the benefits of efforts to tackle illicit trade.

HMRC’s key indicator of the impact of its investigations against organized crime is an esti-
mate of revenue loss prevented. HMRC’s estimates of revenue loss prevented through criminal
enforcement activity are calculated at the point of first intervention (seizure or arrest). The
scale of the fraud disrupted is estimated, and then extrapolated based on the prevention of
12 months of future fraudulent activity.

The NAO underlines that this method can either under-report benefits (if initial estimates of
the scale of the fraud are conservative) or over-report benefits (for example, if a case does
not progress to full prosecution).(85) While reporting the impact at outcome (e.g., successful
prosecution) would be more accurate, this would weaken the link between the activity and
benefit reported within a year.

Results. Between 2011 and 2015, annual prosecutions for tobacco offences rose by 50
percent, with 177 people being convicted of organized tobacco crime offences, and 605
people convicted of smaller-scale tobacco crime offences.(83) While detailed data on the
prosecutions are not published, cases are in the public domain and press releases about
cases are regularly published.(129)

HMRC’s key measure in relation to lower-level criminal activity is the value of civil assess-
ments and penalties issued. In 2011-12, these reached £8.2 million; in 2012-13 their value

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table 8. Criminal Enforcement Activity and Civil Penalties, 2013-14 to 2015-16

CRIMINAL ENFORCEMENT ACTIVITY 2013-14 2014-15 2015-16
Number of individuals prosecuted 328 417 431

Number of individuals convicted 271 237 268

Number of tobacco related confiscation orders 28 36 38

Value of tobacco related confiscation orders (£ million) 3.50 1.4 1.32

Revenue loss prevented (£ million) 606 968.1 983.1

CIVIL PENALTIES
Number of tobacco related wrongdoing penalties issued 1,571 1,339 1,335

Value of tobacco related wrongdoing penalties issued (£ million) 3.2 2.5 2.2

Number of assessments for tobacco products duty issued 1,659 1,376 1,461

Value of tobacco products duty assessments issued (£ million) 15 7.6 15.7

Source: HMRC Tackling tobacco smuggling: outputs (105)

was £17.7 million.(85) Between 2011 and 2015, £49 million was raised in assessments and
penalties.(83)

The results of criminal investigations and civil penalties issued from 2013-14 to 2015-16 are
summarized in Table 8 below. The revenue loss prevented in recent years has been esti-
mated at close to £1 billion.

1.5 COSTS AND BENEFITS OF THE ILLICIT TOBACCO STRATEGY

A formal evaluation of the financial costs and benefits of the illicit tobacco strategy has not
been published; nor has the effect of the strategy on smoking prevalence been assessed.
In the absence of detailed data on expenditure on tackling illicit tobacco, it is not possible
to fully assess the return on investment. Nevertheless, the data presented above give some
indication of the financial costs and benefits, which are summarized here.

In 2000, £209 million was invested in extra staff and x-ray scanners to support implementa-
tion of the illicit tobacco strategy.(16) The limited data published more recently indicate staff
expenditures by HMRC and the Border Agency on detection, investigation, and intelligence
of around £90 million per year.(99) These data do not capture all relevant costs, such as
expenditure on new technology or trading standards, but are likely to represent the bulk of
expenditure on the illicit tobacco strategy.

It is not possible to determine what the value of revenue losses would have been in the
absence of the illicit tobacco strategy; however, when the first strategy was published,
smuggling was on an upward trend and it was predicted that the market share of illicit
tobacco would grow from 21 percent to a third within two years in the absence of action.

194 // United Kingdom: Tackling Illicit Tobacco
As described above, the strategy successfully reversed the increasing trend. The value of
seizures, estimates of revenue losses prevented by criminal investigations, and reductions
in estimated revenue losses - despite regular tax increases - demonstrate that the financial
benefits are significant.

In 2016-17, the estimated revenue losses associated with illicit cigarettes were £1 billion
lower than in 2000-01; in 2014-15, they were nearly £2 billion lower.(125) The revenue value
of cigarettes and HRT seized by HMRC and the Border Agency has been over £600 million
in recent years.(105) The future revenue loss prevented by criminal enforcement activity
increased to close to £1 billion for the year 2015-16.(105)

Taken together, the available data indicate that investment in measures to tackle the illicit
trade has delivered a significant return on investment.

1.6 ONGOING CHALLENGES: TACKLING THE TOBACCO INDUSTRY’S ROLE IN THE
ILLICIT TOBACCO TRADE

Sections 1.4 and 1.5 described the success of the government strategy since 2000 but
underlined that the problem of illicit tobacco in the UK remains significant. Furthermore,
the data presented above to do not capture comprehensive information about the nature
of the illicit market. This section describes the nature of the illicit market in the UK. It offers
evidence of the industry’s ongoing role in the illicit tobacco trade and explores approaches
to tackling that involvement.

Data Suggesting Ongoing Industry Involvement - Tobacco Industry Illicit Remains the
Single Largest Problem

Based on the composition of cigarette seizures, experts deduce the proportions of the illicit
trade which consist of tobacco industry illicit, cheap whites, and counterfeit. This informa-
tion can be vital in identifying underlying problems and directing appropriate supply chain
interventions. As outlined above, HMRC and UK Border Force data on the composition of
seizures only cover large seizures (consisting of 250,000 cigarettes or more from 2004-
05 and 100,000 or more from 2006-13). These data indicate that UK-branded TI illicit as
a proportion of the illicit cigarette market has declined since supply chain legislation was
implemented, falling from 17 percent to 5 percent in 2012-13.(85) For HRT, the proportion
has fallen since 2007-08 (75 percent), to 17 percent in 2012-13.(85)

However, as previously noted, significant concerns have been raised about the quality and
relevance of large-seizure data.(73) Other data sources (including those based on seizures
regardless of size) indicate that estimates based only on large seizures significantly underes-
timate the proportion of the illicit market that comprises tobacco industry illicit product.(72,
73) This is thought to reflect a number of issues: (i) counterfeit products are now trans-
ported in large quantities and are therefore likely to be seized in large batches, while TI illicit
is increasingly transported in smaller quantities; (ii) TTCs investigate and alert government
authorities to other forms of illicit (counterfeits and cheap whites), which are therefore more

195
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

likely to be seized; (iii) TTCs play a role in evaluating which seized products are counterfeit
and which genuine. For example, following litigation brought against the major tobacco
transnationals for their involvement in tobacco smuggling, the EU reached legal agreements
with the firms. (130-133) Under these arrangements, the companies were required to pay
ongoing penalties, should their products continue to be found in illicit seizures. However,
the tobacco firms themselves were asked to help determine which seized products were
genuine and which counterfeit.(72, 73)

The need for independent data on the nature of the illicit market is clear. The UK
Department of Health therefore funded the Trading Standards Institute to systematically col-
lect data on tobacco seizures regardless of size. Two periods of data collection in 2014 and
2015-16 suggested that approximately 70 percent of seized cigarettes were tobacco industry
illicit (Figure 8).(122, 127, 128) Other data sources support that finding.(122) The latest World
Customs Organization data indicate that, globally, approximately 70 percent of seizures are
tobacco industry illicit (Figure 10). Even data funded by the tobacco industry itself show that
tobacco industry illicit remains the largest category of illicit cigarettes across the EU (Figure
9), with TI illicit comprising an estimated 89 percent of the illicit market in 2007 and 58
percent in 2016.

In short, diverse data consistently show that across the UK, the EU, and globally, the single larg-
est component of the illicit tobacco market is tobacco industry illicit.(122) This is despite regular
claims by the tobacco industry that the main problems are cheap whites and counterfeit.

Figure 8. Operation Henry Results: % Share of UK Illicit Market by Type With
Correction for 2015/16 data* Estimates

80%

60%

40%

20%
2014
2015-16
0%
TI illicit* Illicit whites Counterfeit

Source: Trading Standards Institute.(127, 128) Based on systematically collected seizure data from nine English
regions between April-November 2014 and December-April 2016.
*Graphs and corrected analysis by Gilmore
This report identified the two most-seized products, West and Winston, as cheap whites. However, these are
tobacco industry brands, sold in the UK by Imperial Tobacco and Japan Tobacco International, respectively. In
the above graphs, these products have therefore been recoded as tobacco industry illicit. This is more likely to
give an accurate picture. It is unclear if a determination was made as to whether these seized products were
genuine or counterfeit. However, these products are generally not widely sold in the UK. Thus, it is thought
unlikely that counterfeiters would target counterfeit West and Winston at the UK market.

196 // United Kingdom: Tackling Illicit Tobacco
Figure 9. Nature of Illicit Cigarettes in the European Union – Collated Results from
the Project Sun and Star Reports Of Volume and Type (billions of sticks)

30
Illicit white
20
Counterfeit*
10
Tl illicit
0
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016
Source: Data (based on sales figures, empty pack surveys, and consumer surveys) taken from the Project Sun
and Project Star reports published by KPMG and funded by the tobacco industry. KPMG’s 2017 Project Sun
report (with data for 2016) was funded by the Royal United Services Institute which receives funding from the
tobacco industry.(134-140)
* The Counterfeit data in the Project Sun/Star reports comprises just counterfeit PMI brands from 2007-11 and
counterfeited brands for all 4 TTCs from 2013 onward.
Analysis and graphs by Gilmore

Figure 10. WCO Latest Available Global Data Showing the % of Cigarettes Seized
by Type

80%
73% 69%

60%

40%

25%
20%
20%
7% 7% 2011
2012
0%
TI illicit* Illicit whites Counterfeit

Source: WCO data taken from the WCO Illicit Trade Report 2012.(141) Based on data of seizures of all quantities.
Analysis and graphs by Gilmore

Other Evidence of Ongoing Tobacco Industry Involvement

These data suggest that, at best, the TI is failing to control its supply chain: how else could
such large numbers of tobacco-company products end up on the illicit market? Growing
evidence from diverse sources, including industry whistleblowers,(142) investigative journal-
ists,(143) researchers,(144) and government investigations, suggests that TTC involvement
may, however, be less passive.(85, 122, 145) UK government reports highlight that the

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

tobacco industry has continued to oversupply its products to low-tax jurisdictions, in the
knowledge that these products would leak back into the UK.(15, 76, 85, 145)

The National Audit Office noted that 2011 estimates showed “actual supply of some brands
of hand-rolling tobacco exceeded legitimate demand by 240 per cent.”(85) The Public
Accounts Committee argued the need “to put a stop to the abuse of exports by tobacco
manufacturers.” Approaches should include naming and shaming those who fail to co-op-
erate.(106) In line with these conclusions, BAT was recently fined £650,000, reduced on
appeal to £100,000, for over exporting hand-rolled tobacco to Belgium, which then found
its way back to the UK.(146-148) While such fines are small compared to industry income,
the maximum penalty is a more substantial £5 million and the threat of such supply chain
fines can be used by HMRC to encourage change in TTC behavior.

The Role of Civil Society in Supporting Evidence-Based Government Policy on Tax and
Illicit and Addressing TI Misconduct

The tobacco industry in the UK, as elsewhere, has increasingly used the threat of illicit
tobacco to argue against tobacco tax increases and other tobacco control policies, perhaps
most notably plain packaging. Such arguments can hold sway given governments’ fears
about potential revenue losses. Civil society in the UK, including close collaboration between
researchers and NGOs, has long played a key role in exposing tobacco industry misconduct
and countering the industry’s misleading data and arguments. This has enabled the advance-
ment of evidence-based government policy.

Refuting industry arguments that tax increases drive illicit trade. The tobacco industry
consistently argues that high taxes inevitably lead to high levels of illicit, ignoring the strong
correlation between the level of corruption and tobacco smuggling, as well as the role of
enforcement.(62) Although in some jurisdictions industry arguments have been success-
ful in influencing policy,(58) in the UK, civil society organizations, working with the media,
were able to expose the tobacco industry’s facilitation of the smuggling of its own products,
spurring parliamentary committees to carry out Inquiries.(63, 149, 150) These Inquiries led to
reports containing strong recommendations to Government and further negative publicity
about tobacco industry misbehavior both within the UK(151) and internationally (108, 110).
As a result, tobacco industry claims that tobacco taxes are the sole driver of illicit trade have
been met with skepticism.

Despite initial civil-society successes, however, the TI continued to argue that tax increases
spur illicit trade.(152) More recent research on tobacco industry profitability and pricing
played a key role in showing that, in fact, half of recent cigarette price increases in the UK
were due to the tobacco industry’s raising its own prices over and above tax increases.(153)
This result suggested that, since tobacco firms were still able to increase profits by raising
prices, additional scope remained for the UK to raise its tobacco taxes, despite already
imposing some of the highest tobacco taxes in the world.(153)

198 // United Kingdom: Tackling Illicit Tobacco
Exposing the misleading nature of industry data and how firms use this data to scaremonger
and confuse. In recent years, the tobacco industry has increasingly commissioned its own
data on illicit tobacco to try to underpin its arguments that tax drives illicit trade. Much of these
data come from empty pack surveys (EPS), where discarded cigarette packs are collected,
assessed, and categorized.(154) While such surveys can, if conducted properly, provide useful
data on non-domestic goods (i.e., products which have not paid local duties), they cannot in
fact determine which of those products are legal (for example, duty-free products brought
into the country by tourists, students, or workers from abroad) and which are illegal (i.e., illicit).
Hence, these surveys cannot directly measure the illicit tobacco trade. Moreover, the TI and
those doing surveys for it are notoriously opaque about their methodologies, generally volun-
teering no details (152) and refusing to provide clarification when asked.(155)

Nevertheless, in the UK, the TI has presented EPS data to the press in such a way as to
give the impression that they reliably measure the illicit tobacco market. Consequently,
media stories based on TI data have been found to routinely exaggerate the scale of the
illicit tobacco trade.(154) Such efforts, alongside alarming and misleading videos on TTC
websites(156) and TI misrepresentation of government data (the industry routinely cites the
upper rather than mid-point government estimate of illicit in its reports (154)), are designed
to create confusion about illicit. (154, 157)

Other industry-funded data have been produced by major accountancy firms such as KPMG,
Deloitte, and PricewaterhouseCoopers (134-140, 158-162), with European data produced by
KPMG based on modelled estimates. Independent evaluation shows that, by inputting EPS and
other data provided by the TI into its model with no external validation, KPMG tends to over-
estimate illicit.(73) Further, at the moment when standardized packaging was being debated in
the UK, KPMG changed its methodology in just two countries (Italy and the UK) in a way that
led to a sudden overestimate of illicit trade levels in these two markets. The firm’s report was
released early, accompanied by a press release highlighting this ostensible sudden increase,
in an apparent attempt to influence policy decisions about standardized packaging.(73) Only
once an independent critique of this methodology change (73) was made public did KMPG
reanalyze its data (a year later) and produce a lower, more realistic estimate.(163)

Elsewhere, the TTCs have commissioned KPMG or other accountancy firms to prepare
reports on the illicit tobacco trade which have, almost without fail, also been shown to exag-
gerate levels of illicit compared with independent data.(73, 144, 154, 155, 164-190) There is
growing consensus, therefore, that such reports are produced primarily to serve TI interests.
(73, 164, 191, 192)

Exposing the poor quality of tobacco industry evidence that standardized packaging drives
illicit. Most recently, the industry argued that standardized cigarette packaging would fuel
illicit trade and ultimately lead to policy failure and adverse social and economic conse-
quences.(152, 154, 164, 169) The number of media stories citing industry data on illicit
was shown to increase rapidly following the UK government’s announcement that it was

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

considering the option of standardized packaging, at a time when levels of illicit were in
fact falling.(154) As usual, industry arguments sought to exploit policy makers’ fears of losing
revenue through an expansion of the illicit tobacco trade.

Independent analyses showed that these arguments had no foundation (193) and that
industry “evidence” on this issue amounted to little more than anecdote and the opinion of
persons in the industry’s pay.(164) Subsequent analyses commissioned by the UK and Irish
governments supported the conclusion that there was no convincing evidence that the
introduction of standardized packaging would lead to an increase in illicit tobacco.(97, 194-
196) Both governments proceeded to introduce plain, standardized packaging.

Exposing industry third parties. Much of the questionable data we have discussed is col-
lected by individuals and organizations paid by the tobacco industry. It is generally these
individuals and entities, rather than the tobacco companies funding them, that are given
prominence in press stories.(197) Many of these figures are ex-policemen that the industry
pays to provide it, in industry spokespersons’ own words, with a “credible voice.”(198-203)
Such efforts create an aura of respectability and independence.

Similarly, analysis of the industry’s “evidence” that standardized packaging would increase illicit
showed that most of the findings has been produced by industry third parties. The TI almost
entirely failed to disclose this circumstance in its submissions to government.(164) For exam-
ple, TI submissions cited evidence from the Tobacco Retailers Alliance, the British Brands
Group, and the Anti-Counterfeiting Group, without mentioning that all of these organizations
were created (and in some instances entirely financed by) the tobacco industry itself.(164)

Numerous other individuals (see e.g. 204, 205) and organizations, the latter including retailer
front groups (206), research organizations (207-209), and think tanks (210, 211) with close links
to the tobacco industry, have repeatedly argued that tobacco control will increase illicit trade.
Most recently, in 2017, an All Party Parliamentary Group (APPG) on Illicit Trade, which has links
to the tobacco industry, was set up “to investigate and raise awareness of illicit trade in Britain,
support closer working with parliamentarians to bring fresh impetus and ideas to tackling illicit
trade and to highlight the impact on local businesses, high streets and communities” (212, 213).

All Party Parliamentary Groups (APPGs) are informal cross-party groups that have no official
status within Parliament. They are run by and for Members of the Commons and Lords,
though many choose to involve individuals and organizations from outside Parliament in
their administration and activities. In March 2018, the APPG on Illicit Trade launched its
formal inquiry into the state of such commerce in the UK. The report on the group’s findings
was published in July 2018. The report recommended the creation of a UK Anti-Illicit Trade
Group, which would see the government working together with industry to tackle the illicit
trade challenge.6 The APPG report also echoed arguments described above that taxes

6
The APPG report can be consulted via the following link: Illicit trade in the UK. All Party Parliamentary Group
on Illicit Trade. 2018. Available from https://connectpa.co.uk/wp-content/uploads/2018/07/Illicit-Trade-APPG-
report-2018LRi.pdf [Accessed 14 August 2018].

200 // United Kingdom: Tackling Illicit Tobacco
introduced to reduce the consumption of unhealthy commodities, such as the soft drinks
levy implemented in 2018, increase illicit trade. The report notably failed to mention the ITP,
which will be essential in informing future strategies to tackle the illicit tobacco trade. The
report was funded by PA Consulting, which has previously advised British American Tobacco
on tobacco tracking and tracing initiatives, and Coca Cola.

It is impossible to exhaustively analyze the tobacco industry’s complex third-party networks
here. However, the website www.TobaccoTactics.org, with help from tobacco advocacy
organizations such as ASH, publishes details on third-party links (157, 204, 214-216), so that
civil servants, politicians, journalists, and others can learn more about tobacco industry prac-
tices and front groups and determine whether particular individuals and organizations may
be acting on the tobacco industry’s behalf. Through initiatives of this kind, civil society has
increased the transparency of policy making and helped Government live up to its obliga-
tions under Article 5.3 of the WHO FCTC to protect tobacco policy from the commercial
and vested interests of the tobacco industry.(18, 217)

Civil society support for evidence-based policy. In 1993, a pre-budget submission by
a group of health organizations called for unique treatment of tobacco because of its
health consequences and for a commitment to real increases in tobacco taxes, not just
in the forthcoming budget, but for the longer term. In response, in the 1993 Budget, the
Government introduced the tobacco tax escalator discussed above, explicitly to reduce
smoking prevalence as well as raise revenue.(218) Confronting a large and rapidly growing
illicit cigarette market in the 1990s, the UK Government tackled illicit trade by introducing a
tough enforcement strategy rather than by cutting taxes.(16) Health organizations provided
support for the Government’s policy choice, which withstood vigorous lobbying efforts by
the tobacco industry.

The Finance Minister, who is responsible for tobacco taxation and illicit trade, meets with the
tobacco industry but also with civil society, as do other officials responsible for these policy
areas. Representations from advocacy organizations, working with the research community,
(163, 219-222) are taken seriously, and their recommendations are often adopted. From 2004
onwards, civil society organizations argued (in particular via ASH budget submissions) that the
tax escalator should be reintroduced. In 2009, taxes were again increased above inflation, and
the tobacco tax escalator was restored in 2010.

As noted, a diverse body of research examining tobacco industry profitability, pricing, evidence,
data, and conduct has been used to refute the industry’s misleading arguments and expose its
failure to control its supply chain.(11, 58, 72, 73, 122, 153, 154, 164, 189, 223-226) This research
has played a key role in enabling tobacco control policies, including high tobacco taxes, to
advance. A 2009 cost-benefit analysis of the Illicit Trade Protocol was influential in ensuring
that the UK supported its development and committed to ratification.(83, 116)

In 2010/11, civil society argued that, since the illicit market share of handrolled tobacco
was declining, the gap between taxation of manufactured cigarettes and the much lower

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taxation of handrolled tobacco needed tackling.(227) In the 2011 Budget, taxation on
handrolled tobacco was increased above the standard tax escalator of 2% by a further 10%,
then rose again in 2016 by an additional 3%. Research brought forth additional evidence on
the behavior of the tobacco industry in gaming tax levels and causing a widening price gap
between expensive and cheaper products, with implications for inequalities in smoking (11,
228). These findings were used to successfully advocate for the introduction of a Minimum
Excise Tax. (220, 229) Following a consultation in 2014, the Minimum Excise Tax was introduced
in 2017. (A general election in the intervening period initially delayed its implementation.)(230)

Evidence shows that prices are not a principal driver of illicit tobacco trade in Europe, and
that supply-side factors are a more important determinant (189). Civil society has effectively
used these findings, along with evidence that the tobacco industry itself remains involved
in illicit activity, to persuade the UK government to renew the tobacco tax escalator in the
current parliament.(50, 73, 222, 233)

1.7 CASE STUDY METHODOLOGY

This case study has been compiled using documents and data that are in the public
domain. A full reference list is provided in Annex I. Fresh North East contributed infor-
mation on regional partnerships, and HMRC were consulted to ensure the accuracy of
information including that presented on fiscal marks and anti-counterfeiting technology.

2. Lessons Learned and What Else Can Be Done to
Improve Results
2.1 LESSONS LEARNED

Tobacco taxation and strategies to reduce the illicit trade go hand-in-hand as measures
which are intended both to improve public health and protect and increase government rev-
enues. The UK experience underlines that eradicating smuggling is an issue of enforcement.
Cutting tobacco taxes is not an effective method of reducing the illicit trade.(58)

The overarching approach should encompass predominantly supply-side measures that aim to
tackle the illicit trade at home and overseas. Strategies should aim to disrupt supply and distribu-
tion chains, reducing the rewards and increasing the risks and penalties associated with the illicit
trade of tobacco. In the case of illicit products that cross borders, an end-to-end approach and
collaboration with international fiscal and law enforcement agencies is warranted.

There is a need to identify the size and nature of illicit trade using accurate data that are
independent of industry, and to monitor this over time. Setting targets for key indicators can
act as a motivator and mechanism for determining success. In the UK, regular monitoring
has enabled evaluation of the effectiveness of the national strategy and highlighted emerg-
ing challenges; the strategy has been regularly refreshed in response to new threats.

202 // United Kingdom: Tackling Illicit Tobacco
Good governance serves to support the implementation and continued development of the
illicit tobacco strategy. In the UK, active implementation of Article 5.3, on the publication of
strategies and monitoring data in the public domain, ensures transparency. Reports pub-
lished by the NAO and PAC have highlighted gaps in the strategy and its enforcement.

Despite efforts to tackle illicit tobacco in general, and tobacco industry illicit in particular,
there is extensive evidence that the tobacco industry remains heavily involved in the illicit
trade in the UK and funds the production and dissemination of misleading data about
the illicit tobacco market. It is essential that measures to control the supply chain be fully
enforced. Civil society (both academia and NGOs) plays a key role in providing unbiased
evidence, including on industry pricing, profits, and conduct. Civil society voices advocate
for stronger and more innovative evidence-based policy measures.

Strong policies on tax and the illicit trade are necessary but not sufficient to reduce smoking
prevalence. They should be used as part of a comprehensive set of measures to tackle the
burden of tobacco use.

2.2 WHAT ELSE CAN BE DONE?

The UK anti-smuggling strategy has achieved impressive results, but illicit tobacco continues
to undermine efforts to reduce tobacco use in the UK, and the revenue losses associated
with illicit tobacco remain substantial. Recent increases in the illicit market share of manufac-
tured cigarettes are a particular concern.

When the UK government first introduced its anti-smuggling strategy, targets were set for
a reduction in the tobacco market share accounted for by illicit tobacco. These targets
committed the government to reduce the illicit market share from 22% in 2001-2 to 13% by
2007-8.(16, 78, 234) These figures established a clear and transparent benchmark of what
success meant, and helped maintain the incentive for agencies to invest resources in this
effort. However, these targets expired at the end of 2008. In the 2008 joint HMRC UKBA
strategy, no formal targets were set. Reference was made to a partnership agreement that
foresaw sustaining the level of the illicit market at the target set for 2007-8, implying that
no further progress beyond this level was expected.(80, 234) The 2011 strategy was likewise
vague about outcomes, stating only that the objective was “to achieve further sustainable
downwards pressure on the illicit market in cigarettes and HRT through to 2015.”(81)

The latest strategy committed to “hold the cigarettes illicit market share at or below 10 per
cent” and to “contain the illicit market share for hand-rolling tobacco and reverse the recent
upward trend.”(83) In recent years, as smoking prevalence has declined significantly, the illicit
market has come to represent a larger share of the total market, even though in absolute
terms the illicit market has not grown significantly.(126) Given the joint objectives of public
health and finance, to reduce smoking prevalence and minimize revenue losses, it would be
more appropriate to define new objectives in terms of cutting revenue losses, rather than
reducing the market share of illicit tobacco.

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The evidence is clear that tobacco industry illicit remains a significant problem. It is essential
to improve control of the illicit supply chain, as stipulated by both the EU Tobacco Products
Directive and the Illicit Trade Protocol. Authorities must also ensure that implementation
of the ITP remains independent of industry.(122) In addition to maintaining and reinforcing
existing strategies, policy makers can weigh additional measures that may reignite reductions
in the illicit market and halt or reverse the revenue losses associated with illicit trade growth.
We will briefly review several of these policy options now.

Detailed Data Collection and Publication

Article 20 of the FCTC sets out requirements in relation to monitoring and surveillance of the
tobacco industry. The government collects some data from the industry, but access to these
data is currently only allowed if the industry gives its permission, which clearly limits the
usefulness of the arrangement. The collection and publication of detailed data on tobacco
sales, profits, marketing, and research would, among other benefits, facilitate independent
academic analyses of market developments. Such unbiased analyses, in turn, could inform
the development of tobacco control and tax policy, aiding the identification and understand-
ing of illicit market trends over time at local level. Publication of the following data in an
easy-to-use format are recommended.(222)

At national and international level on an annual basis:

»» Profits

»» Taxes (excise duties and corporation tax)

At national level, on a monthly basis:

»» Brand-specific price and sales data for all products

»» Marketing spend by category

»» Research spend by subject area

At local authority level

»» Sales data by product type for all products

Regional Partnerships

As described above in section 1.2, regional partnerships to reduce the illicit trade in the UK
have been successful. Key components of regional activity have included social market-
ing campaigns to reduce demand, local trading standards teams, and partnership working
between local enforcement colleagues and national partners in HMRC.

Despite the NAO’s calling for further roll out of such regional partnerships,(85) the only
partnership of this type that is currently functioning is in the North East; other partnerships in
the South West and North West have disappeared due to cuts in funding. There is a need for
greater encouragement and funding for regions to collaborate across boundaries to tackle
the illicit tobacco market.

204 // United Kingdom: Tackling Illicit Tobacco
Effective regional collaboration relies on adequate funding of trading standards staff to
protect consumers. Given that the financial benefit from reducing the illicit market and so
increasing revenues accrues to central government and to HMRC, it would be appropriate
for additional funding to be provided by HMRC, unless and until measures which require
tobacco manufacturers to foot these costs are implemented.

Supply Chain Licensing

Better control of the illicit supply chain is essential to reducing illicit trade; a supply chain
licensing scheme covering the full tobacco supply chain, including manufacturers,
wholesalers, retailers, importers, and exporters, has been recommended by a number of
organizations.(222) A positive licensing scheme – whereby businesses have to demonstrate
that they meet the required standards - could help to drive out those involved in the supply
of illicit tobacco at all levels of the supply chain, protect the business of legitimate retailers,
and help to protect tax revenues. The UK government rejected a positive tobacco licensing
scheme for retailers in 2017; however, public support for tobacco retailer licensing is strong,
and retailers have also been found to be supportive.(222, 235)

The license fee would generate a revenue stream to support administration and enforce-
ment. Requiring the tobacco manufacturers to meet the costs of licensing would spare
retailers, who make limited profits from selling tobacco, from having to pay more than a
small administrative fee. If the cost is passed on to consumers by manufacturers, this should
encourage quitting or shifting to less harmful products such as e-cigarettes.

Negative licensing schemes/registration for retailers have been implemented in some parts
of the UK; however, this type of legislation does not involve prior assessment of whether
retailers are fit to sell tobacco. Furthermore, if there is no license fee, there is no revenue
stream to support administration and enforcement.

3. Implications for Other Countries
Many of the lessons just outlined may be relevant to other governments seeking to tackle
the problem of illicit tobacco. The overarching approach of focusing on supply-side mea-
sures, enlisting the support of all relevant government agencies, and cooperating and
collaborating with other countries and international agencies is recommended for all coun-
tries. The fundamental components of an illicit tobacco strategy are improved detection and
enforcement and stronger penalties for those involved in the illicit tobacco trade.

In most settings, tackling the illicit trade is the responsibility of customs and tax administrators.
The oligopolistic nature of the tobacco industry means that some key aspects, such as tax
collection and controlling tobacco industry illicit, should be feasible as long as key legislative
frameworks are in place and are enforced. Appropriate human resources measures and tech-
nologies, supportive judicial systems, and increased collaboration and coordination between
customs and enforcement agencies within and between countries have been identified as
essential mechanisms for improving agencies’ effectiveness in combating illicit trade.(236)

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Controlling the illicit tobacco trade requires investment in technology – such as x-ray scan-
ners to identify illicit products in cargo – but also significant investment in human resources
in the form of intelligence networks and coordination and communication within customs.
(236) As the UK case demonstrates, domestic and international activity and collaboration
with a range of stakeholders at home and abroad is warranted.

Given the potential for substantial profits from the illicit trade, there is, however, a high risk of
corruption in settings with poor governance; several studies have highlighted the association
between corruption and the illicit tobacco trade.(236) Government commitment to com-
bating the illicit tobacco trade is essential. Assessing the scale of the problem is a key step in
highlighting the potential benefits of investing in a strategy to tackle the illicit tobacco trade.
The UK experience demonstrates that the benefits of measures to tackle the illicit trade sig-
nificantly exceed the costs when implemented effectively.

Policymakers must be aware of the role of the tobacco industry in the illicit tobacco market
and its efforts to mislead the public and decision makers regarding the causes, effects, and
scale of the illicit trade. Strategies to tackle the illicit trade must be developed and imple-
mented independently from the tobacco industry, in line with Article 5.3 of the FCTC.

Cultural acceptance of the illicit trade may also contribute to the problem.(237) Demand-
side activity to inform the public about the criminal nature of illegal trade, the implications of
illicit tobacco, and the consequences of being caught engaging in such illegal activities has
been shown to be effective in the UK.(102)

Ratification of the ITP is a key step which will place legal obligations on governments to imple-
ment national measures that would strengthen control over the supply chain, including through
the implementation of tracking and tracing of tobacco products. While significant up-front
investment is required, the long-term return on investment in activity to combat the illicit trade,
along with increased tobacco taxes, is substantial. All the more so, given that the Protocol rec-
ommends cost recovery from the tobacco industry. Governments should seek guidance from
other governments and international organizations to ensure that appropriate measures are
commissioned, which may in some cases initially require external financial support.

206 // United Kingdom: Tackling Illicit Tobacco
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223
LATIN
AMERICA
& THE
CARIBBEAN
ORG A N I Z AT ION OF E A S T E R N C A R I B B E A N S TAT E S ( OE C S )
AND TRINIDAD AND TOBAGO

CHILE

COLOMBIA

ECUADOR

MEXICO

U RU G UAY

225
8 9 10 11 12 13
ORGANIZATION OF
EASTERN CARIBBEAN
STATES (OECS) AND
TRINIDAD AND
TOBAGO
8
ORGANIZATION OF EASTERN
CARIBBEAN STATES (OECS)
AND TRINIDAD AND TOBAGO

Caribbean Regional
Report on Illicit
Tobacco Trade
Karl Theodore, Althea La Foucade, Christine Laptiste, Ewan Scott, Charmaine Metivier,
Samuel Gabriel, Daren Conrad, and Malini Maharaj 1

Chapter Summary
This chapter focuses on selected countries in the English-Speaking Caribbean, namely the
members of the Organization of Eastern Caribbean States (OECS) and Trinidad and Tobago.
Apart from the protocol (full) member countries (Antigua and Barbuda, Dominica, Grenada,
Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines), the OECS also
includes associate members Anguilla, British Virgin Islands, and Martinique.

The illicit tobacco trade is a major obstacle in the effort to control tobacco consumption in
the Caribbean. The findings of this review suggest that the countries of the region need to
significantly strengthen their efforts to control the illicit tobacco trade. While the countries
have ratified conventions and passed legislation, the review points to widespread weak-
nesses in implementation and enforcement.

1
Centre for Health Economics, The University of the West Indies

227
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

There is no question that a major limitation to grappling with the illicit trade in the region is
the data situation. Countries face a paucity of reliable data on the extent of the illicit trade.
Contrary to good practice, data on illicit trade and other tobacco issues are largely derived
from the tobacco industry. The review concludes that there are benefits to be gained from
closing this information gap and that this should be treated as a matter of urgency.

Complementing the call for a major improvement in data collection and analysis, this chap-
ter also points to the need for upgrading and modernizing the technological response to the
illicit tobacco trade. Finally, the study highlights the need for the illicit tobacco response in
the Caribbean to be characterized by a more regional approach.

1. Introduction
It has been estimated that, in low- and middle-income countries, the average percentage
of illicit tobacco consumption ranged from 11.8 percent (middle-income) to 16.8 percent
(low-income)2. These levels were relatively higher than for high-income countries, where the
percentage of illicit tobacco consumption was estimated at 9.8 percent of tobacco con-
sumed. Interestingly, in low-and middle-income countries, the average legal prices were lower
than in high-income countries. This suggests that price is by no means the only or most
important consideration in understanding (and controlling) the illicit tobacco trade.

1.1 Context and Content of Tobacco Control Efforts
Patterns of tobacco supply and consumption in the region. Cigarette smoking is the most
popular form of tobacco consumption in the English-speaking Caribbean. WHO STEPS
surveys across various years have found that the percentage of smokers who use manufac-
tured cigarettes ranges from 51.8 percent in St. Kitts and Nevis to 97.6 percent in the Cayman
Islands. Of the nine countries for which recent data were available, seven recorded manu-
factured-cigarette smoking rates of above 76 percent.

In addition to legal imports from outside the Caribbean, a major legal supply of cigarettes
originates within the region itself. The West Indian Tobacco Company (WITCO), a public
company based in Trinidad and Tobago, was established in 1904 and is a member of the
British American Tobacco (BAT) Group. The company supplies 25 brands in 137 stock-keep-
ing units (SKUs) both to the local Trinidad and Tobago market and regionally to 16 Caribbean
Community (CARICOM) members and associate countries. These include: Antigua and
Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica,

2
Joossens, Luk, David Merriman, Hana Ross and Martin Raw M. 2009. How Eliminating the Global Illicit
Cigarette Trade Would Increase Tax Revenue and Save Lives. Paris: International Union Against Tuberculosis and
Lung Disease.

228 // Organization of Eastern Caribbean States (OECS) and Trinidad and Tobago: Caribbean
Regional Report on Illicit Tobacco Trade
Montserrat, St. Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Suriname, Bermuda,
British Virgin Islands and the Cayman Islands (West Indian Tobacco 2018).

Tobacco control policies in study countries. According to the World Health Organization
(WHO), the countries comprising the OECS have implemented smoke-free policies in up to
two public places and some cessation programs, of which at least one is cost-covered. In
the case of Trinidad and Tobago, all public places are covered by smoke-free policies. The
country also has cessation policies and requires large warnings on cigarette packaging. In
the case of the OECS countries, imported products include warnings on their packaging.
However, with the exception of Antigua and Barbuda, none of the countries conducted
national anti-smoking campaigns between 2014 and 2017

Taxes applied on tobacco products include excise taxes, import duties, value-added taxes
(VAT), and customs service charges. In the case of Dominica and Antigua and Barbuda,
respectively, an environmental surcharge and a revenue recovery charge are applied. Total
taxation as a percentage of the retail price of the most-sold brands of cigarettes in 2010
ranged from 12 percent in Antigua and Barbuda to 49 percent in Grenada. By 2016, the per-
centage ranged from 15.5 percent in Antigua and Barbuda to 53.1 percent in St. Lucia. Using
the WHO measure of affordability of cigarettes, there has been no significant change in the
OECS since 2008. Although Antigua and Barbuda has the lowest share of tax in price, that
country achieved unusually positive results on affordability, relative to other countries in the
region. Cigarettes became less affordable in Antigua and Barbuda between 2008 and 2016
(WHO 2017). Cigarettes also became less affordable in Trinidad and Tobago. Table 1 summa-
rizes the tobacco control efforts of the countries under study.

Most of the countries have implemented monitoring measures in the form of recent sur-
veys related to the prevalence of smoking (Table 2). In the cases of Antigua and Barbuda,
Dominica, St. Kitts and Nevis, and St. Lucia, these surveys were limited to the prevalence of
tobacco use among youth. St. Vincent and the Grenadines and Trinidad and Tobago have
moved towards smoke-free environments, with Trinidad and Tobago leading in this mea-
sure, as well as that of the display of health warnings. The British Virgin Islands (BVI) has also
stipulated, in its Tobacco Control Regulations, the mandate for health warnings regarding
tobacco products and smoke-free environments.

229
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table 1. Tobacco Control Policies Implemented by the OECS and Trinidad and
Tobago (2010 to 2017)

ST. KITTS AND ST. VINCENT AND
MEASURES GRENADA ST. LUCIA
NEVIS THE GRENADINES

No known data or
Recent and Recent and
no recent data or Recent and
Monitoring: representative data representative data
data that are not representative data for
Prevalence data for both adults and for both adults and
both recent and both adults and youth
youth youth
representative
Complete absence Complete absence Complete absence Complete absence
Smoke-Free Policies: of ban, or up to of ban, or up to of ban, or up to of ban, or up to
Polices on smoke- two public places two public places two public places two public places
free environments completely smoke- completely smoke- completely smoke- completely smoke-
free free free free
NRT and/or some NRT and/or some NRT and/or some
Cessation Programs: NRT and/or some
cessation services (at cessation services (at cessation services
Treatment of tobacco cessation services
least one of which is least one of which is (neither cost-
dependence (neither cost-covered)
cost-covered) cost-covered) covered)
Health Warnings:
No warnings or small No warnings or small No warnings or small No warnings or small
Health warnings on
warnings warnings warnings warnings
cigarette packages
No national No national No national
Mass Media: Anti- campaign conducted campaign conducted campaign conducted
tobacco campaigns between July 2014 between July 2014 between July 2014
Data not reported
and June 2016 with and June 2016 with and June 2016 with
duration of at least duration of at least duration of at least
three weeks three weeks three weeks
Complete absence of Complete absence of Complete absence of Complete absence of
Advertising bans:
ban, or ban that does ban, or ban that does ban, or ban that does ban, or ban that does
Bans on advertising,
not cover national not cover national not cover national not cover national
promotion and
television, radio and television, radio and television, radio and television, radio and
sponsorship
print media print media print media print media
Taxation: Share of
total taxes in the
retail price of the
49% & 46.7% 31% & 53.1% 14% & 19.8% 16% & 20.7%
most sold brand of
cigarettes (2010 &
2016)*
No trend change No trend change No trend change
No trend change
in affordability of in affordability of in affordability of
Affordability in affordability of
cigarettes since cigarettes since cigarettes since
cigarettes since 2008.
2008. 2008. 2008.

*: The first figure reflects data from 2010 and the second figure data from 2016.
**: Ministry of the Attorney General and Legal Affairs. 2015a. Laws of Trinidad and Tobago, Tobacco Control
Act of 2009 http://rgd.legalaffairs.gov.tt/laws2/alphabetical_list/lawspdfs/30.04.pdf
NRT: Nicotine replacement therapy.
Source: Compiled by authors from WHO Report on the Global Tobacco Epidemic, 2017.

230 // Organization of Eastern Caribbean States (OECS) and Trinidad and Tobago: Caribbean
Regional Report on Illicit Tobacco Trade
Table 1. Tobacco Control Policies Implemented by the OECS and Trinidad and
Tobago (2010 to 2017), Cont.

MEASURES DOMINICA ANTIGUA AND BARBUDA TRINIDAD AND TOBAGO

No known data or no
No known data or no recent
Monitoring: recent data or data that Recent and representative
data or data that are not both
Prevalence data are not both recent and data for both adults and youth
recent and representative
representative
All public places completely
Smoke-Free Policies: Complete absence of ban, Complete absence of ban, smoke-free (or at least 90%
Polices on smoke- or up to two public places or up to two public places of the population covered
free environments completely smoke-free completely smoke-free by complete subnational
legislation)
Cessation Programs: NRT and/or some cessation NRT and/or some cessation
NRT and/or some cessation
Treatment of tobacco services (neither cost- services (at least one of which
services (neither cost-covered)
dependence covered) is cost-covered)
Health Warnings:
No warnings or small Large warnings with all
Health warnings on No warnings or small warnings
warnings appropriate characteristics
cigarette packages
Mass Media: Anti- No national campaign
National campaign conducted
tobacco campaigns conducted between July 2014
Data not reported with one to four appropriate
and June 2016 with duration
characteristics
of at least three weeks
Yes, with the exception
of publications with adult
Advertising bans: Complete absence of ban, Complete absence of ban,
readership of over 85%,
Bans on advertising, or ban that does not cover or ban that does not cover
publications sent to adults
promotion and national television, radio national television, radio and
by mail and places where
sponsorship and print media print media
children are not permitted by
law.**
Taxation: Share of
total taxes in the
retail price of the
26% & 24.3% 12% & 15.5% 34% & 25.8%
most sold brand of
cigarettes (2010 &
2016)*
Cigarettes less affordable – Cigarettes less affordable –
per capita GDP needed to per capita GDP needed to
No trend change in
buy 2000 cigarettes of the buy 2000 cigarettes of the
Affordability affordability of cigarettes
most sold brand increased on most sold brand increased on
since 2008.
average between 2008 and average between 2008 and
2016 2016

3
http://www.who.int/tobacco/surveillance/policy/country_profile/en/

231
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table 2. Smoking Prevalence and Tobacco Share of Deaths: Selected
Caribbean Countries
GRENADINES
ST. VINCENT

2015
12.02

1.99
& THE

1991

0.39
0.59

3.98
17.4

9.2
1.9
2015 2010 2015
16.04

1.96
ST. LUCIA

3.96
0.42

9.16
1.11
…

…
ST. KITTS &

…

4.8 (2007)

3.2 (2007)
NEVIS

2007
11.4

0.7

…

…
2015

2.73
11.4
GRENADA

2010/11

0.66

4.64
9.92
0.79
19.2

2.8

PERCENTAGE OF DEATHS CAUSED BY TOBACCO
2015

1.29
7.34
DOMINICA

2007/8

PERCENT USING TOBACCO DAILY

8.46
0.55
0.76

3.65
0.9
9.7
2010 2015
4.97

2.45
BARBUDA
ANTIGUA

CHILDREN SMOKING

0.38

0.56

2.53
4.73
…

…
PREVALENCE

Source: Drope and Schluger, Tobacco
BY GENDER

Atlas 20184 for 2015 prevalence and
2016 percentage of deaths caused
Female

Female

by tobacco; WHO Global Report
2016
2015
Male

Male

on Trends in Prevalence of Tobacco
Smoking 20155

4
https://tobaccoatlas.org/
5
http://apps.who.int/iris/bitstream/handle/10665/156262/9789241564922_eng.
pdf;jsessionid=E80CFA4D939F89EB56669786A12C7B02?sequence=1

232 // Organization of Eastern Caribbean States (OECS) and Trinidad and Tobago: Caribbean
Regional Report on Illicit Tobacco Trade
2. Tobacco Revenue and Pricing in the Caribbean
Tobacco revenue: regional comparisons. The revenue derived from tobacco taxation by
selected countries of the OECS is shown in Table 3. The data show total revenues as well
as sub-categories for all tobacco products. For many countries in the region, the bulk of tax
revenues are collected from total excise, which consists of either a specific or an ad valorem
tax. Revenue from tobacco taxation as a percentage of total tax revenue ranged from a low
of 0.14 percent in Antigua and Barbuda to 2.15 percent in Grenada.

Table 3. Annual Tax Revenues from Tobacco Products: Selected OECS
Countries (2015)

COUNTRIES
ST. VINCENT
ST. KITTS ANTIGUA &
& THE GRENADA ST. LUCIA DOMINICA
& NEVIS BARBUDA
GRENADINES
All Tobacco All Tobacco All Tobacco All Tobacco All Tobacco All Tobacco
Products Products Products Products Products Products

Year 2013 2015 2015 2015 2015 2015

Currency XCD XCD XCD XCD XCD XCD

Total Excise 1
220,269.11 705,427.02 8,178,933.34 9,905,000.00 - 354,845.65

VAT and other
225,620.05 1,315,703.46 2,429,344.47 2,455,000.00 403,470.00 76,260.71
sales taxes
Import duties and
209,787.50 524,105.84 810,112.13 521,000.00 515,123.00 98,381.46
all other taxes 2
Total (Local
655,676.66 2,545,236.32 11,418,389.94 12,881,000.00 918,593.00 529,487.82
Currency)
% of Total Tax
0.16% 0.57% 2.15% 1.41% 0.14% 0.16%
Revenues**
Total Revenues as
0.031% 0.12% 0.42% 0.29% 0.025% 0.037%
a % of GDP

Total (USD) 242,843.21 942,680.12 4,229,033.31 4,770,740.74 340,219.63 196,106.60

1
Specific and ad valorem.
2 Excluding corporate taxes on tobacco companies.
Source: Compiled from Drope and Schluger, Tobacco Atlas, 2018, WHO Report on the Global Tobacco
Epidemic, 2017; ** Eastern Caribbean Currency Union (ECCU) Central Statistical Offices and Eastern
Caribbean Central Bank.

All countries in the region have to some extent taxed tobacco products (Table 4). They have,
however, done so to widely varying degrees. All rates still remain far below the WHO target
of 75 percent of retail price (Table 5).

233
ST. KITTS AND SAINT VINCENT AND
ANTIGUA &
TAXES NEVIS THE GRENADINES GRENADA (2017) ST. LUCIA (2017)
BARBUDA (2017)
(2017) (2017)

RATE BASE RATE BASE RATE BASE RATE BASE RATE BASE
5% -
stemmed/
striped
35% -
Import 35% - tobacco
Cigar and
Duty / cigarettes
$18 - cigarettes 35% -
Common per kg CIF CIF 45% - cigars, CIF CIF
cigarettes cigarettes
External 5% - cigarettes, and
5% - raw
Tariff tobacco other forms
tobacco
of tobacco
and tobacco
products

Regional Report on Illicit Tobacco Trade
14% - cigars

Revenue Recovery Charge, EXT: Excise Tax; ID - Import Duty
$1.55 per 100 $176 per 1,000
cigarettes Sticks on
cigarettes
20% - 6% raw 105% - CSC+CET+
Excise Tax CSC + ID ID+CIF
cigarettes tobacco cigarettes CIF $125.60 per kg

Source: Statistical Offices and Customs and Excise Divisions of OECS countries.
on cigars and
12% other other tobacco
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

products.
6% - tobacco
substitute
Value EXT+CSC+ CSC+EXT+ EXT+CSC+ EXT+CSC+
17% 16% 15% 12.5% 15% CIF + ID
Added Tax ID ID+CIF CET+CIF ID+CIF
Table 4. Tobacco Taxes and Bases among Selected Member Countries of OECS

Customs
EXT+ID+
Service 6% ID 5% 6% CET+CIF 6%
CIF

Notes: CET - Common External Tariff, CSC - Customs Service Charge, CIF - Cost Insurance and Freight, RRC -
Charge

234 // Organization of Eastern Caribbean States (OECS) and Trinidad and Tobago: Caribbean
Other
taxes
(Revenue ID+CIF 10% CIF
Recovery
Charge)
Table 5. % Share of Total Taxes in the Retail Price of the Most Widely-Sold Brand of
Cigarettes (2008 - 2016)

COUNTRY 2008 2010 2012 2014 2016

Antigua and
14.77 14.77 15.00 14.63 15.47
Barbuda

Dominica 25.61 25.61 23.40 23.40 24.30

Grenada 40.50 49.48 … 47.76 46.73

Saint Kitts and
18.20 14.00 19.96 19.76 19.76
Nevis

Saint Lucia 30.08 26.54 29.91 62.88 53.09

Saint Vincent and
16.15 15.99 15.96 16.76 20.69
the Grenadines
Trinidad and
36.69 33.73 32.58 29.61 25.76
Tobago

Source: WHO Report on the Global Tobacco Epidemic, 2017.

Retail prices of tobacco products: variation between and within countries. A 2017 survey
of cigarette prices in the OECS revealed that smokers in St. Lucia paid the highest overall
prices for cigarettes. The price per pack of 20 cigarettes (full pack) showed wide variations
within and between countries, ranging between EC$5.85 and EC$22.00 per pack in St. Lucia,
and between EC$4.00 and EC$9.20 in Antigua and Barbuda, which has the lowest cigarette
prices (Table 6). Similarly, the price per pack of 10 cigarettes (half pack), varied between
EC$3.25 and EC$5.00 in St. Kitts and Nevis, and between EC$5.00 and EC$16.00 in St. Lucia.

Table 6. Price Ranges per Pack of 20 and 10 Cigarettes, Selected OECS Countries

PRICE PRICE PRICE PRICE
RANGES RANGES RANGES RANGES
COUNTRIES
(PACK OF 20s, (PACK OF 20s, (PACK OF 10s, (PACK OF 10s,
EC$) USD) EC$) USD)
Antigua and Barbuda 4.00 - 9.20 1.48 - 3.41 3.95 - 4.75 1.46 - 1.76

Grenada 6.15 - 15.00 2.28 - 5.56 3.75 - 5.50 1.39 - 2.04

St. Kitts and Nevis 3.50 - 18.87 1.30 - 6.99 3.25 - 5.00 1.20 - 1.85

St. Lucia 5.85 - 22.00 2.17 - 8.15 5.00 - 16.00 1.85 - 5.93

St. Vincent and the
4.00 - 20.00 1.48 - 7.41 3.50 - 6.00 1.30 - 2.22
Grenadines

Source: HEU, Centre for Health Economics, The University of the West Indies, 2017.

235
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

3. Regional and International Cooperation in
Tobacco Control
3.1 Regional Commitment to the FCTC
Countries and institutions engaged. WHO in its 2017 report on the global tobacco epi-
demic indicated that Trinidad and Tobago and all OECS countries, with the exception of
the British territories, had signed and ratified the WHO Framework Convention for Tobacco
Control (FCTC). The British territories are part of the United Kingdom and therefore cannot
sign on to the FCTC as separate jurisdictions (PAHO/WHO 2016b). Nevertheless, in order to
advance the FCTC goals, the British Virgin Islands passed Tobacco Control Laws, while the
other British territories have implemented some of the Convention’s articles. Trinidad and
Tobago also passed the Tobacco Control Act in 2010, under which Section 38 (1) details
Tobacco Control Regulations. Draft Tobacco Control legislation has been developed for
Grenada. CARICOM has also established a Regional Standard for the labeling of retail pack-
ages of tobacco products. The Regional Standard was adopted by the CARICOM Council for
Trade and Economic Development (COTED) in 2012. Key regional institutions with a stake in
combating the illicit tobacco trade also include the Caribbean Customs Law Enforcement
Council, which operates under the umbrella of the World Customs Organization.

Tackling illicit trade under the FCTC and Protocol: implementation gaps. Parties to the
Convention have all undertaken the responsibility to implement a range of anti-illicit trade
measures. However, there has been some stickiness with regard to effective implementation
and enforcement. The Healthy Caribbean Coalition (HCC) suggested that, although coun-
tries in the Caribbean have ratified the FCTC, few have implemented the provisions of the
anti-illicit trade Protocol (HCC 2016). Figure 1 illustrates.

Constraints on multilateral action. It should be noted that an effective multilateral approach
through an international agency that deals with health alone may be fraught with challenges.
One of the main difficulties is that, at the national level, measures required to effectively
address illicit trade fall within the ambit of various customs agencies, law enforcement, and
justice departments. Internationally, bodies such as the United Nations Office on Drugs and
Crime and the World Customs Organization have resources to combat illicit activities such
as smuggling and illicit manufacturing of tobacco products. The FCTC Secretariat and the
WHO did not initially have these forms of expertise in 2011 (Liberman et al. 2011), though the
Secretariat has since developed some capacity in these areas.

236 // Organization of Eastern Caribbean States (OECS) and Trinidad and Tobago: Caribbean
Regional Report on Illicit Tobacco Trade
Figure 1. Timeline of Tobacco Control Policy, Legislation, and Advocacy in the
Caribbean (2004-2014)
Suriname tobacco
control bill passed
St. Kitts & Nevis
St. Lucia, ratiﬁed FCTC Jamaica enacted
Grenada public health tobacco
Jamaica, ratiﬁed FCTC
Guyana, First Jamaica control regulations
Belize, Advocacy for tobacco control RAHO launches
Barbados smoke free Cricket Bahamas grant from manual for tobacco
ratiﬁed FCTC World Cup ratiﬁed FCTC Bloomberg control legislation

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Trinidad Antigua & First multi-country Barbados tobacco Standard for Second
& Barbuda, tobacco control regulations labelling of Jamaica
Tobago Dominica grant from enacted tobacco tobacco
ratiﬁed ratiﬁed FCTC Bloomberg for products control grant
FCTC Barbados, Guyana, St. Vincent & the (caricom) from
Jamaica, Trinidad Grenadines Bloomberg
& Tobago ratiﬁed FCTC
Suriname ratiﬁed Trinidad & Tobago
FCTC tobacco control
Barbados removed act passed
duty free concession
on tobacco products

Source: Adapted from HCC (2016)

4. Tobacco Policies/Reforms Enacted in the
Eastern Caribbean
4.1 Overview of Legal Frameworks
Tobacco control policies in the region are broadly framed. An assessment of the existing
policies and reforms in the region suggests that the regulative and legislative framework
favors policies designed to control tobacco use, in general, rather than specifically targeting
the illicit tobacco trade. However, although data are limited, governments are aware of the
presence of the illicit tobacco trade within the region.

Import restrictions. Most of the countries have imposed restrictions on imports that are also
aimed at providing some level of control of illicit trade. For instance the Trinidad and Tobago
Customs Act states that it is prohibited to import: “…extracts, essences or other concen-
trations of tobacco, or any admixture of the same, tobacco stalks and tobacco-stalk flour,
except under such conditions as the Comptroller may with the approval of the President,
either generally or in any particular case allow”(Ministry of the Attorney General and Legal
Affairs, 2015b: 43). Moreover, it is against the law to import “tobacco, cigars, cigarillos and
cigarettes, unless specifically reported as such and unless in aircraft, or in ships of thirty
tonnes burden at least, and unless in whole and complete packages, each containing not
less than nine kilogrammes net weight of tobacco, cigars, cigarillos and cigarettes” (Ministry
of the Attorney General and Legal Affairs, 2015b: 44).

237
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

4.2 Key Institutions and Administrative Mechanisms
for Enforcement
Customs controls. Broadly speaking, the issue of prevention of illicit tobacco trade is covered
by various Customs Acts in the Caribbean. Specifically, any person caught smuggling tobacco
products on board an aircraft or ship may face a fine, and all goods are forfeited. Caribbean
Ministries of Health have taken the leadership role in driving tobacco control measures in
Caribbean countries, which have led to control laws and legislation in some cases. Again, the
emphasis is on tobacco control rather than the illicit trade of tobacco per se.

Within the region, the customs divisions usually carry out random checks of persons enter-
ing the countries. In the case of Grenada, random checks are also carried out on persons
coming in from Carriacou. Custom officers rely heavily on coast guards to regularize the
smuggling of products across the borders. However, informants admitted that there is a lack
of communication between the two law-enforcement groups.

The importance of “track-and-trace”: recognized in theory. The WHO FCTC Protocol to
Eliminate Illicit Trade in Tobacco Products recognized the need to eliminate all forms of illicit
trade in tobacco and to take measures to control the supply chain and to cooperate interna-
tionally (WHO 2013). The main mechanism through which the trade is to be monitored and
controlled is referred to as a “track-and-trace system.” The WHO (n.d) reported that industry
self-assessment6 and physical controls are the least effective control measures. Tax stamps
without monitoring are partly effective, and automated monitoring using secure digital
stamps is the most effective control measure.

Table 7 summarizes the status of control and enforcement measures in Antigua and Barbuda
(A&B), Dominica (DOM), Grenada (GRE), St. Kitts Nevis (SKN), St. Lucia (STL), St. Vincent and
the Grenadines (SVG), and Trinidad and Tobago (TT).

As Table 7 shows, St. Lucia and Trinidad and Tobago require markings on all packaging
to indicate the origin of the product. They have also established rules for the destruction
of confiscated equipment and tobacco products. Both Grenada and Trinidad and Tobago
have enacted legislation to curtail illicit tobacco trading, adopted measures to monitor and
control the storage and distribution of tobacco products held or moving under suspension
of taxes or duties, and have instituted licensing or other actions to prevent illicit trading.

Track-and-trace implementation in the region: a key shortfall. With the exception of
Trinidad and Tobago, there are as yet no indications of countries’ developing practical
tracking and tracing regimes to address the illicit tobacco trade. This system speaks to
supply chain management (monitoring and control) of tobacco products from the point of
manufacture to the point of sale through the use of secure and unique identifiers. According
to Sharma (2018), the reports to the WHO FCTC for Trinidad and Tobago should state that,

6
Declarations by tobacco industry/manufacturers of production.

238 // Organization of Eastern Caribbean States (OECS) and Trinidad and Tobago: Caribbean
Regional Report on Illicit Tobacco Trade
Table 7. Selected Measures to Reduce the Supply of Illicit Tobacco Products in
the Caribbean

SELECTED MEASURE/DESCRIPTION A&B DOM GRE SKN STL SVG TT

Developing a practical tracking and tracing regime that would
further secure the distribution system and assist in the investigation No No No No No No Yes
of illicit trade?
Requiring marking of all unit packets and packages of tobacco
products and any outside packaging of such products to assist in No No No No Yes No Yes
determining the origin of the product?
Requiring marking of all unit packets and packages of tobacco
products and any outside packaging of such products to assist in
No No No No No No Yes
determining whether the product is legally sold on the domestic
market?
Requiring that unit packets and packages of tobacco products for
retail and wholesale use that are sold on the domestic market carry
No No No No No No Yes
the statement: “Sales only allowed in …” or carry any other effective
marking indicating the final destination of the product?
Requiring the monitoring and collection of data on cross-border
No No No No No No Yes
trade in tobacco products, including illicit trade?
Facilitating the exchange of this information among customs,
tax and other authorities, as appropriate, and in accordance with No No No No No N/A Yes
national law and applicable bilateral and multilateral agreements?
Enacting or strengthening legislation, with appropriate penalties
and remedies, against illicit trade in tobacco products, including No No Yes No No N/A Yes
counterfeit and contraband cigarettes?
Requiring that confiscated manufacturing equipment, counterfeit
and contraband cigarettes and other tobacco products derived
No No No No Yes N/A Yes
from illicit trade be destroyed, using environment-friendly methods
where possible, or disposed of in accordance with national law?
Adopting and implementing measures to monitor, document, and
control the storage and distribution of tobacco products held or No No Yes No No N/A Yes
moving under suspension of taxes or duties?
Licensing or other actions to control or regulate production and
No No Yes No No N/A Yes
distribution in order to prevent illicit trade?

Source: Compiled from the WHO Core Questionnaire of the Reporting Instrument of the WHO FCTC
2018 for: Grenada, St. Lucia, and Trinidad and Tobago; from the WHO Core Questionnaire of the Reporting
Instrument of the WHO FCTC 2016 for: Antigua & Barbuda and Dominica; from the WHO Reporting
Instrument of the WHO FCTC 2012 for St. Kitts & Nevis; and from the WHO Reporting Instrument of the WHO
FCTC 2010 for St. Vincent and the Grenadines.

while the country’s Tobacco Control Act (2009) requires tracking and tracing measures,
implementation and enforcement have yet to occur. Among relevant measures, penalties
and licenses are the only enforceable stipulations that have been and can be executed
(Sharma 2018). Penalties and liabilities for non-compliance with Tobacco Controls Act
Sections 36(1)(c)(ii) and 36(1)(c)(vi) apply to tobacco products: (a) which are not properly

239
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

packaged or labelled; (b) where taxes and duties have not been paid; and (c) which have not
entered the jurisdiction legally. Other penalties and sanctions are identified in the Act and
include fines and loss of licenses, as well as criminal sanctions.

Enforcement of these control measures is fulfilled through the services of the Customs
Division, the Police Service, and the Tobacco Control Unit of the Ministry of Health and its
authorized officers. Enforcement is executed under the following:

»» Proceeds of Crime Act;

»» Protection Against Unfair Competition Act;

»» Trade Marks Act;

»» Customs Act;

»» Trade Description Act;

»» Excise (General Provision) Act; and

»» Tobacco Control Act 2009 (TCA).

In terms of physical control measures, the Government of Trinidad and Tobago ensures con-
trol of the storage of taxed and untaxed products on the premises of the manufacturers. These
products are overseen by an Officer of the Customs and Excise Division of the Ministry of
Finance who is located onsite and, in the case of imports, who relies upon issued licenses to
importers in order to monitor the cross-border movement of tobacco products (cigarettes).

Enforcement gaps. However, there are challenges with consistency in the strength of imple-
mentation. The issues concern resource constraints. For example, at the time of this study,
personnel contracts for the Tobacco Control Unit were pending renewal and, as such, the
division was effectively without staff. Additionally, key informants from the public sector indi-
cated that, while licenses are required for the importation of tobacco products, small traders
who are granted these licenses tend to utilize these for the importation and distribution of
brands different from those for which the licenses were granted, usually without penalty
because of gaps in monitoring. Similar shortcomings exist where unique identifiers stipulated
in the legislation have not been implemented.

Grenada’s WHO FCTC report (2016) indicated that comprehensive multi-sectoral national
tobacco control strategies, plans, and programs have not been implemented, although a
focal point and national coordinating mechanism have been established. However, Draft
Tobacco Control legislation has been developed. Grenada also has a negative list, issued
by the Ministry of Trade. The negative list requires importers to apply for a trade license to
import cigarettes from extra-regional countries into Grenada. St. Kitts and Nevis, as well as St.
Vincent and the Grenadines, have no national coordinating mechanisms.

240 // Organization of Eastern Caribbean States (OECS) and Trinidad and Tobago: Caribbean
Regional Report on Illicit Tobacco Trade
5. Cigarette Smuggling: Multiple Routes and
Few Seizures
Customs and excise departments in OECS countries and Trinidad and Tobago report that
seizure of contraband cigarettes and other tobacco products has been minimal to date,
and in many instances non-existent. This is supported by data from the WHO Framework
Convention on Tobacco Control Reporting Instrument (2010-2018), which indicate that
there have been no reported seizures in Antigua and Barbuda, Dominica, St. Kitts and Nevis,
or St. Lucia over the period. Grenada (2013) and Trinidad and Tobago (2012), reported sei-
zures of 10,000 and 81,400 illicit sticks of tobacco, respectively.

Anecdotal evidence indicates that potential smugglers may opt for one of the many informal
entry points that exist along the island coastlines, as the route through which contraband
tobacco products are imported. This possibility speaks to the need for stronger monitoring
of the countries’ territorial waters and coastlines. The virtual absence of tobacco seizures
in the region underscores the need to improve detection. Resources and technical support
from international partners may prove invaluable.

6. Innovative and Technological
Enforcement Solutions
The WHO (n.d.) assesses the effectiveness of control measures as reflected in Table 8.

Table 8. Effectiveness of Control Measures

LEAST EFFECTIVE PARTLY EFFECTIVE MOST EFFECTIVE

Tax stamps (without
Automated monitoring: digital
monitoring): Stamps ordered
stamps placed on packs by
from the Ministry of Finance
special machines affixed in
Industry self-assessment: relying (MOF) and placed on packs by
manufacturing facilities. The
on declarations of production manufacturers. These stamps
machines record production
by the manufacturers is highly (even new digital versions) can
and this data is sent to a
vulnerable to tax evasion. be counterfeited. The MOF can
central MOF database. These
check the market for illegal
types of measures minimalize
sales, but can't determine their
tax evasion.
origin.
Physical control: MOF officials
monitor/clear production
on-site. Still vulnerable to tax
evasion and industry capture of
officials.

Source: Compiled from WHO (n.d)

241
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Closing technology gaps: what role for industry? With regard to innovative and techno-
logical enforcement solutions adopted to fight forgery and counterfeiting in the OECS and
Trinidad and Tobago, WITCO (2018) indicates that, as a manufacturer of some products
sold in CARICOM markets, the company recently acquired the INEXTO technology, which
performs digital encoding of tobacco packs and ancillary packaging. This system will be oper-
ationalized in 2018 in the WITCO facility (Padgett 2018). The INEXTO technology, formerly
“Coidentify”, developed by PMI, is seen by critics as de facto perpetuating industry, rather
than government, control of “track and trace.”

In the English-speaking Caribbean, apart from the systems acquired by the tobacco industry,
there is a general lack of anti-counterfeiting technology, tracking and tracing systems, and
fiscal marks as enforcement mechanisms.

Excise tax stamps. Generally, the various arms of the Ministries of Finance and/or Customs
and Excise Departments throughout the region are responsible for collecting taxes on
tobacco. Revenues collected usually flow into a pooled government fund (consolidated
fund). Figure 2 illustrates the cases of Grenada and Trinidad and Tobago, which show similari-
ties to other countries in the region.

Figure 2. Alcohol and Tobacco Industry Tax Collection System: Grenada and
Trinidad and Tobago

Customs and Excise Division: Board of Inland Revenue:
All Tobacco Taxes and Taxes VAT, Corporate Income Tax
on Imported Alcohol and Personal Income Tax

Ministry of
Finance

Consolidated
Fund

Neither the OECS countries nor Trinidad and Tobago have implemented an excise tax stamp
regime, although for Trinidad and Tobago, the existing regulations and legislation commit
the country to this approach, as Table 7 indicates. In the wider CARICOM region, the Guyana
Revenue Authority (GRA) Customs, Excise and Trade Operations (CE&TO) introduced excise
stamps on imported alcohol and tobacco products in November 2017. The GRA collabo-
rated with the Canadian Bank Note Company, which designed and produced the stamps
(Guyana Revenue Authority 2017). In March 2016, the Jamaica Customs Agency (JCA) sig-
naled its intention to introduce the use of excise stamps for tobacco and alcohol products
(Jamaica Observer 2016).

242 // Organization of Eastern Caribbean States (OECS) and Trinidad and Tobago: Caribbean
Regional Report on Illicit Tobacco Trade
In the absence of excise stamps in the case countries, importers or their agents/brokers
normally complete an import declaration form, on which they indicate the type, quantity,
and value of the good being imported. This form is normally accompanied by invoices
and other relevant shipping documents, licenses, and permits. The taxes are then applied.
Manufacturers also pay excise and other taxes on their products.

Advancing “track-and-trace”: seizing a key opportunity. WHO FCTC’s Illicit Trade Protocol
specifies the minimum data needed for tracking and tracing. The track-and-trace system
was designed to verify the quantity produced or imported, verify correct tax payments,
track products through the supply chain, trace products back to their sources, and ensure
product authenticity (WHO 2013). The data required for effective tracking and tracing are
brand names of cigarettes; trademark holders; harmonized tariff schedule numbers; cus-
toms duties and payment records; taxes paid and payment records; and information as to
whether the goods were previously reported stolen, destroyed, seized, or returned to the
manufacturer. Tracking-and-tracing systems are non-intrusive and require minor adjustments
to production lines.7 There are a number of countries where the implementation of the
track-and-trace system increased tax revenues and reduced illicit trade. In Turkey, for exam-
ple, the implementation of the track-and-trace system led to an increase in tax revenues
of 31 percent with no rise in tax rates. Other countries where this system has been imple-
mented are Brazil, Canada, Kenya, Malaysia, Panama, the Philippines, and the United States.
Although, as reported in Table 8, Trinidad and Tobago responded “Yes” to the question of
whether the country is developing a practical tracking and tracing regime, to date, none of
the English-speaking Caribbean countries—including Trinidad and Tobago—has implemented
the track-and-trace system.

7. Recommendations and Conclusions
The importance of independent data. This chapter has examined illicit tobacco trade in
the OECS countries and Trinidad and Tobago. Although industry data were available and are
generally the source of information used to discuss illicit trade in the region, this study opted
not to utilize such data. This choice reflects the consensus in the international literature that
industry data tend to have an upward bias (see e.g. Liberman et al. 2011). Within the English-
speaking Caribbean region, as elsewhere, tobacco industry spokespersons highlight the illicit
tobacco trade in urging policy makers to renounce or scale back tobacco control measures,
including excise tax increases and other reforms. To counter this strategy, a sub-regional
effort is needed to provide independent data on tobacco, including illicit flows.

Progress through political leadership. Caribbean countries can act as both sources and
destinations of illicit tobacco, based on their licit and illicit trading activities. For example, for

7
WHO (2014) Secretariat study of the basic requirements of the tracking and tracing regime to be established
in accordance with Article 8 of the Protocol to eliminate illicit trade in tobacco products, cited in Ross (2015).

243
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

St. Vincent and the Grenadines, the 2010 FCTC Report indicated that, even though tobacco
is grown in that jurisdiction (WHO 2010), the country also imports manufactured tobacco
products (cigarettes) from Trinidad and Tobago.8 According to Marquez et al. (2018: 6), “By
far, the largest share (61 percent) of the cigarettes sold in the sub-region is supplied by
Caribbean and CARICOM countries; of that total, Trinidad and Tobago accounts for 91.9
percent, followed by the Dominican Republic (5 percent).” In source countries, such as
Trinidad and Tobago, the flows of illicit tobacco may be facilitated by the lack of political will
and the attendant lack of institutional capacity to counter the illicit activity. The same holds
for destination countries, particularly the smaller Eastern Caribbean States, in which the illicit
trade in tobacco is also facilitated by, inter alia, low law enforcement focus. This lack of prioriti-
zation may be linked to cultural acceptance of the illegal products.

Resource gaps call for international support. In developing countries, including those in the
Caribbean, there is no question that resource restrictions have also limited efforts to control
the illicit trade of tobacco and tobacco products (HCC 2016). A major challenge identified
by Joossens and Raw (2012: 233) is the “difference in technical capacity between customs
and enforcement authorities in different regions of the world.” There is a case here for inter-
national support to standardize the measures taken to counteract illicit tobacco trade.

This report’s first recommendation in addressing illicit trade is to acknowledge the pau-
city of relevant and reliable data within the Caribbean and commit to strengthening the
information-gathering platform. If the region’s leaders do not realize the true dimensions of
the illicit tobacco trade, they will not be in a position to control it. Lecours and Hallen (2016:
202) emphasize that, “[t]he lack of specific country information has been an important barrier
to policy adoption.” This underscores that, while technology can help law enforcement, the
manner in which the law is to be enforced is itself dependent on the extent of data capture.

To successfully combat the illicit trade in tobacco products in the Caribbean, law enforce-
ment authorities must take the lead on data systems, surveillance, and corrective action,
including civil and criminal prosecution. Those involved in legitimate import, export, pro-
duction, storage, and movement of tobacco products, whatever their scope, should work
together to address the problem constructively and provide authorities with information and
assistance on specified key elements. Further, legitimate market actors should be receptive
to the introduction of reporting mechanisms as well as close collaboration to ensure that
tracking and tracing systems are in place. Linked to the need for better information are the
policy commitments and legislative frameworks required to modernize countries’ techno-
logical control capacities.

The evidence is very clear that effective control measures work hand in hand with taxation.
While it cannot be said that the Caribbean has not adopted any measures whatsoever, there is

8
In many cases, countries can be considered to be in more than one category: source, transit, and destination
(WHO 2018a). For example, Trinidad and Tobago can be classified as a source, transit, and destination country,
while St. Vincent and the Grenadines functions as a source and destination country for tobacco products.

244 // Organization of Eastern Caribbean States (OECS) and Trinidad and Tobago: Caribbean
Regional Report on Illicit Tobacco Trade
no question that the areas of coding, verification, tracking and tracing of tobacco products and
tax stamps have not been developed to a degree where positive results could be expected.

This leads to the second recommendation of the present study: the need to adequately
train personnel and acquire the equipment and systems required to mount an effective
technological response to the illicit trade. In this respect, the region stands to benefit from
the experience of countries like Brazil, which have had success on this front.

Illicit tobacco trade is affected by both demand and supply considerations: demand by smok-
ers for cheaper or specific tobacco products and the supply of tobacco products by legal and
illegal manufacturers looking for more profit (Joossens and Raw 2012). Of course, industry col-
lusion is a means of tax evasion whereby tobacco products are diverted into the illicit market,
where sales are tax-free and profit margins on illicit operations are considerably larger.

To reduce illicit trade in tobacco products, it is also critical to secure the legitimate supply
chain. This will require that participants in the supply chain take measures to prevent diver-
sion of tobacco products and machinery into illicit trade channels. These measures are
intended to promote responsible business conduct that must apply equally to all partici-
pants, regardless of size.

Another key component of securing the supply chain involves, as stated earlier, tracking and
tracing systems for different commodities. Added to this is the need to properly institute
controls on the supply of key components used to manufacture cigarettes. This provides a
targeted and powerful mechanism for restricting and ultimately eliminating the production
of counterfeit and “illicit white” cigarettes.

In the English-speaking Caribbean, tobacco producers have argued that, “Over the years,
they [governments] have increased taxes so much that they have created a smuggler’s
paradise. The difference between legal product and illegal product is so huge from a profit
standpoint, that people are willing to take that risk, once that remains you will always have
smuggling.” 9 Contradicting this argument is analysis presented by the World Bank, which
shows that high levels of illicit tobacco products are linked more closely to corruption and
tolerance of contraband sales (Merriman, Yurekli and Chaloupka 2000), as opposed to
higher taxes. As a matter of fact, Joossens and Raw (2012) pointed out that illicit tobacco
trade occurs in both low- and high-tax jurisdictions and occurs primarily as a result of a
lack of control on cigarette manufacturing and the movement of cigarettes across borders.
Research in Central and Eastern Africa also highlighted that, while varying tax levels among
countries were a factor in cigarette smuggling, even more important contributors were high
levels of corruption, weak state capacity to monitor and enforce, and the activities of rebel
groups (Titeca, Joossens and Raw 2011). Interestingly, Joossens and Raw (2012) further
pointed out that cigarette smuggling is more prevalent in low-income countries than in

9
See Illicit Trade a Big Problem ( Retrieved from, http://www.guardian.co.tt/business/2018-04-07/
illicit-trade-big-problem)

245
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

high-income countries. Tobacco Tax Reform: at the Crossroads of Health and Development
(World Bank 2017) reinforces the arguments in these earlier studies.

The situation facing the Caribbean is one where a purposeful, strategic attack on illicit
tobacco trade is necessary. Most of all, this calls for political commitment at the highest
level, a commitment to adopt the available technology, and a commitment to significantly
improve the data situation. The capacity of the tobacco industry to confuse the picture
is directly linked to the low data-capture level that now prevails. If the region is to reduce
exposure to the heavy price in preventable death and disease as well as the heavy drain on
health expenditure caused by tobacco consumption, steps will have to be taken to limit the
consumption of illicit tobacco. These steps are not unknown to us and are certainly not
beyond the ken of the customs and tax officials in the different countries. The important
point is that something substantial needs to be done. To do nothing would be to settle for
the fact that tobacco will continue to kill almost half of those who use it and to impose a
heavy economic burden on our countries.

The truth is that dealing with the illicit trade problem is well within the capacity of this region.
At the country level in the Caribbean, the main enforcement bodies are usually customs
authorities, with the possibility of creating specialized police units. However, since proper
enforcement presumes that professionals will carry out their responsibilities with integrity,
measures will be needed to ensure that this integrity is not compromised. This means that
the third recommendation is for steps to be taken to reduce or eliminate corruption in the
sphere of illicit tobacco trade.

In summary, this study calls for action in three critical areas:

1. Data systems. A major upgrade in the quality of current intelligence and information
provided to enforcement officials about smuggling and domestic illicit production
methods/players. Simple practical guidance will also be helpful, and this must be kept
up-to-date to reflect trends, developments, and players in the illicit trade.

2. Technology and skills. Training personnel and adopting technology to facilitate coding
practices and the latest anti-counterfeit techniques, and to help customs officials detect
false compartments even when scanners are not available.

3. The corruption fight. A determination to reduce corruption, which remains a major
enabler of illicit tobacco trade. To this end, if the culture of corruption that might be
present is to be stamped out, there will have to be a willingness in the Caribbean to
demonstrate visionary leadership and efficient management, as well as a preparedness to
arrange appropriate remuneration and ethics training of personnel involved in the moni-
toring of the illicit tobacco trade.

To date, Caribbean countries have focused substantial tobacco control efforts on legislation.
But good laws, while crucial, are not enough. The need now is to take the fight to another
level—one where effective measures are implemented to deal with the illicit tobacco trade.

246 // Organization of Eastern Caribbean States (OECS) and Trinidad and Tobago: Caribbean
Regional Report on Illicit Tobacco Trade
The FCTC Protocol seeks to eliminate all forms of illicit trade in tobacco products through a
suite of measures to be taken by countries acting in cooperation. It offers a global solution
to a global problem. The time has come for the Caribbean to make a significant contribution
to this global solution.

References
Drope, Jeffrey and Neil W. Schluger, eds. 2018. The Tobacco Atlas: Sixth Edition. Atlanta: American
Cancer Society.

Guyana Revenue Authority. 2017. Anti-Smuggling campaign continues with the introduc-
tion of the Excise Tax Stamp. Accessed April 6, 2018. http://www.gra.gov.gy/publications/
press-releases/702-anti-smuggling-campaign-continues-with-the-introduction-of-the-excise-tax-stamp.

Healthy Caribbean Coalition. 2016. Civil Society Led Tobacco Control Advocacy in the Caribbean.
Experiences from the Jamaica Coalition for Tobacco Control. Healthy Caribbean Coalition.

HEU, Centre for Health Economics. 2017. Survey on “Cigarette Prices in the Organisation of eastern
Caribbean States.” The University of the West Indies, November. Unpublished.

Jamaica Observer. 2016. “Customs to Implement Tax Stamp System for Alcohol,
Cigarettes.” Jamaica Observer March 30, 2016. http://www.jamaicaobserver.com/news/
Customs-to-implement-tax-stamp-system-for-alcohol--cigarettes.

Joossens, Luk, David Merriman, Hana Ross and Martin Raw M. 2009. How Eliminating the Global
Illicit Cigarette Trade Would Increase Tax Revenue and Save Lives. Paris: International Union Against
Tuberculosis and Lung Disease.

Joossens, Luk, and Martin Raw. 2012. “From Cigarette Smuggling to Illicit Tobacco Trade-Strategic
Directions and Emerging Issues in Tobacco Control.” Tobacco Control 21: 230-234.

Lecours, Natacha and Glen Hallen. 2016. “Addressing the Evidence Gap to Stimulate Tobacco Control in
Latin America and the Caribbean.” Rev Panam Salud Publica 40(4):202–3.

Liberman Jonathan, Evan Blecher, Alejandro Ramos Carbajales and Fishburn Burke. 2011. “Opportunities
and Risks of the Proposed FCTC Protocol on Illicit Trade.” Tobacco Control 20:6.

Marquez, Patricio et al. 2018. Advancing Action on the Implementation of Tobacco Tax Harmonization
in the Organisation of Eastern Caribbean States (OECS) Countries. Port of Spain Trinidad and Tobago
and Washington D.C.: The World Bank Group.

Merriman, David, Ayda Yurekli and Frank J. Chaloupka. 2000. “How big is the worldwide cigarette
smuggling problem?” In Tobacco Control in Developing Countries, edited by Prabhat Jha and Frank
Chaloupka, 365-392. Oxford: Oxford University Press.

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Ministry of the Attorney General and Legal Affairs. 2015a. Laws of Trinidad and Tobago, Tobacco Control
Act of 2009: Amended by 12 of 2012. Accessed March 2, 2018.

http://rgd.legalaffairs.gov.tt/laws2/alphabetical_list/lawspdfs/30.04.pdf

Ministry of the Attorney General and Legal Affairs. 2015b. Laws of Trinidad and Tobago, Customs Act
Chapter 78:01: Act 22 of 1938: Amended and Updated to December 31st 2015. Accessed March 2,
2018. http://laws.gov.tt/ttdll-web/revision/list?offset=130&q=&currentid=600#email-content

Padgett, John. 2018. Interview by Malini Maharaj with Caribbean External Affairs Manager, Legal and
External Affairs, British American Tobacco. February 20, 2018.

Pan American Health Organization (PAHO) and World Health Organization (WHO). 2016a. Report on
Tobacco Control of the Region of the Americas. WHO Framework Convention on Tobacco Control: 10
Years Later. Washington D.C.: PAHO.

Pan American Health Organization (PAHO) and World Health Organization (WHO). 2016b. PAHO/
WHO Strategy for Technical Cooperation with the United Kingdom Overseas Territories (UKOTs) in the
Caribbean 2016-2022. July.

Ross, Hana. 2015. Measures to Control Illicit Tobacco Trade – Draft. University of Cape Town and
Institute for Health Research and Policy, University of Chicago. June 14.

Sharma, Karmesh. 2018. Interview by Malini Maharaj with Epidemiologist and former Manager, Tobacco
Control Unit, Trinidad and Tobago, Ministry of Health, Trinidad and Tobago. February 22, 2018.

Titeca, Kristof, Luk Joossens, and Martin Raw. 2011. “Blood Cigarettes: Cigarette Smuggling and War
Economies in Central and Eastern Africa.” Tobacco Control 20:226-232.

West Indian Tobacco Company (WITCO). 2018. Interview by Malini Maharaj with Head of Legal and
External Affairs, West Indian Tobacco Company. February 21, 2018.

World Health Organization. (n.d.). Illicit Trade in Tobacco: A Summary of the Evidence and Country
Responses. Accessed February 15, 2018. http://www.who.int/tobacco/economics/illicittrade.pdf

________________. 2018a. The Protocol to Eliminate Illicit Trade in Tobacco Products: Questions and
Answers. WHO Framework Convention on Tobacco Control. World Health Organization. Accessed
June 25, 2018. http://www.who.int/fctc/protocol/faq/en/index1.html

_________________. 2018b. Core Questionnaire of the Reporting Instrument of the WHO Framework
Convention on Tobacco Control: Grenada. World Health Organization. Accessed June 20, 2018. http://
untobaccocontrol.org/impldb/wp-content/uploads/Grenada_2018_report.pdf

_________________. 2018c. Core Questionnaire of the Reporting Instrument of the WHO Framework
Convention on Tobacco Control: St. Lucia. World Health Organization. Accessed June 20, 2018. http://
untobaccocontrol.org/impldb/wp-content/uploads/Saint_Lucia_2018_report.pdf

_________________. 2018d. Core Questionnaire of the Reporting Instrument of the WHO Framework
Convention on Tobacco Control: Trinidad and Tobago. World Health Organization. Accessed June 20,
2018. http://untobaccocontrol.org/impldb/wp-content/uploads/Trinidad_and_Tobago_2018_report.pdf

________________. 2017. WHO Report on the Global Tobacco Epidemic: Monitoring Tobacco Use
and Prevention Policies. Geneva: World Health Organization.

248 // Organization of Eastern Caribbean States (OECS) and Trinidad and Tobago: Caribbean
Regional Report on Illicit Tobacco Trade
________________. 2016. Core Questionnaire of the Reporting Instrument of the WHO FCTC: Antigua
and Barbuda. World Health Organization. Accessed January 7, 2018. http://untobaccocontrol.org/
impldb/wp-content/uploads/reports/Antigua_and_Barbuda_2016_report.pdf

________________. 2016. Core Questionnaire of the Reporting Instrument of the WHO Framework
Convention on Tobacco Control: Dominica. World Health Organization. Accessed January 5, 2018
http://untobaccocontrol.org/impldb/wp-content/uploads/reports/dominica_2016_report.pdf

_________________. 2012. Reporting Instrument of the WHO Framework Convention on Tobacco
Control: St. Kitts and Nevis. World Health Organization. Accessed January 5, 2018. http://untobacco-
control.org/impldb/wp-content/uploads/reports/st_kitts_and_nevis_2012_report.pdf

_________________. 2015. WHO Global Report on Trends in Prevalence of Tobacco Smoking 2015.
Geneva: World Health Organization.

_________________. 2013. Protocol to Eliminate Illicit Trade in Tobacco Products: Framework
Convention on Tobacco Control. Geneva: World Health Organization.

_________________. 2010. Reporting Instrument of the WHO Framework Convention on Tobacco
Control: St. Vincent and the Grenadines. Accessed January 5, 2018. http://untobaccocontrol.org/
impldb/wp-content/uploads/reports/st_vincent_grenadines_2012_report_final.pdf

249
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Annex

Taxes on the Most-Sold Brand of Cigarettes for
CARICOM Countries

250 // Organization of Eastern Caribbean States (OECS) and Trinidad and Tobago: Caribbean
Regional Report on Illicit Tobacco Trade
MOST SOLD MOST SOLD MOST SOLD MOST SOLD
MOST SOLD MOST SOLD
BRAND OF BRAND OF BRAND OF BRAND OF
BRAND OF BRAND OF TOBACCO
CIGARETTES CIGARETTES CIGARETTES CIGARETTES
CIGARETTES CIGARETTES EXCISE TAXES
COUNTRY YEAR - TAXES AS A - TAXES AS A - TAXES AS A - TAXES AS A
- TAXES AS A - TAXES AS A INCREASED
% OF PRICE % OF PRICE - % OF PRICE % OF PRICE -
% OF PRICE - % OF PRICE - 2008-2016
- SPECIFIC AD VALOREM - IMPORT VALUE ADDED
OTHER TAXES TOTAL TAX
EXCISE EXCISE DUTIES TAX
2016 0 0 0 13.04 2.43 15.47

2014 0 0 0 13.04 1.59 14.63
Antigua and
2012 0 0 0 13.04 1.95 15.00 NA
Barbuda
2010 0 0 0 13.04 1.72 14.77

2008 0 0 0 13.04 1.72 14.77

2016 11.26 0 0 13.04 0 24.30

2014 10.35 0 0 13.04 0 23.40

Dominica 2012 10.35 0 0 13.04 0 23.40 No

2010 12.57 0 0 13.04 0 25.61

2008 12.57 0 0 13.04 0 25.61

2016 0 31.80 0 13.04 1.89 46.73

2014 0 32.76 0 13.04 1.95 47.76

Grenada 2012 ... ... ... ... ... ... No

2010 0 34.70 0 13.04 1.74 49.48

2008 0 0 40.50 0 0 40.50

2016 28.27 0 0 14.16 2.05 44.48
No
2014 26.25 0 0 14.16 2.52 42.94
(2016 tax rate
Jamaica 2012 31.82 0 0 14.16 0.08 46.06
lower than 2008
2010 36.21 0 0 14.89 0.08 51.18 despite intermittent
increases)
2008 29.63 0 0 14.16 0.09 43.88

251
MOST SOLD MOST SOLD MOST SOLD MOST SOLD
MOST SOLD MOST SOLD
BRAND OF BRAND OF BRAND OF BRAND OF TOBACCO
BRAND OF BRAND OF
CIGARETTES CIGARETTES CIGARETTES CIGARETTES EXCISE
CIGARETTES CIGARETTES
COUNTRY YEAR - TAXES AS A - TAXES AS A - TAXES AS A - TAXES AS A TAXES
- TAXES AS A - TAXES AS A
% OF PRICE % OF PRICE - % OF PRICE % OF PRICE - INCREASED
% OF PRICE - % OF PRICE -
- SPECIFIC AD VALOREM - IMPORT VALUE ADDED 2008-2016
OTHER TAXES TOTAL TAX
EXCISE EXCISE DUTIES TAX
2016 0 4.03 0 14.53 1.21 19.76

2014 0 4.03 0 14.53 1.21 19.76
Saint Kitts
2012 0 4.18 0 14.53 1.25 19.96 No
and Nevis
2010 0 5.01 0 7.10 1.89 14.00

2008 0 6.52 0 9.23 2.46 18.20

2016 39.11 0 0 13.04 0.93 53.09

Regional Report on Illicit Tobacco Trade
2014 48.55 0 0 13.04 1.29 62.88

Saint Lucia 2012 28.71 0 0 0 1.20 29.91 Yes

2010 0 24.92 0 0 1.62 26.54

2008 0 28.25 0 0 1.84 30.08

Source: WHO Report on the Global Tobacco Epidemic 2017, Appendix IX, Table 9.1
2016 5.17 2.48 0 13.04 0 20.69
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Saint 2014 2.2 1.52 0 13.04 0 16.76
Vincent
2012 1.83 1.08 0 13.04 0 15.96 Yes
and the
Grenadines 2010 1.67 1.28 0 13.04 0 15.99

2008 1.67 1.44 0 13.04 0 16.15

2016 14.65 0 0 11.11 0 25.76

252 // Organization of Eastern Caribbean States (OECS) and Trinidad and Tobago: Caribbean
2014 16.57 0 0 13.04 0 29.61
Trinidad
2012 19.54 0 0 13.04 0 32.58 No
and Tobago
2010 20.69 0 0 13.04 0 33.73

2008 23.64 0 0 13.04 0 36.69
253
CHILE
9

CHILE:

Tackling the Illicit
Tobacco Trade
Guillermo Paraje1

Chapter Summary
Although smoking prevalence in Chile has reduced over the past decade, consumption of
tobacco products remains very high. Chile’s tobacco taxation levels have been increasing since
2010 and currently represent about 70-75 percent of the price of the most sold brand. Cigarette
real prices have been increasing well above such tax increases. Data on cigarette tax-paying
sales over this period confirm that, as cigarette price increased, sales of cigarettes decreased. A
recent survey in the metropolitan area of Santiago found that the prevalence of illicit cigarette
among smokers was 10.9 percent, in contrast to industry estimates of 24 percent.

Chile ratified the WHO’s FCTC in June 2005. Although Chile has not ratified the Protocol
to Eliminate Illicit Trade in Tobacco Products, it soon plans to implement Track and Trace
systems, which would give the Inland Revenue Service a rapid means of distinguishing illicit
cigarette packs. In addition to this forthcoming system, it is recommended that Chile imple-
ments a comprehensive, integral policy to curb illicit trade, including the ratification of the
Protocol and coordination with neighboring countries on tobacco illicit trade.

There is also an urgent need to produce independent information on the extent of tobacco
illicit trade, its characteristics and its implications on Chile’s internal tobacco market. It is also

1
Universidad Adolfo Ibáñez

255
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

recommended that penalties for the illicit trade of tobacco products be increased, in parallel
with greater enforcement of these measures. Other suggested steps include adopting stron-
ger measures to address the entry of tobacco products via the duty-free zone of Iquique (close
to the Bolivian and Peruvian borders), and greater controls on Chile’s sizable duty-free allow-
ances, which include no limitations on the number of trips per day (or month).

1. Tobacco Consumption and Regulation
Consumption of Tobacco
The average per capita consumption of tobacco products in Chile is among the highest
in the world. This health epidemic has a high toll in human lives and economic resources.
Tobacco is directly responsible for more than 16,000 annual deaths in Chile, equivalent to
more than 18 percent of all deaths (Pichón-Riviere et al. 2014). Treating tobacco-related
diseases implies a financial burden on the health system of more than Ch$1 trillion (roughly
US$1.8 billion). Tobacco consumption also accounts for at least 285,000 lost disability-ad-
justed life years, 19 percent of the annual total.2 Studies in numerous countries show that,
among people who die in middle age (ages 30–69), smokers die an average of 10 years
earlier, while, overall, smokers lose an average of 20 years of life with respect to nonsmokers
(Jha and Peto 2014).

Until 2006, the share of the population aged 12–65 who reported they had smoked during
the previous year was high and stable, at around 48 percent (Figure 1). The share among this
age-group who reported they had smoked during the previous month was also high and
stable, at around 43 percent. Consumption was concentrated in manufactured cigarettes,
more than 90 percent of total consumption; the rest represented roll-your-own tobacco.3
After 2006, trends in both past-month and past-year smoking showed a clear declining
trend, though the trends seemed to have stabilized since 2012. Past-year prevalence had
fallen to 38 percent by 2016 (a decrease of 10 percentage points in 10 years). Past-month
prevalence had fallen to 33 percent, also a decrease of 10 percentage points in a decade.

The progress in the reduction of tobacco use has been substantial, but the current levels of
use are still elevated among high-income countries, a category Chile joined about a half-de-
cade ago, but also among the countries in the region. Chile is only second to Bolivia in the
Americas in smoking prevalence, more than twice the regional average and well above the
global average (Table 1).

2
See GBD Results Tool (database), Global Burden of Disease Study 2016, Global Health Data Exchange,
Institute for Health Metrics and Evaluation, Seattle, http://ghdx.healthdata.org/gbd-results-tool.
3
See Euromonitor International Passport (database), Euromonitor International, London, http://www.
euromonitor.com/.

256 // Chile: Tackling the Illicit Tobacco Trade
Figure 1. Trends in the Prevalence of Tobacco Consumption, Ages 12–65, Chile,
1994–2015

Evolution of year and month-prevalence of tobacco consumption,
population 12-65 years old
55

49.5 49 49.4
50 48.4 48.3
47.7
47.3
46.1
45 44 43.6 43.6
42.4
41.3 41.6
40.7 41.2
39.5 39.1
40 38.2 37.9

36
34 34.7
35 33.4
Year-prevalence

30 Month-prevalence

2014
1996

2010
1994

2000

2012

2016
1998

2004

2006

2008
2002

Source: Calculations based on Use of Drugs in General Population Surveys in Chile; see Observatorio Chileno
de Drogas 2017.
Note: Month-prevalence refers to the share of the age-group that reported they had smoked during the
previous month. Year-prevalence is the corresponding share with reference to the previous year.

Figure 2. Past-Month Tobacco Consumption, by Sex, Ages 12–65, Chile,
1994–2015

Month-prevalence of tobacco consumption by sex,
population 12-65 years old
50 47.9 48.5
47.4
46.4 46.3
45.7 45.1 45.2
45
41
39.8 39.9 39.8
40 38.6
37.4 37
36.6 35.6 35.9 36
36
35 33.4 33.4
31 30.8
30

25
Males

20 Females
2014
1996

2010

2012

2016
1994

2000
1998

2004

2006

2008
2002

Source: Calculations based on Use of Drugs in General Population Surveys in Chile; see Observatorio Chileno
de Drogas 2017.

257
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table 1. Age-Standardized Smoking Prevalence, Ages 15 and Over, Americas,
Circa 2016

COUNTRY VALUE
Bolivia (Plurinational State of) 38.9

Chile 37.9

Cuba 35.2

Suriname 25.2

Argentina 22.0

United States of America 21.9

Jamaica 17.0

Uruguay 17.0

Canada 14.3

Mexico 14.2

Brazil 14.0

Dominican Republic 13.8

Paraguay 13.3

Haiti 13.0

Costa Rica 11.9

Bahamas 11.8

El Salvador 10.7

Colombia 9.1

Barbados 8.2

Saint Kitts and Nevis 8.0

Ecuador 7.2

Panama 6.2

Regional average 16.9

Global average 21.9

Source: Calculations based on data of “Maternal Mortality Country Profiles,” GHO (Global Health Observatory)
(database), World Health Organization, Geneva, http://www.who.int/gho/maternal_health/countries/en/.

One of the more striking characteristics in the Chilean case is the high prevalence of
smoking among women, the highest in the region (Drope and Schluger 2018). Currently at
31 percent, the rate shows the same trend as the prevalence among men, that is, high and
stable until 2006 and then declining. The gap in smoking between the sexes has decreased
considerably (Figure 2).

258 // Chile: Tackling the Illicit Tobacco Trade
No single explanation exists for the high prevalence of smoking among women. The reasons
often given are linked to women’s empowerment, such as greater female participation in the
labor market—still one of the lowest such participation rates in the region—and the associated
rise in disposable incomes. However, no study has yet been conducted to probe this issue.

The high smoking prevalence is even more striking among young women. Data on
smoking among children ages 12–17 indicate that, although rates have been decreasing
since 2005, the past-month prevalence of smoking is consistently greater among girls
than among boys (Figure 3). In 2015, the prevalence was 28.5 percent versus 23.4 percent,
respectively. This pattern of consumption is rare in developing or developed countries
(Drope and Schluger 2018).

Figure 3. Past-Month Tobacco Consumption, by Sex, Ages 12–17, Chile, 2001–15

Month-prevalence of tobacco consumption in school children, by sex
50

44.9 44.3
45
40.9

40 39.1
38.4 38
35.4 35.6
35
32.7
30.6
30 28.2
28.7 28.5

23.5 24.7
25 23.4
Males

20 Females
2011
2003

2007

2013

2015
2005

2009
2001

Source: Calculations based on Use of Drugs in School Children Population Surveys in Chile; see Observatorio
Chileno de Drogas 2016.

This pattern of consumption has likewise not been thoroughly studied, and there are no
clear explanations. One possible contributory factor might be the introduction of products
that are targeted mostly at young women, such as flavored and scented cigarettes. These
products represented only 6 percent of the cigarette market in 2010, but account for almost
40 percent today (Figure 4). A recent study finds that the consumption of flavored cigarettes is
inversely associated with age and significantly more likely among women, even if the prices
of these products are substantially higher than the prices of more standard products (Paraje
and Araya 2017).

The fact that the market share of flavored cigarettes has been expanding rapidly despite
the relatively higher prices also points to a singular feature of the Chilean market: smoking
prevalence is at least as considerable among better-off groups as among the less well off.
This can be investigated through smoking among school-age children, for example. In Chile,

259
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 4. Distribution of Cigarette Sales, by Type of Cigarette, Chile, 2003–17
Distribution of cigarette sales by type of cigarette
0.1 0.1 1.1 1.4 1.6 1.6
100 3.7 5.9 7
13

19.9
90

25.8
31

34.7

39.6
80
70
60
98.4
99.9

98.9

98.6
99.1

97.9

96.3

50
94.1

87
40
80

74.2

65.3

60.4
30
20
Regular
10
Flavoured
0 or menthol
2011

2014

2017
2003

2010
2007

2012

2013

2015

2016
2004

2005

2006

2009
2008

Source: Calculations based on data of Euromonitor International Passport (database), Euromonitor
International, London, http://www.euromonitor.com/.

Figure 5. Past-Month Tobacco Consumption, by School Type, Ages 12–17, Chile,
2001–15

Month-prevalence of tobacco consumption in school children,
by type of school
50

Private
25
Partially subsidized

20 Public
2011
2003

2007

2013

2015
2005

2009
2001

Source: Calculations based on Use of Drugs in School Children Population Surveys in Chile; see Observatorio
Chileno de Drogas 2016.

260 // Chile: Tackling the Illicit Tobacco Trade
socioeconomic status can be approximated by the type of school attended. Students at
public schools are typically from low- and lower-middle income households, while students
at partially subsidized schools are often from middle-income households, and students at
private schools are usually from high-income households. During most years in 2001–15,
smoking prevalence among children ages 12–17 at private schools was as high as or higher
than the rates among the corresponding children in public schools (Figure 5). This is differ-
ent from the situation in, for instance, neighboring Argentina, which is at a similar per capita
income, or in the United Kingdom, where children from less affluent backgrounds exhibit
higher smoking rates (Linetzky et al. 2012; Taylor-Robinson et al. 2017).

Market Structure
The only sources of information on the market structure of tobacco products in Chile are
international consulting firms. One such firm is Euromonitor International, which provides a
detailed account of the market structure among companies selling taxed cigarettes in Chile
(Figure 6). This market is completely dominated by British American Tobacco (BAT), which
enjoys a market share that is above 95 percent by volume. The second most important
player is Philip Morris International, with no more than 4 percent of the taxed market, while
the rest is distributed among minuscule players.

Figure 6. Cigarette Market Shares, by Volume, Chile, 2012–16

Market share for cigarettes in Chile (in volume)
120

100
3.7 3.7 3.7 3.4 3

60
95.4 95.4 95.4 95.6 96
40
British American Tobacco
20 Philip Morris International
Others
0
2014
2012

2013

2015

2016

Source: Calculations based on data of Euromonitor International Passport (database), Euromonitor
International, London, http://www.euromonitor.com/.

BAT Chile produces for the internal market and also exports more than half of its domestic
production. It shows a clear trend of shrinking production and expanding exports, which
represented only 25 percent of total production in 2012 (Figure 7). In 2015, BAT Chile
exported cigarettes to 17 countries, including Argentina, Colombia, Peru, the United States,
Uruguay, and República Bolivariana de Venezuela.

261
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

“All of the company’s cigarettes that are sold in duty-free outlets in Latin America and the
majority of its cigarettes sold in duty-free outlets in Europe are produced in Chile,” affirms
Euromonitor International.4

Figure 7. Production, Exports, and Imports, Cigarettes, Chile, 2012–16

Production, exports and imports of cigarettes in Chile
(in million sticks)
25000

20000

15000

10000
Production
5000
Export
0 Import
2014
2012

2013

2015

2016

Source: Calculations based on data of Euromonitor International Passport (database), Euromonitor
International, London, http://www.euromonitor.com/.

Figure 8. Export Destinations, Cigarettes, by Free on Board Value, Chile, 2015

Destination of exports of cigarettes according to FOB value in 2015
2.96%
2.97%
3.29%
Colombia Guatemala
Peru El Salvador
9.08% Paraguay Uruguay
Holanda Dominican Republic
54.91% Nicaragua Malta
24.02% Argentina Panama
Honduras USA
Costa Rica

Source: Calculations based on data of Euromonitor International Passport (database), Euromonitor
International, London, http://www.euromonitor.com/.

4
See “British American Tobacco Chile SA,” Tobacco (Chile), Euromonitor International Passport (database),
Euromonitor International, London, http://www.euromonitor.com/.

262 // Chile: Tackling the Illicit Tobacco Trade
Among the main destinations in 2015, more than half the cigarette exports of Chile went
to Colombia, while almost a quarter went to Peru (Figure 8). More than 95 percent of total
exports went to only five countries, including Paraguay, which produces sufficient tobacco
to supply its own domestic market and which is often indicated as a source of illegal ciga-
rettes. All the exports are produced by BAT Chile.

In 2015, almost 84 percent of all imported cigarettes, including cost, insurance, and freight
documentation, were imported by Philip Morris International, presumably to supply the inter-
nal market, of which Philip Morris International accounts for only 4 percent, while 16 percent
were imported by BAT.

Several countries account for the imports of tobacco products, of which cigarettes represent
an average of about 30 percent. More than 90 percent of annual imports are provided by
eight countries, most of them within Latin America (Figure 9). Argentina and Brazil have tradi-
tionally been the main sources. Both countries are among the top 19 growers of tobacco,
with no less than 40 percent of total imports into Chile in 2015 and a peak of 58 percent in
2013. Among the other countries, there has been a visible change in the share of imports.
For instance, Peru was an important exporter to Chile until 2014 (an average import share
of 18 percent), but its share in imports fell to almost zero beginning in 2014. Meanwhile,
imports from Colombia started expanding rapidly in 2014. Countries outside the region,
such as India and Turkey, have raised their shares recently, especially after 2014. There is no
obvious explanation for any of these changes.

Figure 9. Imports of Tobacco Products, by Country of Origin, Chile, 2010–17

100% 5% 5.6% 4.2% 3.7%
8.6% 0.7% 6.5% 6%
1.4% 1.3% 4.2% 1.4% 6.7%
1.0% 6.1% 4.5% 2.3%
90% 5.4% 5.6% 3.5%
8.2%
9.7%
4.8% 7.1% 3.7% 4.8% 10.7%
1.3% 4.1% 4%
80% 7.4% 7% 3.0% 10.4% 10.9% 4.4%
10.9% 1.2%
11.3% 0.6%
70% 16.8%
19.5% Brazil
60% 30.3% 5% 27.2% 25.8%
13.9% 23.8% 32.1% Argentina
50% Colombia
22.3%
40% 13.8%
36.7% 17.4% Peru
32.8%
30% 32.4% 32.6% 19.9% Paraguay
20% India
35.3% 35.2%
28.4%
10% 20% 19.7% 20.5% Turkey
13.6% 13.5%
0% Mexico
2011

2014

2017
2010

2012

2013

2015

2016

Others

Source: Calculations based on data of the National Customs Service.
Notes: Import valuation includes cost, insurance, and freight.

In the distribution of imports of tobacco products by means of transport, sea transport is by
far the most important, representing from around 65 percent to 83 percent of all imports by

263
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 10. Imports of Tobacco Products, by Means of Transport, Chile, 2010–17

100%
8.9%
14.4% 17% 13.8%
90% 22.2% 19.7%
13.1% 27.3% 26.7%
3.5% 3.5% 3.4%
80% 2.5%
1.4%
5.3% 2.4%
70%
60%
50%
40% 82.1% 77.8% 79.5% 82.8%
78% 76.5%
67.4% 70.9%
30%
20% Sea

10% Air
Land
0%
2011

2014

2017
2010

2012

2013

2015

2016

Source: Calculations based on data of National Customs Service.
Notes: Import valuation includes cost, insurance, and freight.

value (Figure 10). Land transport, mostly from Argentina, Brazil, and Paraguay, accounted for
between 9 percent and 27 percent of imports by value.

Regulatory Context
Chile signed the Framework Convention on Tobacco Control (FCTC) of the World Health
Organization (WHO) in September 2003 and ratified it in June 2005. The ratification of the
FCTC implied a clear change in the regulation of tobacco products in the country.

The earliest legislation on tobacco products dates to Decree-Law 828 in 1974, which lays
out the conditions under which tobacco should be grown and commercialized. The legisla-
tion assigned the Servicio de Impuestos Internos (Internal Revenue Service, SII) the mandate
to monitor and raise revenue on sales of tobacco products. Law 19,419 of October 1995
banned advertising for tobacco products that targets minors (aged under 18), introduced
health warnings on cigarette packaging, and prohibited smoking in closed spaces, such as
elevators, classrooms, and public offices. In addition, restaurants, hotels, bars, and other
such establishments, though they were not required to have them, were to indicate clearly
any smoking and nonsmoking areas they might have.

After the ratification of the FCTC, Law 20,105 was enacted in May 2006 to adapt Chilean
legislation to certain provisions of the convention. In particular, the law barred all tobacco
advertising in the media, including radio, television, and newspapers, except at points of sale,
which, moreover, were required to be of a type and dimensions defined by the Ministry of
Health. All sales and promotions among minors were forbidden, as was the sale of tobacco
products within 100 meters of primary and secondary schools. The sale of cigarettes in

264 // Chile: Tackling the Illicit Tobacco Trade
packs of fewer than 10 cigarettes or of loose cigarettes was also prohibited. The Ministry of
Health designed health warnings that were required to cover at least 50 percent of cigarette
packs. The law likewise forbade the use of terms such as light, soft, and low tar on tobacco
packaging. The law tightened regulations on smoking in educational institutions, public
buildings, buses, airports, and so on. Public places such as restaurants, casinos, and bars
were now required to provide separate areas for smokers.

Law 20,660 of February 2014 prohibits tobacco advertising targeted indirectly at children,
such as the exhibition of smoking on television during hours when children’s programs are
being aired. The law also extends the definition of nonsmoking area to cover, for instance,
patios with temporary roofs and similar structures, and it forbids smoking in any closed
area, including those that would have been allowed as designated smoking areas under the
previous law. The new law requires tobacco companies to issue public notification of any
expenditures by agreement with other public or private companies. Tobacco companies
must likewise provide detailed information about meetings and activities of any kind with
public officials.

Parliament is considering a modification of the new law that would completely ban addi-
tives, such as menthol, chocolate, vanilla, and so on, prohibit advertising at the point of
sale, impose a health warning that would cover 100 percent of the cigarette pack, and bar
smoking in locations in which children are likely to be present, such as public parks and
beaches. The new initiative has already been approved by the Senate. Though the Lower
Chamber has been delaying debate, and the government has not introduced the legislation
as a priority, the Health Commission of the Lower Chamber has unanimously recommended
that the bill be taken up.

Licensing
Two government entities are charged with authorizing the sale of tobacco products for the
domestic market. The first is the Ministry of Health, which must be informed by tobacco
producers (or importers) about the components and additives included in tobacco prod-
ucts to be sold on the domestic market. The producers and importers must notify the
ministry about the quantity and quality of ingredients and substances used in the treatment
of tobacco products (Law 20,660). In practice, the Division of Healthy Public Policies and
Health Promotion of the Ministry of Health is the licensing authority for tobacco products.

The second government entity that authorizes the sale of tobacco products is the SII, which
collects tobacco tax revenue. Producers and importers of tobacco products must register
with the SII to be able to sell their products in the domestic market (Decree Law 828 of
1974). Though tobacco growers do not have to pay the taxes on tobacco, they must supply
regular information on planted area and harvests.

Because tobacco taxes are paid to the SII directly by the tobacco producers or importers,
there is no licensing requirement among retailers.

265
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Taxes on Tobacco Products
Tobacco taxes have been collected in Chile at least since 1974, when an ad valorem tax
was imposed on packs of cigarettes (at a rate of 57 percent), cigars (40 percent), and loose
tobacco (40 percent). The tax base was the retail price, including the tax. In practice, this
means that tobacco companies have to notify the SII on the prices at which they will sell
tobacco products to final consumers and that these prices will be the same throughout the
country. The rates were subsequently changed frequently (Table 2). The change in the rate in
1998 was the last one before the ratification of the FCTC. It was also the first under a demo-
cratic government and therefore had to be approved by Parliament. The previous rates had
been fixed under the dictatorship of Pinochet.

Table 2. Ad Valorem Tax Rates on Tobacco, Chile, 1974–2014
Percentage of retail price, plus the tax

YEAR CIGARETTES, PER PACK OF 20 CIGARS LOOSE TOBACCO

1974 57.0 40.0 40.0

1975 62.0 40.0 62.0

1977 57.0 40.0 57.0

1978 26.0 42.9 42.9

1982 52.9 26.0 52.9

1995 55.4 46.0 52.9

1998 50.4 51.0 47.9

2010 62.3 52.6 59.7

2012 60.5 52.6 59.7

2014 30.0 52.6 59.7

In 2010, four years after the ratification of the FCTC and with the stated purpose of funding
the reconstruction of part of the country that had been devastated by a severe earthquake,
Parliament approved an increase in the tobacco tax rate, and, for the first time, introduced
a specific tax on individual cigarettes. Such specific taxes are automatically indexed in Chile
to the projected monthly inflation rate, which is fixed by the SII. The value of the specific tax
was set at 0.0000675 monthly tax units per cigarette, which was Ch$2.5, around US$0.005,
at the exchange rate at the time.5 In 2012, when the tobacco tax was again changed by
Parliament, aside from the new tax rate on packs of cigarettes, the specific tax on individual
cigarettes was doubled to 0.0001288 monthly tax units, about Ch$5.1, or US$0.01. In 2014,
though the ad valorem tax on packs of cigarettes was cut appreciably, the specific tax was

5
Monthly tax units are units of value defined in real terms for tax purposes. They are changed according to
expected inflation, as projected

266 // Chile: Tackling the Illicit Tobacco Trade
raised by a factor of more than 8, to 0.00103 monthly tax units, about Ch$43.7, or US$0.074,
the equivalent of US$$1.48 a pack, at the exchange rate at the time.6 The reliance on spe-
cific rather than value added excises, the increases in real taxes, and the indexation of the
taxation to inflation, if not to affordability to take account of increases in per capita income
as well, are all consistent with current international best practice distilled by the World
Bank (Marquez and Moreno-Dodson 2017).

The price of a pack of 20 cigarettes of the most widely sold brand jumped in real terms in
Chile between 2008 and 2016, but not above the average increase in the WHO region of the
Americas (Figure 11). Indeed, the price was also similar to the global real price estimated by
WHO. Around 2008, the most widely sold brand of cigarettes in Chile was more expensive
than the corresponding brands in neighboring countries, plus Paraguay. By 2016, the brand
in Chile was the second most expensive behind the top brand in Peru.

While the tax share of the most widely sold brand in Chile was well above the regional and
global averages in 2008 and 2016, it never reached the 75 percent threshold suggested by
WHO as a minimum tax share for tobacco (Figure 12). Indeed, in both years, the second larg-
est corresponding tax share after Argentina was in Chile, though the real prices in Argentina
were lower.

Figure 11. Most Widely Sold Brand, by Price, Chile and Neighbors, 2008 and 2016
U.S. purchasing power parity (PPP) dollars per pack of 20

Global average

Regional average

Paraguay

Bolivia

Peru

Chile
2016
Argentina 2008
0,00 1,00 2,00 3,00 4,00 5,00 6,00 7,00

Source: Calculations based on data of TFI (Tobacco Free Initiative) (database): Taxation, World Health
Organization, Geneva, http://www.who.int/tobacco/economics/taxation/en/index1.html.

Consequences of Regulatory and Tax Changes
Figure 13 depicts the changes in regulations and taxes since 1990, when democracy was
restored and Parliament began once more to debate bills. The pace of the changes in
regulations and taxes sped up after Chile ratified the FCTC in June 2005. According to

6
The value of the monthly tax unit at the time of the tax change was Ch$42,431.

267
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 12. Most Widely Sold Brand, by Tax Share, Chile and Neighbors, 2008
and 2016
A. 2008

Global average 32,3% 15,1%
Regional average 32,8% 12,2%

Paraguay 6,4% 9,1%
Bolivia 29,5% 11,5%
Peru 25,2% 16%
Chile 60,4% 16%
Tobacco excises
Argentina 62,6% 6,6%
VAT and other taxes
0% 10% 20% 30% 40% 50% 60% 70% 80%

B. 2016

Global average 36,5% 14,7%
Regional average 35,5% 12,9%

Paraguay 8,3% 9,1%
Bolivia 27,9% 11,5%
Peru 34,3% 15,3%
Chile 73,2% 16%
Tobacco excises
Argentina 76,1% 4,2%
VAT and other taxes
0% 20% 40% 60% 80% 100%

pack of 20, percent
Source: Calculations based on data of TFI (Tobacco Free Initiative) (database): Taxation, World Health
Organization, Geneva, http://www.who.int/tobacco/economics/taxation/en/index1.html.

WHO, through these changes, the government of Chile is fulfilling most dimensions of
the MPOWER measures, except for the O (policies aiding in quitting smoking), on which
the country is considered not to have progressed much, and the E (enforcement of bans
on tobacco advertising, promotion, and sponsorship), on which it is considered to have
achieved intermediate progress, mainly because it has not prohibited advertising at the point
of sale (PAHO 2016).7

It is clear from Figure 13 that a number of policies were implemented in a short time, which
renders an econometric assessment of the impact of these policies almost impossible. At least
one study has attempted to measure the effect of the 2006 smoking ban in schools (Feigl et
al. 2015). It finds that the ban was effective in reducing smoking prevalence among students,
though it did not affect smoking intensity among the smokers. These results must be taken

7
MPOWER = M)onitor tobacco use and prevention policies. (P)rotect people from tobacco smoke. (O)ffer help
to quit tobacco use. (W)arn about the dangers of tobacco. (E)nforce bans on tobacco advertising, promotion,
and sponsorship. (R)aise taxes on tobacco. See TFI (Tobacco Free Initiative) (database): MPOWER, World Health
Organization, Geneva, http://www.who.int/tobacco/mpower/en/.

268 // Chile: Tackling the Illicit Tobacco Trade
Figure 13. Changes in Tobacco Regulation and Taxation, Chile, 1990–2014

Ad-valorem tax reduced to 30%
Excise tax increased (approx, 0.08
USD per stick)

Ad-valorem tax reduced to 60.5%
Excise tax increased (approx, 0.01
USD per stick)
Ad-valorem tax increased 55.4% Ad-valorem tax increased 62.3%
Excise tax increased (approx, 0.005
USD per stick)

Ad-valorem tax increased 50.4%

2011

2014
1996

1999
1990

1993
1994

1997

2000

2003
1995

2007

2010

2012
2013
1998
1991

2004
2005
2006
1992

2009
2008
2001
2002
Law 19419
Partial ban on advertising
Introduction of health warnings
Partial smoking ban on closed spaces
Law 20105
Total ban on direct advertising
Incease in legal smoking age to 18 (from 16)
Selling ban within a radius of 100 mts. of schools
Total ban on school smoking
Increase in the size of health warning to 50%
Increase prohibition of smoking in closed places
Law 20660
Complete prohibition of smoking in closed spaces
Total ban on tobacco advertisment
Increase the number of warnings (to 6)
Total ban on indirect advertising

with extreme care, however, because the study does not consider changes in taxes and prices
during the period of analysis. It is quite likely that the effect of the ban is overestimated.

There are other, indirect indicators of the effectiveness of these policies on the population,
especially youth. One such indicator is the perception that there is a health risk associated
with the frequent consumption of certain substances. Figure 14 shows trends in the per-
ceptions among school children of a high risk to health from tobacco and alcohol, the two
most frequently consumed harmful substances. It highlights that, while the incidence of
the perception that consuming alcohol represents a health risk declined, the corresponding
incidence of the perception about tobacco increased by 7 percentage points between 2007
and 2011. The increase has been constant at around 52 percent since then. This is a cause
for real concern, given that tobacco kills about half of the confirmed users. Meanwhile,
alcohol control policies are mild in Chile; apart from restrictions on sales to minors, there is
little regulation.

Figure 15 shows trends in the real price of cigarettes and cigarette affordability. The real price
is estimated as the ratio of the cigarette component of the consumer price index and the
overall consumer price index. Affordability is the ratio between the general nominal wage
index and the cigarette component of the consumer price index. These data are compiled
monthly by the National Statistics Institute.

The real price of cigarettes rose by more than 280 percent between April 1993 and
December 2017. Attributing this huge increase only to increases in the tobacco tax would be
a mistake. Between April 1993 and May 2010, when the first substantial rise in the tobacco

269
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 14. Youth Who Say Use of Tobacco or Alcohol Is Risky, Chile, 2007–15

Percentage of youth population considering as highly risky the frequent
consumption of tobacco and alcohol
0.7
65.6% 66%

0.65.

0.55 52.3% 52.4%
50.4%
0.5 48% 48%
45.1%
0.45 41.6%
43%

0.4 Risk alcohol
frequently
0.35
Risk tobacco
0.3 frequently
2011
2007

2013

2015
2009

Source: Calculations based on Use of Drugs in School Children Population Surveys in Chile; see Observatorio
Chileno de Drogas 2016.

Figure 15. Price and Affordability, Manufactured Cigarettes, Chile, 1993–2015

Evolution of real price and a ordability (secondary axis)
for manufactured cigarettes (April 1993=100)
400 120

350 110

100
300
90
250
80
200
70
150 Real price of
60
cigarettes
100 50
A ordability of
50 40 cigarettes
jun-97
abr-98
feb-99
dic-99
oct-00
ago-01
jun-02
abr-03
feb-04
dic-04
oct-05

jun-07
abr-08
feb-09
dic-09
abr-93
feb-94
dic-94
oct-95
ago-96

oct-10
ago-11
jun-12
abr-13
feb-14
dic-14
oct-15
ago-06

April 1993 = 100
Source: Calculations based on data of the National Statistics Institute.

tax in decades was implemented to finance reconstruction in the country, the real price of
cigarettes increased by 100 percent. This was entirely the result of a profit-maximization
decision by the monopolist producer, BAT Chile, and, during this time, there was no mention
by the company of the illicit trade in cigarettes.

270 // Chile: Tackling the Illicit Tobacco Trade
Between May 2010 and December 2017, the real price of cigarettes rose by 91 percent.
During this time, BAT Chile pointed out repeatedly that the increase in the tobacco tax was
responsible for the expansion in the market for contraband cigarettes (BAT Chile 2014). It is
untenable to claim that only tax-driven price increases are responsible for contraband, while
profit-maximizing price increases bear no responsibility.

Figure 15 also shows that cigarette affordability decreased steeply during the period, especially
beginning in mid-1998 with the onset of the Asian crisis. Thus, affordability fell by 23 percent
between April 1993 and May 2010 and by 33 percent from May 2010 to December 2017.

Though no econometric analysis has been conducted on the impact that price changes had
on consumption, these changes, plus the changes in regulation, are most likely behind the fall
in smoking prevalence among school children and across the general population. Evidence on
Latin America shows that a 10 percent rise in prices is associated with a decline in consump-
tion of about 3 percent, which increases to 4 percent over the long run (Guindon, Paraje, and
Chaloupka 2015). These results are similar to elasticities reported on Chile, though the study
presenting them has econometric limitations (Debrott Sánchez 2006).

Data on cigarette sales that are taxed confirm that, as cigarette prices rise, legal sales of cig-
arettes decline. Figure 16 shows a clearly declining trend in such sales since the end of 2010.
(No government data on cigarette sales existed before then).

Figure 17 shows trends in tobacco tax revenues in real terms in 1993–2017. The figure shows
that tobacco tax revenue increased steadily until 2015, but then declined slightly in 2016–17.
The rise in the ad valorem tax and the real price of tobacco were behind the increase in rev-
enues (see Figure 15). That revenues fell in 2016–17 is more surprising. This may be attributed

Figure 16. Sales of Cigarettes of National Origin, Units, Chile, 2010–17
Sales of cigarettes of national origin (in units)
2,000,000,000

1,800,000,000

1,600,000,000

1,400,000,000

1,200,000,000

1,000,000,000

800,000,000

600,000,000

400,000,000

200,000,000

0
08–2014
10–2014
12–2014
02–2015
04–2015
06–2015
08–2015
10–2015
12–2015
02–2016
04–2016
06–2016
08–2016
10–2016
06–2014

12–2016
02–2017
04–2017
06–2017
04–2014
06–2013
08–2013
10–2013
12–2013
02–2014
12–2010
02–2011
04–2011
06–2011
08–2011
10–2011
12–2011
02–2012
04–2012
06–2012
08–2012
10–2012
12–2012
02–2013
04–2013

Source: Calculations based on data of the SII.

271
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

to shrinkage in cigarette consumption (consistent with the data in Figure 16), to an expansion
in the illicit trade in cigarettes, or to a combination of both (see below). It is clear in any case
that, despite the decline in legal sales in 2010–17, tobacco tax revenues generally rose.

In terms of relative revenue, Figure 17 shows that, despite recent increases, tobacco taxes
have fluctuated between 3 percent and 4 percent of total tax revenue. Even the jump in the
specific tax on individual cigarettes in 2014, which implied a nominal price increase of about
15 percent-20 percent, did not alter this pattern.

Figure 17. Share of Tobacco Tax Revenue in Total Taxes, Chile, 1993–2017

Tobacco tax revenue (primary axis)(2010-100) and share in
total tax revenue (secondary axis)

140 4.5%
128.5
127.1
120
120.7 4%
116.9
116.2
113.7
111.2

100
100

3.5%
87.2

80
80.2
78.7
77
71.4
68

60 Tobacco
64.5
64.7

3%
62.1
60

tax revenue
54.3

(real)
47.4

40
44
42.7
40.6

(2010=100)
37.5
35.8

2.5%
20 Tobacco
tax share in
2% total tax
0 revenues
2011

2017
2014
2010
1994

2003

2007

2012
2013

2015
2016
1993

1996
1997

1999
2000
1995

1998

2004

2006

2008
2005

2009
2001
2002

Source: Calculations based on data of the SII.

2. The Illicit Trade in Tobacco Products
Context
Chile extends over more than 4,200 kilometers from north to south and shares, with
Argentina, one of the longest borders in the world. Nonetheless, the country is relatively
isolated by natural barriers. In the east, the Andes, the tallest mountain range in the world
outside Asia, covers much of the interior. The west is bounded by the Pacific Ocean. In the
north, one of the driest deserts in the world abuts Bolivia and Peru. The south is broken up
by numerous lakes and rivers and extends into frigid Antarctica. These natural barriers restrict
travel and commerce and mean that the points of entry into the country are relatively few.

By the nature of the phenomenon, relatively little is known about the illicit trade across the
borders of Chile, including the illicit trade in cigarettes, the main tobacco product involved.
Until recently, the debate has been dominated by the data produced by the tobacco

272 // Chile: Tackling the Illicit Tobacco Trade
industry, especially BAT Chile. BAT Chile has linked a presumably explosive increase in the
illicit trade in cigarettes to the rise in the tax on tobacco (see above). Yet, the truly impressive
rise in the real price of cigarettes in recent years has been dominated by the decision of BAT
Chile to raise its prices, which preceded any appreciable tax increase. As is usual in monopo-
listic markets, BAT Chile has raised its prices at a pace to outstrip the rise in prices associated
with the tax increase. Indeed, the average pass-through of the tax increase was 1.12 between
2010 and 2017 (Delipalla and O’Donnell 2001; Paraje, Araya, and Drope 2018).

According to BAT Chile, the market share of illicit cigarettes expanded by a factor of more
than six from 2012 to the first half of 2017, from 3.6 percent to 22.3 percent (Figure 18). BAT
Chile claims that, in the Metropolitan Region of Santiago (where about 40 percent of the
total population of the country lives), the penetration of the illicit trade in cigarettes grew
from 2.3 percent in 2012 to 24.0 percent in the first half of 2017. It also claims that the illicit
trade in cigarettes accounts for tax evasion to the tune of US$500 million a year.8

The claim made by BAT Chile that the tax increase is behind the rise in the illicit trade is
untenable, because the real price of cigarettes started to climb rapidly at least as early as
1999, almost 10 years before of the main change in the tobacco tax (see Table 2). Despite
the obvious inconsistency, the debate in the press has been dominated by the data of BAT
Chile, which regularly publishes reports—widely reproduced in the media—about the role

Figure 18. BAT Chile: Penetration of the Illicit Cigarette Trade, Chile, 2012–17

20
Percentage of total market

25 24

15
15
11.4
10
10.3
National
5
5.2 Metropolitan
Region of
2.3 Santiago
0
2012 2013 2014 2sem2015 2sem2016 1sem2017

Source: Calculations based on data in “Informes por Industria,” Observatorio de Comercio Ilícito,
Cámara Nacional de Comercio, Santiago, Chile. http://www.observatoriocomercioilicito.cl/estudios/
informes-por-industria/#1484577459575-1ef5d87e-6715.

8
See “Informes por Industria,” Observatorio de Comercio Ilícito, Cámara Nacional
de Comercio, Santiago, Chile. http://www.observatoriocomercioilicito.cl/estudios/
informes-por-industria/#1484577459575-1ef5d87e-6715.

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of the tax on tobacco in the expansion in the illicit trade.9 International consultancy firms
also repeat the unfounded claims, which feeds into the debate in the press. The most
important example is Euromonitor International, which has produced annual estimates of
the penetration of the illicit trade in cigarettes at least since 2003 (Figure 19).10 According to
these estimates, the illicit trade shrank from 6.9 percent to 1.3 percent of the total market in
2003–09 before expanding to 19.4 percent in 2017 and a projected 22.8 percent in 2018.

Euromonitor International explicitly states that “successive increases in tobacco tax, and
the resultant increases in the price of cigarettes, remain the main drivers of growth in the
illicit trade in cigarettes in Chile.”11 However, between 2003 and 2010, the real price of cig-
arettes jumped by 43 percent, while affordability declined by 18 percent. Yet, Euromonitor
International claims that the illicit trade shrank at this time. This type of inconsistency and the
fact that Euromonitor International explicitly acknowledges that its main source of information
is the tobacco industry means that Euromonitor International is not a neutral, credible analyst
of illicit trade; this is also demonstrated in the case of other countries (Blecher et al. 2015).

Figure 19. Euromonitor International: Illicit Trade in Cigarettes, Chile, 2003–18

Euromonitor International estimates of illicit trade in cigarettes
(as percentage of total market)
25
Percentage of total market

22.8

20
19.4

12.3
10
10.5
6.9
7.2
5
4.5 5
3 3.3
2.3 1.8 1.4 1.3 1.5 2.3
0
2011

2018
2017
2014
2010
2003

2007

2012
2013

2015
2016
2004
2005
2006

2009
2008

Source: Calculations based on data of Euromonitor International Passport (database), Euromonitor
International, London, http://www.euromonitor.com/.

9
See Pérez-Cueto (2017); “Aumenta contrabando de cigarros en nuestro país,” 24horas.cl (November 8, 2013),
http://www.24horas.cl/nacional/aumenta-contrabando-de-cigarros-en-nuestro-pais-927199; “Comercio ilegal
de cigarrillos en Chile creció un 386% en cinco años,” La Tercera (February 1, 2017), Las Condes, Santiago,
Chili, http://www2.latercera.com/noticia/comercio-ilegal-cigarrillos-chile-crecio-386-cinco-anos/.also.
10
See Euromonitor International Passport (database), Euromonitor International, London, http://www.
euromonitor.com/.
11
“Cigarettes in Chile 2016,” Euromonitor International Passport (database), Euromonitor International, London,
http://www.euromonitor.com/.

274 // Chile: Tackling the Illicit Tobacco Trade
More disturbing than the Euromonitor International estimates is the behavior of the govern-
ment agencies in charge of combating the illicit trade, such as customs, that use BAT Chile
estimates in analyses and that echo tobacco industry arguments that higher taxes might be
behind the expansion in the illicit trade (National Customs Service 2016).

Studies on the Illicit Trade in Cigarettes in Chile
Independent studies are scarce, though, in the last couple of years, more effort has been
undertaken to evaluate trends in the illicit trade in cigarettes. The first study of the illicit trade
relied on sales data of BAT Chile (at the time, Chiletabacos SA) for 2002 and compared these
data with reported consumption from the 2002 National Survey on Drug Use in the General
Population (Debrott Sánchez 2006). The author attributed the gap between the two sets of
consumption data to the consumption of illicit cigarettes and estimated the size of the gap
at 4.2 percent of the total market. However, it is well known that this type of gap analysis is
not appropriate for estimating the size of an illicit market, but only for evaluating trends. The
shortcoming arises mainly because user surveys tend to underestimate true consumption
(Ross 2015).

Using a private household survey, another study estimated the extent, in 2011, of the evasion
of the tobacco tax, which represents a concept that is related to, but different from illicit
trade because tax evasion may also involve undeclared and illegal domestic production
(Jorratt 2012). The study found that the evasion of the tobacco tax reached 17 percent of the
total tax base, that is, total cigarette consumption. No estimate was offered of the market
share of the cigarettes entering the country illicitly from abroad.

A more recent study uses gap analysis to estimate trends in the illicit trade in cigarettes
between 2008–14 (Paraje 2018). The study also considers the consumption reported in four
waves of the National Survey on Drug Use in the General Population and compares these
data with reported cigarette sales (Figure 20). As often occurs in gap analysis, the study
assumes that the underreporting of cigarette consumption in surveys is constant across
time. It concludes that the trends in the reported consumption are not statistically different—at
a 99 percent confidence level—from the trends in the reported sales and that the illicit trade
in cigarettes therefore did not change in proportion to the total market over the period. This
contradicts the BAT Chile and the Euromonitor International data.

The gap analysis does not supply any information on the size of the illicit market - it cannot
distinguish between tax avoidance and tax evasion and cannot determine whether illicit
cigarette are counterfeit or contraband.12 As a result, it is primarily used to detect deviations
from the trend, not to estimate the scope of tax avoidance/evasion. However, if the initial
estimates of Euromonitor International (indicating that the illicit trade of foreign origin in
2010 represented only 1.5 percent of the total market) are correct, then the illicit market for

12
Ross, Hana (2015). Understanding and measuring tax avoidance and evasion: A methodological guide

275
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 20. Gap Analysis, Chile, 2008–14

120

110

100

90
Total sticks
80 (estimated)
Total sticks
(registered EI)
70
Lower bound
60 Upper bound
2008 2010 2012 2014
Source: Paraje 2018.

cigarettes in 2014 was not statistically different from that share. Another option is that
the true share of the illicit market of both domestic and international origin in 2010 was
close to 17 percent. Keeping this share statistically constant for 2014 might imply that the
market share of illicit cigarettes of domestic origin is a sizable, about 15.5 percent, if the
Euromonitor International estimates are considered accurate.

A recent study conducted independently of the tobacco industry included a survey among
smokers (810 respondents) in the Santiago Metropolitan Area in May–June 2017 (Paraje and
Araya 2017). It finds the share of illicit cigarettes among the consumption of these smokers
is at 10.9 percent, in contrast to the contemporary estimates of BAT Chile of 24 percent
(see Figure 18). The study also finds that illicit cigarettes are, on average, cheaper than licit
cigarettes, though there are infrequent cases in which licit cigarettes are cheaper than illicit
cigarettes (Figure 21).

In addition, the study finds that illicit cigarettes are mostly consumed by men, youth of
school age, adults ages 60 or older, the less well educated, and the unemployed or eco-
nomically inactive (Figure 22). This suggests that illicit cigarettes are mostly consumed by
people at relatively lower income. This and the fact that illicit cigarettes are relatively cheaper
than licit ones indicate that illicit cigarettes mostly compete in the lower-price segment of
the cigarette market.

Characteristics of the Illicit Cigarette Trade
The most comprehensive, up-to-date, government analysis of the illicit trade cigarette has
been produced by the National Customs Service (2016). The report includes a thorough
description of the main routes and methods used in the illicit trade, though it acknowledges
that there are no official estimates on the size of the illicit market and that government

276 // Chile: Tackling the Illicit Tobacco Trade
Figure 21. Unit Cigarette Price, by Type of Cigarette, Chile
250

200

150

100
Source: Based on data of
Paraje, Araya, and Drope
50 2018.

0
Unit price total Unit price ilicit Unit price ilicit
cigarettes cigarettes

Figure 22. Sociodemographic Characteristics of Illicit-Cigarette Smokers,
Santiago, Chile

35.0%

30.0%

25.0%

20.0%

15.0%

10.0%

5.0% Source: Based on data of Paraje, Araya, and
Drope 2018.
0.0%
Males
Females

13-17 years old
18-40 years old
41-60 years old
61 and more

No education or

Secondary complete
Some college

Employed
Unemployed
Inactive
primary incomplete
Secondary incomplete

agencies do not possess studies independent of the tobacco industry. Thus, the report relies
on BAT Chile estimates and provides an alternative way of estimating the market that is,
however, based on a wrongly applied gap analysis.

The illicit trade in northern Chile originates mainly in Bolivia and Peru. Part of the trade
involves the fraudulent use of the legal allowance of up to two cartons of cigarettes per
overland trip per adult. The report states that, at the Chile-Peru border, people, mostly
women, cross the border several times a day and use the legal allowance each time.

In addition to this petty “ant smuggling” (a term used to describe tax avoidance and tax eva-
sion), clandestine illegal crossings, mostly at the border with Bolivia, involve the large-scale

277
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

transport of contraband. At the border with Bolivia, 116 such crossings were recently
counted, while there were 50 more at the border with Peru. A 140-year-old rift with Bolivia
over the border is responsible for frequent tensions in the relationship between the two
countries and makes collaboration on any matter difficult. For instance, Bolivia and Chile do
not exchange ambassadors.

Another source of illegal trade is the duty-free zone at Iquique, one of the main ports of
Chile. This zone is used as a port of entry for cigarettes, mostly from Asia, that are then
re-exported to Bolivia and Peru. The cigarettes never reach those countries, but are redi-
rected into the national market. The same method is used with a share of the cigarettes
produced in Chile for export. Free of tobacco excise taxes or value added taxes, these ciga-
rettes are re-transported into Chile using illegal crossings, or they never leave Chile, but are
sold illegally on the domestic market.

In central Chile, a small-scale illicit trade likewise involves reliance on the two-carton
allowance per adult per trip. In this case, there are no Argentine cities close to the border,
and, hence, the number of cigarettes entering using this method is limited. In the case of
air travel, the duty-free allowance is an extremely high seven cartons of cigarettes, which
facilitates the commercialization of foreign cigarettes. Santiago International Airport is, by far,
the main recipient of international travelers, and the number of passengers arriving in Chile
by air rose 117 percent in 2001–17. Illicit cigarettes also enter into the country through the
main seaports, on board ships mostly from Panama and the United States via the Dominican
Republic. By sea, contraband is mostly brought in by concealing the illicit cigarettes in other
goods shipments, such as clothing, or by falsifying import declarations, that is, by declaring
that shipments contain other goods when, in reality, they contain cigarettes. That this large-
scale smuggling is possible simply by misreporting the type of goods that are imported reveals
the limited capacity to control imports effectively.

In southern Chile, Argentine cities are much closer, and the main source of illegal cigarettes
is small-scale contraband involving the concealment of cigarettes in cars, buses, and cloth-
ing. In addition, ant smuggling also occurs.

Annex 1A shows summary tables of the main entry points for illicit cigarettes into Chile,
along with information on brands and smuggling methods as reported by the National
Customs Service (2016).

Figure 23 illustrates trends in illicit cigarette seizures in Chile. The seizures began to increase
rapidly after 2012, growing by more than 500 percent in 2012–17. Though international
experts warn against the practice, data on seizures have been used as a proxy for the trends
in illicit trade and presented as evidence of expanding illicit trade.13 However, seizures of illicit

13
“Comercio ilegal.” British American Tobacco, Argentina, Córdoba, Argentina (accessed December 27, 2017),
http://www.batargentina.com/group/sites/BAT_9YXKEP.nsf/vwPagesWebLive/DO9T5K4G, but see NCI and
WHO (2016).

278 // Chile: Tackling the Illicit Tobacco Trade
Figure 23. Number of Packs of Cigarettes Seized by Customs, Chile, 2007–17

12,000,000
10,745,240
10,000,000

8,000,000

6,875,916
6,000,000 5,521,083

5,165,485
4,000,000 4,620,040
2,516,890
2,000,000 1,355,500 Source: Calculations
2,388,130 2,305,020 based on data of
1,020,240 982,640 National Customs
0 Service.
2011

2017
2014
2010
2007

2012

2013

2015

2016
2009
2008

cigarettes have recently grown at least at a similar rate as seizures of other goods, which
points to more effective control at borders, rather than to an increase in the volume of illicit
trade (National Customs Service 2017).

The study by the National Customs Service (2016) makes clear a worrying fact: the lack of
the technical capacity or the resources to produce independent government studies on
contraband, which leads to a reliance on tobacco industry estimates without the ability to
gauge accuracy or be critical of analysis. Moreover, it is clear that government agencies in
charge of overseeing cigarette markets do not communicate or collaborate together suffi-
ciently, at least on the production of official information.

The lack of technical capacity is clear not only in official reports, but in media reports, where
officials repeat tobacco industry estimates, and also from the alliances between public enti-
ties and private associations in which the tobacco industry has a prominent role (National
Customs Service 2016).14 Government studies on the illicit trade in cigarettes almost invari-
ably begin by quoting tobacco industry estimates, even though they acknowledge there is
no clarity about methodology or the way such estimates are produced.

The lack of technical capacity is made clear by the gap analysis produced by customs to
estimate the illicit trade in cigarettes. First, customs uses data on sales provided by BAT Chile,
even if official SII data exist on taxed sales (see Figure 16). BAT Chile estimates for 2015 are
3.2 percent lower than the official figures, a bias that would tend to raise the estimates of
the illicit trade. Second, customs estimates a theoretical consumption of cigarettes using

One of these is the Illicit Trade Observatory (Observatorio del Comercio Ilícito; website: http://www.
14

observatoriocomercioilicito.cl/), which maintains alliances with customs, several branches of the police, the
Public Prosecutor’s Office, the SII, and so on.

279
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

a methodology with no theoretical or empirical validity, given that it assumes arbitrarily the
impact several policies, such as a tax increase and smoke-free areas, would have had on
consumption. Using theoretical and observed consumption, customs concludes that the
illicit trade accounted for 10.4 percent of the market in 2015, close to the BAT Chile esti-
mates. This estimate lacks any validity also because a well-developed gap analysis, not one
that is flawed such as the one produced in the customs report, requires at least two points
in time to predict trends, not levels, of illicit trade. The report concludes that seized ciga-
rettes constitute 7.7 percent of the illicit market, though seized cigarettes are not part of the
market because they were seized, not consumed. Customs estimates the total tax evasion
produced by this contraband at US$220 million. Because the estimates of contraband are
flawed, the estimate of tax evasion lacks any validity, though it is close to the BAT Chile esti-
mate of the taxes evaded because of contraband, though BAT Chile provides no information
on methodology.

3. Tackling the Illicit Trade in Tobacco Products
International experience shows that it is the quality and enforcement of tax administration,
not tobacco taxation, that is the major driver of success in controlling illicit trade (Marquez
and Moreno-Dodson 2017; NCI and WHO 2016). The first step to strengthening the quality
and enforcement of tax administration is to implement a successful policy to control the
illicit trade, that is, to possess a comprehensive national strategy that addresses this issue
systematically. This is missing in Chile. Various agencies have distinct approaches, means,
and priorities, and there seems to be no substantial coordination among them, apart from
some recent efforts to share information. Illicit cigarettes can be purchased in known places
around large cities and even on the Internet on well-known trading sites.15 Investigative
journalists have denounced publicly cases of collusion between contrabandists and cus-
toms officials who are behind the illegal commercialization of large quantities of cigarettes
(Carvajal and Jara 2016).

Though the methods of contrabandists are well known, the activity continues to this day
(see Annex 1A). Some efforts have been undertaken by the authorities. In the case of the
National Customs Service, an integrated smuggling plan (Plan Integral de Fiscalización) was
developed for cigarettes, along with 10 other sectors, groups, or problem areas (mining
products, intellectual property, public health, drugs, and so on). The plan has involved the
establishment of a network of actors and responsibilities within customs and the formation
of working groups among several agencies with shared action plans.

The program has brought about an increase in communication among customs offices
on important information obtained during seizures of cigarettes. An initial report is filed
within 24 hours of a seizure, and then, within 48 hours, a final report is filed containing

15
For instance, see Mercado Libre Chile, at https://www.mercadolibre.cl/.

280 // Chile: Tackling the Illicit Tobacco Trade
all information relating to the incident. Reports are sent to a central office where they are
processed, and then they are sent to nearby customs offices. This central office regularly
generates a spreadsheet that consolidates all seizure information across customs offices
and incorporates data on the most relevant seizures carried out by the other agencies (the
National Police and the Investigation Police). This spreadsheet is sent to customs offices on
a regular basis to ensure that the entire organization is informed of incidents occurring in
various parts of the country.

For inspection and control operations, the plan relies on a handful of regional customs
offices in the most highly affected areas, the National Police Force, and the Investigative
Police for work outside the customs perimeter. It has established the Organization of
Cigarette Smuggling–Integrated Smuggling Plan Technical Meeting to promote the work
of the customs departments involved in the program.

The Control Directorate of the National Customs Service uses a suite of risk analysis tools.
Risk filters refer to selection criteria or parameters based on risk indicators and involve
the review of documents, cargo scanning, and physical examinations to identify risk char-
acteristics. Customs uses these filters to select operations automatically or manually for
documentary review, evaluation, or physical examination and to generate customs alerts.
This is a dynamic process that requires constant review of the effectiveness of the filters to
determine whether they should be maintained or modified.

One central topic in controlling contraband is the penalty associated with, for example,
smuggling. It is a basic economic premise that, for certain crimes, such as smuggling, if the
expected cost of committing the crime (which depends on probability of detection, prob-
ability of conviction, fines, and length of conviction) is smaller than the expected benefits
(which depends on the probability of detection and the economic gain associated with the
crime), there is an incentive to commit the crime.

In Chile, the penalties associated with smuggling are relatively mild. Currently, an individual
smuggling fewer than 25 monthly tax units (about US$1,850) in goods is punished by the
seizure of the goods and a fine from one to five times the value of the goods. If the value of
the goods exceeds 25 monthly tax units apart from the seizure and fine (one to five times
the value of the goods), the individual may receive up to 40 days in prison. Usually, the time
in prison is not effective unless individuals have committed serious crimes before.

The Protocol to Eliminate the Illicit Trade in
Tobacco Products
Though the government of Chile ratified WHO’s FCTC early, it has not ratified the Protocol
to Eliminate Illicit Trade in Tobacco Products. Indeed, the government has not even signed
the protocol, despite the fact that many Latin American countries that have cigarette trade
with Chile, such as Colombia, Panama, and Uruguay, have either signed or already ratified
the protocol.

281
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

There is no clear indication about when the protocol will be signed and ratified in Chile, and
there is currently no information available on which government department is analyzing
any future implementation of the protocol. There are no Parliamentary initiatives nor political
discussions regarding the ratification of the protocol despite the constant claims by the
tobacco industry about a growing illicit trade.

The Track-and-Trace System
Despite the lack of progress on the protocol, Chilean authorities have decided to implement
a track-and-trace system (TTS). However, the reason to implement such a system is related to
tighter fiscal control over the tobacco industry with respect to the collection of the tobacco
tax rather than to the effective control of illicit trade, as explicitly stated in the laws and regula-
tions on this matter. In other words, the stress is on domestic tax evasion, not smuggling.

The TTS was approved by Parliament during discussions on general tax reform in 2014. The
reform substantially raised the specific tax on cigarettes, and lawmakers supported it by
extending the supervisory power of the SII over the tobacco industry and by approving the TTS
(see Figure 13). Until then, though the SII was generally believed to be one of the most effec-
tive tax collection agencies in Latin America, it was informally assumed by SII officials that the
capacity they have to audit the tobacco industry’s tax declarations was limited (Serra 2003).

The TTS system was approved in September 2014 through Law 20780, on general tax
reform, which explicitly stated that the reason for the adoption of the system was to
enhance fiscal control over the excise taxes on tobacco. It also stipulated that the Minister
of Finance should issue a regulation defining the characteristics of the system. The regu-
lation was published in Decree 19 of the Minister of Finance in January 2015. It defines the
TTS as an integral platform housing information on the production, importation, distribution,
commercialization, and so on of taxed tobacco products. In addition, it provided that the
system should be enabled to identify, mark, and trace taxed tobacco products. According to
the regulation, the firm providing the TTS platform could not be associated with the tobacco
industry, though the definition of the prohibited relationship was not sufficient to prevent
firms connected to the tobacco industry from installing a systems technology developed by
the tobacco industry, such as Philip Morris International’s Codentify TTS software.

Civil society pressure caused Parliament to amend Law 20780 through Law 20899 (February
2016), which mandated that the Minister of Finance introduce regulations preventing the direct
participation of the tobacco industry in the TTS. The main regulation was issued at the end of
December 2016 (Decree 1027) and established that the TTS would necessarily have to include
devices installed on production lines that would compile information on product types, dates
of production, production lines, the quantities produced, and so on. It was left as an option
of the SII to tag products with seals, stamps, or other tracking material. Though there was no
requirement on the independence of the TTS provider relative to the tobacco industry, there
was a public agreement that the firm operating the TTS would be independent.

282 // Chile: Tackling the Illicit Tobacco Trade
In March 2017, the SII issued a public tender on the TTS. Contrary to the agreement, there
was no provision on the independence of TTS providers from the tobacco industry, and
the tender gave 93 percent of the total weighting of bids to economic aspects, and only 7
percent to technical aspects. However, only firms qualifying on the technical aspects would
be assessed on the economic aspects.

In August 2017, three firms presented bids. Two had ties with the tobacco industry. One
was ATOS, one of the developers of the Codentify software; the other was a firm that pro-
vided printing products to the tobacco industry. Civil society and political pressure exerted
by some parliamentarians led the SII to reject the bids of these two firms and award the
contract to SICPA, a firm not related to the tobacco industry (SII 2018).16 Because of legal
challenges and the lack of the necessary legal authorization for the entire process, no TTS
has yet been implemented, though it has been estimated that one should be established by
April 2019.

There is no objective evidence that the tobacco industry was involved in the changes,
delays, and attempts to interfere in the implementation of the TTS. However, a system that
should have been in place by the end of 2015, at the latest, is still being legally challenged. A
former director of the SII estimated that delaying the TTS meant a loss of US$500 million a
year in extra revenue and that officials at the Ministry of Finance were not willing or able to
overcome the tobacco industry’s resistance to the system (Alonso 2017).

The TTS that will be implemented will allow the SII to count the cigarettes produced in the
country. It will permit an accounting of the cigarettes sold domestically. This information is
available today only through the tax declarations provided by the tobacco industry, and there
is currently little capacity to audit these declarations properly. The TTS will also allow the SII
to monitor the quantities of cigarettes that are exported and thus not liable for local taxes.

The TTS will consist of a printed seal similar to a QR code on the pack. It will include
information on the production line, the date and time of production, the brand, and so
on. Cigarettes that are destined for the international market will not be marked, and no
information on these will be collected apart from the number produced. This means that
round-tripping, whereby the cigarettes end up on the domestic market, will still be possible.
The information contained in the printed seal will only be readable using the special devices
that will be supplied to SII officials.

One of the main limitations of this method of product identification is that it can be repli-
cated by simply printing a counterfeit code on packs. The only way to discover if seals are
being counterfeited is to check each one using the special code readers. Unlike the meth-
ods adopted by other countries in the region, such as Argentina, Brazil, Ecuador, and others,
this method does not involve stamps of different colors or seals with special inks allowing

16
See “Trazabilidad a las tabacaleras: El gato cuidando la carnicería,” GuidoGirardi website, http://guidogirardi.
cl/tag/trazabilidad/.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

a rapid, bare-eye inspection to check if the product is licit or illicit. In this respect, Chile has
chosen a method that, while allowing the collection of information useful in monitoring tax
evasion by producers, may fall short in the goal of identifying contraband cigarettes.

4. Challenges and Recommendations in Tackling
the Illicit Trade
Chile faces several challenges to tackling the illicit trade successfully. First, the country
needs an integrated set of laws and regulations designed to curb the illicit trade in cigarettes.
Ratifying the Protocol to Eliminate Illicit Trade in Tobacco Products is certainly a first step in
this direction. New legislation improving the policing capabilities of the agencies involved in
reducing the illicit trade can be built on the framework provided by the protocol, especially
in coordinating with agencies in other countries. The difficult relationship between Bolivia
and Chile represents an extra challenge, but the protocol may also facilitate collaboration
with countries trading tobacco products with Bolivia.

Second, there is an urgent need to produce more information, independent of the tobacco
industry, on the extent of the illicit trade in tobacco, its characteristics, and the related impli-
cations for the internal tobacco market. The public discussion on the illicit trade cannot be
dominated by the data of the tobacco industry, with no account taken of how these data
are produced or that the data tendentiously link trends in the illicit trade with taxes. Public
authorities echo these data and misleading conclusions. Independent estimates, whether
produced by public entities or commissioned to third parties, should be available regularly
to assess the extent of the illicit market and trends in the trade. No serious political effort to
tackle the illicit trade can be undertaken without knowledge of the scope of the problem or
with misleading ideas about the problem.

Third, the influence of the tobacco industry on policy makers should be contained, as set out
in the FCTC. The tobacco industry or private associations and other organizations in which the
tobacco industry is prominent maintain regular contacts with government agencies on illicit
trade issues. This helps the tobacco industry propagate its questionable data and discourse on
the illicit trade across the public sector. There are frequent meetings between tobacco industry
executives and government officials; and, as a consequence, important initiatives, such as the
implementation of the TTS, were stopped, altered, or delayed.

Fourth, the penalties for illicitly marketing cigarettes and other tobacco products should be
drastically augmented. A successful campaign against the illicit trade depends on effective-
ness in detecting the illicit act, but also on the penalties for those people who are found
guilty. In Chile, the penalties are relatively light. The cost of engaging in smuggling must be
raised, not only by increasing the ability of government agencies to detect the illicit trade,
but also in punishing illicit traders meaningfully.

284 // Chile: Tackling the Illicit Tobacco Trade
Thus, the recommendations for tackling the future development of the illicit trade in
cigarettes include the following: to sign and ratify the Protocol to Eliminate Illicit Trade in
Tobacco Products; to enforce related policies and initiatives; to reduce the influence of the
tobacco industry on policy makers and other officials; to produce independent and verifiable
information on the extent of and trends in the illicit trade in cigarettes; and to augment the
amount of fines and imprisonment for people convicted of trading in contraband.

Other measures could also be adopted that would have a significant effect on the illicit
market for cigarettes:

»» The existence of a duty-free zone in Iquique, one of the main ports of Chile and close to
the Bolivian border, is a threat to any meaningful policy aimed at tackling the illicit trade in
cigarettes. The zone has often been justified as a tool to foster economic development in
a relatively poor area of the country.17 Even if such an ambition were achievable through a
duty-free zone, it is not credible that the cigarette trade would contribute to such a goal.
There are no meaningful economic reasons to allow cigarettes to enter the Iquique free
zone untaxed.

»» Duty-free allowances should be limited or eliminated. Though duty-free allowances might
be justified by the lack of capacity to check every person entering the country or because
it is more cost-effective to allow individuals to enter the country with a small amount
of certain goods, the allowance could be greatly reduced or eliminated. Permitting a
duty-free allowance of up to seven cartons for international air travelers seems exces-
sive, especially because passengers entering the country at the main airport, Santiago
International Airport, are extensively checked by the Agriculture Service to block them
from bringing in fruits and vegetables. The x-ray scanners used for this purpose at every
international airport and even at some land crossings could easily be used to check for
larger quantities of cigarettes. The allowance at land crossings—up to two cartons per
trip—could be more effectively enforced by limiting the number of times a person can use
the cigarette allowance to, for instance, once a month.

»» A regional political approach toward the illicit trade should be considered. Latin American
countries with which Chile has regular trade relations, such as Bolivia and Paraguay, are
sources of smuggled cigarettes. A successful policy for the control of contraband would
be incomplete if it focuses only on the recipient country, especially if the source of these
products is known. The relationship with Bolivia is often difficult, and, in the case of
Paraguay, the contraband and the counterfeiting industry (not only in cigarettes) are well
established and often enjoy substantial political protection. It has even been suggested
that a cigarette manufacturing facility owned by a former president of Paraguay may be a
source of the illicit trade in cigarettes in other countries (Risatti 2017). High-level meet-
ings in multilateral regional forums, such as the Southern Cone Common Market, could

See “Nuestra Historia,” ZOFRI, Zona Franca de Iquique, Iquique, Chile, https://www.zofri.cl/es-cl/Nosotros/
17

Paginas/Historia.aspx.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

encompass discussions on how to limit or control the illicit trade in all goods, including
cigarettes. A more extreme initiative would be to forbid cigarette exports from Chile to
countries suspected of not contributing appropriately to controlling the illicit trade, such
as Bolivia or Paraguay. The use the Iquique free-trade zone to re-export foreign ciga-
rettes to these countries could be prohibited given that these cigarettes are often illegally
re-transported into Chile or never cross the border at all.

Smoking prevalence rates, including among young people, are so high as to constitute
a severe public health epidemic and to merit a more vigorous response. Chileans who
continue to smoke will die an average of 20 years prematurely. So, Chile should not allow
self-interested and exaggerated underestimates of the illicit trade to stop it from strengthen-
ing its tobacco control program.

286 // Chile: Tackling the Illicit Tobacco Trade
Annex

Annex A. Illicit Entry of Cigarettes into Chile

Table A.1. Modus Operandi of the Illicit Entry of Cigarettes, Northern Chile

ZONE OF CHARACTERISTICS, BRANDS
SMUGGLING METHOD
ENTRY SMUGGLED CIGARETTES IDENTIFIED

Entry of cigarettes at Arica through
the misuse of the international traveler
Chacalluta allowance, for subsequent collection and
customs post sale in Arica or shipment to southern Chile
Cigarettes primarily of Bolivian
Entry of cigarettes hidden in vehicles. origin (Bolivian National Customs
stamp), involving brands not
Unauthorized
authorized for sale in Chile
border crossings Entry of cigarettes by ship, mules
in the Arica (transporters), and cargo trucks, 4x4s, and
and Parinacota so on
Region (XV)
Entry of cigarettes in the Tarapacá Region
Cigarettes primarily of Bolivian
through misuse of the international traveler
origin (Bolivian National Customs
allowance, for subsequent collection and Mainly Carnival,
Colchane border stamp), involving brands not
sale in Iquique or shipment to southern Fox, Jaisalmer,
crossing authorized for sale in Chile
Chile Mensfield, and
Entry of cigarettes hidden in vehicles, Pine
primarily buses
Unauthorized Counterfeit cigarettes of
Entry of cigarettes by ship, mules
border crossings Paraguayan origin, which enter
(transporters), and cargo trucks, 4x4s, and
in Tarapacá Bolivia through unauthorized
so on
Region (I) border crossings and
Around the subsequently enter Chile in the
Breach of the Quillagüa internal control same way
Quillagüa
point by means of detours and alternate
internal control
routes
point
Reshipment processes in which the goods
are not reported to the exit customs office
and remain in the country illegally

Source: Calculations based on data of National Customs Service 2016.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table A.2. Modus Operandi of the Illicit Entry of Cigarettes, Central Chile

ZONE OF CHARACTERISTICS,
SMUGGLING METHOD BRANDS IDENTIFIED
ENTRY SMUGGLED CIGARETTES

Cigarettes primarily of Chinese
origin and Chinese brands
Small number of packs or
presumably for personal
cartons are hidden among
consumption
imports of other goods, such as
Mainly Belmont, Bronco,
clothing or miscellaneous small Cigarettes primarily from China, Cumbia, Derby, Golden,
Port of San items Curaçao, Jamaica, Panama, and Jaisalmer, Lucky Strike,
Antonio
the United States; unauthorized Marlboro, Montreal, Pocker,
Entry of contraband involving
brands intended for sale in Rich, Seneca, Walden
importers bringing in full
Chile (cigarettes that cannot be
containers of counterfeit
identified as counterfeit) and
cigarettes
counterfeit cigarettes have been
found
Entry via small-scale smuggling,
By land, by means of the misuse of Various manufacturer brands; Mainly 357, Blue Point, Brass,
via the Los passenger allowances authentic cigarettes, with or Bronco Ultra, Carnival,
Libertadores
Entry by various means of without authorization for sale in Eston, Euro, Fox, Lucky
customs post,
transport, particularly buses, Chile; counterfeit cigarettes Strike, Pall Mall, Rodeo
Andes Customs
trucks, and passenger vehicles
Mainly 51, Blue Point,
Brands authorized for sale in Chile
By land, on Bronco, Carnival, CJ, Fox,
From other regions and and unauthorized brands have
trucks to Golden, Hilton, Jaisalmer,
countries; stored for later been seized; the former includes
locations in Laredo, Marlboro, Melbour,
distribution and sale in shops some counterfeit cigarettes,
the outskirts of Mensfield, Montreal, Nirvana,
not authorized by the SII whereas the latter involves only
Santiago Pall Mall, Philip Morris, Pine,
authentic cigarettes
Rodeo, Starlite, V8, You
By sea, from
Panama and
the United Cartons or packs are hidden
Seized cigarettes not authorized Cumbia, Gold City,
States, the among imports of other types
for sale in Chile, mainly of Indian Hongmei, Huang Shan,
latter with of goods, such as vehicle roof
origin Jaisalmer, Shuangxi
transit through racks and television antennas
the Dominican
Republic
Trucks loaded with cigarettes
from northern Chile, such as
Arica and Coquimbo, involving Seized cigarettes not authorized
By land, from Carnival, Fox, Jaisalmer,
counterfeit cigarettes; the for sale in Chile, mainly of Indian,
northern Chile Laredo, Nirvana
transit return method is used Korean, and Paraguayan origin
with cigarettes produced in
Bolivia

288 // Chile: Tackling the Illicit Tobacco Trade
Table A.2. Modus Operandi of the Illicit Entry of Cigarettes, Central Chile, Cont.

ZONE OF CHARACTERISTICS,
SMUGGLING METHOD BRANDS IDENTIFIED
ENTRY SMUGGLED CIGARETTES

Counterfeit: Belmont, Pall
Seized cigarettes not authorized
Mall, Viceroy; not authorized
Sales in commercial warehouses for sale in Chile and counterfeit
for sale: Carnival, Esse,
cigarettes
Jalsaimer, Pine Blue
Belmont, Blue Point,
Seized outside
Carlile, Carnival, Cigar
the customs
Seized cigarettes that are or are Mojito, Esse Black, Esse
perimeter
not authorized for sale in Chile, Blue, Esse Change, Fox,
Clandestine trade
primarily of Argentine, Bolivian, Hilton, Jalsaimer, Marlboro,
Korean, and Paraguayan origin Mustang, Pall Mall, Philip
Morris, Pine Blue, Pine
Green, President, Viceroy

Source: Calculations based on data of National Customs Service 2016.

Table A.3. Modus Operandi of the Illicit Entry of Cigarettes, Southern Chile

CHARACTERISTICS,
BRANDS
ZONE OF ENTRY SMUGGLING METHOD SMUGGLED
IDENTIFIED
CIGARETTES

Border crossings: Dorotea, Entry of cigarettes in the Magallanes
Casas Viejas, Monte Aymond, and Chilean Antarctic regions Mostly 357,
Cigarettes primarily
San Sebastián through misuse of international Belmont, Blue
of Argentine origin,
traveler allowances (small scale); Point, Camel,
Unauthorized border crossings: cigarettes hidden in vehicle both brands that are
Lucky Strike,
Última Esperanza Province authorized for sale in
compartments (caletas); cigarettes Marlboro, Pall
(Puente Lincoman), Tierra del Chile and those that
hidden in luggage and clothing; the Mall, Philip Morris,
Fuego Province (Las Bandurrias, goods are stored and shipped to are not.
Red Point, Viceroy
adjacent estancias) northern Chile
Entry at Punta Arenas of cigarettes
of Argentine origin that are
Ports of Puerto Montt subsequently transported to the
(for example, Oxxean, Lakes Region and the rest of the Cigarettes primarily Mostly 357,
Empormontt) and Cardenal country; storage of Argentine of Argentine origin, Baltimore,
Samoré border crossings cigarettes in Puerto Natales; direct both authorized and Belmont, Blue
entry of trucks with cigarettes from unauthorized for sale Point, Derby,
Argentina in Chile Melbo, Pall Mall
Entry of cigarettes of Argentine
Futaleufú and Río Encuentro
origin in the Lakes Region for later
border crossings
transport to the rest of the country

Source: Calculations based on data of National Customs Service 2016.

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291
COLOMBIA
10

COLOMBIA:

Illicit Cigarette Trade
Blanca Llorente and Norman Maldonado 1

Chapter Summary
Colombia introduced a major tobacco tax hike in December 2016, raising the specific com-
ponent of its tobacco excise from 700 Colombian pesos (COP$) per 20-cigarette pack to
COP$ 1,400 in January 2017 and then COP$ 2,100 (US$ 0.74) in January 2018. Such recent
measures have energized Colombia’s tobacco control agenda. Meanwhile, however, reforms
to tackle illicit tobacco in Colombia have not yet achieved the status of a functional public
policy, i.e., one that integrates actions across sectors at the national level while establishing
coordination with subnational authorities.

Estimates from an independent 2017 survey show a slight rise in illicit tobacco trade after
Colombia’s 2016 tax reform. However, the figures remain low, with 6.63 percent of cig-
arettes identified as illicit and 4.23 percent of smokers consuming illicit products. Illicit
cigarette trade in Colombia mostly involves outright smuggling, that is, cigarettes that do
not appear in any official records and on which no taxes are paid. In some cases, the mer-
chandise enters the country through official border crossings with the complicity of public
servants, while in other instances illicit products enter through any of the hundreds of paths
along the Colombo-Venezuelan border. Criminal organizations maintain smuggling activities
as a “portfolio” that includes cigarettes along with other goods. La Guajira is a region with a
particularly weak presence of state institutions, where illegal armed groups have aimed to
control both narcotraffic and smuggling activities.

1
Fundación Anáas

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Colombia does not currently have a track-and-trace system or tax stamps that facilitate iden-
tification of illicit cigarettes. The country’s National Development Plan 2011–2014 foresaw
the creation of a unified tracking and tracing system, dubbed SUNIR. However, as of 2018,
the SUNIR initiative remains on hold. The information available to subnational tax administra-
tions is fragmented and at times misleading. With the data currently available, it is difficult to
prove noncompliance. Currently the tobacco industry is the only source of information used
by the authorities to establish if a tobacco product is genuine.

This chapter presents policy options for national and subnational authorities to strengthen
Colombia’s illicit tobacco control. Specific recommendations include:

»» Implement a unified excise tax management system to reduce costs and improve
efficiency, for example by rolling out the proposed SUNIR system.

»» Establish a national-level coordinating authority to manage all information about
domestic tobacco production, international trade, tax revenues, prices, sales, and
consumption trends.

»» Ensure that subnational authorities consult with the Ministry of Health to verify compli-
ance with the Framework Convention on Tobacco Control (FCTC), when developing
interventions related to tobacco taxation.

»» Establish formal mechanisms to ensure participation by the research community and civil
society in institutional structures for policy debates on illicit trade.

»» Inform national and subnational stakeholders about tobacco-industry involvement in illicit
trade activities and interference in policy processes. Programs against cigarette smuggling
at the subnational level should not be funded or receive technical cooperation from the
tobacco industry.

»» Continue to reinforce legal penalties for illicit tobacco trade, and publish complete infor-
mation on the implementation of sanctions. Set fines such that wholesalers and retailers
face penalties that are truly dissuasive, relative to their potential profits from illicit tobacco.

Introduction
Until December 2016, Colombia had the doubtful distinction of being one of the countries
with the lowest cigarette prices in Latin America. Arguments against tax increases relied
almost exclusively on the alleged direct link between high cigarette taxes and smuggling. In
the early 1990s, in the face of local tobacco companies’ claim that illicit trade represented
between 50 and 80 percent of the country’s tobacco market, Colombia’s Congress cut the
then-existing 100 percent ad valorem tobacco tax to a 55 percent rate.2 In the following

2
Law 223/1995 established the base for this tax in 1995 as the retail price of domestic cigarettes before tax,
and the value of the cigarettes at custom point plus tariff and a 30 percent assumed profit margin, for imported
cigarettes. The latter should not be less than the average tax paid by domestic cigarettes.

294 // Colombia: Illicit Cigarette Trade
years, tobacco taxes and prices remained low, despite two modifications in tax design: first
from ad valorem to specific in 2006, and then to a mixed system with a small ad valorem
component in 2010.

A major tobacco tax increase took place in December 2016, when a tax reform boosted the
specific component of the excise from 700 Colombian pesos (COP$) per 20-cigarette pack
to COP$ 1,400 in January 2017 and COP$ 2,100 in January 2018.3 In subsequent years, this
value will be adjusted according to the inflation rate4 plus 4 additional points.

This tax measure resulted in consumption reduction and increased tax revenues, as
expected. Illicit trade remained at moderate levels. That this success was possible under
highly challenging border security conditions, and a resurgence of money laundering associ-
ated with drug trafficking, makes this a case worth studying.

The purpose of this chapter is to present the case of illicit cigarette trade (ICT) in Colombia.5
To do so, Section 1 describes the country’s situation in terms of its tobacco epidemic, cig-
arette market, and illicit trade. Section 2 presents the institutional, legal, and administrative
situation and efforts developed to control ICT. The chapter concludes with lessons learned
and a set of policy recommendations in Section 3.

1. Situation Description
1.1 Current State of the Tobacco Epidemic
Colombia is a South American upper-middle income economy with an estimated popu-
lation of 50 million as of 2018. Regarding consumption of tobacco products, the country
has experienced a decrease in smoking prevalence. In 2013, the Survey of Consumption of
Psychoactive Substances (SCPS) estimated a smoking prevalence of 13 percent, down from
17 percent in 2008 (MPS and DNE 2008; MinSalud and ODC 2013). Other surveys prior to
20086 show the same trend. This decrease is likely explained by implementation of some
FCTC measures by Law 1335/2009, including a comprehensive regulation on smoke-free
areas, one of the strongest tobacco advertising, promotion, and sponsorship (TAPS) bans in
the region, and to a lesser extent the introduction of health warnings.

SCPS is the most accurate source of information on Colombia’s smokers because of the
protocols it follows to minimize response bias; however, the survey has not been updated.
For this reason, monitoring of the epidemic since 2016 relies on other sources that provide

3
According to the Central Bank of Colombia, the exchange rate between COP$ and US dollars (USD$) was
COP$ 3,053 = USD$ 1 for 2016, COP$ 2,951 for 2017 and the January-to-May monthly average for 2018 was
COP$ 2,841. Thus, the specific component of the excise tax was USD$ 0.23 in 2016, USD$ 0.47 in 2017, and
USD$ 0.74 in 2018.
4
The average inflation rate in the last six years reported by the Central Bank of Colombia was 4.29 percent and
the average inflation target for the same period was 3 percent.
5
There is no record of illicit trade in other tobacco products in the country.
6
With methods that are not entirely comparable.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

the minimum information needed to measure prevalence. One of those is the National
Survey of Quality of Life (NSQL); it shows an ongoing decreasing trend over the past two
years (DANE 2017; DANE 2018) and an estimated number of smokers of 2.85 million for
2017. Smoking prevalence in Colombia is similar between urban and rural areas.7 However,
as a result of the urbanization process,8 smokers are mostly concentrated in urban areas.
The most recent survey among university students indicates that this group still displays rela-
tively high levels of consumption, with a month-prevalence of 17.2 percent in 2016 (UNODC
2017), down from 21.7 percent in 2009 (MIJ 2009). Subnational-level evidence shows that
cigarettes are the most common type of tobacco product consumed, with 97.9 percent of
smokers using cigarettes (Fundación Salutia 2018, p.94).

There are important differences in smoking patterns across regions. Elements behind these
patterns include population size, age composition, and cultural issues. The biggest cities in
terms of population, namely, Bogotá (the capital), Medellín, Barranquilla, Cali, and Cartagena,
possess the highest concentration of smokers. Some medium-sized cities with high local
prevalences include Cúcuta, Soacha, Villavicencio, Manizales, and Pereira. Some of these
cities are near borders and coasts, potentially increasing their exposure to illicit trade.

Most smokers report daily consumption (Figure 1). According to NSQL-2017, 57.2 percent
smoke every day, 26.23 percent smoke some days in the week, and only 14.44 percent smoke
less than once a week. Similar proportions are reported in the Demand for Illicit Cigarettes
Survey for Colombia (DEICS-COL). Figure 2 shows the distribution of smoking intensity, mea-
sured as number of cigarettes per day. For non-daily smokers, the number of cigarettes per
month was calculated and then divided by 30 to provide a proxy of daily intensity. The figure
shows that most smokers consume ten cigarettes per day (i.e., half a pack), followed by one
cigarette and five cigarettes per day. This is consistent with a smoking epidemic concentrated
in younger smokers, and relatively more people in an experimentation phase. Distribution
of brands noted in DEICS-COL-2017 indicates that the most common brands are Rothmans
(British American Tobacco, BAT) at 29 percent and Chesterfield (Philip Morris International,
PMI) at 22 percent,9 followed by Marlboro (18.7 percent) and Lucky Strike (17.5 percent). Local
brands like Pielroja have low participation in the portfolio (3.6 percent).

1.2 Production and Supply of Cigarettes
Traditionally, Colombia had two local companies controlling production and distribution of
cigarettes: Compañía Colombiana de Tabaco (Coltabaco) and Productora Tabacalera de
Colombia (Protabaco). That changed at the beginning of the 21st century, when PMI and

7
As reported by Fundación Salutia 2018, p.94, DANE 2017, p.20, DANE 2018, p.21 and estimations using
microdata from the National Health Survey (MPS and Cendex 2009).
8
According to the World Development Indicators, the proportion of the population living in urban areas in
Colombia increased from 45 percent in 1906 to 77 percent in 2016. Maldonado et al. 2018a, p.3.
9
In 2017 BAT started to replace Mustang and Belmont by Rothmans. Similarly, PMI replaced Boston and Green
by Chesterfield.

296 // Colombia: Illicit Cigarette Trade
BAT acquired Coltabaco in 2005 and Protabaco in 2011, respectively. By 2015, the market
share was 51 percent for PMI and 48.9 percent for BAT (Forero 2015).

In Colombia, the most reliable source of information for production of manufactures such
as cigarettes is the Annual Survey of Manufacturing - EAM. According to EAM, in 2016
Colombia produced 8,242.39 million cigarettes, equivalent to 412.12 million packs of 20
sticks, down from 626.57 million packs in 2013; most of the production goes to the local
market, and filtered cigarettes represent around 95 percent of the total production. The
decreasing trend in production (supply side) over time is consistent with the similar trend
in smoking prevalence (demand side) shown above; this is a good signal for control of the
tobacco epidemic, although the country is still far from the tobacco endgame (Thomson et
al. 2012).

Figure 1. Smoking Intensity

.15
Density

.05
Source: DEICS-COL 2017.
Graph includes daily and
non-daily smokers.
0
0 5 10 15 20 25 30 35 40 45 50 55 60
# cigarettes per day

Both smokers’ access to cigarettes and the success of inspection, surveillance, and control
activities are strongly determined by channels of distribution. To begin with, in Colombia
there is no licensing that provides official authorization to buy or sell cigarettes. Informal dis-
tribution channels in the country play a crucial role in provision of cigarettes to consumers;
according to DEICS-COL 2017, 55.7 percent of smokers purchase their cigarettes from street
vendors, and 42.2 percent of cigarettes are sold through this channel. Ranked by proportion
of smokers that use the distribution channel, street vendors are followed by small neigh-
borhood grocery stores (26.7 percent) and liquor stores (11.2 percent). Informal distribution
channels, especially street vendors, play a role in expanding the tobacco epidemic, because
they are able to offer cigarettes10 anywhere at nil transport cost for the consumer, given their
atomized structure and negligible costs of relocation.

10
Most of them offer sugar confectionery (chocolate, sugar candy, chewing gum), snacks, and cigarettes; the
larger establishments also offer soft drinks, industrialized juice, and bottled water.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

In terms of tobacco control policies, regulatory compliance and law enforcement are more
difficult to achieve in informal distribution channels, because, as part of the informal sector,
these businesses are harder to identify, locate, monitor, and penalize. At the same time, the
lack of law enforcement makes street vendors more likely to get involved in illegal activities,
such as sale of cigarettes to minors (banned by Law 1335/2009 Article 2), loose cigarettes
(banned by Law 1335/2009, article 3), illicit cigarettes,11 and engagement in promotion and
advertising (banned by Law 1335/2009, article 15).

1.3 Tobacco Control
Colombia became a party to the Framework Convention on Tobacco Control (FCTC) in
2006, and ratified the FCTC in 2008. The specific tool developed within this agreement to
act against illicit trade is the Protocol to Eliminate Illicit Trade in Tobacco Products (Protocol),
which Colombia signed in 2013 but has not yet ratified. Colombia is mentioned among
some of the key players in global illicit trade, because it is a transit country. As a destination
country in the global context, Colombia’s role has become less relevant, both because of
the long-term downward trend in market size and because of Colombia’s position, until
2016, as one of the countries with the cheapest cigarettes in the Americas (PAHO 2016).

Colombia has reached several milestones in the implementation of the FCTC through a set
of policy, planning, and regulation tools. The planning instrument with the largest potential
influence in policy making is the ten-year Public Health Plan (2012-2021) that sets goals to
reach 100 percent enforcement of smoke-free areas and increase taxes considering afford-
ability trends. The National Cancer Plan (MinSalud and INC 2012) for the same period includes
the same tax goal and adds a commitment to increase health warning size from 30 percent
of the pack surface to 70 percent by 2021. The current National Development Plan com-
mits to develop a tracking and tracing system (SUNIR from its initials in Spanish) by 2018.
However, this system is not yet in place.

NON-PRICE MEASURES

The most comprehensive regulatory development of FCTC commitments is Law 1335/2009,
providing national guidelines for smoke-free areas, packing and labeling, prohibition of loose
cigarette sales and sales to minors, and a total ban on tobacco advertising, promotion, and
sponsorship (TAPS). It also considers education and cessation interventions, but these have
advanced less rapidly than the other measures. Compliance with smoke-free areas is fairly
high (particularly with respect to closed area) and Colombia is considered one of the leading
countries in this policy in the region.

As for tobacco packaging, in order to comply with FCTC article 11, article 13 of Colombia’s
Law 1335/2009 established restrictions for cigarette pack design elements and defined general

11
Even in high-income countries like Germany, street selling has been associated with distribution of illicit
cigarettes (Lampe 2006, p.240).

298 // Colombia: Illicit Cigarette Trade
guidelines for health warnings. Three years later, the Ministry of Health (MoH) created the
Tobacco Packaging and Labeling Committee.12 This committee is in charge of authorizing pack
designs that can be sold in the national market, after studying tobacco companies’ submissions.

Other general norms that interact with tobacco control regulation are the Consumer
Protection Act (Law 1480/2011), the Anti-Smuggling Act (Law 1762/2015), the National Police
Code (Law 1801/2016), and sanitary inspection, surveillance, and control norms, particularly
the Administrative Act 1229/2013.13 A relevant aspect to determine institutional capacity to
detect illegal activity, including illicit cigarette sales, is the regulation to protect consumers. It
defines the general responsibilities for the Superintendence of Industry and Commerce (SIC)
to ensure compliance with labeling and packaging norms and with TAPS ban observance at
the point of sale. SIC can impose fines and other penalties when establishments sell mer-
chandise that does not comply with legal requirements, including tobacco products.

Violation of packaging and labeling regulations is subject to fines between 200 and 400
times the value of the minimum wage per day.14 This is a significant amount for street
vendors but not for larger retailers, wholesalers, or manufactures. Retailers and wholesalers
not complying with the TAPS ban face fines so small they are inconsequential: between
two and five times the value of the minimum wage per day. Other participants engaging in
TAPS activities would pay higher penalties: up to 400 times the value of the minimum wage
per day. Unfortunately, complaints of TAPS ban violations lodged by members of VCCT, a
local coalition that oversees the implementation of the FCTC in Colombia, have increased.
DEICS-COL 2017, a survey with a representative sample of smokers from the five cities with
the largest number of smokers, found that one in five smokers reported having been offered
free cigarette samples in the prior eight months.

The Police Code (articles 38 and 180) establishes sanctions on behaviors that could be
related to the distribution of illicit cigarettes. Distribution, offering, selling, and instigation of
consumption of cigarettes to minors are punished with the destruction of the merchandise
and a fine equal to 32 times the value of the minimum wage per day (the equivalent of about
USD$ 293), the highest level of ordinary fines. Sanctions may take time to become effective,
because the Code has been in force since January 2017, and it requires a gradual process
to be fully implemented. Additionally, existing penalties are not sufficient to discourage such
practices among organizations that can promote them on a large scale.

TOBACCO PRICE, TAXES AND TAX REVENUE

In Colombia, cigarettes are subject to Value-Added Tax (VAT) and excise tax. The general
rate for VAT, currently 19 percent, applies to cigarettes. The excise tax has an ad valorem
component (reintroduced for the first time since 2006) and a specific component. The ad

12
Administrative decision 1309/2012.
13
For a comprehensive description of sanitary control mechanisms, consult the following MoH document:
https://www.minsalud.gov.co/sites/rid/Lists/BibliotecaDigital/RIDE/VS/PP/SA/ ivc-control-tabaco.pdf.
14
Minimum wage per day for 2017 was COP$ 24,590 (USD$ 8.33) and for 2018 is COP$ 26,041 (USD$9.16).

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

valorem rate is 10 percent (Law 1393/2010, article 6), and for 2018 the specific tax is COP$
2,100 (USD$0.74) per 20-stick pack. The Department of Statistics, once a year, must certify
the cigarette price of a 20-stick pack for each brand variant to the Ministry of Finance for cal-
culation of the ad-valorem component of the excise tax.15 Certified cigarette prices are based
on retail price information,16 including VAT, and the formula discounts ad valorem taxes from
the previous period and adjusts the result by the Consumer Price Index.17

Figure 2. Certified Prices of 20-Stick Packs (Supermarkets)

8.0e-04

6.0e-04
Density

4.0e-04

2.0e-04
2016

0 2017
2000 3000 4000 5000
Price of a 20-stick pack (nominal COP$)
Source: DEICS-COL 2017. Graph includes daily and non-daily smokers.

Figure 2 shows the distribution of certified cigarette prices (nominal) in COP$ for 2016 and
2017, and the vertical line in the figure shows the average price, which in 2016 was COP$
3,282 (USD$ 1.07) and in 2017 was COP$ 3,991 (USD$ 1.35). There is a substantial dispersal
of prices, with the cheapest brand in 2017 priced at COP$ 2,500 (USD$ 0.84) and the most
expensive at COP$ 5,400 (UDS$ 1.82). Also, the mean does not represent the behavior of
the market. The distribution is usually bimodal, that is, most prices are concentrated around
two values, making the average a statistical measure that does not accurately capture market
realities. The bimodal distribution is explained by two market segments: the regular segment
with affordable cigarettes (price ≤ COP$3,000 (USD$ 1.01)) and the premium segment with
fancy and expensive cigarettes (price ≥ COP$4,000 (USD$ 1.35)).

A good indicator of the behavior of prices after the 2016 tax reform is the cigarette real
price index calculated with the price index for cigarettes18 (included in the CPI basket) and

15
Decree 2427/2007 Article 3, Law 1819/2016 Article 348, Law 1393/2010 Article 6.
16
Article 6 of Law 1393/2010 establishes that retail price information must correspond to the price charged to
the consumer in supermarkets.
17
The base calculation was simplified in 2016, and now uses only the average price of the previous year,
without the discount.
18
This index provides information beyond the supermarket channel, although it is a limited representation of
prices in the main distribution channels

300 // Colombia: Illicit Cigarette Trade
the general CPI. This is the fastest price growth observed in the past three decades, but still
below the accumulated rate between July 1997 and October 2001 (52.7 percent), which
remains the period of most dynamic growth in Colombia’s cigarette prices. It is worth noting
that the price behavior during those years was not caused by taxes.

Department of Statistics published estimates by brand are reliable for prices in supermarkets.
However, its sample underrepresents informal channels of distribution because it excludes
prices of illicit cigarettes as well as those of loose cigarettes. This is a relevant issue for
Colombia, where 68 percent of smokers bought sticks instead of packs for their last pur-
chase, and 7 percent of purchases take place via supermarkets. By using information from
smokers instead of retailers, DEICS-COL 2017 provides more reliable data on prices in both
distribution channels. Distribution of prices and average price (thick line) from this source for
20-stick packs and for loose cigarettes is shown in Figures 4 and 5, respectively.

Figure 3 shows that, when all distribution channels are considered, dispersion of prices in the
market for packs is wider than the one reported in formal distribution channels. The average
price of a 20-stick pack is around COP$ 5,200 (USD$ 1.76). Packs on the far left of the distri-
bution represent a public-health issue, because they are being offered at a price below the
price consistent with current cigarette taxes, undermining the tobacco tax policy and provid-
ing affordable cigarettes to consumers.19 Figure 4 shows that the average price of a stick is
around COP$ 400 (USD$ 0.13) and also confirms an important price spread in this segment
of the market. In both markets, illicit cigarettes are found all across the price spectrum,20
which partially explains the difference in average price between data from DEICS-COL 2017
and from the Department of Statistics. Comparison of both figures show that, overall, the
price of a stick is lower in packs than in loose cigarettes. By brand, for instance, the average
price of a Belmont stick in loose cigarettes is COP$ 386.95 (USD$ 0.13), while in 20-stick
packs, it is COP$ 289.79 (USD$ 0.09). For Marlboro, the corresponding prices are COP $
489.03 (USD$ 0.16) and COP$ 278.6 (USD$ 0.09), and for Lucky Strike COP$ 484.11 (USD$
0.16) and COP$ 365.39 (USD$ 0.12). Even though a higher price of loose cigarettes has the
potential to reduce consumption via price elasticity, it might actually increase consumption,
because (i) indivisibility21 in formal channels makes loose cigarettes more affordable and (ii)
small package sizes might not activate a self-control conflict (Coelho do Vale, Pieters, and
Zeelenberg 2008).

At the end of 2016, Colombia had the second-lowest cigarette price in the Americas. The
tax reform approved in December 2016 (Law 1819/2016) increased the specific compo-
nent of the cigarette excise tax by 200 percent. The reform adopted a two-step annual

19
Colombian regulation does not establish a minimum price. Although this is usually not considered when
the specific component is large, the price dispersion observed here suggests that additional price regulation
measures could help increase the tax impact in this case and reduce possible cross subsidy across brands.
20
Evidence of expensive illicit cigarettes, sold by pack or loose, is found in DEICS-COL 2016 and 2017, as
well as in Fundación Anáas’ active search for illicit brands through direct purchases in traditional distribution
channels, such as San Andresitos.
21
In Colombia, it is illegal to sell packs of less than 10 sticks.

301
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 3. Cigarette Real Price Index

170
May 2018: 163.9

160

150
Dec 2017: 143
Jul 2017: 142
140

130

120
Dec 2016: 177

110

100

90
dec. -08
mar. -09
jun. -09
sep. -09
dec. -09
mar. -10
jun. -10
sep. -10
dec. -10
mar. -11
jun. -11
sep. -11
dec. -11
mar. -12
jun. -12
sep. -12
dec. -12
mar. -13
jun. -13
sep. -13
dec. -13
mar. -14
jun. -14
sep. -14
dec. -14
mar. -15
jun. -15
sep. -15
dec. -15
mar. -16
jun. -16
sep. -16
dec. -16
mar. -17
jun. -17
sep. -17
dec. -17
mar. -18

Figure 4. Prices of 20-Stick Packs Figure 5. Prices of Loose Cigarettes
in 2017 in 2017

5.0e-04 .02

4.0e-04
.015
3.0e-04
Density

2.0e-04 .01

1.0e
.005
Density

-04

0 0
2000 4000 6000 8000 10000 12000 0 100 200 300 400 500 600 700
Price of a 20-stick pack (nominal COP$) Price of a stick (nominal COP$)

302 // Colombia: Illicit Cigarette Trade
Figure 6. Structure of cigarette prices in Colombia

6,021
6,000 5,701
533
Nominal Prices in COP$ per 20-cigarette pack

5,385
504
5,011 570
469
5,000 538
431
501
395
3,949
4,000
345 2,573
3,128 313 2,404
2,247
2,100
3,000 430
256 1,400

701
2,000
VAT

2,345
Excise -
2,085 2,168 2,255 Ad Valorem (10%)
1,000 1,740 1,891
Excise - Speciﬁc

0 Price before tax
(Supermarket)
2016 2017 2018 2019 2020 2021

increase for the period 2017-2018 and subsequent annual adjustments by the inflation rate
plus 4 percentage points, adjustment that takes place every January. The new legislation
also established a small increase in the ad valorem component of the excise, keeping its
10 percent level while changing the procedure to calculate its reference price. The reform
also raised the general VAT rate, applicable to cigarettes since 2000, from 16 percent to 19
percent. Figure 6 shows the current and expected structure of the price. Table 1 shows the
evolution of tax burden as percentage of retail price, which is near 60 percent of retail price,
and relies mostly on the specific component. In international dollars, the price of Colombian
cigarettes is closing the gap with other countries in the region, but it is still relatively low
compared to Chile, Ecuador, or Panama, and needs an extra tax hike to reach the bench-
mark of 75 percent suggested by WHO.

Figure 7 describes the behavior of affordability using minutes of labor required to purchase
one pack. In the 1990s, the trend was driven by price volatility and a sharp tax cut in 1994-
1995. Between 1998 and 2000, cigarettes became less affordable due to a rapid drop in
household income. During most of the 2000-2016 period, cigarettes were cheaper as a
result of a combination of household purchasing power improvement and stable prices. The
2010 tax reform produced only a minor rise. The effects of Law 1819/2016 are reflected in
the surge observed in 2017 and 2018.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 7. Affordability
Minutes of labor required to buy a 20-cigarette pack

50
2018
2014
1996
1990

2010
1988

1994

2000

2012

2016
1998
1992

2004

2006

2008
2002

Year

Table 1. Prices and tax burden for 20-cigarette pack
INCREASE (%)

SPECIFIC TAX

RETAIL PRICE
TOTAL TAXES

BURDEN (%)

BURDEN (%)
VAT (COP$)

TOTAL TAX
CERTIFIED

EXCISE AD
VALOREM
SPECIFIC
EXCISE

(COP$)

IN PPP
PRICE

PRICE
YEAR

2010 2,134 570.0 194.7 293.6 1,058 26.7 49.6 1.92

2011 2,168 584.8 200.2 298.2 1,083 1.6 27.0 50.0 1.87

2012 2,295 607.9 203.7 315.8 1,127 5.9 26.5 49.1 1.95

2013 2,433 624.8 215.6 334.8 1,175 6.0 25.7 48.3 2.06

2014 2,516 635.8 230.6 346.2 1,213 3.4 25.3 48.2 2.13

2015 2,718 659.0 236.3 373.9 1,269 8.0 24.2 46.7 2.26

2016 3,128 701.1 256.4 430.4 1,388 15.1 22.4 44.4 2.51

2017 3,949 1400.0 312.8 345.1 2,058 26.2 35.5 52.1 3.10

2018e 5,011 2100.0 394.9 430.7 2,926 26.9 41.9 58.4 3.90

2019e 5,385 2247.0 501.1 468.6 3,217 7.5 41.7 59.7 4.16

2020e 5,701 2404.3 538.5 503.6 3,446 5.9 42.2 60.4 4.36

2021e 6,021 2572.6 570.1 533.2 3,676 5.6 42.7 61.1 4.61

e
: estimated

304 // Colombia: Illicit Cigarette Trade
1.4 Illicit trade
Illicit cigarette trade (ICT) is a threat to tobacco-tax policy because it increases market size
and expands the epidemic by offering affordable cigarettes. ICT also undermines other
tobacco control measures, particularly packaging and labeling regulation. Finally, even if it
is not the main policy concern, tax evasion associated with illicit cigarettes leads to revenue
loss for the government.

From the demand side, for many years the only source of information available was the one
provided by the Tobacco Industry (TI) through the Federación Nacional de Departamentos
and, more recently, the national business association of Colombia - ANDI. This study is per-
formed by Invamer, a private market research firm, with a survey of smokers aged 18 or older
regarding smoking habits and information on last purchase.22 Results are presented as a set
of slides (Invamer and ANDI 2017).23 Using this survey, the TI estimated the market share of
illegal cigarettes for 2017 at 18 percent, and the proportion of smokers consuming illegal
cigarettes at 13 percent. In order to undermine the tobacco tax policy, TI studies emphasize
the loss of tax revenue caused by ICT (Invamer and ANDI 2017: 21-23) and claim that higher
tobacco taxes increase ICT (Portafolio 2018b). TI studies are positioned in public opinion
through a strong media strategy. Every year, when Invamer’s study is released, the results are
widely covered by influential national media. Findings are also disseminated among top-level
government officials.24 This media strategy seeks to discourage tobacco tax increases and
disparage tobacco taxes’ contribution to public health. Since the first wave of the Invamer
survey in 2011, Invamer’s published estimates of illicit cigarette penetration fluctuate
between 13 percent and 19 percent.25

Illicit cigarette trade in Colombia mostly involves outright smuggling, that is, cigarettes that
do not appear in any official records and on which no taxes are paid. In some cases, the
merchandise enters through border crossings with the complicity of public servants, while
in other instances the merchandise enters the country through any of the hundreds of paths
(“trochas”) along the Colombo-Venezuelan border. Tax avoidance associated with bootleg-
ging easily takes place in cities like Maicao, Guajira, and Cucuta (Llorente and Díaz 2018).
The magnitude of bootlegging in Colombia has not been established. However, due to the
link between money laundering and illicit trade in Colombia (Cáceres-Corrales 2016), it is
plausible that large-scale operations constitute the most important type of smuggling. This is
consistent with the fact that the traditional smuggling routes used by criminal organizations
in the 1990s remain operational, although criminal structures have evolved over the decades

22
The questionnaire of the survey is not publicly available, so the topics of the survey are deduced from the results.
23
There is no report with all the technical information on the study.
24
For example Vega 2018, Cigüenza 2018, La República 2018, Portafolio 2018a, El Tiempo 2018.
25
As opposed to other global sources of illicit trade, the estimates produced by INVAMER through FND/ANDI
have not been subject to retrospective revisions. For instance, the 2011 survey from INVAMER was published
by the National Association of Retailers, FENALCO, showing the same estimates as those reported by ANDI in
2018 for 2011.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

(Avila et al. 2012; Ochoa Sierra 2011), and new routes have also emerged. This recomposi-
tion maintains smuggling activities as a “portfolio” that includes cigarettes, among other goods.
La Guajira is a region with a particularly weak presence of state institutions, where illegal
armed groups have aimed to control both narcotraffic and smuggling activities (Quiroga-
Angel 2018).

In 2016, an independent study on ICT, funded by the American Cancer Society, collected
information for a representative sample of smokers in the five Colombian cities with the
highest number of tobacco consumers, allowing researchers to draw inferences on 57.3
percent of this population in the country. The instrument used to collect information was
the Demand for Illicit Cigarettes Survey (DEICS), with a questionnaire covering demographic
variables, smoking behavior, characteristics of the last purchase, and socioeconomic infor-
mation. The penetration of ICT based on DEICS-COL-2016 was estimated to be 3.46 percent
of cigarettes and 3.35 percent of smokers (Maldonado et al. 2018a). Funded by PROACTT, a
joint effort of the American Cancer Society and UK Cancer Research, a comparable study was
conducted a year later, with the purpose of obtaining estimates after Colombia’s tax reform
(Maldonado et al. 2018b). Results were used as inputs for an impact evaluation of the tobacco
tax increase on ICT (Gallego et al. 2018). Estimates from DEICS-COL 2017 show a slight
increase of ICT after the tax reform but remain at a very low 6.63 percent of cigarettes iden-
tified as illicit and 4.23 percent of smokers consuming illicit products. These results coincide
with a substantial body of independent studies finding consistently lower ICT penetration
compared to TI-funded studies (Stoklosa and Ross 2014).

On the other hand, at subnational level there are important differences. Cucuta, a border city
with Venezuela facing a 38 percent illicit tobacco penetration rate, is an extreme example of
what can happen with smuggling when governance conditions are very challenging. On the
other end of the spectrum is Bogotá, the country’s main market for cigarettes, with only a 2
percent share of illicit cigarettes. In the capital city, the institutional strengths are explained
by elements such as the capacity to coordinate efforts across government agencies, a very
different situation with illegal armed groups, and a territory where the interaction between
the state and communities is not dominated by repressive actions. This regional pattern has
been observed in the analysis of criminal activities in other sectors. For instance, when com-
paring levels of violence in Colombia’s banana-growing regions and in regions with flower
production, distance to the capital city and the institutional conditions associated with this
difference are features suggested as partially explaining more peaceful conditions (Nasi and
Lozano 2018). In this sense, Colombia is a natural experiment that illustrates how regions
with gaps in institutional structures, when subject to the same policy, respond differently in
terms of illicit trade indicators.

Colombia does not have a track-and-trace system or tax stamps that facilitate identifi-
cation of illicit cigarettes; therefore, identification must rely on characteristics of the pack/

306 // Colombia: Illicit Cigarette Trade
Figure 8. Share of Illicit Cigarettes by Brand

Lucky Strike, Win,
8.0 7.2

D&J,
Other,
18.9
13.1 Golden Golden
Marlboro, Seal, Deer,
6.5 3.8 3.4

Golden
Roth
State,
mans
2.2
Chesterfield (Belm
(Boston), Kool, Jet, ont) Montreal,
16.1 10.0 6.4 2.3 2.0

stick. One such characteristic is the brand/presentation approved by the Ministry of Health.26
This is not to say that every product from companies that have submitted requests for MoH
approval complies with legal requirements; in fact, DEICSCOL and active search of brands
clearly suggest that some cigarette brands enter the market without permission. Prominent
cases include Camel (imported by JTI), sold during 2017 before the committee’s approval
was sought, and Chesterfield, found in the market bearing the text “menthol with capsule”
on the front of the pack, violating the committee’s rejection of PMI’s request for this pre-
sentation. In addition to brand, the other two criteria are current health warnings and price
(Maldonado et al. 2018a).27 Applying these criteria to DEICS-COL-2017 to identify illicit ciga-
rettes among a representative sample of smokers, the brands constituting the highest share
of illicit cigarettes are D&J and Chesterfield (Figure 8). D&J is mostly found in Cúcuta. Of
note, there is a wider dispersion of brands in this illicit market than for the cigarette market
as a whole.

26
Details in Section 2.1.
27
For price, the study defines a threshold to classify cigarettes as illicit, “based on the fact that the current tax
scheme implicitly determines a minimum price... Any price under COP$100 [USD$ 0.03] for sticks, COP$ 1,700
[USD$0.57] for a 20-stick pack and COP$20,000 [UDS$ 6.77] for a carton was classified as illicit.” (Maldonado et
al. 2018a, p.4).

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

2. Policy and reforms
Reforms of ICT control in Colombia can be described as a set of efforts that have not yet
achieved the status of a functional public policy, i.e., a policy that integrates actions across
sectors at the national level while establishing coordination with subnational authorities.
Regarding the legal, institutional, and administrative dimensions of ICT control, the country
shows encouraging achievements that still lack intersectoral coordination. The uneven pace
of implementation is largely determined by highly disparate regional institutional conditions.
The following sections describe the efforts deployed and the current challenges faced in
each dimension. We summarize lessons learned that may help other countries in similar
situations, as well as policy recommendations to further advance ICT policy in Colombia.

It is worth noting that, despite challenging circumstances, the Colombian government
managed to adopt an ambitious cigarette tax hike, obtaining positive results in terms of
consumption reduction and tax revenue increases. At the same time, overall illicit trade
penetration remained at moderate levels, with exceptions due to the regional differences
mentioned above, which require a differential policy response.

2.1 Institutional Context
The focal point for tobacco control policies is the MoH. In compliance with the FCTC, the
MoH has adopted specific goals to raise tobacco taxes as the most cost-effective instru-
ment to control the epidemic. However, any tax initiative must be submitted to Congress by
the Ministry of Finance. Since 1990, Colombia has gone through 14 tax reforms, that is, an
average of one tax reform every two years. Each one of these has created opportunities to
discuss tobacco taxes. Sometimes the result was a sharp tax cut, as was the case in 1995.
However, the latest reform, in 2016, took the opposite direction. Along with tax discussions,
the MoH has worked to strengthen government-wide capacity to eliminate ICT. The MoH
advocacy role includes providing technical advice to agencies in other sectors; training cus-
toms police (POLFA); and incorporating the verification of sanitary regulations (e.g., health
warnings) into customs procedures, among other actions.

In addition to national institutions, subnational authorities play a key role, as they receive
all the revenues from the tobacco tax based on reported sales in each region. Colombia is
divided in 33 first-level subnational authorities—32 departments (departamentos) and one
capital district—and each department is divided into a set of municipalities (the second level).
Tobacco excise tax rents belong to departments.28 This is a consequence of the decen-
tralization process that allocated certain tax revenues to these entities. However, only the

28
Article 2 Law 30/1971.
29
Constitutional Court rulings C-246/95 on Decreto 1280/199 1994 http://www.corteconstitucional.gov.
co/relatoria/1995/C246-95.htm and C-252/2010 and C-253/2010 on Decreto 4975/2009 http://www.
corteconstitucional.gov.co/RELATORIA/2010/C253-10.htm

308 // Colombia: Illicit Cigarette Trade
Colombian Congress has the authority to define the tax level and its composition. In addi-
tion, Congress is the only instance that can establish the taxable event, and name the agent
responsible for its payment. Past attempts to modify tobacco taxes through administrative
acts by the executive branch have been deemed unconstitutional.29

Revenues from excise taxes of departments are partially earmarked for universal health cov-
erage and sports.30 This includes excises on tobacco products, liquor, beer, lotteries, and the
registry (World Bank 2009, p.19).31 Consequently, tobacco taxes are part of the departments’
revenue, and departments are responsible for decentralized tax collection and administra-
tion, including tax evasion controls (see Section 2.3). In order to coordinate efforts among
departments, the Federación Nacional de Departamentos (FND) was created in 1998.32 In
2009, a Cooperation and Investment agreement was signed between PMI-Coltabaco, the
Republic of Colombia, and the departments. It established commitments for the tobacco
company to provide funds and technical cooperation for actions against the illicit cigarette
trade. FND acts as the recipient of funds and is in charge of executive tasks.

Section 1.4, above, described the TI’s skillful construction of a discourse linking tax increases
with ICT and significantly overstating both the level of ICT and the impact of higher taxes
on it. As a consequence, this argument is widely accepted within the government, media,
and public opinion. The resulting misrepresentation of the impact of tobacco taxes and
ICT on tax revenues discourages subnational authorities both at the local level (department
governors) and the national level (members of Congress), making it difficult for Congress to
substantially increase tobacco taxes.

Tobacco tax administration, enforcement, and penalties bring other institutions into play:
in particular, the national customs authority (DIAN),33 customs police (POLFA),34 Financial
Information and Analysis Unit (UIAF),35 and the Superintendence of Industry and Commerce
(SIC). DIAN is responsible for collecting the tobacco tax at borders. Also, in joint work with
POLFA, they are in charge of ICT seizures all over the country. UIAF collects information
to identify illegal flows of money and money laundering. At the end of the enforcement
process is Colombia’s Office of the Attorney General,36 whose main role on ICT is to impose
penalties on people and organizations involved in the illegal trade. At the MoF, the tax admin-
istration advisory division (DAF) oversees the tax administration performance of subnational

30
Article 7 Law 1393/2010 and Article 211 Law 1819/2016.
31
For further details, see ruling C-958/99 by the Constitutional Court, República de Colombia.
32
Concept Note 5293, 2012 of the Office of the Inspector General of Colombia (Contraloría General de
la Nación).)
33
Dirección de impuestos y Aduanas Nacionales.
34
Policía Fiscal y Aduanera.
35
Unidad de Información y Análisis Financiero.
36
Fiscalía General de la Nación.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

authorities. Finally, the Ministry of Foreign Affairs is an important actor on ICT, because it is in
charge of international treaties, including the FCTC. At present, this ministry has the pending
task of submitting the Protocol to Congress to obtain its ratification.

2.2 Legal Framework
Colombia has benefited from a set of reforms that improve harmonization of customs
management, including features such as a comprehensive risk management perspective,
cooperation between the customs agency and sub-national authorities, non-intrusive
inspection, infrastructure improvements, and coordinated actions across border areas,37 as
well as new regulations on procedures, sanctions, and institutional mechanisms. This section
explains some relevant aspects of these reforms.

Law 1762/15 (also known as the Anti-Smuggling act) is the current legal framework in
Colombia for illicit trade control. Its main contribution is to include smuggling activities
within the legal framework for money laundering in Colombia. This law also boosted
penalties for smuggling and strengthened institutions involved in the control of illicit trade,
including POLFA, DIAN, and UIAF. The law also unified the sanctions imposed for evasion
of the tobacco tax, overcoming previous limitations caused by the lack of coordination of
penalties among departments. The law represents an important milestone for ICT, because
it recognizes legal and institutional factors as the main drivers of illicit trade, and it provides
tools for extending law enforcement activities in order to improve control of illicit trade in
border areas.

Since 2014, another advance in the legal framework is Decree 2155/2014, which established
the technical standards for non-intrusive inspection and created an intersectoral commis-
sion for implementation and monitoring of these procedures.38 Although the foundation
for non-intrusive inspections was laid out several years earlier with Decree 1520/2008, the
adoption of technologies and standard procedures became a reality when the commission
was put in place. The commission’s responsibilities include the coordination and provision
of guidelines for procurement activities and the non-intrusive inspection system. DIAN is
responsible for the technical secretariat functions.39 One of its accomplishments is the
adoption of a manual with detailed procedures for international trade operations, including
imports. This first manual covers inspections at sea ports. Later versions will address proce-
dures in border posts and airports.40 Ports in Colombia are managed through concession
contracts. In some cases, such contracts already include an obligation to acquire non-intru-
sive inspection technology. In other cases, this is a voluntary option for the concessionaire.41

37
The border act, law 191/1995 also set the general framework to establish cooperation with neighbor
countries to fight illegal activities.
38
http://www.alcaldiabogota.gov.co/sisjur/normas/Norma1.jsp?i=59857
39
The operation of the commission is defined by Resolución 247/2014
40
Resolución 84/2015
41
Circular externa 051/2017 from the Superintendence of Ports and Transportation.

310 // Colombia: Illicit Cigarette Trade
The most recent modification to the customs regulatory framework is Decree 349/2018.
It modifies a previous norm, Decree 390/2016, and advances in a process that started
with the Customs Act (Law 1606/2013) and that has consistently enhanced the capacity of
government agencies responsible for control of international trade operations to act more
strategically against the activities of criminal organizations.

Law 677/2001 established the regulatory framework for "Special Economic Export Zones."
One of these, in La Guajira, plays a prominent role in the illicit trade of cigarettes directed
to the domestic market, and possibly to neighboring countries, such as Ecuador. It is worth
mentioning that, although the smoking population in La Guajira represents less than 6 per-
cent of cigarette consumers in the country, a significant proportion of cigarette imports in
official records declare this department as their destination. According to Bonilla et al. (2015):
“The critical spot for smuggling is the Special Customs Zone in Maicao (Guajira) [...] More
than 90 percent of smuggled cigarettes enter through this area.” Article 18, Paragraph 2 of
this law assigns departments full responsibility to control excise tax payments.

Maicao is not the only problem area. Both the departments of La Guajira and Norte de
Santander face many difficult governance challenges that require a careful and better-informed
approach. Recently, control agencies have identified Urabá as a new route for smuggled cig-
arettes. Identification of the driving forces of corruption and other institutional weaknesses in
these territories is necessary to determine the path for a successful illicit trade policy.

Colombia’s National Development Plan 2011-2014 foresaw a Unified Tracking and Tracing
System (SUNIR),42 and in 2012, a policy document43 supporting decree 602/2013 offered
guidelines to develop SUNIR. The system was intended to improve coordination and effi-
ciency in the management of excise taxes for alcohol and tobacco products. Unfortunately,
despite attempts to develop the initiative, as of 2018 the country still does not have an infor-
mation system with the technical specifications described in CONPES 3719 and in guidelines
for implementation of the Protocol to Eliminate Illicit Trade of Tobacco Products. SUNIR was
included as one of the strategies in the current National Development Plan, but without stating
which entity would be responsible for it.

2.3 Administrative Mechanisms
Tobacco taxes represent a very small fraction of tax revenues for subnational entities, as shown
in Figure 9. However, for some departments, especially those with the weakest tax struc-
tures, this is an important source of funds. Usually these are areas with relatively low smoking
prevalence, thus the importance of tobacco taxes in such cases is better explained by the lack
of alternative sources of revenue that are typically present in regions with a more developed
economy. The institutional limitations are not unique to tobacco tax administration. In fact, the
Expert Tax Commission appointed by the Santos administration to provide recommendations

42
Law 1450/2011.
43
Conpes 3719/2012.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 9. Tobacco Tax As a Share of Departments’ Total Tax Revenues (2008-2017)

100 4 3.6 4.5 4.5 3.8 3.6 3.9
4.9 4.3 5.2
% dentro del recaudo tributario total

16 17 17 15 16 15 14 14 14
80 24

60
2,404

40 80 80 80 80 80 82 82 82
79
71

20 Tobacco
Alcohol

0 Otros
2011

2014

2017
2010

2012

2013

2015

2016
2009
2008

Source: based on subnational entities’ reports to CHIP – the national accountancy information system.

for the recent tax reform reiterates the need to establish a unified tax act for the subnational
entities to eliminate inefficiencies both for the authorities and for tax payers.

One indicator of the efficiency of tax collection is the effective revenue per pack. Figure 10
shows the results obtained from the ratio between tax revenues in 2016 and the number
packs in each region.44 Departamentos with border trade activity, like Amazonas, will have
much larger revenue, probably from sales destined to the Brazilian market, where prices are
higher. Setting aside that observation, it is clear that some regions are doing a better job than
others. On average, a 20-stick cigarette pack would have yielded COP$ 1000 (USD$ 0.03)
in revenue in 2016 (COP$ 701 specific plus COP$ 300 from the ad valorem). Regions with
ratios below that reference value are Antioquia and Caribe, which are also regions with more
frequent complaints about illicit trade of cigarettes and a history of other illegal activities
related to organized crime.

Currently, the information system is administered by FND. This institution has sparked con-
troversy regarding control of its activities and contracting procedures. FND manages taxes
through the “Fondo Cuenta,”45 administered by a fiduciary contract with the consortium
FIMPROEX. This mechanism has been in place since January 2010. However, Fondo Cuenta
covers only one part of the operations related to the tobacco product market.

44
The number of packs is calculated based on the most comprehensive consumption survey, Encuesta de
Calidad de Vida, that provides information on number of smokers per region and frequency of consumption.
The consumption intensity indicators used are derived from a previous survey, the Psychoactive Consumption
Study, 2013.
45
This fund was created by article 224, Law 223/1995, to handle the revenues generated by excise taxes on
imported goods, including tobacco products.

312 // Colombia: Illicit Cigarette Trade
Figure 10. Effective Revenue per 20-Cigarette Pack by Region (2016)

Orinoquía-Amazonia 5558
Pacifica (Sin incluir Valle) 1937
Pacifica (Incluye Valle) 1518
Bogota 1430
Valle del cauca 1341
Oriental 1103
Central 1013
Antiquia 976
Caribe 783

0 2,000 4,000 6,000
Impuesto efectivamente pagado por cajetilla de 20

Source: based on data from CHIP, Encuesta de Calidad de Vida 2016, Estudio de Sustancias Psicoactivas 2013.

Domestic cigarette sales must be reported directly to departments. In the past, this has been
implemented through private suppliers that offer information systems to register sales of
goods subject to excise taxes (including cigarettes). There is no obligation for departments
to use the same system. The official documentation to prove the legality of merchandise
is a certification (tornaguía), that declares point of origin and destination. It has been pro-
posed to replace this certification by electronic invoicing, but this is not yet implemented.
Currently, the dispersion of control mechanisms across departments, limited development
of standards for inspection procedures, and the division between controls for imported and
domestic cigarettes create inefficiencies and risks that can be exploited by those seeking to
evade taxes.

TOBACCO INDUSTRY INTERFERENCE

The cooperation and investment agreement signed between PMIColtabaco, the Republic of
Colombia, and the departments covers specific activities regarding illicit trade. These include:

1. Purchasing and maintaining equipment

2. Training personnel

3. Storing and destroying seized cigarettes

4. Developing educational campaigns

5. Providing financial resources for production control mechanisms.

Under the agreement, FND is required to present reports to PMI-Coltabaco. Worryingly,
the arrangements give the company the opportunity to influence budget allocations and
decisions relating to the control of ICT. Other aspects of the current situation also raise
concerns. For example, in 2016, FND initiated a contracting process to implement a unified

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

information system. However, according to personal communications with tax authorities,
even though a provider had been selected, the system is not yet operating.

It is clear that the current tools for tracking and tracing do not reflect best practices, at least
in the following respects:

Data security and integrity: the information available to subnational tax administrations is
fragmented and at times misleading. Most importantly, with the data currently available, it
is difficult to prove noncompliance. For instance, fiscal authorities do not have clear infor-
mation about the volume and place of origin of cigarettes. Cigarette packs are not labeled
individually, and the codes used are those of the manufacturer.

Independent production controls. Existing information systems do not give relevant stake-
holders enough information to establish the volume of tobacco products flowing from source
to final destination. The controls are based on manual procedures, not machine-readable iden-
tifiers. They rely on the accuracy of information provided by the taxpayer.

Authentication mechanisms. Currently the tobacco industry is the only source of infor-
mation used by the authorities to establish if a tobacco product is genuine. Also, the
documentation to support the legality of the merchandise (tornaguias) in highway control
posts is easy to reuse. Cases of such abuse have been reported, and an expert commission
has recommended a change to newer technologies.

Such dependence on the tobacco industry in the identification of illicit products falls far short
of the standards called for in the Protocol, which notably includes the following language:

Parties shall act to protect these policies from commercial and other vested
interests of the tobacco industry in accordance with national law; […]

[Parties must] be alert to any efforts by the tobacco industry to undermine or
subvert strategies to combat illicit trade in tobacco products […];

Obligations assigned to a Party shall not be performed by or delegated to
the tobacco industry. Each Party shall ensure that its competent authorities,
in participating in the tracking and tracing regime, interact with the tobacco
industry and those representing the interests of the tobacco industry only to
the extent strictly necessary in the implementation of this Article.

3. Conclusions and Recommendations
3.1 Lessons Learned
Colombia has recently increased its tobacco taxes substantially. The country’s 2016 tax
reform defied partisan warnings from the tobacco industry about spiking ICT and marked a
historic step in the defense of the nation’s public health. However, when compared to other
countries in the region, Colombia’s tobacco tax levels remain below average. Colombia is far

314 // Colombia: Illicit Cigarette Trade
from having taxes high enough to control its tobacco epidemic. The country’s health leaders
continue to advance the anti-tobacco fight.

Among recent efforts on ICT by national and subnational institutions, three in particular
appear pivotal. First, the modernization of customs regulation by DIAN is already paying off
in terms of institutional capacity to confront the renewed force of criminal organizations
using illicit trade as part of their operations. Second, a monitoring and evaluation initiative
has been launched to provide authorities with reliable, impartial information on interac-
tions among tax increases, tobacco consumption, and ICT. This initiative originated with
Colombian civil society, generating evidence that was subsequently used by the MoH to
shape policy.46 More recently, the MoH has championed including a question on tobacco
use prevalence in a national survey. This will provide annual nationwide data on trends in
tobacco market size.47

It is important to emphasize, based on the Colombian experience, that ICT monitoring and
evaluation must not be limited to conventional indicators. An integrated approach incorporat-
ing different dimensions of tobacco control is required. That means monitoring consumption,
supply, prices, violations to labeling and packaging regulations, characterization of distribution
channels, and price information at different stages of the distribution chain. All this must be in
addition to standard metrics on seizures. Because of the illegal nature of ICT activities, qualita-
tive methods provide useful explanations and inform the analysis of the quantitative data, and
should be included in the monitoring and evaluation strategy.

A third key point regarding Colombia’s recent ICT control efforts is the following. Some sub-
national authorities demonstrate that it is possible to maintain low illicit trade penetration rates
in the context of a significant tax increase. The asymmetries observed in this indicator reflect
uneven institutional capacities across the national territory. Comparison of subnational results
can be used to motivate and guide interventions to address these performance gaps.

3.2 The Way Forward: Action Steps
Looking ahead, a next key step for Colombia is to secure congressional approval of the
Protocol, followed by ratification with the Treaty Section of the United Nations Secretariat.
At the same time, it is necessary to develop national and subnational capacities for imple-
mentation. For the latter, issues related to tobacco tax policies per se must be understood
as part of a larger conversation about the improvement of subnational tax management

46
The MoH also rapidly disseminated this evidence to decision makers in other institutions and sectors.
This has helped counteract TI attempts to misinform stakeholders and create the perception of a failed and
unsustainable tax policy.
47
That said, Colombia still badly needs more detailed measurement of its tobacco epidemic to better
understand smokers’ behavior and provide evidence for future policy design, including illicit trade control.
For instance, since 2012, the MoH has planned the Global Adult Tobacco Survey (GATS), but the decision to
perform the study remains stalled. Colombian authorities continue to rely heavily on TI data to assess tobacco
consumption and ICT.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

capacity. This involves governance challenges related to coordination between institutions
at the national and subnational level and across sectors. The conversation should include
government and non-governmental actors with responsibilities to promote transparency and
improve governance, largely absent from tobacco control discussions in Colombia to date.
Specific steps for Colombia to develop relevant capacities include the following:

1. Develop a strategy to promote a unified excise tax management system to reduce
coordination costs and improve operational efficiency and transparency. One path
already established is the commitment in the National Development Plan to adopt the
SUNIR system. This pledge has not yet been fulfilled. It is imperative that, after ratifi-
cation of the Protocol, the next administration appoint a national-level authority to
develop and deliver SUNIR. Current discussions in Latin America about adoption and
implementation of the Protocol provide the opportunity to exchange information with
neighboring countries on the required technology and procedures. Emerging innova-
tions may reduce contracting costs and institutional efforts, improving synergies for
international cooperation.

2. Despite the inherent challenges of monitoring an illicit activity such as ICT, Colombia has
started to generate ICT evidence through collection of better data, independent estimates,
articulation of different sources of information, and preliminary evaluation exercises. The
country should pursue this critical effort. Ultimately, Colombia’s ICT policy should be based
on evidence meeting the World Bank’s minimum quality requirements for inputs to policy
design (Ross 2015; Yurekli, Beyer, and Merriman 2001).

3. An important positive experience in Colombia is the improvement in independent infor-
mation available to diagnose and analyze illicit trade. The government should reflect
such independently generated knowledge in its routine policy monitoring. Leaders
should plan and budget for activities and resources to further advance reliable monitor-
ing and evaluation.

4. Establish formal mechanisms to ensure participation of legitimate representatives of the
research community (academia) and civil society in institutional structures established
for policy debates on illicit trade. These structures include the High Commission Against
Illicit Trade. It is vital to tap into academic and civil society expertise in tobacco control
and related illicit trade issues.

5. Even in a country with a history of TI involvement in illegal activities, including a well-es-
tablished case of illicit trade in the 1990s, most stakeholders still tend to regard the TI as
a partner and the first source of information and technical advice on ICT issues. Thus,
significant efforts are needed to inform national and subnational stakeholders about
international evidence on TI involvement in illicit trade activities. Improved communi-
cation is needed to raise awareness of the FCTC, the Protocol, and the need to prevent
direct or indirect TI interference in policy processes. Moreover, Colombia’s information
system for tobacco-related data (including on topics other than ICT) must draw much
more strongly on data that does not come from industry sources. Relevant institutions

316 // Colombia: Illicit Cigarette Trade
must also strengthen their capacity to verify the reliability of any remaining data that
continues to be derived from the TI.

6. Other procedures to counteract TI interference include requiring a comprehensive
explanation of the methodology of TI-funded studies, when they are presented to
the authorities.

7. Programs against cigarette smuggling at the subnational level should not be funded
or receive technical cooperation from the TI. Some of the conditions in the current
cooperation agreement between PMI-Coltabaco and various public-sector authorities
provide PMI with influence over the use of resources for tobacco control, a circum-
stance that is not consistent with the commitments of the Colombian State under the
FCTC (Article 5.3).

8. A national-level coordinating authority should be established to manage all information
about domestic tobacco production, international trade, tax revenues, prices, sales,
and consumption trends. This agency should also be in charge of outlining plans for
international cooperation. It is not appropriate to maintain the current fragmentation
of responsibilities in the strategic management of tobacco taxation and illicit trade. The
role played so far by the FND does not fulfil the necessary conditions. It is also worth
noting that the usual controls in place for public servants do not apply to FND, making
it a liability in terms of governance conditions. The scope of FCTC 2030, which cur-
rently incorporates an objective related to establishment of a National Coordinating
Mechanism, provide an opportunity to consider these issues in the discussions about
specific institutional designs.

9. The MoH should continue its effort to offer training to agencies outside the health sector
that bear responsibility for inspection activities, in particular, members of POLFA. Training
should include relevant updates on sanitary regulations, specifically health warnings,
the list of brands approved by the packaging and labeling committee, and guidelines for
implementation of Article 5.3 to prevent tobacco industry interference.

10. Subnational authorities must undertake consultations with the MoH to verify FCTC com-
pliance, when developing any intervention related to tobacco taxation.

11. Advances in the definition of legal penalties must be accompanied by publicly available
information on performance indicators for the implementation of sanctions. A specific
case that requires improvement in coordination and policy-objective harmonization is
the engagement of the Superintendence of Industry and Commerce to improve point-
of-sale controls and the imposition of penalties according to the law. The magnitude of
fines (particularly in relation to the minimum wage) needs to be adjusted so that whole-
salers and established retailers face penalties that are more than trivial in relation to their
sales and profits from tobacco products.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

12. Improving transparency on tax revenue may help identify the weakest areas of tax
administration and focus authorities’ efforts on those areas. Learning about tax-collec-
tion performance across regions may help in identifying champions and encourage
information sharing about successful strategies.

13. Development policies under Agenda 2030 may identify local multisectoral interventions to
optimally manage informal channels that distribute both licit and illicit cigarettes. This is a
common situation in Colombia, as in other Latin American countries.

318 // Colombia: Illicit Cigarette Trade
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ECUADOR
11

ECUADOR:

Addressing Illicit
Tobacco Trade
Santiago Trujillo1

Chapter Summary
The chapter begins with a review of the smoking epidemic using global figures and data,
followed by an examination of Ecuador’s domestic epidemic. The chapter describes the
advances and challenges associated with specific laws and regulations designed to combat
tobacco consumption in Ecuador, such as the Tobacco Control Law and the country’s sign-
ing and ratification of the Protocol to Eliminate Illicit Trade in Tobacco Products. The analysis
highlights how Ecuador’s government has promoted cultural and social change smoking-re-
lated attitudes and practices by means of measures such as the National Plan for Well-Being.
A brief look is taken at the application of MPOWER measures recommended by the World
Health Organization (WHO) as the most effective means to combat the smoking epidemic.
This is followed by analysis of tobacco tax issues.

The chapter provides an extensive analysis of Ecuador’s tax track-and-trace system (TTS) for
domestically produced cigarettes, alcoholic beverages, and beer, known as the Identification,
Marking, and Tracking System (Sistema de Identificación, Marcación y Rastreo, SIMAR). The
system was implemented by Ecuador’s Internal Revenue Service (SRI) in 2017. Topics related

1
Servicio de Rentas Internas (SRI), Ecuador

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

to the technical and security characteristics of the physical features of the SIMAR system are
discussed; these features are evidence of the robustness of the solution.

The implementation of the SIMAR system earned the SRI a 2017 award from WHO on World
No Tobacco Day (which supported the theme “tobacco – a threat to development”). The
first TTS to comply with the Protocol to Eliminate Illicit Trade in Tobacco Products, SIMAR
has become a benchmark for other countries in the region as they begin to tackle these
issues. The government of Ecuador has signed an international cooperation agreement
with the Dominican Republic to establish a similar system, cooperated with various other
countries in the region, and participated in a number of international forums to share its
experiences: precisely the sort of international assistance called for under the Protocol.

The core of this study focuses on the illicit trade. Illicit trade in cigarettes has been widely
discussed and is recognized as a policy issue of great importance. The collection of relevant
data is especially critical in understanding the scope of the problem and whether illicit trade
is expanding. Unfortunately, it is difficult to conduct a study of this type without adequate
data on consumption within countries. This remains a challenge in Ecuador, which needs
to periodically collect more reliable consumption statistics and compare them with data on
sales and production to establish a robust assessment of the illicit trade. This would allow
more effective targeting of public policy and facilitate intraregional comparisons and lessons.

The study presents additional evidence that may help in the further analysis of Ecuador’s
illicit tobacco trade, such as the finding of a recent striking decline in the sales of the only
authorized cigarette producer in the country. Seizures of illicit products are also discussed
that highlight the effectiveness of Ecuador’s public policy and market surveillance. A key
conclusion of the study is that, while the decline in legal cigarette sales has been associated
with a fall in tobacco tax revenues, the current tobacco tax level in Ecuador is sustainable.
The government appears to be adopting the appropriate response to the revenue reduction,
which is strengthening tax administration.

The Smoking Epidemic: Background and Data
Tobacco consumption is the main factor in the death of 50 percent of smokers (WHO 2017).
In Ecuador, an estimated 15.0 percent of women and 38.2 percent of men were current
smokers in 2013 (PAHO 2016). The data indicate that 21 Ecuadorians die each day as a result of
smoking, and approximately US$ 478.4 million are spent annually by the government to treat
health issues and impacts related to tobacco consumption; this is the direct cost of smok-
ing. This expenditure represented 0.47 percent of Ecuador’s gross domestic product (GDP)
and 6.32 percent of total annual public spending on health in 2015. Moreover, 13.4 percent
of all deaths among people over the age of 35 in Ecuador can be attributed to this pan-
demic, which means that controlling tobacco consumption might help avoid some 7,798
deaths annually (Bardach et al. 2016).

324 // Ecuador: Addressing Illicit Tobacco Trade
The Ecuadorian government has undertaken considerable effort in tobacco control over
the past decade. In March 2004, it signed the Framework Convention on Tobacco Control
(FCTC), and, in July 2006, it ratified the convention.2 Subsequently, in 2011, the Organic Law
on Tobacco Regulation and Control was enacted.3 The objective of the law is to promote
the right of the population to health and protect the population against the consequences
of the consumption of tobacco products and their harmful effects. In February 2012, the
regulations governing the implementation of the law were approved. These recognized the
Ecuador Inter-institutional Anti-Tobacco Committee as an entity within the Ministry of Public
Health charged with coordinating tobacco control nationwide.4

Ecuador’s government signed the Protocol to Eliminate Illicit Trade in Tobacco Products
on September 25, 2013, and, in 2015, the National Assembly ratified the Protocol.5 Notably,
only six countries in the Latin America and Caribbean region—Brazil, Costa Rica, Ecuador,
Guatemala, Panama, and Uruguay—have ratified the Protocol. This demonstrates the
importance that the government of Ecuador has attached in recent years to combating the
smoking epidemic, the associated externalities, and the harmful direct and indirect effects.
The key to the progress achieved was the link established between the economic agenda
and the health agenda by means of a key message: tobacco taxes are not only an economic
measure; they are also a comprehensive public policy that is effective in reducing smoking
and preventing young people from taking up tobacco consumption (Pizarro et al. 2018).

Laws and Regulations
An examination of the national legislation on tobacco control, from the macro level down to
specifics, is revealing. Article 361 of the Constitution of Ecuador states that:

The State shall exercise leadership of the system through the national health
authorities, shall be responsible for national health policy making, and shall
set standards for, regulate, and monitor all health-related activities.

The leadership of the health system is assigned to the Ministry of Public Health, and the
Constitution indicates that it is necessary to establish a policy at the national level. Article
364 affirms:

2
Article 15 of the FCTC indicates that it is necessary to eliminate all forms of illicit trade in tobacco products
(smuggling, illicit manufacturing and counterfeiting), and Article 6 recognizes that price and tax measures are
effective and important in various sectors.
3
Published in Official Gazette 497 (July 22, 2011), the law sets out guidelines for tobacco control.
4
The committee was established by Plutarco Naranjo in 1988. It includes representatives of public and private
organizations and civil society actors.
5
Among the most important articles on illicit trade in the Protocol is Article 8, which provides that each party
shall establish a TTS controlled by the government for all tobacco products that are manufactured in or
imported into the national territory.

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Addictions are a public health problem. The State shall be responsible for
developing coordinated programs for information about and the prevention
and control of the use of alcohol, tobacco, and narcotic and psychotropic
substances, as well as providing treatment and rehabilitation to occasional,
habitual, and problematic users.

Thus, the Constitution establishes that tobacco consumption and the consumption of other
narcotic substances are issues of national interest, requiring a comprehensive policy for
prevention and for the treatment of users.

The government’s road map over the past few years was laid out in the National Plan for
Good Living, 2013–2017.6 Objective 3 of the plan focused on improving the quality of life of
the population and, more specifically, in Objective 3.2, on:

Expanding health prevention and promotion services to improve the living con-
ditions and lifestyles of individuals… [including by] [p]reventing and combating
the consumption of tobacco, alcohol, and narcotic and psychotropic sub-
stances with emphasis on pregnant women, girls and boys, and adolescents.

This all demonstrates how the government views public policy as a whole and the topic
of smoking as an issue that requires commitment at the highest level, particularly because
2016 data show that seven of the ten leading causes of death in Ecuador, accounting for
36.9 percent of total deaths, related to tobacco consumption. These included: ischemic
heart disease, 9.65 percent; diabetes mellitus, 7.27 percent; cerebral vascular diseases, 6.35
percent; hypertensive diseases, 5.17 percent; diseases of the urinary system, 2.73 percent;
chronic diseases affecting the lower respiratory tract, 2.69 percent; and malignancies of the
stomach, 2.43 percent (INEC 2016).

The National Development Plan 2017–2021: Toda una Vida (“A Whole Lifetime”) entered into
effect in 2017 (SENPLADES 2017). The plan is a continuation of earlier plans with adjustments
and changes in structure, focus, and objectives. The anti-tobacco efforts are included in Focus
1: Lifelong Rights for All, and, within this focus, in Objective 1: Guarantee a life in dignity with
equal opportunity for all. The policies established to achieve this objective include the follow-
ing: guarantee the right to health care, education, and lifelong comprehensive care that is

6
The plan represented a well-defined political stance and the government's guide for the four years from 2013
to 2017. It comprises a set of objectives that indicate the intention to continue the historical transformation
of Ecuador, as follows: Consolidate the democratic state and the construction of popular power. Promote
equality, cohesion, inclusion, and social and territorial equity within diversity. Improve the quality of life of the
people. Strengthen the capacity and potential of citizens. Construct common meeting places and strengthen
the national identity, diverse identities, plurinationality and interculturalism. Consolidate the transformation of
justice and strengthen overall security, while maintaining strict respect for human rights. Guarantee the rights of
nature and promote territorial and global sustainability. Consolidate a sustainable, caring economic system with
a social focus. Guarantee decent work in all its forms. Promote the transformation of the production matrix.
Ensure the sovereignty and efficiency of strategic sectors for industrial and technological transformation.
Guarantee sovereignty and peace, further strategic insertion in the world, and Latin American integration
(SENPLADES 2013).

326 // Ecuador: Addressing Illicit Tobacco Trade
accessible, of good quality, and of local and cultural relevance (1.6); and confront the socioeco-
nomic phenomenon of drugs and alcohol through comprehensive prevention, control, and
supply reduction strategies (1.14). The plan proposes the following vision for Ecuador in 2030:

Ecuador will make progress in its guarantee of the right to health through the
promotion of healthy lifestyles that focus on the prevention of disease. It pro-
poses that Ecuador reduce sedentarism, improve people’s eating habits, and
increase physical activity among all groups, regardless of age. This will help
reduce stress levels and the number of deaths from cardiovascular diseases,
diabetes, excess weight, obesity, and so on. Emphasis will also be placed on
combating drug, alcohol and tobacco consumption (especially among ado-
lescents and young people). (SENPLADES 2017, 32)

Reducing tobacco consumption is a key in both national development plans. The plans are
spearheaded by the National Secretariat for Planning and Development, but their imple-
mentation is the responsibility of all government agencies according to the relevant areas
of expertise.

Combating Smoking
The government of Ecuador has aligned its efforts to combat smoking with the six most
effective measures stipulated by the WHO MPOWER policies contained in the FCTC: moni-
tor tobacco use and prevention policies; protect people from tobacco smoke; offer help in
quitting tobacco use; warn about the dangers of tobacco; enforce bans on tobacco adver-
tising, promotion, and sponsorship; and raise taxes on tobacco (WHO 2017). These efforts
have been led mainly by the Ministry of Public Health. With the publication of the Organic
Law on Tobacco Regulation and Control, attention was drawn more tightly around the pack-
age of MPOWER strategies, as follows:

Protect: 100 percent no-smoking areas were established in enclosed public spaces. This was
subsequently expanded to enclosed public and private spaces with public access and open
spaces in educational and health care institutions.

Warn: Tobacco packaging was required to bear graphic warnings covering 70 percent of the
package surface. The seventh series of health warnings on tobacco packages was launched
on July 15, 2018. This includes descriptions of real cases of individuals whose health has
been affected by tobacco consumption. Such packaging is required for all tobacco products
sold in Ecuador.

Enforce: Measures included a prohibition on all types of advertising, including the sponsor-
ship of sports, cultural, and arts activities, by the tobacco industry, as well as a prohibition
on any type of advertising, promotion, or sponsorship of tobacco products or the tobacco
industry in any mass media or through interpersonal means of communication. The sale,

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including retail sales, to or by individuals under age 18 was prohibited, and regulations on the
retail sale and use of vending machines for tobacco products were introduced.

Monitor: Ministry of Public Health data are essential in determining smoking prevalence.
Breakdowns by gender and age-group are important in revealing the segments of the
population in which smoking prevalence is greater. In 2012, the prevalence of tobacco
consumption, defined as the number of persons declaring that they have smoked tobacco
at least once in the previous month among those who declared that they had tried tobacco
one or more times in their lives, is 28.4 percent among adolescents ages 10–19 and 31.5
percent among individuals ages 20–59. Among both adolescents and adults, prevalence is
greater among men and the 15–19 and 20–29 age-groups. Among the 10–19 age-group,
48.7 percent of both sexes declared that they had begun to consume tobacco at 16 or older,
compared with 73.5 percent among the population ages 20–59. Among adolescents, 34.1
percent say that it is easy to obtain cigarettes; 38.4 percent say that it is difficult; and 15.8
percent say that it is very difficult. However, 45.5 percent of individuals ages 20–59 who say
they have smoked at some point in their lives no longer smoke currently (ex-smokers); the
share is larger among men than among women (Freire et al. 2014).

Raise Taxes: In line with the most cost-effective tobacco control measures and the WHO
(2010) recommendations, the government has undertaken wide-ranging steps to regulate
and control tobacco products to reduce cigarette consumption, prevent young people
from starting to consume tobacco products, restrict consumption by vulnerable groups,
and encourage cessation of tobacco product use. The strategy has been led by the SRI, with
the support of the Ministry of Public Health. The main method has involved raising taxes,
leading to a rise in cigarette prices and thus to a decrease in demand. The following section
describes the various tax issues in more detail.

Tax Issues
The Excise Tax on Cigarettes
The tax on cigarettes in Ecuador, the special consumption tax (impuesto a los consumos
especiales, ICE), was created in 1989 through the enactment of the Law on the Internal Tax
Regime.7 Its main purpose was to restrict the consumption of luxury goods and products
harmful to health. WHO (2010, 2017) recommends that specific taxes on tobacco should
represent at least 70 percent of the sales price to generate the desired impact on consump-
tion. Other taxes, such as the value-added tax (VAT), are then added to the specific tax to
reach the recommended minimum tax burden of 75 percent. Currently, the tax burden on
the top-selling brand of cigarettes in Ecuador is 66.4 percent.

7
Published in Official Gazette 341 (December 22, 1989).

328 // Ecuador: Addressing Illicit Tobacco Trade
Trends in the tax burden are reflected in the commercial strategy of the only tobacco
producer in Ecuador, which responds to every tobacco tax increase by immediately raising
prices, often by more than the tax increase (Table 1). The firm can do this because it has a
monopoly on the manufacture of cigarettes in the country, accounting for almost the entire
formal cigarette market.

Table 1. Tax Burden on the Top-Selling Cigarette Brand, Ecuador, 2015–18
BREAKDOWN 2015 2016 2017 2018
ICE, per unita
US$0.13 US$0.16 US$0.16 US$0.16
ICE value, pack of 20 US$2.64 US$3.20 US$3.20 US$3.20
VAT, % 12 14 b
12 12
VAT value US$0.32 US$0.45 US$0.38 US$0.38
ICE + VAT US$2.96 US$3.65 US$3.58 US$3.58
Manufacturer’s
US$4.25 US$5.20 US$5.40 US$5.40
suggested retail price
Tax burden, % 69.5 70.2 66.4 66.4

Source: SRI database.
a. The tax rate, VAT share, and manufacturer’s suggested retail price correspond to the values at the close of
the fiscal year, that is, in December.
b. In 2016, the VAT rate was increased from 12 percent to 14 percent for one year to raise funds for the
reconstruction of areas affected by the April 16, 2016 earthquake.

Ecuador has one of the highest average prices per pack of cigarettes in the region. The retail
sale price per pack of the top-selling brand of cigarettes in Ecuador is almost triple that in
Colombia, where, in 2018, a pack of cigarettes cost approximately Col$ 5,000, or US$ 1.74.
This is only 32.2 percent of the price in Ecuador.8 In Peru, the top-selling brand costs approxi-
mately S/. 11.50, equivalent to US$ 3.52, or 65.2 percent of the Ecuadorian price.9

ICE Collections
ICE collections on cigarettes rose steadily from 2000 through 2015 (Figure 1). Starting in 2016,
there was a 12.7 percent decline in collections relative to the previous year, a trend that
was maintained in 2017 with an even larger drop of 20.2 percent. With the launch in May
2017 of Ecuador’s tobacco-product tracking and tracing system (TTS), known as SIMAR, it is
hoped that this decline will be much smaller for 2018, because the TTS also tackles issues of
under-invoicing and makes it easier to differentiate between legal and illegal products (which
allows for greater efficiency in the surveillance process).

8
The official exchange rate in June 2018 was Col$2,777.75 per U.S. dollar.
9
The official exchange rate on June 29, 2018, was S/. 3.27 per U.S. dollar.

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Figure 1. ICE collections on cigarettes, in US$ millions (2011-2017)
$200.00
$175.77 $181.42
$180.00
$155.84 $177.58
$160.00 $149.40 $158.37

$140.00
$118.57 $126.34
$120.00
$98.42 $116.77
$100.00

$80.00 $71.87
$49.53 $75.52 $73.94
$60.00
$43.29
$40.00 $55.18
$46.38
$20.00
$23.96
$-
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017
Source: SRI database.

Thus, the collection of the ICE on cigarettes rose from 2000 through 2015, but has trended
downward since then. This analysis must be supplemented with historical data on the
volume of sales (closely related to production output) to obtain an accurate analysis of the
cigarette market. This analysis is provided below, in the discussion of illicit trade.

Ecuador’s Tax Identification, Marking,
Authentication, and Track-And-Trace System
SIMAR, Ecuador’s TTS, is primarily designed to minimize tax evasion associated with domes-
tic products. The goal is to increase tax collections by identifying and tracking legal products
and to provide citizens and watchdog organizations with the means to detect products of
doubtful origin that can negatively impact the health of Ecuadorians.

The design and implementation of SIMAR for domestically produced cigarettes, beer, and
alcoholic beverages began with the launch of an international public tender on April 7, 2016.
Following a detailed process, SRI awarded the contract for the SIMAR Project to the SICPA
EcuaTrace Consortium. The selection criteria were detailed in the terms of reference for the
tender (bids had to meet certain minimum criteria for consideration: minimum technical
personnel, minimum general and specific experience, minimum experience of the technical
personnel, technical specifications or terms of reference, capital, percentage of the mini-
mum Ecuadorian value added, etc.). After these requirements were met, the factors to be
scored were established: general experience, specific experience, experience of the techni-
cal personnel, other parameters met by the contracting entity (related to additional levels of
security), plus financial indicators and the financial bid (Table 2). These criteria were scored

330 // Ecuador: Addressing Illicit Tobacco Trade
Table 2. Terms of Reference, Bid Scoring, SIMAR, 2016

EVALUATION PARAMETERS IDEAL SCORE

General experience 11

Specific experience 14

Experience of technical personnel 5

Other 5

Financial bid 55

Subtotal 90

Ecuadorian value added 10

Total 100

Source: Terms of reference for the SIMAR tender.

in accordance with the guidelines set out in Ecuadorian public procurement regulations.
It is important to note that only for the item “other” was there freedom for the contracting
authority to establish any criterion that it wishes to evaluate, but the scoring of that parame-
ter was just five points.

After completion of the legal process set out in the public procurement regulations, the
contract for the implementation of the system was signed in July 2016. The bidding process
from the announcement of the specifications through to the awarding of the contract took
two months. The cost of the project, as stipulated in the terms of reference, is US$ 81.5 mil-
lion for the five-year contract or the marking of 6,678,901,820 units, whichever comes first.10
The project is financed through the general government budget.

Owing to various contractual, technical, and political factors, implementation took place
on different dates for different products. SIMAR went into operation in alcoholic beverages,
artisanal beer, and one of the industrial beer producers on February 23, 2017. It was imple-
mented for cigarettes on May 20, 2017. Nonetheless, almost the entire system had been
installed on production lines by February 2017, which made it possible to count all of the
cigarettes manufactured in the production plant even if they had not yet been marked.

In the case of cigarettes, the SRI defined an indirect type of marking, that is, the application
of visible physical security features to the product or the packaging containing the product
on the production line.

Physical Security Features
The elements that comprise the physical security features (PSFs) applicable to this type
of marking were outlined in the terms of reference of the bidding process. The terms of

10
This is an estimate based on the actual units marked in 2017 and projections for 2018–22.

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reference made it clear that, in addition to the required coding that would facilitate the
tracing of the product, there should be at least two components for each of the PSF cate-
gories, as follows:

»» Overt, visible security features: security features that can be verified with the naked eye,
such as change of color, change of ink, holograms, latent images, watermarks, and secu-
rity threads

»» Semi-covert security features: security features that can be verified using a simple tool,
such as ultraviolet filters, polarized filters, or magnifiers

»» Covert, invisible security features: security features that require the use of specialized
robust electronic devices for the verification of authenticity

»» Forensic security features: security features that include forensic markers that can only be
identified through a laboratory analysis and that are capable of providing irrefutable proof
that may be presented as evidence in a court of law

PSFs also have to include tamper-evident features to prevent the manipulation, transfer,
or reuse of security devices. Moreover, PSFs are required to meet general security criteria,
as follows:

»» Security based on type of material used: integrate robust high-security features to prevent
copying and safeguard against the reuse of the features on illicit products or their repro-
duction through commercially available means

»» Information-based security: security based on algorithms with unique encryption keys
for Ecuador

»» Compatibility with high-speed devices, without affecting the speed and volume of pro-
duction, within a margin of error of 2 percent

»» Readability by equipment designed for use in the field by SRI users and other inspection and
control entities, as well as through a mobile application, enabling oversight by the public11

PSFs are stacked in bundles of 500 units and are delivered on the basis of minimum orders of
124,000 units (SRI 2017). They are affixed automatically by marking equipment installed as part
of the SIMAR solution on all production lines of the country’s cigarette manufacturer. They are
placed on the product by a labeling arm during the final stage of the production process, at
a point when the cigarettes packs are not subject to any other processing. This means new
products may enter the production line once the paper filters have been attached.

Each taxpayer, the cigarette manufacturer in this case, is obliged to submit an application
by e-mail to the account designated by SRI to request the quantity of PSFs needed for
manufacturing. The request should take account of historical production amounts and
comply with the format and instructions indicated on the website and outlined in Resolution

See the terms of reference for the SIMAR recruitment process on the SIMAR website, at http://www.sri.gob.
11

ec/web/guest/simar.

332 // Ecuador: Addressing Illicit Tobacco Trade
NAC-DGERCGC16-00000455, published in the Supplement to Official Gazette 878 of
November 10, 2016. In cigarette production lines, PSFs are applied in an L shape on the right
side of each pack (SRI 2017).

Some of the physical and security characteristics of PSFs placed on cigarette packs are
as follows:

»» The rectangular PSF measures 44 x 20 millimeters.

»» The PSF is printed on dry paper with a weight of 80 grams per square meter.

»» Green security ink on the edge of the PSF shows a high sheen under sunlight and shifts to
blue if the PSF is viewed from another angle.

»» The data matrix is visible.

»» The Quick Response Code, a barcode, can be scanned using the SRI SIMAR application.12

»» A printed alphanumeric code can be scanned and verified using the SRI SIMAR application.

»» The SRI logo shifts between pink and red if it is viewed from different angles.

»» Modulation lines have been added.

»» “Republic of Ecuador, Internal Revenue Service, and SRI SIMAR” is printed in micro-text on
the pack (SRI 2017).

PSFs also possess other security features that cannot be revealed. This precaution is neces-
sary to ensure that security solutions are robust and to prevent counterfeiting.

Characteristics of the SIMAR Solution
The SIMAR solution comprises a number of technological components that provide marking
and online data storage across various stages, starting with the production plants owned by
taxpayers and their interface with registry services and extending to web-based authoriza-
tions and the verification of information generated throughout the cycle. The technological
platform is based on the installation of information technology equipment in each produc-
tion plant. Central storage facilities are supplied by the provider. The service relies on various
technical channels to process the information, which is the property of SRI, and to ensure
adequate control over taxpayers. The technological solution provides a service that allows
for adequate control over the technological components, such as web systems, links (SRI–
taxpayers–providers), SRI integration, databases, and data visualization.

The SIMAR solution includes two important components of a business intelligence platform
(inteligencia empresarial), which contains data facilitating decision making. One is a system

12
The Quick Response Code holds information about the taxable entity, the reference number on the Single
Taxpayer Registry (Registro Único de Contribuyente), the location of the production facility (province, city,
canton, address), the date of production, the production line, the time of production, the lot number, the
product type, and the ICE code of the product (brand, presentation, packaging, and so on) as stipulated in the
terms of reference and control requirements of the tax administration.

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for use by cigarette manufacturers and producers of alcohol and beer that facilitates the
interface between the tax administration and the provider. The other supports the tax admin-
istration’s own business intelligence system to allow it to consolidate and group information
on the basis of the parameters that the control units might require. The major benefit of
such a tool is the flexibility it provides for the preparation of new or the updating of exist-
ing reports in response to the changing requirements of the SRI. Furthermore, by avoiding
the need to depend completely on the provider, it facilitates more rapid cross-referencing
and report preparation. The reports are prepared by trained tax administration officials in
accordance with internal requirements and requests. Once they are ready, the provider is
requested to roll them out to make them available to all tax administration stakeholders. The
provider is expected, at all times, to offer support and advice and to prepare and produce
the reports in accordance with the terms and conditions of the contract.

Illicit Trade
Preliminary Considerations
The illicit trade in cigarettes is an international phenomenon. However, the countries
of the Americas, including Ecuador, have had difficulties implementing the methodolo-
gies that WHO, the Pan American Health Organization, the Inter-American Center of Tax
Administrations, and the World Bank recommend for measuring the real scale of the prob-
lem.13 The difficulty extends to characterizing the types of illegal markets and understanding
how such markets have developed. Some of the challenges are the absence of time series
data, inconsistencies in the data, and the lack of ready comparability of the data because of
changes in the methodologies used for collection and analysis.

However, in 2014, SRI, applying a method commonly known as gap analysis, undertook
the development of an internal system to measure the scope of the illegal trade in ciga-
rettes and other harmful products, such as alcoholic beverages (Jorratt 2012). The system
draws on data from the National Health and Nutrition Survey, which discusses risk factors,
including risks associated with alcohol and tobacco consumption (Freire et al. 2014). SRI
created estimates of total consumption based on information organized by age-group and
prevalence. These consumption data were compared with data in the SRI database on the
collection of the ICE to determine whether there were any significant discrepancies or
variations that would indicate a high incidence of illicit trade. This method of measurement
makes government verification of the consistency of the various data easy, given that the tax
data are linked to a specific ICE per cigarette. The SRI estimates have served as inputs for the
implementation of the TTS in Ecuador. However, because it contains sensitive information
on taxpayers, the study is intended for the sole use of the tax administration.

13
See Ross’s (2015) summary of these methods.

334 // Ecuador: Addressing Illicit Tobacco Trade
If one were to analyze data from the ICE declarations of the only legal, formal producer
of cigarettes in Ecuador, one would be struck by the fact that sales volumes fell drastically
between 2014 and 2016. At the same time, because of frequent tax rate increases, tax col-
lections had been on a rising trend up to 2015. The collections did not decline until 2016,
when there was a drop of 12.7 percent relative to 2015. This was followed by a reduction
in real tax collections of 20.2 percent in 2017 relative to 2016. However, a comparison of
collection rates that have been converted into volumes reveals that, between 2014 and
2017, there was a large drop in cigarette production. A cursory analysis might lead one to
conclude that the ICE and the public policies being applied in the fight against the tobacco
epidemic were having the desired effect.

According to WHO, a good public policy consisting of a 10 percent rise in the tax on a pack
of cigarettes in middle-income countries should lead to a 4 percent–8 percent decline in
consumption as the economics of the tax tends to make the population more sensitive
to price (Jha and Chaloupka 2000). Taking as a reference the 2016 price elasticity study

Table 3. Net Cigarette Sales Volumes, 2012–18
number of cigarettes

MONTH 2012 2013 2014 2015 2016 2017 2018

01 183,715,701a 204.050,000 141,737,600 53,990,000 78,901,400 55,789,800 61,683,500

02 183,715,701 a
169.820,000 163,600,000 130,279,000 83,348,500 56,410,000 55,444,500

03 190,501,785.25 173.940,000 142,150,000 131,219,000 106,803,200 65,713,000 64,760,000

04 168,460,000 179.930,000 181,500,000 127,070,000 145,179,500 71,416,000 62,564,100

05 187,580,000 161.590,000 152,034,880 136,954,500 47,179,900 59,378,700 58,293,400

06 194,670,000 178.650,000 160,060,700 124,632,600 76,652,900 67,710,000

07 189,433,985.19 164.993,070 162,976,000 125,651,700 71,716,700 59,552,400

08 190,707,550 180.857,860 163,164,400 126,530,000 67,170,000 69,517,000

09 174,550,000 159.870,000 227,507,700 125,201,900 66,300,000 67,704,020

10 202,930,000 192.330,000 126,994,200 127,045,500 76,900,000 66,901,000

11 185,100,000 193.533,420 172,853,500 100,520,000 71,596,300 55,971,000

12 153,223,690 203.078,530 241,175,300 182,330,000 93,536,100 59,710,000

Subtotal 2,204,588,412.53 2,162,642,880 2,035,754,280 1,491,424,200 985,284,500 755,772,920 302,745,500

Variation −1.90% −5.87% −26.74% −33.94% −23.29% −1.93%b

Source: TSource: SRI database on the basis of taxpayer declarations on cigarettes on which the ICE has
been levied.
a. No tax collection data exist for January and February 2012. The figures for these two months were
extrapolated from the average of the 10 remaining months of 2012.
b. The variations between 2017 and 2018 were only considered for the first five months of the year (that is,
January to May), which is the cutoff point of the available data.

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on Ecuador, whereby price elasticity was calculated at a value of 0.87, a 10 percent price
increase could lead to an 8.7 percent decline in consumption (Chávez 2016).

In light of these considerations, the data are significant and may be indicative of an illicit
cigarette market affecting Ecuador (Table 3). The situation is exacerbated by the negative
externalities associated with neighboring countries with much lower cigarette prices.

On the basis of tax collection data from 2012 onwards and the same calculation method
for the ICE on cigarettes at a specific rate, it is possible to arrive at the volume of cigarette
production in Ecuador. It emerges that, since 2012, sales have fallen each year, which, to
a certain extent, reflects the volume of production. Sales fell by 1.9 percent between 2012
and 2013 and by 5.9 percent between 2013 and 2014. In both cases, the reduction in sales
can be explained by the price elasticity in those years. In 2014–15, the specific ICE rate rose
by 41.6 percent, and sales fell by 26.7 percent. The specific ICE rate was raised again, by 14.8
percent, in 2015–16 to reach US$0.16 per unit, the current rate. This rate rise resulted in a
33.9 percent drop in the volume of cigarette sales. The specific ICE tariff of US$ 0.16 was
maintained from 2016 to 2017, and sales plummeted once again, by 23.3 percent.

It is not likely that the reduction in sales between 2015 and 2017 was caused solely by the
effectiveness of public health policies. Such an outcome would also have to be attributed
in part to the growth of the illegal market. The government should carry out its own study
of the illicit cigarette trade to discover the cause of the drop. Another key factor to consider
in discussing the illicit trade is the volume of seizures and confiscations. This, too, must be
approached with caution and should be used only as a point of reference, because a greater
number of seizures tends to reflect greater government attention to the illicit trade as well as
improved inspection and control, particularly through the application of new technologies.
The National Customs Service of Ecuador (SENAE) has recorded a high volume of seizures
since 2017, following the adoption of the anti-smuggling plan as a tool to strengthen policies
to address the illicit market (SENAE 2017). Spearheaded by SENAE, the plan brings together
the efforts and resources of 20 institutions, including SRI, the Ministry of Agriculture and
Livestock, the State General Prosecutor, and the Ministry of the Interior. Among the achieve-
ments under the plan is the confiscation of over US$ 36 million in contraband merchandise
between May and December 2017, including a large number of cigarettes. As a result of
these actions, almost 3,600 jobs have been protected in Ecuador (SENAE 2017).

Many countries have focused on conducting their own analyses of the illicit trade and have
sought to do so without interference from the tobacco industry. Colombia, for example,
conducted two surveys of smokers (in 2016 and 2017) to estimate both consumption
patterns and the scale of illicit trade.14 Similarly, Euromonitor provides data on the illegal
cigarette market, but, because of the methodology and other issues, sole reliance on this
data source can be problematic. This underscores the need for governments, academic

14
The studies were conducted by Anaas (a Colombian civil society organization).

336 // Ecuador: Addressing Illicit Tobacco Trade
institutions, and civil society organizations to pursue the preparation of their own studies that
are not linked in any way to the industry.

Furthermore, considering that a TTS is already in place in Ecuador to provide reliable data
on the production and sale of cigarettes from the only tobacco production company in
the country, new studies should be implemented to facilitate data comparison with other
time periods and to clarify trends. While the illicit trade is difficult to measure because of the
nature of the problem, robust methodological approaches have already been developed.
This is why every effort must be made to prepare the most rigorous and realistic study possi-
ble, with the understanding that, while it may over- or underestimate the extent of the trade,
the estimates may be verified after the TTS has enhanced the transparency of the cigarette
market and segments of the illegal market have been formalized and regulated.

The data that the SIMAR system can generate will give the SRI ongoing access to real online
data on the production of the formal industry and will, in time, allow for estimates of market
behavior and sales forecasts. Nonetheless, a study on illicit trade can only be prepared if
there are other studies or data on consumption patterns, the preparation of which falls
outside the scope of the tax administration. While the SRI conducted a study in 2014 on the
basis of existing data, they have not been able, because of the lack of regular surveys on
consumption or of time series data, to prepare a new study to confirm the robustness of the
first or to analyze trends and behavior patterns. The failure to prepare a new study has also
been caused by the fact that the surveys on consumption were conducted using different
approaches, assumptions, and methodologies, making comparisons difficult. Furthermore,
the data of the national statistical entity for this type of product have usually involved
substantial underestimates, owing to the fact that they were gathered on the basis of house-
hold surveys that make it notoriously difficult for respondents to reveal the real quantity of
cigarettes they consume. It is therefore essential for the government to collect consistent
cigarette consumption statistics on an ongoing basis to improve our understanding of the
illicit trade and the overall pattern of consumption, which is essential for monitoring the
effectiveness of tobacco control.

Data on Cigarette Seizures by Inspection and
Control Agencies
According to SENAE data, approximately 2,053,418 cigarettes were confiscated in 2013
and 4,458,950 in 2014. In 2015, 16,839,285 units were seized, and 17,024,324 units in 2016.
These data point to the efficiency of the SENAE inspection process and to the existence of
an extensive illicit trade that needs to be quantified. Aside from these two issues and over
and above questions about the accuracy of the data on seizures, it is evident that the number
of cigarettes confiscated after 2015 increased by over 200 percent (SENAE 2017). The bulk
of the goods seized were from China (brands such as Elephant and Modern), Colombia, and
India, or brands such as Lucky Strike.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Against this background, SRI began, in 2014, to step up efforts to identify a mechanism
or strategy to control the illicit trade. A tax monitoring and tracking system was identified
as offering a number of potential benefits. On September 2, 2014, the SIMAR Project was
adopted in recognition of the need to strengthen and improve oversight of ICE by more
carefully monitoring products prone to tax evasion, such as spirits and cigarettes.

SIMAR regulations provide for the confiscation of goods subject to the ICE (beer, cigarettes,
and alcoholic beverages) that do not have the required PSFs.15 SRI started to undertake
field inspections and apply confiscation measures after the corresponding regulations were
published, which meant that, for a time, products manufactured before the enactment of
SIMAR and which did not carry PSFs actually coexisted on the market with SIMAR-compliant
products. Between October and December 2017, 55,370 cigarettes were seized through
79 operations carried out in Ambato, Cuenca, Guayaquil, Ibarra, Loja, Machala, Manta,
Portoviejo, Quero, Quito, Santo Domingo, and Tisaleo. Between February and April 2018,
4,310 packs were seized in 49 operations carried out in various cities.

Between 2017 and 2018, SENAE carried out a series of large-scale operations that resulted
in the seizure of sizable quantities of cigarettes that were being imported into the country as
contraband through criminal schemes such as the cambiazo (switching scam).16 Cigarettes
were identified, together with textiles, fruits, and other foodstuffs, among the products most
likely to be trafficked as contraband. According to official SENAE data, the most extensive
operations aimed at confiscating cigarettes included the seizure of 1.5 million cigarettes in
January 2018 and the raid in the week of December 5–11, 2017, of a clandestine warehouse
in the city of Ibarra that had 945,500 units of various brands in storage that were valued at
US$ 235,643. In March 2018, SENAE seized 3 million cigarettes contained in a shipment from
Florida. In November 2017, SENAE, through the Unidad de Vigilancia Aduanera (Customs
Monitoring Unit), incinerated 10 million cigarettes that would have represented a govern-
ment revenue loss of more than US$ 6 million. However, seizures usually represent a small
share of total sales. In particular, the largest seizures of 2017 are less than 0.5 percent of the
total sales registered that year (756 million; see Table 10.5).

15
Article 28 of SRI Resolution NAC-DGERCGC16-00000455, published in the Supplement to Official Gazette
878 on November 10, 2016, states expressly as follows:
With effect from February 23, 2017, goods subject to SIMAR control that exit manufacturing premises without
the required physical security features will be subject to seizure, and auctioned, destroyed, or donated in
accordance with the law. . . . Similarly, with effect from July 11, 2017, products subject to SIMAR control that are
on the market without the required physical security features (PSF) will be subject to seizure, and auctioned,
destroyed, or donated in accordance with the law. Products subject to SIMAR control that have the required
PSF, but are not backed by sales receipts or import documents will be confiscated provisionally, in accordance
with the legal provisions in force.
16
The scheme involves the reentry of containers to the customs control area with items other than those
initially declared.

338 // Ecuador: Addressing Illicit Tobacco Trade
Recommendations
The government has made great progress in a number of the MPOWER measures recom-
mended by WHO and the Pan American Health Organization. Furthermore, the government
has worked hard to achieve 100 percent smoke-free areas, and these are growing in number
and scope. It has adopted a coordinated approach to reducing prevalence and to multiply-
ing and improving the provision of health care and supporting people wishing to quit using
tobacco. It has carried out three tax reforms in under eight years, increasing the ICE on
cigarettes. The challenge now is to establish generic packs and adopt other measures, such
as prohibiting the sale of packs of fewer than 20 cigarettes. These actions will be addressed
through the adoption of a new tobacco control law in Ecuador.

To prepare a complete illicit tobacco trade study, the availability of comprehensive data must
be assured. Ideally, the data would be in time series to facilitate a comparative analysis. Time
series data are not normally available to governments or do not usually cover all years, and,
even in cases in which time series data are available across at least two years, the data often
originate from different sources and have been obtained based on different methodologies,
thus making comparisons impossible. It is vital for governments to have their own data, limit
the use of industry data, and possess protocols based on good methodological practices in
data production. In Ecuador, the challenge is to have ongoing access to cigarette consump-
tion statistics to facilitate the preparation of studies on the illicit trade and ensure a greater
understanding of the issue. Such data are also essential to monitoring the effectiveness of
tobacco taxation in the country.

While it will always be important to have access to information on the confiscation of illicitly
traded goods, such as contraband, illicit whites, or other illicit products, this information
should be managed with great care and be treated only as supplementary data to be used
on a case-by-case basis. Alternatively, statistics in this area can be used to determine specific
aspects of the type of illicit trade affecting a country or region. But such data should not
be used as a direct indicator of illegal market growth because increases in the number of
seizures are more indicative of the efficiency of governments and of the new initiatives that
these adopt in the fight against this global scourge.

Since 2017, SRI has been implementing SIMAR for domestically produced cigarettes and
other products, such as spirits and beers. This project will, in the short run, be extremely
useful in providing the tax administration with real, first-hand data on the production of the
national tobacco industry, without the need for the taxable entity to make any declarations
whatsoever. At the same time, once information for some time periods has been collected,
it will then be possible to make projections of market behavior and trends that will be instru-
mental in generating a better understanding of the situation. Once the Protocol to Eliminate
Illicit Trade in Tobacco Products enters into force, the government can begin implementing
the SIMAR for other tobacco products, and, once guidelines are established for an interna-
tional center for information exchange, an institution described in the Protocol, then the

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

next step will be to begin sharing the data efficiently on an ongoing basis. SIMAR will be the
first TTS in line with the provisions of the Protocol. As early as September 2018, it will be
adopted as a binding legal instrument.

The government has also been collaborating with other countries, particularly within the
Americas. It has signed international cooperation agreements, such as with the Dominican
Republic, and is active in forums organized by WHO and nongovernmental organizations,
such as the RENATA National Anti-Tobacco Network of Costa Rica. These organizations
have also provided a platform for the government to share its successful experiences in the
implementation of the SIMAR TTS and in resolving concerns about the process, addressing
industry interference issues, and providing support for other countries to begin work on simi-
lar projects to combat the illicit trade and promote tobacco control. The challenge will be to
continue its pioneering work and offer support to other countries in the operation of TTSs.

While the fight against the tobacco epidemic is, to a certain extent, the responsibility of the
Ministry of Public Health, it is also everyone’s responsibility. Thus, other public entities and
civil society representatives must play a collaborative and supportive role. If countries are to
meet the health goals recommended by WHO and the Pan American Health Organization
and successfully reduce illicit trade, lower access and the prevalence of tobacco use, and
meet the tobacco challenge head on, then they must approach the issue and work together
on various fronts. This highlights the importance of a collaborative effort between health
care agencies, budget ministries, tax administrations, and customs authorities. The potential
for results is demonstrated in the tremendous progress that Ecuador has achieved over the
past few years.

Ecuador’s tax burden on cigarettes is one of the heaviest in the region. This achievement,
together with the importance assigned by the government to eliminating illicit trade, and
the fact that the government has ratified the Protocol and implemented the SIMAR TTS and
the anti-smuggling plan, shows the great strides that have been made. Moreover, while the
recent decline in legal cigarette sales has been associated with a fall in tobacco tax revenues,
a key conclusion of this study is that the current tobacco tax level in Ecuador is sustainable.
The government appears to be adopting the appropriate response to the revenue reduction,
which is strengthening tax administration.

However, these efforts will not be sufficient without international cooperation and support.
The problem of the illicit trade is not confined to Ecuador, nor even to the region of the
Americas. It is a global problem that must be tackled through global strategies and interna-
tional cooperation. Because it is committed to the fight against the tobacco epidemic, the
Government of Ecuador will continue its collaborative efforts to increase the effectiveness of
each type of action and to support the continuing development of harmonized and coordi-
nated public policies as it pursues the objective of reducing tobacco access, prevalence, and
illicit trade.

340 // Ecuador: Addressing Illicit Tobacco Trade
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Arias, Diana, Edwin Buenaño, Nicolás Oliva, and José Ramírez. 2008. “Historia del Sistema Tributario
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Bardach, Ariel, Andrea Alcaraz, Joaquín Caporale, Belén Rodríguez, Alfredo Palacios, Tatiana Villacres,
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342 // Ecuador: Addressing Illicit Tobacco Trade
343
MEXICO
12

MEXICO:

Controlling the Illicit
Cigarette Trade
Belén Sáenz de Miera Juárez1

Chapter Summary
In the last decade, Mexico has made important progress in tobacco control. Graphic
warnings were included on cigarette packs, advertising was restricted, and 100-percent
smoke-free environments were implemented in 11 of the country’s 32 states. At the same
time, tobacco taxation and tobacco tax administration were strengthened, with the homolo-
gation of ad valorem excise taxes for all non-handmade tobacco products, and a specific
excise was added to reduce price differentials across tobacco products. Mexico’s General
Law for Tobacco Control, approved in 2008, incorporated two key measures designed to
curb illicit tobacco trade: (1) the obligation for firms to obtain health licenses to produce or
import tobacco products, and (2) the requirement that firms secure a specific permit for each
import process involving tobacco products.

Mexico’s customs controls have recently been enhanced. In particular, since late 2017, a
fiscal mark for tobacco products is required. This mark consists of an alphanumeric code
that is accompanied by a two-dimensional code that can be read with mobile devices.
Officials can now immediately verify cigarettes’ place and date of production and pull up

1
Universidad Autónoma de Baja California Sur, Mexico.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

detailed information about the producer or importer. The system is expected to improve
tax compliance and could help identify potential diversion of national production into the
illicit market.

Unfortunately, a lack of transparency has characterized Mexico’s implementation of fiscal
marks. This is exemplified by the absence of a public bidding process for the development
of the technologies used to generate the codes. This casts doubt on the measure’s integrity
and ultimate effectiveness. In addition to clarifying this process and evaluating the effects on
tax compliance of the information that is being generated with the codes, the Mexican tax
authority will have to consider possible improvements in the physical characteristics of the
fiscal marks (e.g., adding covert elements to make them more secure).

Although Mexico has relatively low levels of tobacco smuggling (below 3 percent, accord-
ing to a recent national survey), regional cooperation must be strengthened to rein in illicit
tobacco. Available evidence indicates that most of the current supply of illicit cigarettes in
Mexico consists of products that are introduced into the country illegally, rather than domes-
tically produced.

Finally, Mexico requires much more vigorous action on tobacco taxation. The lack of excise
tax hikes during the last seven years has been accompanied by an increase in cigarette
affordability and a reduction in the tax incidence, which was already below the level recom-
mended by the World Health Organization.

1. Context
1.1 Tobacco Control in Mexico
In May 2004, Mexico became the first country in the Americas to ratify the World Health
Organization Framework Convention on Tobacco Control (WHO FCTC). However, Mexico’s
General Law for Tobacco Control (LGCT), which includes most of the regulations designed
to curb the country’s tobacco epidemic, did not enter into force until August 2008. The
LGCT and its regulations impose measures such as: smoke-free indoor environments with
special smoking areas; restrictions on tobacco advertising;2 a complete ban on tobac-
co-product sponsorships and promotional items; and requirements for product packaging
and labeling. The LGCT also requires firms to obtain health licenses to manufacture or
import tobacco products, along with a permit for each import process.

Mexico has made substantial strides in tobacco control at the local level. Although the LGCT
does not fully protect non-smokers, 11 Mexican states have laws in place providing smoke-
free environments. Such legislation currently protects 45 percent of the country’s population.

2
Advertisements for tobacco products may only be directed at persons of legal age and placed in magazines
for adults, personal mail, or within adult-only facilities (Article 23 of the LGCT).

346 // Mexico: Controlling the Illicit Cigarette Trade
The first of these laws was Mexico City’s 2009 Non-Smokers’ Health Protection Law (Ley de
Protección a la Salud de los No Fumadores en el Distrito Federal). The Mexico City measure
was followed by similar laws in the states of Tabasco, Morelos, Veracruz, Zacatecas, Estado
de México, Baja California, Baja California Sur, Oaxaca, Nuevo León, and Sinaloa.

Mexico’s national tobacco excise tax, called the Special Tax on Production and Services
(IEPS), increased steadily between 2000 and 2011. Originally, the IEPS was an ad valorem
excise tax that varied across tobacco products, for example imposing lower rates on unfil-
tered cigarettes. However, a uniform tax was adopted in 2005 for all types of cigarettes. In
2007, the uniform tax was extended to virtually all tobacco products. (The uniform rate does
not cover cigars and other tobacco products that are entirely handmade, but these account
for less than 0.5 percent of tobacco sales in Mexico [Waters et al. 2010].) In 2010, the excise
tax structure was also revised to include a specific component (Sáenz de Miera Juárez 2013).
Effective from that year, a mixed tax that comprises the ad valorem excise and a specific
excise denominated in pesos for each unit of product is in force (see Section 2.1.). At first,
the specific component was set at 4 cents per cigarette but was increased to 35 cents in
2011. The reduction in price differentials across brands, aimed to limit consumers’ options
for switching to cheaper cigarettes, is one of the key advantages of this change, particularly
given the sharp increase in the specific excise tax in 2011 (Sáenz de Miera Juárez et al. 2014).

Figure 1. Cigarette Affordability in Mexico, 2010-2017

4,000
Per capita income / average cigarette price
(current Mexican pesos)

Notes: Per capita Gross
Domestic Product (GDP) is
3,900
used to measure per capita
3,800 income. Cigarette price
affordability is calculated as
3,700 the ratio between per capita
GDP and the average price
3,600 per cigarette pack of the
most-sold brand.
3,500 Sources: International
Tobacco Control Survey
3,400
(average price per pack
3,300 for 2010), INEGI (GDP and
average price per pack
3,200 for 2011-2017), CONAPO
(population).
3,100

3,000

2,900
2010 2011 2012 2013 2014 2015 2016 2017

Taking account of increases in per capita income and inflation as well as cigarette prices
(Blecher 2010), the affordability of cigarettes in Mexico increased by 8.5 percent from 2011
to 2017, as shown in Figure 1 (all prices are in current pesos). Cigarettes clearly became less

347
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

affordable as a result of the most recent tax hike, implemented in 2011. However, per capita
income has once again grown faster than cigarette prices in recent years.

While considerable efforts have been made over the past decade to improve Mexico’s
tobacco control strategy, significant gaps remain. Partial protection provided to non-smokers
under the LGCT and the lack of adjustments to the special taxes over the past seven years
perhaps best illustrate the stagnation in policies aimed at mitigating the harmful effects of
tobacco on health and the economy. This, in turn, is reflected in the performance of key
epidemiological indicators.

Although the average number of cigarettes consumed by daily smokers, who account for
roughly half of current smokers, fell from 9.4 cigarettes per day in 2009 to 7.7 in 2015, no
changes in smoking prevalence were observed (PAHO and INSP 2017). Both the Global Adult
Tobacco Survey (GATS) and the National Addictions Survey (ENA, recently renamed National
Survey on Drug, Alcohol, and Tobacco Consumption or ENCODAT) indicate that, between
2009 and 2016, there were no changes in overall smoking prevalence or in prevalence by
gender or age group (Table 1). This was the case as regards smoking prevalence both among
daily and occasional smokers (INPRF et al. 2017; PAHO and INSP 2017). Currently, smoking
prevalence among women is about one-third the prevalence among men (approximately 8
percent vs. 25 percent, respectively).

Contrary to the experience in other countries (World Bank 2017), the rise in tobacco afford-
ability from 2011-2017 did not increase prevalence, a tribute to the effectiveness of the other
tobacco control steps the federal and local governments were taking. This speaks, however,
to the reduction in prevalence that could have occurred, and the significant future death and
disease that could have been prevented, if tobacco excise taxes had been raised significantly,
at least enough to keep cigarette affordability from increasing.

1.2 Institutions Tasked with Designing and Monitoring
the National Tobacco Control Strategy
The Comisión Nacional contra las Adicciones (National Commission Against Addictions,
CONADIC) is responsible for devising and spearheading the national policy on the preven-
tion and treatment of addictions. As a decentralized administrative body of the Ministry of
Health, this Commission enjoys technical, operational, and administrative autonomy. Its
mandate includes: (a) proposing programs for the prevention, treatment, and control of
addictions to the Secretary of Health, and spearheading and coordinating their implementa-
tion once approved; (b) proposing crosscutting programs and strategies for actions to other
agencies of the Federal Public Administration; (c) serving as a liaison with the bodies that
may be established by states to deal with addiction prevention and control; and (d) propos-
ing to the relevant bodies preliminary draft reforms of legal provisions on the production,
marketing, and consumption of alcoholic beverages, tobacco, and other psychoactive sub-
stances. Established at the same time as the LGCT, the Oficina Nacional para el Control del

348 // Mexico: Controlling the Illicit Cigarette Trade
Table 1. Smoking Prevalence in Mexico Based on Selected Demographic
Characteristics, 2009-2016

GATS (15 YEARS OLD AND ABOVE) ENA/ENCODAT (12-65 YEARS)
2009 2015 2011 2016
% CI (95%) % CI (95%) % CI (95%) % CI (95%)
Total

Current smokers 16 (14.8, 17.1) 16.4 (15.4, 17.3) 17.0 (16.1, 18.0) 17.6 (16.9, 18.3)

Daily smokers 7.6 (6.8, 8.3) 7.6 (6.9, 8.3) 7.0 (6.4, 7.6) 6.4 (6.0, 6.9)

Occasional smokers 8.4 (7.6, 9.2) 8.8 (8.1, 9.5) 10.0 (9.3, 10.7) 11.1 (10.6, 11.7)

Gender

Men 25 (23.2, 26.6) 25.2 (23.6, 26.9) 25.2 (23.5, 26.9) 27.1 (26.0, 28.2)

Women 7.8 (6.7, 9.1) 8.2 (7.3, 9.3) 9.3 (8.4, 10.2) 8.7 (8.1, 9.3)

Age*

15-24 years 17 (14.8, 19.0) 17.4 (15.5, 19.5) 22.0 (19.2, 24.7) 23.0 (21.6, 25.1)

25-44 years 17.0 (15.6, 18.4) 18.7 (17.2, 20.4) 20.0 (18.2, 21.0) 21.0 (19.6, 21.8)

45-64 years 16 (13.8, 17.7) 14.6 (12.8, 16.5) 17.0 (14.6, 18.5) 17.0 (15.9, 18.3)

65 years and above 8.0 (6.4, 9.9) 8.2 (6.5, 10.2)

Notes: GATS = Global Adult Tobacco Survey, ENA = National Addictions Survey, ENCODAT = National Survey
on Drug, Alcohol, and Tobacco Consumption. The ENA was recently renamed ENCODAT, but maintains the
same goal and objectives. The definition of a current smoker is the same for both the GATS and the ENA and
refers to persons who have smoked in the past 30 days. *Age groups for ENA/ENCODAT differ slightly from
those for the GATS. Specifically, in the case of ENA/ENCODAT, the first age group ranges from 18 to 24 years,
while the last age group ranges from 45 to 65 years.
Source: PAHO/INSP (2017), INPRF et al. (2017).

Tabaco (National Tobacco Control Office, ONCT) is currently located within CONADIC and
is focused on FCTC implementation in Mexico.

Established in 2001, the Comisión Federal para la Protección contra Riesgos Sanitarios
(Federal Commission for Protection Against Health Risks, COFEPRIS), another decentralized
body of the Ministry of Health, is responsible for monitoring compliance with the LGCT and
enforcing administrative sanctions for violations.

The Subsecretaría de Ingresos (Office of the Undersecretary for Revenue) in the Ministry
of Finance and Public Credit (SHCP)—through the Unidad de Política de Ingresos (Revenue
Policy Unit) and the Unidad de Legislación Tributaria (Tax Legislation Unit)—is tasked with
designing tobacco taxes, while the Sistema de Administración Tributaria (Tax Administration
Service, SAT), a branch of the SHCP, has responsibility for their administration. Broadly speak-
ing, the SAT is responsible for applying tax and customs legislation, ensuring that taxpayers
comply with tax and customs provisions, and generating the information needed to devise
and evaluate tax policy.

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Lastly, if the application of the LGCT, the tax laws, or the customs law reveals the possible
commission of smuggling or counterfeiting offenses, the Office of the Attorney General
(PGR) is charged with instituting criminal proceedings (upon filing of a criminal complaint
by the aggrieved party)3 and, where appropriate, applying the relevant punitive measures. To
address criminal complaints pertaining to counterfeiting, the Mexican Institute of Industrial
Property (Instituto Mexicano de la Propiedad Industrial, IMPI) is charged with preparing the
technical statement needed to bring criminal justice action.

1.3 Political Situation
Mexico has recently been engaged in a large-scale electoral process in which over 3,400 local
and federal offices were contested. On July 1, 2018, Andres Manuel Lopez Obrador, often
described as an anti-establishment figure, was elected President for the 2018-2024 term. At the
same time, a completely new Federal Congress was ushered in (including 500 federal house
members, 300 elected by direct vote and 200 by proportional representation, along with 128
senators). State-level elections were held in 30 of the country’s 32 states, including Mexico
City. Governorships and other offices were contested in nine states, while other jurisdictions
elected mayors and/or local lawmakers. After a 100-year ban on the reelection of lawmakers,
senators can now be reelected for up to two consecutive terms while members in the lower
house can serve up to four consecutive terms, paving the way for newly elected lawmakers
to potentially remain in office until 2030. While these developments will make it possible for
organized civil society and citizens in general to demand that their representatives ensure con-
tinuity and progression in tobacco control policies, it is also expected that the industry will
scale up its efforts to influence decision making (see Section 1.4).

The sharp rise in violence and high levels of corruption—the primary concerns of the
Mexican people4—have naturally dominated the political agenda. In 2016, the Instituto
Nacional de Estadística y Geografía (National Institute of Statistics and Geography, INEGI)
recorded 23,953 homicides, or 20 homicides per 100,000 inhabitants, more than double
the figures recorded ten years earlier (8,867 homicides or eight homicides per 100,000
inhabitants in 2007). These increases were observed in 30 of the 32 states. The homi-
cide rate quintupled between 2007 and 2016 in states such as Baja California Sur and
Guanajuato, and increased tenfold in such states as Colima (INEGI 2017).5 Corruption has

3
In order to institute legal proceedings in cases involving smuggling offenses, the SHCP, in accordance with
the country’s Tax Code, must file a criminal complaint, notify the tax authorities of the harm caused, and draft
its statement.
4
The 2017 National Survey on the Impact and Quality of Governance (ENCIG) conducted by INEGI indicates
that insecurity and crime, followed by corruption, are the most pressing concerns of the Mexican people. It
further notes that, between 2015 and 2017, the percentage of people expressing these concerns rose from
66.4 percent to 73.7 percent with respect to insecurity and from 50.9 percent to 56.7 percent in the case of
corruption (INEGI 2018).
5
The number of journalists murdered is another indicator of violence in the country. Reporters Without
Borders (RSF) ranks Mexico as the world’s deadliest country at peace for journalists. In 2017, 11 journalists were
murdered in Mexico, making the country second only to Syria in this ranking (Reporters Without Borders 2017).

350 // Mexico: Controlling the Illicit Cigarette Trade
also worsened in the country. Mexico ranked 123 out of 176 countries on Transparency
International’s Corruption Perceptions Index in 2016 and 135 out of 180 countries in 2017,
making it the most corrupt nation in the OECD (Organization for Economic Cooperation
and Development) (Transparency International 2018).

In this context, although the main presidential candidates presented a number of general
health proposals, the legislative-branch candidates paid scant attention to this issue. It is
therefore difficult to predict if the new configuration of the Federal Congress will facilitate
the approval of the necessary reforms to the LGCT and the LIEPS (Law on the Special Tax on
Production and Services) and the possible ratification of the Protocol for the Elimination of
the Illicit Trade in Tobacco Products.

1.4 The Tobacco Industry
Mexico’s tobacco industry is dominated by two companies—Philip Morris Mexico and British
American Tobacco Mexico—both of which are subsidiaries of transnational corporations
that control a large share of the global cigarette market. The 2015 GATS reported that the
Philip Morris Marlboro cigarette brand was the most popular among just over half of Mexican
smokers (52.7 percent), followed by Pall Mall and Montana from British American Tobacco
(17.8 percent) (PAHO and INSP 2017).

As is the case in many other countries, the tobacco industry has used various methods to
obstruct progress on tobacco control in Mexico (Madrazo and Guerrero 2012). Industry rep-
resentatives have focused much of their effort on tax policy. The claim that higher tobacco
taxes will increase the illicit tobacco trade is the industry’s most frequently used argument
against tax hikes.

One of the most common strategies employed by the industry is lobbying, conducted
directly by representatives of the large corporations or indirectly through lobbying
firms. Another approach is the mobilization of business organizations or small distributors
(Fundación InterAmericana del Corazón Argentina, et al. 2012). Along with other authorities
and stakeholders, the tobacco industry also currently participates in the Mesa de Combate a
la Ilegalidad, a task force convened by the SAT to coordinate actions against smuggling and
counterfeiting of various products, including tobacco products (see Section 2.6).

2. Combating the Illicit Tobacco Trade in Mexico:
Legal and Institutional Framework
2.1 Excise Taxes on Tobacco Products
In Mexico, the LIEPS contains all the provisions relating to excise taxes (IEPS). In addition to
tobacco products, excise taxes are also imposed on a wide range of goods and services,
including: alcoholic beverages, energy drinks, flavored drinks, pesticides, fuels, high-calorie,

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non-staple foods, betting and sweepstakes games, and mobile and internet services provided
through public telecommunications networks.

To put the role of excise taxes in context as a source of financial resources for the country,
Table 2 shows the origin of the federal government’s budget revenue. Currently, three-quar-
ters of this revenue is generated by taxes. Specifically, close to 10 percent of all federal
revenue comes from the IEPS. While revenue from the IEPS on gasoline and diesel far sur-
passes revenue from other applications of this tax, tobacco products contribute close to 11
percent of the revenue from the IEPS and approximately 1 percent of total revenue.

The IEPS currently has two components: an ad valorem component, calculated based on
the price to the retailer, and a specific component, consisting of a fee in Mexican pesos
per unit of product (number of cigarettes or grams) (Table 3). The exact composition of the
excise on tobacco products has varied over time (Figure 2).

The manufacturers or importers of tobacco products are responsible for paying the IEPS
to the Tax Administration Service (SAT). The deadline for payment is the seventeenth day of
the month following the sale of the products. In addition, during the first month of the year,

Table 2. Federal Government Revenue, Mexico, 2017

MILLIONS OF % OF TAX % OF THE
ITEM % OF TOTAL
PESOS REVENUE IEPS
Total 3,837,584.6 100.0%

Oil 437,346.8 11.4%

Non-oil 3,400,237.9 88.6%

Tax Revenue 2,854,799.3 74.4% 100%

Income tax 1,573,688.3 41.0% 55.1%

Flat Rate Business Tax (IETU) -1,744.4 0.0% -0.1%

Tax on Cash Deposits (IDE) -739.1 0.0% 0.0%

Value Added Tax (VAT) 816,039.1 21.3% 28.6%

Special Tax on Production
367,834.4 9.6% 12.9% 100%
and Services (IEPS)
IEPS on gasoline and diesel 216,498.7 5.6% 7.6% 58.9%

IEPS on manufactured tobacco 39,123.6 1.0% 1.4% 10.6%

IEPS on alcoholic drinks 14,958.2 0.4% 0.5% 4.1%

IEPS on beer and carbonated
35,007.7 0.9% 1.2% 9.5%
drinks
IEPS on betting and sweepstakes
2,741.4 0.1% 0.1% 0.7%
games
IEPS on public
5,752.1 0.1% 0.2% 1.6%
telecommunications networks

352 // Mexico: Controlling the Illicit Cigarette Trade
Table 2. Federal Government Revenue, Mexico, 2017, Cont.

MILLIONS OF % OF TAX % OF THE
ITEM % OF TOTAL
PESOS REVENUE IEPS

IEPS on energy drinks 7.9 0.0% 0.0% 0.0%

IEPS on flavored drinks 23,162.9 0.6% 0.8% 6.3%

IEPS on high-calorie, non-staple
18,339.4 0.5% 0.6% 5.0%
foods

IEPS on pesticides 705.2 0.0% 0.0% 0.2%

IEPS on carbon 11,537.2 0.3% 0.4% 3.1%

IEPS on water, soda, and
0.0 0.0% 0.0% 0.0%
concentrates

IEPS on other goods and services 0.0 0.0% 0.0% 0.0%

Imports 52,330.1 1.4% 1.8%

Exports 0.4 0.0% 0.0%

Motor vehicle tax 0.0 0.0% 0.0%

New automobiles 10,536.3 0.3% 0.4%

Tax on exploration and extraction of
4,329.6 0.1% 0.2%
hydrocarbons

Hydrocarbons Income Tax 0.0 0.0% 0.0%

Other 376.9 0.0% 0.0%

Other related government charges 32,147.7 0.8% 1.1%

Non-tax
545,438.6 14.2%
revenue

Betterment levy 50.8 0.0%

Non-oil duties 61,283.2 1.6%

Earnings 7,830.5 0.2%

Government charges 476,274.1 12.4%

Notes: Oil revenue includes transfers from the Mexican Oil Stabilization and Development Fund and income
tax on contractors and assignation holders for exploitation of hydrocarbons.
Source: Ministry of Finance and Public Credit (SHCP).

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Table 3. Special Tax on Tobacco Products in Mexico, 2018

AD VALOREM
PRODUCT (% OF THE PRICE TO SPECIFIC
THE RETAILER)
$0.35 per
Cigarettes 160%
cigarette
$0.35 per 0.75
Cigars and other manufactured tobacco products 160%
grams
Cigars and other entirely hand-made manufactured
30.4% Exempt
tobacco products

Notes: The weight of the cigars and other tobacco products other than cigarettes must take into account the
weight of other substances mixed with the tobacco, except for the filter, paper, or any other tobacco-free
substance in which they are wrapped.
Source: Special Tax Law on Production and Services (LIEPS).

Figure 2. Components of the Excise Tobacco Tax, Mexico 1995-2018

160% 0.40
Ad valorem component (% of the price to the retailer)

Speciﬁc component (pesos per cigarette or 0.75 grams)

140% 0.35

120% 0.30

100% 0.25

80% 0.20

60% 0.15

40% 0.10

20% 0.05

0% 0.00
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Ad valorem excise - ﬁltered cigarettes
Ad valorem excise - unﬁltered cigarettes
Ad valorem excise - all cigars and other tobacco products
Ad valorem excise - entirely hand-made cigars and other tobacco products
Speciﬁc excise - all tobacco products

Notes: The specific component of the excise tax implemented in 2010 applied to all tobacco products, but in
2014 entirely handmade cigars and other tobacco products were exempted from this duty.
Sources: Law on the Special Tax on Production and Services (LIEPS).

354 // Mexico: Controlling the Illicit Cigarette Trade
manufacturers and importers must present to the tax authority a list of prices for all their
products classified by brand and presentation. This list must include the price to the whole-
saler, the price to the retailer, and the suggested price to the end consumer. If the prices are
modified before January of the following year, the manufacturer or importer must present
the list of updated prices within five days after the changes are implemented.

In the third month of each year, manufacturers and importers of tobacco products must
also present to the SAT data on the products sold the previous year. Similarly, at the start of
each quarter (January, April, July, and October), they must present data on their 50 main
clients and service providers during the previous quarter. Lastly, they are required to provide
monthly data on the price and volume of the tobacco products sold, classified by brand.

2.2 Other Taxes Applicable to Tobacco Products
In addition to the IEPS, tobacco products are subject to payment of the Value-Added Tax
(VAT) of 16 percent of the sale price to the consumer (Law on Value-Added Tax). This price
includes the price to the retailer (taxable base of the ad valorem component of the IEPS),
the IEPS (ad valorem and specific), and the retailer’s revenue and expenses. The retailer is
responsible for expressly passing on the VAT to buyers of the products and then paying it to
the SAT.

Tobacco products that are imported from a number of countries are also subject to an
additional ad valorem tax. The applicable rate for imported cigarettes is 67 percent of the
price to the importer, while the rate for cigars and cigarillos is 45 percent (Law on General
Import and Export Taxes). The price to the importer includes the cost of the products, pack-
aging expenditures, transportation costs, and insurance. However, as a result of the trade
agreements in effect, imports of tobacco products from some countries, such as the United
States and Canada, are exempt from payment of these import duties. It is worth highlight-
ing that the majority of the cigarettes consumed in Mexico are manufactured domestically,
and those that are imported come largely from countries for which duties are not levied. In
the case of imported tobacco products, the price to the retailer used to calculate the IEPS
includes the price to the importer, the import duty, and the importer mark-up.

Import taxes, when applicable, are paid by importers at the time of initiating the process. This
is also recorded in a customs declaration that importers must present to the customs brokers.
The customs declaration also contains detailed information on the products that are being
imported, such as weight and volume. Travelers over the age of 18 can bring into the country a
maximum of ten packs of cigarettes, 25 cigars, or 200 grams of loose tobacco tax free.

In the event that the customs authorities detect lack of compliance with the tax provisions
during the import process, they must impose the administrative sanctions provided for in
the Customs Law. These sanctions are determined based on the percentage of resulting tax
evasion or in accordance with intervals specified in the law. It is important to mention that
administrative sanctions are independent of sanctions arising from criminal proceedings,

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which may be imposed by a judicial authority. In the case of products that are in transit, the
Customs Law establishes in detail the periods, documents, and means of transport that can
be used.

2.3 Fiscal Markings on Tobacco Products
Unlike with alcoholic beverages, Mexican law does not require that tobacco products include
tax stamps or tags. The fiscal mark that had been provided for in the LIEPS since late 2009
was a security code to be printed on packs of cigarettes manufactured or imported for sale in
Mexico. This was scheduled to enter into effect in July 2010, which would have given the SAT
time to establish rules governing the characteristics and mechanisms for printing the codes.
However, these rules were not published and, therefore, the codes were not implemented.

Subsequently, with the reform of the LIEPS approved in December 2013—which was part of
a much broader tax reform process—the possibility of reviving the security code system pre-
sented itself. Details were then added about the codes, and another period was established
for the publication of more specific rules and the implementation of appropriate mecha-
nisms. However, successive Miscellaneous Tax Resolutions (RMF) postponed the system’s
entry into force. Ultimately, the final version of the rules was presented in the RMF for 2016,
while the resolution for 2017 determined that the requirement should be met from July of
that year. Accordingly, since late 2017, cigarettes packs sold in Mexico bear an alphanumeric
code accompanied by a two-dimensional, machine-readable code.

On one hand, these codes could lay the foundation for a system to monitor and track
tobacco products, which would help improve tax compliance and identify potential diver-
sion of national production to the black market. However, the lack of transparency in the
implementation process casts doubt on its effectiveness. In principle, recent RMF indicate
that only the SAT can generate the security codes, but both the SAT itself or pre-authorized
companies can act as providers of the codes for manufacturers and importers.6 If the former
is true, cigarette manufacturers and importers must:

»» Print the code as part of the process of producing the cigarette packs or prior to import-
ing them,

»» Record and store the data contained in the security code,

»» Supply the SAT with the data on entries online and in real time, and

»» Implement all the technical and security features established by the SAT.

»» Specifically, the code must be random and encrypted; include a graphic representation
readable with mobile devices; and contain the following information visible to the user to
authenticate the products:

6
It is important to mention that the reform of the LIEPS approved in 2013 established that the code was to be
handled through authorized third parties, but subsequent RMF opened the possibility that the SAT could act
directly as provider of the codes.

356 // Mexico: Controlling the Illicit Cigarette Trade
a. Random security folio;

b. Place and line of production;

c. Manufacturing machine;

d. Date, time, and place of production;

e. Brand and commercial characteristics;

f. Number of cigarettes in the pack;

g. Country of origin and number of import permit, if applicable;

h. Federal Taxpayer Registry (RFC) and name of the producer or importer; and

i. Banner of the Ministry of Health “Smoking kills slowly.”

j. No other physical high-security features are required (e.g., covert elements).

If authorized printing-service providers are employed, these providers have to carry out the
printing, recording, storage, and submission of data derived from the code. However, to
date, no certification process for authorized providers has been made public.7 On the other
hand, it is not clear who developed the technology to generate the codes and how the SAT
acquired it (no public bidding process was implemented), how much it cost, and whether
it was paid with public resources. In other words, it is impossible to rule out conflicts of
interest in the implementation process and to assess the extent to which the code is under
exclusive control of the SAT.

2.4 Health Markings on Tobacco Products
In accordance with the LGCT, packaging for tobacco products must contain the following:

»» A pictogram or image covering 30 percent of the front of the package; rotating picto-
grams should be printed directly on the packages,

»» A health message covering 100 percent of the back and one of the sides of the package;
rotating health messages should also be printed and should include a telephone number
at which to obtain information on prevention, cessation, and treatment of illnesses or
adverse effects caused by tobacco consumption, and

»» The caption “For sale exclusively in Mexico.”

Warnings and textual information should be in Spanish on all packaging and external labeling
of all tobacco products.

Although the LGCT entered into force in 2008 and its regulations in 2009, it was after the
publication of the initial agreements of the Ministry of Health in September 2010 that the
packaging started being printed as described above. These agreements set forth in detail

7
According to recent RMF, the list of authorized providers (including name, fiscal address, website and RFC)
would have to be published on the SAT's website, just as is done with other service providers.

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the features and content of the health warnings and images. Originally, the images could be
freely downloaded in high resolution from the Ministry of Health’s website, but now they are
only provided directly to authorized manufacturers and importers to prevent forgery of the
images. So far, there have been nine rounds of warnings implemented, the last of which will
be in force up to May 2020.

2.5 Health Import Licenses and Permits
Although smuggling is not expressly defined in the LGCT, the law provides for at least two
measures that aim to prevent it. First, the LGCT establishes that all manufacturers or import-
ers of tobacco products must have a health license from the COFEPRIS. This license is
valid for three years, although it can be renewed as long as the administrative and technical
requirements set forth in the RLGCT continue to be fulfilled. The administrative require-
ments include the payment of fees in the manner authorized by the SHCP and proof of legal
personality, while the technical requirements refer to issues of hygiene, order, and other
health-related aspects. Second, importers must request health permits from the COFEPRIS
for each import process. The main objective of this permit is to verify that the merchandise
entering the country corresponds to what the importer is claiming to import. These permits
are only granted to holders of health licenses that comply with the applicable requirements
and are valid for 90 days, which can be extended for another 90 days if the health authori-
ty’s requirements continue to be fulfilled.8 Importers of tobacco products must present the
health permits at the time of customs clearance along with the customs declaration con-
firming payment of the applicable taxes (see Section 2.2).

Based on the foregoing, it follows that tobacco products brought in without health permits
issued by the COFEPRIS are considered to be illegally imported and, consequently, are
subject to the applicable security measures (e.g., seizure and destruction) and penalties.
Penalties can range from 4,000 to 10,000 times the general minimum wage, according to
the provisions of the LGCT.

As a result of its supervision activities, at least since 2014, the COFEPRIS has issued health
alerts in which it includes the cigarette brands that do not fulfill the regulations regarding
packaging and/or the import health permits. Generally speaking, these are “non-traditional”
brands, meaning they are different from those of the corporations that dominate the ciga-
rette market in Mexico (see Section 1.4) and, therefore, are not listed in the index of brands
that the SAT periodically publishes, based on the information submitted to it by cigarette
manufacturers and importers.

8
The requirements for requesting an import permit, according to the RLGCT, are: (1) Certificate issued by
competent authority of the country of origin indicating that the tobacco product was manufactured in the
country of origin, its physicochemical composition, the place of origin, with validity by batch or by certificate of
free sale that mentions that this product is consumed without restrictions in the country of origin; (2) Copy of
the establishment’s health license; (3) Original label of origin; (4) Original label with which it will be marketed in
Mexico; (5) Proof of payment of fees.

358 // Mexico: Controlling the Illicit Cigarette Trade
In 2017, the government announced a strategy called Aduana Siglo XXI (21st-Century
Customs) to modernize Mexican customs by incorporating the best international prac-
tices. Some of the actions contemplated are: the use of new technologies to improve the
detection of illicit products, the modernization of points of inspection to automate customs
clearance, the elimination of cash payments, the simplification of procedures, and the imple-
mentation of import permits readable with mobile devices, among others.

2.6 Key Institutions in the Fight against the Illicit Trade
In general, illicit trade takes the form of administrative offenses and/or tax-related crimes
or counterfeiting, which fall under the jurisdiction of the Federal Government. The most
relevant authorities in the fight against the illicit tobacco trade are: the COFEPRIS, charged
with verifying compliance with health regulations (packaging, health import licenses, and
permits); the SAT, responsible for monitoring compliance with tax and customs regulations
(import taxes and requirements); the PGR, charged with initiating criminal proceedings when
necessary; and the IMPI, responsible for issuing an opinion in counterfeiting proceedings.
Coordination among these multiple institutions is critical.

One of the measures implemented to improve interinstitutional coordination was the
establishment of the Mesa de Combate a la Ilegalidad, in April 2013, at the initiative of the
SAT. In addition to the COFEPRIS, the PGR, and the IMPI, the Ministry of Economy (SE)
and the Federal Consumer Protection Agency (PROFECO) from the public sector are also
involved, along with the Mexican Confederation of Industrial Chambers (Confederación de
Cámaras Industriales de los Estados Unidos Mexicanos, CONCAMIN), the Confederation of
National Chambers of Trade, Services, and Tourism (Confederación de Cámaras Nacionales
de Comercio, Servicios y Turismo, CONCANACO), and the Mexican Confederation of
Associations of Customs Agents (Confederación de Asociaciones de Agentes Aduanales de
la República Mexicana, CAAREM) from the private sector. The main purpose of this task force
is to promote joint action to identify, prevent, and combat major illegal practices relating to
five products: alcoholic beverages, tobacco, automobiles, footwear, and clothing. However,
although reports available for 2015 and 2016 provide an account of various positive results
for sectors other than tobacco (e.g., increase in revenue collection, auditing, cancellation of
licenses, etc.), in the case of tobacco, they only report the incidence of cigarette destruc-
tion (283 occasions with 51.09 million cigarettes destroyed by customs officials in 2016).
Moreover, this initiative ignores the fact that the FCTC establishes specific guidelines on how
governments and the tobacco industry, which is part of CONCAMIN, should interact.

3. Outcomes of the Strategy to Combat Illicit Trade
The health markings required on cigarette packs since late 2010 have drastically changed
their appearance and, therefore, facilitated identification of illegal products. However,
the most important reform with respect to combating illicit tobacco trade has been the

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

introduction of the security code. That said, as of this writing, the code has only been in
use for a few months, and critical details about the way in which it is being applied are still
unknown. Specifically, the RMF stipulates that only the SAT can generate the codes, but
there is no information on the technology that is being employed and the process followed
to acquire that technology, as no public bidding process took place. In addition, although
the LIEPS originally contemplated that the printing of the codes, as well as the registration,
storage, and submission of data derived from the codes would be done through previously
authorized independent third parties, the RMF indicates that the SAT can directly provide the
codes to the manufacturers/importers. Since the SAT has not published a list of authorized
providers, it must be acting as the provider of the codes, but it is not clear whether this will
continue in the future. Finally, if the SAT itself generates and distributes the codes, but the
producers/importers print them and store the data generated, it is unclear how the SAT
guarantees that the flow of information is transparent. Given these conditions, rather than
seeking to evaluate the outcomes of the policies, a brief review was done of the status of the
illicit trade in Mexico in recent years.

According to the GATS, less than 1 percent of Mexican smokers consumed illegal cigarettes
in 2009 (Sáenz de Miera Juárez and Zúñiga Ramiro 2013). More recent data indicate that this
percentage stood at 2.7 percent in 2015; that is, there was a slight increase (Sáenz de Miera
Juárez, et al. 2018). However, these figures are considerably lower than the global average
and lower than the estimates for other Latin American countries, which generally stand at
approximately 10 percent (Ramos 2009).

It is worth highlighting that two of the factors associated with higher incidence of illicit trade
are the presence of criminal organizations and high levels of corruption. Given that both are
serious problems in Mexico, it is possible that some of the previously described improve-
ments, such as strengthening health controls, may have counteracted those factors to some
degree and helped maintain a low incidence of illicit trade. However, more detailed studies
are needed to better understand the situation.

Small-scale smuggling associated with cross-border shopping is another issue that merits
attention. While some reports suggest that Mexico is most commonly the source of illicit
trade between Mexico and the United States, historical smuggling trends seem to sug-
gest the opposite (Colledge 2013). A recent report by the United States Government
Accountability Office (GAO) also points in that direction (GAO 2017). In particular, the GAO
focuses on high-volume cigarette sales of US duty-free stores located near the border that
are largely smuggled into Mexico or diverted into the US market. While the magnitude of this
problem is not estimated, and seizures by Mexican Customs authorities are presented as the
main evidence, the GAO indicates that most of the cigarettes smuggled into Mexico are from
“non-traditional” brands, i.e., brands that according to COFEPRIS do not fulfill the Mexican reg-
ulations regarding packaging and/or import health permits. If this is the case, the consumption
of these cigarettes would be accounted for in the estimates of illicit cigarette consumption

360 // Mexico: Controlling the Illicit Cigarette Trade
mentioned above. In other words, although there is evidence of smuggling at the country’s
northern border, its magnitude would be small. In any case, this situation exemplifies a side of
the illicit-trade problem for which international cooperation is indispensable.

4. Recommendations
One of the main weaknesses of Mexico’s strategy to combat the illicit trade in tobacco
products was for many years the absence of a system for monitoring and tracking products
manufactured in the country. Such a mechanism is indispensable to prevent tax evasion and
to identify potential diversion of products for their illegal distribution, whether domestically or
in other countries. However, with the implementation of the security code visible on Mexican
cigarette packs since late 2017, it is possible for the first time to obtain data on characteristics
including: the production line and location from which a pack originated; the production
machine used; the date, time, and place of manufacture; the brand and commercial features;
the number of cigarettes per pack; the country of origin and customs declaration number
(in the case of imported cigarettes); and the Federal Taxpayer Registry (RFC) and name of the
manufacturer or importer. Yet, because of the lack of transparency regarding the generation
of the codes, it is unclear if this process is independent and free of conflicts of interest. As
is stipulated in the rules included in the RMF, it is critical that the tax authority publish the list
of security code service providers and periodically supply information about how the data
generated are used. It is also important to consider that the security features of the code are
relatively basic. Other successful tracking and tracing systems, such as the one implemented
in Brazil, combine visible and non-visible elements to improve efficacy.

However, while control of domestic production is essential to combating illicit trade, the
available evidence (e.g., alerts from COFEPRIS) indicates that the bulk of illegal tobacco
products in Mexico are cigarettes that were illegally brought into the country. In this sense,
although the process of enhancing the customs authority has begun, border controls must
be strengthened, particularly at the country’s southern border, where the presence of free
zones impedes inspection processes. Regional cooperation in the drive to combat the illicit
trade is indispensable.

Recent action to strengthen interinstitutional collaboration is certainly a positive step.
However, given the tobacco industry’s participation in the Mesa de Combate a la Ilegalidad,
details of concrete collaborative actions between government bodies and the industry
should be made public to eliminate possible conflicts of interest.

Also, it is important for the country to officially monitor the illicit trade in tobacco products.
Even though in recent years the SAT has improved the recording of data on embargos in gen-
eral, it does not have its own indicators of the magnitude of, and trends in, the illicit trade.

Finally, Mexico’s relatively low rate of smuggling and relatively strong administrative capac-
ity, including tax and customs, reinforce the arguments for the country to undertake much

361
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

more vigorous action on tobacco tax reform. This is all the more the case as evidence accu-
mulates that it is the effectiveness of customs and tax administration, and not comparative
tax rates, that primarily drive illicit tobacco trade (World Bank 2017).

It is unfortunate that the affordability of tobacco products has been allowed to increase
over the past six years, even though Mexico has otherwise been making efforts to reduce
tobacco consumption and the resultant death and disease. Total cigarette excise taxes, spe-
cific and ad valorem, account for only 53 percent of the retail price of cigarettes in Mexico
in 2018 (Fundación Interamericana del Corazón México 2018), as compared to the WHO
recommendation of at least 70 percent (WHO 2010). Relevant steps called for by the World
Bank (2017) include: “Go big, go fast. Attack affordability. Change expectations. Tax by quan-
tity: replacing ad valorem excises with specific, preferably uniform, excise taxes.” Following
these steps maximizes health benefits by reducing “downward substitution,” as well as
increasing tax revenues and simplifying tax administration.

References
Blecher E. Targeting the affordability of cigarettes: a new benchmark for taxation policy in low-income
and middle-income countries, Tobacco Control 2010; 19:325-330.

Colledge JW. Comercio ilícito de Tabaco entre México y Estados Unidos, in: Reynales Shigematsu
LM, Thrasher JF, Lazcano Ponce E, Hernández Ávila M (eds.). Salud pública y tabaquismo, volumen I.
Políticas para el control del tabaco en México. Cuernavaca, Mexico: INSP; 2013.

Fundación InterAmericana del Corazón Argentina, Fundación InterAmericana del Corazón México,
Corporate Accountability International Colombia, Alianca de Controle do Tabagismo. La salud no se
negocia. La sociedad civil frente a las estrategias de la industria tabacalera en América Latina, Case
studies 2010-2012. Buenos Aires, Argentina: FIC Argentina.

Fundación InterAmericana del Corazón México. XIII Informe de la sociedad civil: a 10 años de la Ley
General para el Control del Tabaco. Mexico City, Mexico: FIC Mexico; 2018.

Government Accountability Office (GAO). Tobacco Trade. Duty-Free Cigarettes Sold in Unlimited
Quantities on the U.S. – Mexico Border Pose Customs Challenges, Report to the Ranking Member,
Committee on Finance, U.S. Senate, GAO-18-21; 2017.

INEGI. Datos preliminares revelan que en 2016 se registraron 23 mil 953 homicidios, Press Release
298/17; 2017.

INEGI. Resultados de la Encuesta Nacional de Calidad e Impacto Gubernamental, Press Release
136/18; 2018.

362 // Mexico: Controlling the Illicit Cigarette Trade
INPRF, INSP, CONADIC, Ministry of Health. National Survey on Drug, Alcohol, and Tobacco
Consumption 2016-2017: Reporte de Tabaco. Reynales-Shigematsu LM, Zavala-Arciniega L, Paz-
Ballesteros WC, Gutiérrez-Torres DS, García-Buendía JC, Rodríguez-Andrade MA, Gutiérrez-Reyes J,
Franco-Núñez A, Romero-Martínez M, Mendoza-Alvarado L. Mexico City, Mexico: INPRF; 2017.

Madrazo-Lajous A, Guerrero-Alcántara A, Estrategias de la industria tabacalera en México para interferir
en las políticas de control del tabaco, Salud Pública de México 2012; 54(3):315-322.

PAHO, INSP. Global Adult Tobacco Survey. Mexico 2015. Cuernavaca, Mexico: INSP/PAHO; 2017.

Ramos A. Illegal trade in tobacco in the Mercosur countries. Framework Convention Alliance; 2009.

Reporters Without Borders. Annual Report 2017. France: Reporters Without Borders; 2017.

Sáenz de Miera Juárez B. Impuestos al tabaco en México: análisis del periodo 2006-2012, en: Reynales
Shigematsu LM, Thrasher JF, Lazcano Ponce E, Hernández Ávila M (eds.). Salud pública y tabaquismo,
volumen I. Políticas para el control del tabaco en México. Cuernavaca, Mexico: INSP; 2013.

Sáenz de Miera Juárez B, Zúñiga Ramiro J. Comercio ilícito de productos de tabaco en México: evi-
dencia disponible y legislación vigente, in: Reynales Shigematsu LM, Thrasher JF, Lazcano Ponce E,
Hernández Ávila M (eds.). Salud pública y tabaquismo, volumen I. Políticas para el control del tabaco en
México. Cuernavaca, Mexico: INSP; 2013.

Sáenz de Miera Juárez B, Thrasher JF, Reynales Shigematsu LM, Hernández Ávila M, Chaloupka FJ. Tax,
Price and cigarette brand preferences: a longitudinal study of adult smokers from the ITC Mexico Survey,
Tob Control 2014; 23:i80-i85.

Sáenz de Miera Juárez B, Rodriguez MA, Reynales LM. Measuring illicit cigarette consumption with
tobacco surveillance data: evidence from the Global Adult Tobacco Survey in Mexico, Tob Induc Dis
2018; 16(Suppl 1): A132.

Transparency International. Corruption Perceptions Index 2017. Berlin, Germany: Transparency
International; 2018.

Waters H, Sáenz de Miera B, Ross H, Reynales Shigematse LM. The Economics of Tobacco and Tobacco
Taxation in Mexico. Paris: International Union Against Tuberculosis and Lung Disease; 2010.

WHO. WHO technical manual on tobacco tax administration. Geneva: WHO; 2010.

World Bank. Tobacco Tax Reform. At the Crossroads of Health and Development. A Multisectorial
Perspective. Washington, D.C.: World Bank; 2017.

363
URUGUAY
13

URUGUAY:

Tackling Illicit
Tobacco Trade
Winston Abascal and Alejandro Ramos-Carbajales1

Chapter Summary
Tobacco use has health, economic, and social consequences for populations. It is associ-
ated with Uruguay’s two leading causes of death, cardiovascular diseases and cancer.

After ratifying the World Health Organization Framework Convention on Tobacco Control
(WHO FCTC) in September 2004, Uruguay put in place a strong national tobacco control
policy implementing a comprehensive set of measures, including 100 percent smoke-free
environments; pictorial health warnings; a ban on advertising, promotion, and sponsorship;
and the inclusion of tobacco dependence treatment in all health care settings. Uruguay
has achieved the highest levels of implementation of MPOWER, the WHO-recommended
package of six key evidence-based measures proven to reduce tobacco use. Following the
implementation of these measures in 2005, prevalence of tobacco use has significantly
declined, both among young people and adults. Highest prevalence is observed in the poor-
est third of Uruguay’s population.

1
W. Abascal (Director of International Cooperation Centre for Tobacco Control, WHO FCTC Secretariat and
Former Director of the National Program for Tobacco Control, Ministry of Public Health, Uruguay); A. Ramos-
Carbajales (Former Planning and Research Director at CIET [Research Center for the Study of the Tobacco
Epidemics] Uruguay).

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

There are several approaches to measuring the illicit cigarette trade in a country. The
method adopted here uses data from the Global Adult Tobacco Survey (GATS) 2009 and
2017, which included questions on cigarette brands smoked. The size of the illicit market is
estimated at 12 percent of total cigarette consumption in Uruguay.

In the last 15 years, illicit cigarettes entering the Uruguayan market are largely manufactured
in Paraguay and transported across the Brazilian border by small trucks. Illicit traders often
make multiple trips to the Brazilian border to pick up incoming cigarettes, and most seizures of
cigarette cargo take place on Uruguay’s network of National Routes. In addition, cigarettes
are being brought by small boats via the Uruguay River from Argentina.

Although illicit trade legislation in general involves many different laws, Uruguay has passed
specific legislation on tobacco with the Tobacco Control Act of 2008, which notably
introduced a regulation mandating the Executive Branch to secure the human and mate-
rial resources needed to proceed to the elimination of all forms of illicit tobacco trade.
Nonetheless, analysis of Uruguay’s legislation on illicit tobacco points to an important
deficit in terms of compliance with FCTC Article 15 and the newly ratified Protocol for the
Elimination of Illicit Tobacco Trade (the Protocol).

Tobacco control policies, and particularly tax policies, are undermined by illicit trade. GATS
2009 and 2017 data show that, while the proportion of Uruguay’s smokers who consume
illicit brands has not increased in the last eight years, the country’s poorest smokers are
the main consumers of illicit tobacco products. In this sense, controlling the illicit tobacco
trade is a special priority, since the burden of health consequences falls mainly on the poor.

Ratification of the Protocol in 2014 spurred the creation of an Inter-Agency Commission
for the Implementation of the Protocol. The Commission includes delegates from several
ministries, Uruguay’s customs and tax authorities, the judiciary, and two non-governmen-
tal organizations. Uruguay has the chance to develop a robust long-term fiscal policy on
tobacco products, thanks to legislation giving the Executive Branch a wide mandate to set
the tobacco tax base.

It is necessary to address illicit tobacco at a regional level through the MERCOSUR Inter-
Governmental Commission on Tobacco Control. An important aspect of the Protocol (Part
V) refers to the international exchange of information on law enforcement, technical assis-
tance, and cooperation.

When Uruguay ratified the FCTC, it acquired obligations but also substantive support to apply
the policy measures contained in the agreement. This has been fundamental in the evolu-
tion of tobacco control in the country. With the entry into force of the Protocol, Uruguay
once again enjoys an opportunity to benefit from partnerships, implement necessary policy
changes, and ultimately eliminate illicit tobacco trade.

366 // Uruguay: Tackling Illicit Tobacco Trade
1. Overview of Tobacco Control Policy in Uruguay
Given that tobacco use is associated with the two leading causes of death in Uruguay,
cardiovascular diseases and cancer,2 its control constitutes a public health measure of fun-
damental importance.

Tobacco use is a complex phenomenon and has consequences in the health, economic
and social fields. Therefore, the response from public policy, as established by the WHO
FCTC,3 must encompass a set of measures that involve multiple areas. For more than a
decade in Uruguay, the prevalence of tobacco use remained almost constant, according
to the four household surveys carried out between 1994 and 2006 by the National Board
on Drugs (JND).4 5 6 7 Tobacco control policy as such began with the new Government in
March 2005. Uruguay had ratified the FCTC in September 2004 and, from 2005 on, the
country implemented a strong, FCTC-guided tobacco control policy that resulted in a
comprehensive package of measures. The central axis was the implementation of smoke-
free environments, a measure that determines a change in society's view of smoking, as it
denormalizes smoking behavior. In addition, it discourages the beginning of consumption,
decreases its magnitude, and stimulates quit attempts.

The implementation of other measures such as health warnings; the wide prohibition of
advertising, promotion, and sponsorship; the increase of prices through tax hikes; and the
incorporation of free treatment of tobacco dependence added to these regulations. Apart
from their own impact, they contributed to a contextual change in the social perception of
tobacco use and the risk of this behavior.8

In 2009, the size of graphic warnings was increased to 80 percent of both main faces of the
cigarette package, and the existence of variants within the same brand was forbidden ("single
presentation requirement"). In 2014, the ban on advertising and promotion became total by
eliminating the exception that had existed at the point of sale and including the prohibition
to display tobacco products. The Protocol for the Elimination of Illicit Trade in Tobacco
Products was ratified in the same year.9 Box 1 presents a summary of relevant policies,
including those approved before 2005. These measures include the main recommendations
of the WHO FCTC.

2
Ministerio de Desarrollo Social, Presidencia, Oficina de Planeamiento y Prespuesto, Report Uruguay 2015 -
http://200.40.96.180/images/ReporteUruguay2015_OPP_web.pdf
3
World Health Organization. WHO Framework Convention on Tobacco Control. Geneve: WHO, 2005.
4
Junta Nacional de Drogas. Secretaría Nacional de Drogas. 2da. Encuesta Nacional de Prevalencia del
Consumo de Drogas, 1994
5
Junta Nacional de Drogas. Secretaría Nacional de Drogas. 2da. Encuesta Nacional de Prevalencia del
Consumo de Drogas, 1998
6
Junta Nacional de Drogas. Secretaría Nacional de Drogas. UNDP. 3ra. Encuesta Nacional de Prevalencia del
Consumo de Drogas, 2001.
7
Junta Nacional de Drogas. Secretaría Nacional de Drogas, 4ta. Encuesta Nacional en Hogares sobre
Consumo de Drogas. Uruguay, 2006.
8
Abascal W, Esteves E, Goja B, González F, Lorenzo A, Sica A. Impacto de las políticas de control de tabaco en
Uruguay 2006-2009. Programa Nacional para Control del Tabaco. Archivos de Medicina Interna, 35(Supl.4),1-16
9
Ley 19259. Available at: http://archivo.presidencia.gub.uy/sci/leyes/2014/08/mrree_3855.pdf

367
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Box 1. History of Key Tobacco Control Policies and Programs in Uruguay

POLICY SUMMARY OF MEASURES

Earlier Bans in public workplaces and in retail food stores since 1996.
restrictions
on smoking Bans in public transportation since 1981; bans in hospitals and all health facilities since 2004.

Tobacco Legislation prohibiting smoking in work and closed public places introduced in Uruguay in September
control policy 2005 by Decree, became effective on March 1, 2006, at national level. A comprehensive tobacco
after March control law was passed in Parliament in 2008, including smoke-free environments (no change in
2005 2006 bans).10
Used as a tool to decrease demand through tax hikes from March 2005 until 2010 and from March
Tobacco tax
2014 to the present. From 2010-2014, there were no tax increases.
Illicit trade A specific strategy to tackle illicit tobacco trade was applied to the operation of free-trade zones and
control other tax-free spaces in the early 1990s to prevent rerouting to the domestic market (see section 8.3).
Large-scale MMCs were implemented at the time of Uruguay’s initial systematic tobacco control
policies in 2005, in particular in connection with smoke-free environment legislation. Campaigns
included “Un millon de gracias” (“A million thanks,” 2006) and “Uruguay Libre de Humo de Tabaco”
Mass media
(“Smoke-Free Uruguay”).
campaigns
(MMCs)
Subsequently, additional mass media campaigns, in particular via the internet: “Me declaro ex” (“I'm
a former smoker,” 2016) and now “Bienvenida independencia” (“Welcome independence”), a mass
media and graphic campaign (www.msp.gub.uy)
Text warnings since 1982, mandated inclusion of text in TV advertising.

Although text warnings became a legal requirement in Uruguay in 1982, a new and more direct
text was implemented in 2003, encompassing warnings on cancer, respiratory and cardiovascular
Health diseases, and risks for pregnant women.
warnings
Since May 2005, health warnings included pictorials covering 50% of the pack.

Since 2009, picture and text warnings covering at least 80% of the front and back of tobacco
packaging.
Television advertising for tobacco products banned, May 2005.

Uruguayan Comprehensive Tobacco Control Law 18256 of 2008 banned all advertising, promotion,
Advertising and sponsorship except for point of sale.11
and
promotion Complete ban on advertising, promotion, and sponsorship, 2014, also prohibits point-of-sale
advertising.

A standardized tobacco packaging bill is before Parliament pending approval as of June 2018.
Minimum age for tobacco sales set at 18 years since 1982.
Youth access
Vending machine ban implemented.
Extensive provision of free stop-smoking services providing counselling and access to
Treatments to
pharmacotherapy from 2004 onwards.
help smokers
quit
Nicotine replacement therapy (NRT), bupropion, and varenicline available on prescription.

10
Ley 18.256 – Ley de Control del Tabaquismo. (Tobacco Control Act, 2008) - https://parlamento.gub.uy/
documentosyleyes/leyes/ley/18256
11
http://archivo.presidencia.gub.uy/_web/leyes/2008/03/S405_19%2010%202007_00001.PDF

368 // Uruguay: Tackling Illicit Tobacco Trade
2. Regional Partners: Uruguay and the
MERCOSUR Agreement12
The MERCOSUR countries created the “Comisión Inter-gubernamental para el Control del
Tabaco” (Inter-Governmental Commission for Tobacco Control, CICT) in 2004. Two of the
main topics of discussion at the Commission have been (i) the need to control illicit tobacco
trade and (ii) tax harmonization.13 However, over the years, the Commission´s recommen-
dations to the governments of MERCOSUR have not produced any policy changes. There
is also the problem that the Commission is mostly the responsibility of health ministers, and
finance and economic ministers have generally not shared health officials’ concern about
the illicit tobacco trade.

3. Trends in Tobacco Use in Uruguay
Following the implementation of the main measures established in the WHO FCTC, Uruguay
has shown a sustained decrease in the prevalence of tobacco use, both among young
people and adults.

3.1 Tobacco Prevalence Among Adults
Before the implementation of systematic tobacco control measures, beginning in 2005,
Uruguay’s adult tobacco consumption prevalence stood between 32 and 33 percent,
according to multiple surveys.14 15 16 17 In 2006, STEPS18 reported a prevalence of 32.7 percent
for the population between 25 and 64 years of age. Three years later, however, GATS 200919
found a substantially lower prevalence of 25.0 percent in the same age group.

12
Since January 1995, MERCOSUR (Argentina, Brazil, Uruguay and Paraguay) is a trade area with free trade for
all goods circulating in the region. It has also established a Customs Union, not full yet, with the existence of a
Common External Tariff (AEC). Chile and Bolivia are associated members, while Venezuela is a full member but
is currently suspended.
13
Paraguay has one of the lowest tobacco tax rates and tax shares of retail price in the world. Paraguay has
been since the early 2000s the source of most illicit tobacco trade in the region.
14
Junta Nacional de Drogas. Secretaría Nacional de Drogas. 2da. Encuesta Nacional de Prevalencia del
Consumo de Drogas, 1994
15
Junta Nacional de Drogas. Secretaría Nacional de Drogas. 2da. Encuesta Nacional de Prevalencia del
Consumo de Drogas, 1998
16
Junta Nacional de Drogas. Secretaría Nacional de Drogas. UNDP. 3ra. Encuesta Nacional de Prevalencia del
Consumo de Drogas, 2001.
17
Junta Nacional de Drogas. Secretaría Nacional de Drogas, 4ta. Encuesta Nacional en Hogares sobre
Consumo de Drogas. Uruguay, 2006.
18
STEPS- Primera Encuesta Nacional de Factores de riesgo de enfermedades crónicas no trasmisibles (First
Survey of risk factors for Non-communicable diseases).2006 http://www.msp.gub.uy/sites/default/files/
archivos_adjuntos/1er_enfrecnt_2006_1.pdf
19
Global Adult Tobacco Survey (GATS 2009) - World Health Organization, Pan American
Health Organization, Centers for Disease Control and Prevention. Ministry of Health of
Uruguay, National Institute of Statistics Uruguay. Uruguay, 2017 - https://paho.org/hq/index.
php?option=com_content&view=article&id=1751&Itemid=1185&lang=en

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

The most recent tobacco survey at the national level (Uruguay GATS 2017 Fact Sheet)20
points to a further decrease in male smoking prevalence since 2009, but no significant
decline among women. Male smoking prevalence decreased from 30 percent to 25 per-
cent, while female smoking prevalence slipped from 19.8 percent to 18 percent in the period
2009-2017.

Overall, the prevalence of tobacco smoking among adults aged 15 years and older
decreased significantly, from 25.0 percent in 2009 to 21.6 percent in 2017 (Table 1). By age
groups, the most important decrease was shown in the 15-24 group, with a drop from 24.7
percent in 2009 to 14.6 percent in 2017.

The greatest impact on the decrease in smoking prevalence was observed following imple-
mentation of the broad tobacco control measures introduced in 2005-2006.

Table 1. Evolution of Tobacco Smoking Prevalence, Uruguay, 2009-2017

TOTAL MEN WOMEN

GATS 2009 25.0% 30.7% 19.8%

GATS 2017 21.6% 25.6% 18.0%

Source: Global Adult Tobacco Survey (GATS), Uruguay, 2009 and 2017. Prevalence figures include daily and
non-daily smoking.

The main tobacco product smoked in 2017 was cigarettes, including manufactured (18.4
percent) and hand-rolled cigarettes (5.9 percent).

Using the distribution of wealth21 as a proxy for income, the 2017 results in Table 2 confirm
that the lower income tercile has the highest smoking prevalence.22 We also note that the
prevalence of roll-your-own (RYO) consumption is much higher (almost 10 times) in the
poorest tercile, compared with the richest tercile.

In Table 3, 2017 GATS data show that adults who completed only elementary and early sec-
ondary schooling have the highest smoking prevalence.

Two other facts that point to a successful tobacco control policy are the decrease in tobacco
smoke exposure at home and the percentage of smokers who want to quit. Regarding expo-
sure to tobacco smoke at home, a significant decrease was registered, from 29.2 percent
in 2009 to 20.0 percent in 2017. The percentage of smokers who state that they want to

20
Global Adult Tobacco Survey (GATS). (Fact sheet) https://www.paho.org/uru/index.php?option=com_
docman&view=document&alias=576-uru-gats-2017-core-factsheet&category_slug=publications&Itemid=307.
21
Ramos Carbajales, A; Clemente, A; Gonzalez Rozada, M. Impuestos al tabaco y políticas para el control
del tabaco en Uruguay. Fundacion Interamericana del Corazón, México 2013 - http://tabaco.ficmexico.org/
wp-content/uploads/2014/08/uruguay_web.pdf
22
In Uruguay, smoking hand-rolled tobacco is an established custom, and the use of this product increased
after 2012.

370 // Uruguay: Tackling Illicit Tobacco Trade
Table 2. Prevalence of Tobacco Smoking by Income Level, 2017

ALL SMOKED
RYO
TOBACCO
Tercile 1 (richer) 17% 1.30%

Tercile 2 23% 4.55%
Source: Author's calculations
Tercile 3 (poorer) 26% 11.70% based on GATS 2017.

Table 3. Adult Tobacco Prevalence and Educational Attainment

PREVALENCE OF TOBACCO SMOKING
BY EDUCATIONAL LEVEL (ALL TOBACCO PRODUCTS)
Elementary school 24.1%

Secondary levels 7-9 27.1%

Secondary levels 10-12 23.6% Source: Authors’
calculations, based on
University 14.2%
GATS 2017 data

quit smoking continues to be substantial: 10.9 percent of current smokers in 2009 and 10.3
percent in 2017 planned to or were thinking about quitting within the next month.

3.2 Tobacco Prevalence Among Youth
Regarding young people, the decline in prevalence has been even more pronounced. The
National Survey on Drug Use among Secondary Education Students is performed by the
National Board on Drugs (JND) among 13 to 17 year-olds.23 24 25 26 27 28 Results show a steady
decrease in smoking prevalence from the year 2003 onward (Figure 1).

23
Junta Nacional de Drogas. 1ra. Encuesta Nacional y 2da. en Montevideo sobre Consumo de Drogas en
Estudiantes de Enseñanza Media. JND/OEA-SIDUC. October 2003.
24
Junta Nacional de Drogas. Observatorio Uruguayo de Drogas. 2da. Encuesta Nacional sobre Consumo de
Drogas en Estudiantes de Enseñanza Media. JND/OUD. Abril 2006
25
Junta Nacional de Drogas. Observatorio Uruguayo de Drogas. 3ra. Encuesta Nacional sobre Consumo de
Drogas en Estudiantes de Enseñanza Media. JND/OUD/OEA-SIDUC. Abril 2007
26
Junta Nacional de Drogas. Observatorio Uruguayo de Drogas. 4ta. Encuesta Nacional sobre Consumo de
Drogas en Estudiantes de Enseñanza Media. JND/OUD/United Nations-Office on Drugs and Crime. October 2010
27
Junta Nacional de Drogas. Observatorio Uruguayo de Drogas. 5ta. Encuesta Nacional sobre Consumo de
Drogas en Estudiantes de Enseñanza Media. JND/OUD. October 2012
28
Junta Nacional de Drogas. Observatorio Uruguayo de Drogas. 6ta. Encuesta Nacional sobre Consumo de
Drogas en Estudiantes de Enseñanza Media. JND/OUD. Uruguay, 2014

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 1. Trends in 30-Day Smoking Prevalence in Youth (%)
35
: 30,2
30
; 24,8
25
; 22
20 ; 18,4

15 ; 13,1
; 9,2
10

5 Source: National Survey
on Drug Consumption
0
among Secondary
2003

2005

2007

2009

2011

2014
Students, JND. Population
13-17 years old.

The United States Surgeon General29 notes that, "Almost all smokers start smoking during
childhood and adolescence. 88 percent of adult smokers started before age 18.” In 2017,
according to GATS Uruguay, smoking initiation patterns in the country are similar to those
described for the United States. In Uruguay, 89.0 percent of adult smokers started smoking
before age 20. "This has strategic implications in the planning of [policy] measures, and it
is crucial that, in deciding national tobacco-control policies, a line of work aimed at the
younger population be established.”30

3.3 Impact of Tobacco Control Policy on Prevalence,
Compared with Argentina
To better evaluate what has happened with tobacco consumption in Uruguay, Argentina
was chosen as a comparator, “not only because of its geographical proximity and common
language and culture, but also because Argentina did not enact comprehensive nationwide
anti-tobacco legislation until June 2011.”31

Between 2005 and 2011, per capita consumption of cigarettes in Uruguay decreased by 4.3
percent per year, while in Argentina it increased by 0.6 percent per year. Between 2003 and
2009, the prevalence of tobacco consumption in the previous 30 days among young people
aged 13, 15, and 17 years fell by 8.0 percent annually in Uruguay, while in Argentina the figure
decreased by just 2.5 percent annually. Among adults, current tobacco use (including daily
and occasional smokers) decreased by 3.3 percent annually between 2005 and 2011 in
Uruguay, while Argentina registered an annual decrease of 1.7 percent.

29
US Department of Health and Human Services. Public Health Services. Preventing tobacco use among
youth and young adults. A Report of the Surgeon General. Atlanta, GA: US Department of Health and Human
Services, Centers for Disease Control and Prevention, National Centre for Chronic Disease Prevention and
Health Promotion, Office on Smoking and Health,2012
30
Abascal W, Lorenzo A. Impact of tobacco control policy on teenager population in Uruguay. Salud Pública de
Mex 2017;59suppl I:S40-S44. http://doi.org/10.21149/8051
31
Abascal W, Esteves E, Goja B, González F, Lorenzo A, Sica A. et al. Tobacco control campaign in
Uruguay: a population-based trend analysis. Lancet 2012;380(9853):1575-1582. https://doi.org/10.1016/
SO140-6736(12)60826-5

372 // Uruguay: Tackling Illicit Tobacco Trade
4. Evolution of the Price of Cigarettes and RYO and
Smoking Prevalence
Tax and price increases have been one of the key factors in decreasing prevalence in the
2009-2018 period, as measured by the two GATS surveys. Tobacco smoking in the popu-
lation age 15 and older was estimated at 25 percent in 2009 (GATS 2009). It had fallen to
20.4 percent by early 2018, a nearly 19 percent decrease over the period. The real price
of cigarettes rose by 50 percent and the price of RYO tobacco by more than 160 percent
between 2009-2018 (Table 4 and Figure 2). The impact of this tax and price increase has
been substantial, even considering that there were no tax increases from March 2010 to
November 2014. Another factor that limited the impact of tax and price increases was real
income growth in the period (discussed below in Section 4.1).

Table 4. Evolution of Tobacco Prices and Adult Smoking Prevalence

INDEX OF REAL INDEX OF REAL
ADULT SMOKING
PRICE OF 20-STICK PRICE OF 45G RYO
PREVALENCE
CIGARETTE PACK TOBACCO PACK
2009 73 41 25.0%

2011 87 61 23.9%

2014 86 80 22.2%

2017 100 100 21.6%

2018 109 105 20.4%

Source: Authors, using data from INE, GATS, and household surveys.

4.1 Evolution of Adult Smoking Prevalence and
Real Income
Consumption is the result of prevalence and intensity of smoking. In Uruguay, some surveys
do not report intensity.32 For this reason, analysis of prevalence and income is presented in
Table 5, while Table 6 discusses consumption only at the beginning and end of the 2009-
2017 period.

One of the reasons for the slow decrease in prevalence despite important increases in taxes
and real tobacco product prices was the parallel increase in real income. Uruguay was
recovering from the economic downturn of the early 2000s, and real income grew by about
one-third between 2009 and 2017.

32
After INE participated in the GATS survey of 2009, it kept some questions on smoking prevalence in the
Household Surveys (Encuesta Nacional de Hogares) of 2011 and 2014. Table 5 uses the same GATS definition of
prevalence and the data is comparable. Unfortunately, intensity as measured in smoked cigarettes per day was
not included in the Household Surveys, consequently consumption may only be measured in 2009 and 2017.

373
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Given that, over the period, opposing forces affected the demand for cigarettes, there is
a need to consider simultaneously the impact of the increase in real prices and the rise in
real income. This involves the calculation of an index of affordability of tobacco products. A
detailed analysis of affordability is beyond the scope of this chapter. However, a discussion
of this important topic is provided in Annex B.

Table 5. Adult Smoking Prevalence and Real Income

REAL PER CAPITA INCOME (INDEX
YEAR PREVALENCE
2009=100)
2009 25.00% 100

2011 23.90% 116.3

2014 22.20% 129.1

2017 21.60% 135.2

Source: ASource: GATS 2009 and 2017, Household Surveys of INE for 2011 and 2014. Central Bank of Uruguay
for real income.

5. Evolution of Legal Sales of Tobacco Products
The retail price of RYO had always been lower than for finished cigarettes, and consumption
traditionally was male and low-income. Women, particularly young women, increasingly
started smoking RYO after 2002, and many kept smoking it after the economy and personal
income and employment improved.

Figure 2. Trends in Legal Sales of Tobacco Products, Uruguay, 1999-2017

Evolution of yearly legal sales of 20-cigarette packs and
hand-rolled tobacco 45g packs
230,000,000 25,000,000
20,000,000
180,000,000
15,000,000
130,000,000
10,000,000
80,000,000 5,000,000
1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

N° cigarette packs (20 sticks) N° of 45g tobacco packs

Figure 2 above shows that, after 2010, when there were no tax increases on tobacco prod-
ucts for almost four years, cigarette sales started to grow, but RYO stabilized. After 2015,
with the advent of new tobacco-product tax increases, cigarette sales followed a renewed

374 // Uruguay: Tackling Illicit Tobacco Trade
downward trend, but RYO sales did not. Comparing the average cigarette and RYO sales in
1998-2004 with the 2005-2017 period (Table 6), cigarette sales fell 25 percent, but RYO sales
went up 16 percent.

Table 6. Evolution of Legal Sales of Tobacco Products

N° OF CIGARETTE PACKS
N° OF 45G RYO PACKS
(20 STICKS)
Average 1998-2004 165,612,822 16,469,643

Average 2005-2017 124,937,199 19,179,720

% change -25% 16%

Source: Authors, using data from DGI (tax authority)

6. Tax Legislation and Policy
Uruguay’s present tobacco tax regime has been set since 2007, when a comprehensive tax
reform was implemented through Law 18.083. (Annex B provides a complete description of
successive changes in the country’s tobacco excise tax legislation.) Even though cigarettes
and RYO are both tobacco products, they have generally received a different tax treatment.
The difference in tax rates between the two types of products began during the 1980s. Part
of the strategy to fight contraband from Brazil was to keep lower taxes and prices on RYO.
This strategy ultimately proved counterproductive, but was maintained for many years.

Early legislation (consolidated through the 1996 Texto Ordenado) had given the Executive
Branch authority to set and update the tobacco excise tax base and the rate, stipulating that
the base was the retail price or a proxy, and the rate was restricted to a maximum legal rate
of 70 percent. Subsequently, the Uruguayan Tax Authority (Direccion General Impositiva, or
DGI) and the Ministry of Economy and Finance (MEF) set by Government Decree a proxy for
the retail price by means of a multiplier (a unique multiplier for cigarettes and another for
RYO) for each brand.

In line with Law 18.803, Decree 232/79 of June 2007 provided a unique value for the tax
base of cigarettes (though not yet RYO), which, when multiplied by the tax rate, produced a
specific tax amount for all cigarette brands. The tax base is not related to any price. It simply
reflects the decision of the Government to move at a certain speed in terms of tax and retail
price, given that the tobacco industry normally passes through the tax to retail prices. This
tax system continues to operate today, incorporating similar changes to RYO taxation, as
well as additional tax rate increases (Annex C).

One of the main features of tobacco excise tax practice in Uruguay from 2001 to the pres-
ent has been that policy changes were achieved without the need for new legislation, given

375
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

the ample authority assigned by Parliament to the Executive Branch. This system continues
to function and is a distinctive framework that most countries do not share.

7. Background on Illicit Tobacco Trade in Uruguay
During the early 1980s and the 1990s, illicit cigarette trade from Brazil created a tax revenue
problem in Uruguay. Meanwhile, retailers in some Uruguayan cities near the border with Brazil
(Rivera, Chuy) were suffering extensive decreases in sales due to Brazil’s cheaper prices for
a range of goods. Buyers from other parts of Uruguay also travelled to these border cities to
purchase goods. There were complaints by retailers (and also by local governments).

The government in power after 1985 passed legislation to strengthen retail trade by means
of the creation of “tax-free shops.” The preamble to the new legislation mentioned the need
to promote economic activity in border towns using a new regional tourism promotion
tool.33 Legally, Uruguayan residents could not buy goods in the new shops. Instead, the tax-
free shops fueled illicit cigarette trade. Very quickly, cigarettes of Uruguayan manufacture
and some international brands became a key illicit trade item by being diverted from tax-free
shops to the local market. Cigarettes intended for sale only to tourists and non-residents
were rerouted and ended up in the hands of Uruguayan smokers by means of extensive
illegal networks.34

Cheaper prices for the same brands they usually smoked became popular among Uruguay
smokers. The size of this illicit trade reached between 10 and 20 percent of the total domes-
tic market.35 In that period (the 1990s), no other major sources of illicit trade in cigarettes
existed in Uruguay.

At the beginning of the 2000s, several government decrees were passed to strengthen
control of cigarettes (and whisky) taken from free-trade zones to the tax-free shops. Decrees
sought to hold every participant in the supply chain accountable and increased the excise
tax charged on cigarette sales in duty-free shops. Later, authorities entirely eliminated the
excise tax rate differential between cigarettes sold in duty-free shops and those sold legally
in the domestic market. At this point, the only tax benefit of buying cigarettes in the special
shops was VAT exemption.

In the late 1990s, a major change occurred in the source of illicit cigarettes in Uruguay. In
Brazil, the Souza Cruz company (a BAT subsidiary) was accused by independent sources of
using a “carousel”36 tax evasion strategy: exporting cigarettes (free of taxes) to Paraguay, then

33
Decree 222/86 (not available online)
34
Ramos, A. “The illegal trade in tobacco in the Mercosur Countries”. Trends in Organized Crime
2009;12:267-306. Another link in English: http://www.fctc.org/images/stories/INB-3/INB3_report_illegal_
trade_in_MERCOSUR.pdf. A synthesis in: http://www.fctc.org/media-and-publications-20/fact-sheets/
illicit-trade/278-inb3-fact-sheet-illict-trade-in-mercosur
35
Source: authors’ estimate base on DGI (tax authority).
36
FATF Illicit tobacco trade, 2012. http://www.fatf-gafi.org/media/fatf/documents/reports/Illicit%20
Tobacco%20Trade.pdf

376 // Uruguay: Tackling Illicit Tobacco Trade
largely funneling them back into Brazil through illicit distribution channels. The Government
of Brazil initially reacted with export bans and later with very high export taxes. Meanwhile,
Paraguayan (and Brazilian) manufacturers seized the opportunity and started an enormous
illicit cigarette business. Within a few years, manufacturers in Paraguay were producing and
selling around 60 billion cigarette sticks per year, using their own brands (brands not sold in
the domestic Paraguayan market and not registered as legal exports). Sales went to Brazil
and other markets, including Uruguay.

In the last 15 years, illicit cigarettes entering the Uruguayan market are largely manufactured
in Paraguay. Tobacco companies In Paraguay may pay the very low domestic tobacco and
VAT taxes there, but these brands of cigarettes are not intended for Paraguayan domestic
consumption. The products are thus classified as “illicit whites,” or “cheap whites,” cigarettes
that have been described as manufactured by legitimate business enterprises in a given juris-
diction but sold usually outside the jurisdiction where they are produced, without payment
of duties and taxes in the destination country.37

Today, Paraguayan illicit whites destined for Uruguay are mostly transported by ground
routes and brought into Uruguay after unloading in warehouses in the Uruguayan-Brazilian
border zone. Small trucks are generally used to smuggle the products into Uruguay. Most
cigarette cargo seizures are reported along Uruguay’s National Routes, with smugglers often
making several trips from the Brazilian border to Montevideo (350-500 km, depending on
the specific border town).

Cigarettes are also being brought by small boats through the River Uruguay bordering
Argentina, or using the bridge that links Salto (Uruguay) to Concordia (Argentina). Corrupt
customs officers may facilitate this traffic in some cases. The Uruguayan Customs Authority
(DNA) has initiated prosecutions to tackle such corruption.38

8. Estimates of Illicit Trade
There are several approaches to measuring the illicit cigarette trade in a country.39 The
method used in this report takes advantage of the recent GATS 2017 survey, which included
questions on cigarette brands smoked. This information provided a clear indication on illicit
brands, since the total number of legal brands in Uruguay is small, and the illicit brands
(Paraguayan) are very well known.40

37
Hana Ross et al. A closer look at ‘Cheap White’ cigarettes. https://tobaccocontrol.bmj.com/content/
early/2015/09/28/tobaccocontrol-2015-052540
38
Illicit trade via containers “in-transit” through the port of Montevideo was not cited as a problem in our
interviews with judges, prosecutors, and DNA authorities, and there are no recorded seizures from this setting.
On the other hand, the DNA only occasionally inspects transit containers: for example, when it has received
specific alerts from other Customs agencies, when suspicious documentation is received, or when owners’
background appears to warrant special action.
39
Ross, Hana. Understanding and Measuring Illicit tobacco trade. A methodological guide. Tobacconomics 2015.
https://tobacconomics.org/wp-content/uploads/2015/03/Ross_Methods_to_Measure_Illicit-Trade_03-17-15.pdf
40
By law, brands must register with the Ministry of Health. If registration is not updated yearly, then the brands
become illegal.

377
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

In 2009, the size of the illicit cigarette market in Uruguay was estimated through that year’s
GATS at around 12 percent of cigarettes smoked. About 8.5 percent of smokers bought illicit
cigarettes. The results of the new survey in 2017 were similar in terms of the proportion of
smokers acknowledging consumption of illicit brands (7.8 percent) (Table 7).

The results summarized in Table 7 use microdata from GATS 2009 and 2017 on population,
prevalence, and intensity of cigarette smoking.41 (There is currently no evidence concerning
illicit RYO trade.)

Illicit cigarettes have been entering Uruguay from Paraguay. The brands involved (in fact,
mainly one single brand, Eco), are perfectly identifiable. They belong to TABESA (the largest
tobacco company in Paraguay). The brands that reach Uruguay are not sold in the Paraguayan
market, and there are no legal cigarette exports from Paraguay to Uruguay (or most places).
Thus, cigarettes of Paraguayan origin found in Uruguay are illicit goods by definition.

In Uruguay, there currently appear to be no illicit brands that originate from sources other
than the Paraguayan connection. PMI and BAT in Uruguay import legally from Argentina;
together they have a market share of around 15-20 percent. The company Montepaz S.A.,
Uruguay’s only domestic tobacco manufacturer, holds the rest of the market (80 percent-85
percent).42 The Uruguayan market includes only a few legal brands. The two bestselling
brands from Montepaz together comprise around 65-70 percent of the country’s total legal
cigarette market.

In Table 7, the population size is defined as in the two surveys, that is, people aged 15 and
older. Prevalence is the number of smokers of cigarettes (daily and non-daily) over total
population aged 15 and over. The number of smokers includes those who smoke only man-
ufactured cigarettes and those who smoke both manufactured cigarettes and RYO. Intensity
of smoking is measured as the average number of cigarettes smoked daily per smoker. In the
case of smokers of both products, only the number of manufactured cigarettes was included.

YEARLY TOTAL CONSUMPTION OF CIGARETTES=INTENSITY X NUMBER OF
SMOKERS X 365

Total consumption includes both legal and illicit cigarettes. From the prevalence data on of
smokers of illicit brands, their number was calculated. The GATS data also provide the intensity
of cigarette smoking in the total calculation. Finally, the number of illicit cigarettes smoked

41
For the analysis of microdata, the authors gratefully acknowledge the assistance of Alejandra Clemente
(for GATS 2009) and Dr. Martin Gonzalez Rozada (for GATS 2017), both from the University Di Tella, Buenos
Aires, Argentina. The GATS 2009 Report did not include data on illicit brands, and the GATS 2017 Report is still
pending as of July 2018.
42
Source: Euromonitor International.

378 // Uruguay: Tackling Illicit Tobacco Trade
Table 7. Estimate of Illicit Trade in Cigarettes, Uruguay, 2009 and 2017

2009 2017

Population aged 15 and older 2,580,349 2,762,798

Prevalence of total smokers (daily and non-daily) of
20.58% 18.30%
manufactured cigarettes
N° of smokers of manufactured cigarettes (includes cigarette
531,036 505,592
smokers who also smoke RYO)
Average intensity of smoking among daily and non-daily
10.85 11.61
smokers of manufactured cigarettes

Yearly total consumption of cigarettes (number of sticks) 2,103,305,982 2,142,522,083

% of smokers of illicit brands/total population 15+ 8.50% 7.77%

N° of daily smokers of illicit brands 45,138 39,285

Intensity of smoking illicit brands of cigarettes, all smokers 15.3 17.65

Yearly illicit consumption of cigarettes, all smokers (number of
252,073,413 253,080,577
sticks)

Illicit trade as % of total cigarettes smoked 11.98% 11.81%

Source: Authors, using data from GATS 2009 and 2017

yearly was calculated, and the ratio with the previously calculated total yearly consumption
provides estimates of the percentage of illicit cigarettes in the market in both years.

Findings:
As seen earlier, total prevalence of cigarette smoking has decreased 11 percent (18.30/20.58-
1= -11 percent) in the 2009-2017 period and the number of cigarette smokers has also
dropped by 5 percent (505.592/531.036-1= -5 percent). However, intensity increased in the
period by 7 percent (11.61/10.85-1=7 percent). The resulting total yearly cigarette consump-
tion remained almost unchanged.

Smokers of illicit cigarettes (measured by brand, as previously explained) were 7.7 percent
in 2017 versus 8.5 percent in 2009, for a decline of 8.6 percent. However, the intensity of
smoking increased 15.4 percent (17.62/15.3-1= 15.4 percent). This seems plausible, since
remaining smokers are more addicted. Finally, the numbers of illicit sticks smoked in 2009
and 2017 are roughly the same, and the estimate of the illicit cigarette trade close to 12
percent in both years.

The conclusion is that the illicit market has not shown substantive changes in the period.
Possibly, the decrease in the number of smokers who smoke illicit brands is compensated by
the higher intensity of those who do not abandon smoking, the total illicit market remaining
about the same.

379
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table 7 shows that the total number of smokers of illicit brands was 7.8 percent in this
survey, and that they smoked a daily average of 17.65 cigarettes. Intensity was lower in 2009
(15.3 cigarettes). This might indicate that some of the heavy smokers who do not abandon
tobacco are more inclined to switch to illicit brands of cigarettes.

In GATS 2009, the percentage of smokers of illicit brands was estimated at 8.5 percent of
total cigarette smokers, accounting for 12 percent of the total cigarettes smoked. Given
that the affordability of the legal market of tobacco products has not changed much in the
2009-2017 period, the size of the illicit market has seemingly not varied greatly. This could
suggest that, even when legal cigarettes became more affordable, between 2010 and 2014
(See Annex B), the market for illicit cigarettes did not decrease. It seems, then, that this
market could be stable.43

To shed some light on the period of increased affordability, there is information from another
survey taken during 2011-2012. The International Tobacco Control Policy Evaluation Project
(ITC) has been performing a longitudinal study of smokers in Uruguay since 2006,44 with a
new wave every two years. Wave 3 in 2011-12 introduced a question regarding the health
warnings included on the cigarette pack, to check for possible illicit brands (defined as those
that did not show the standard warning).

As shown in Table 8, an estimated 13.1 percent of cigarette packs were not properly labelled
with the health warnings that were standard at the time in Uruguay. The authors concluded
that this could point at tax avoidance/evasion. These results are also consistent with those
discussed above in relation to the size of the illicit cigarette market (Table 7).

Table 8. An Illicit-Trade Estimate Derived Through Improper Labelling of
Cigarettes, 2010-2011

PROPERLY LABELED PACKS
NON-STANDARD LABELS NO WARNING LABEL
WITH HEALTH WARNINGS
86.90% 6.50% 6.60%
Source: ITC Uruguay Project. Figure 31. Percentage of smokers’ cigarette packs showing evidence of possible
tax avoidance/evasion, Wave 3 (2010-11).

Illicit trade, RYO, and Poverty
The GATS 2009 in Uruguay showed that poor smokers are those most likely to turn to illicit
brands (Table 9). Smokers in the poorest third of the population are much more likely to
smoke illicit cigarettes [3.56/(18.29+3.56) =16 percent] than are those in the middle tercile (7
percent), while among smokers belonging to the richest third of the population, practically

This issue requires additional research.
43

The International Tobacco Control Policy Evaluation Project ITC Uruguay National Report Findings From the
44

Wave 1 to 3 surveys (2006-2011) August 2012

380 // Uruguay: Tackling Illicit Tobacco Trade
none (0.13 percent) reported smoking illicit brands. Table 9 shows that poor people´s strat-
egy was, when continuing smoking, to buy relatively more illicit cigarettes and RYO than
legal cigarettes, as compared with wealthier groups.45 In light of these findings, illicit tobacco
trade control in Uruguay takes on added priority, since the burden of health consequences
falls predominantly on the poor. This is a substantial health equity problem.

Table 9. Prevalence of Smokers by Tercile of Wealth (2009)

CIGARETTES
TERCILE RYO ONLY
LEGAL NOT LEGAL

1 (Wealthiest) 18,33% 0,13% 0,55%

2 (Middle) 21,12% 1,70% 1,89%

3 (Poorer) 18,29% 3,56% 7,76%

Source: Authors, using GATS 2009 data.

9. Illicit Trade Control Legislation
9.1 Background
Article 15 of the FCTC, which Uruguay ratified in 2004 and is part of the country’s national
legislation since then, has not yet brought substantial changes in the rules and controls
applied to illicit tobacco trade. In 2014, Uruguay ratified the Protocol, but except for the cre-
ation of the Interagency Commission to eliminate illicit tobacco trade (See Annex D on illicit
trade legislation), there have been no advances of significance following that ratification.

Article 15 of the FCTC46 states that illicit tobacco trade includes “smuggling, illicit manu-
facturing, and counterfeiting.” There is as yet no specific legislation in Uruguay to deal with
the illicit tobacco trade as such. Customs and penal legislation and regulations have not yet
been affected by the country’s international commitments.

Legislation on smuggling in general has long existed in Uruguay, but very few regulations
apply specifically to tobacco products. The recent Customs Code (2015) and Criminal
Procedures Code (applicable since November 2017) have not addressed tobacco as a
specific concern, and smuggling is still generally treated using the traditional approach
emphasizing fiscal revenue loss. Illicit trade control legislation deals mostly with contraband
in general terms and does not distinguish tobacco products from other types of goods. Only
weapons, narcotics, and medicines have their own special crime legislation in Uruguay.

45
Unfortunately, comparable results for 2017 were not available for this report.
46
Cf. Protocol Part IV, “Measures Relating to the Reduction of the Supply of Tobacco,” as well as FCTC Article
15, “Illicit Trade in Tobacco Products.”

381
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Previously, Law 18.256, the Tobacco Control Act of 2008, included a provision that the
Executive Branch should ensure the availability of necessary human and material resources
to proceed to the elimination of all forms of illicit tobacco trade. Since it formulated a coun-
try-wide responsibility bestowed on the Executive, this law was never accompanied by a
Decree regulating it. Such a Decree might, for example, have prescribed actions for the MEF
and its agencies, particularly the DNA, as well as law enforcement. The legislation has a wide
reach, including all customs special primary territories (such as free-trade zones, economic
special zones, and free ports that do not have specific exemptions from customs surveil-
lance). The law applies to all types of transportation and storage.

Main relevant features of Uruguay’s illicit tobacco trade legislation include the following (See
also Annex D).

»» Customs law in Uruguay, as in other countries, exists for the main purpose of facilitating
and protecting legal trade operations, and it encompasses the smuggling of many types
of products. There is no specific, systematic approach to dealing with illicit tobacco trade
or even contraband in tobacco products.

»» The law stipulates fines and other penalties and mandatory referral to criminal courts,
when illicit cargo reaches a defined value. The law’s principal objective is historically to
protect fiscal revenue from the loss of import duties and other applicable taxes.

»» DNA has no customs police functions, and customs officers cannot carry weapons.

»» DNA has preeminence in illicit trade control in Uruguay’s primary customs territory (almost
the whole national territory). The law allows DNA to request assistance from other state
agencies and law enforcement (Police, Coast Guard), when needed.

»» The Customs Code and the Penal Code treat the crime of tobacco smuggling in different
ways, but the approach is mainly that of a misdemeanor, and violators receive penalties
accordingly (fines, confiscation of vehicles, etc.).

»» In March 2015, the new Customs Code came into effect, systematizing and unifying the
various laws and previously approved regulations that apply across the entire Uruguayan
territory, including free zones. All customs offenses are incorporated. The crime of
contraband is maintained, and customs fraud is added as a new crime. Penalties do not
increase but “aggravating circumstances” are included (Articles 258 and 260), such as
a contraband committed by three or more people (meaning an organization), several
similar crimes committed by the same offenders (recidivism), or smuggling goods whose
value is over UI 5 million (UI are indexed units, presently UI 5 million is over US$ 600,000).
Interestingly, Article 260 Paragraph D establishes that, “When the goods of the contraband
are weapons, ammunition, narcotics, or any substance potentially affecting peace or public
health,” the minimum penalty is mandated to be from two to six years of prison time. Even
though tobacco products are not included as such, a relatively minor legal clarification to

382 // Uruguay: Tackling Illicit Tobacco Trade
explicitly include tobacco products among goods that threaten public health could make
a difference in the criminalization of the illicit tobacco trade, in line with the Protocol.

»» There is no compliance with Article 12 of the Protocol. Even when DNA has the legal
authority, traditionally “in-transit” goods are not inspected, given the judicial interpretation
of the legal status of such a policy.

Other features of the legislation are discussed in detail in Annex D.

9.2 Cigarette Markings and Track-And-Trace Options
FCTC Article 15 established in its heading that each country "shall adopt and implement
legislative, executive, administrative or other effective measures to make all packages or
packaging of tobacco products and any external packaging of such products bear an indi-
cation to help the parties determine the origin of tobacco products." However, Uruguay has
not complied with these provisions. The country has not established any markings or tracing
mechanism for tobacco packs or boxes, such as a stamp, whether affixed or not. Only cig-
arettes to be sold in tax-free and duty-free shops are mandated to be marked with a legend
authorizing “sale only” in those premises.

Given that the Paraguayan factory that produces the illicit cigarettes that reach Uruguay is
very well known and it does not export any legal cigarettes to Uruguay, a traceability system
would not have any effect on the present “illicit white” type of illicit trade.47 48 However, a
traceability system in place would increase controls on the existing tobacco companies that
manufacture tobacco products in Uruguay (Montepaz S.A) or import them legally (BAT and
PMI affiliates), and on any other legal tobacco company in the future, by limiting their poten-
tial to divert non-duty or untaxed tobacco into the domestic Uruguayan market. We note,
however, that this maneuver has not as yet been documented in Uruguay by DGI and DNA
or other law enforcement agencies.

10. Lessons Learned
In Uruguay, the tax share in the retail price of cigarettes and RYO has yet to match the rec-
ommendations established by WHO49 and anchored in the Guidelines for Implementation
of Article 6 of the FCTC. These norms stipulate that excise taxes should constitute at least 70

47
Brazil has the same “illicit white” cigarette problem as Uruguay, but on a larger scale. A traceability system
for cigarettes (and alcoholic beverages) in operation in Brazil since 2007 has not stemmed the inflow of illicit
cigarettes from Paraguay. In fact, evidence suggests that illicit trade represents a much larger share of the total
cigarette market in Brazil than in Uruguay. See Szcklo A et al. Trends in Illicit Cigarette Use in Brazil Estimated
from Legal Sales, 2012–2016. https://ajph.aphapublications.org/doi/10.2105/AJPH.2017.304117
48
The Paraguayan “illicit white” cigarette trade has similarities with the European Union experience with
cigarettes from Belarus and other Eastern countries. See for instance: https://www.euractiv.com/section/trade-
society/news/minsk-under-pressure-to-take-action-against-illicit-whites/
49
WHO Tobacco Tax Administration Manual. WHO, 2011.

383
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

percent of sales price.50 However, while its total tax share is below this target, Uruguay has
one of the highest retail cigarette prices in the region, as confirmed in the most recent WHO
Global Tobacco Control Report (GTCR VII, released in July 2016).51 The increase in affordability
of tobacco products over the period 2010-2014 is quite inconsistent with the World Bank rec-
ommendation to raise tobacco taxes substantially: “Go big, go fast,” and “attack affordability.”52

The increase in taxes and prices has produced an increase in Uruguay’s total fiscal revenue
during recent years (when the revenue from VAT since 2007 is included). This underscores
that, as in most other countries, there is a double beneficial impact of tobacco tax and
price increases. They reduce consumption and raise fiscal revenue. Nevertheless, eco-
nomic authorities have not been in the frontline to raise taxes, and a whole-of-government
approach to tobacco taxation and illicit trade control has not yet emerged.

Tobacco control policies, and particularly tax policies, are undermined by illicit trade.
Uruguay has not passed legislation to focus on illicit tobacco trade or introduce more strin-
gent penalties. Existing penal legislation sentences in customs and criminal courts tend to
involve no jail time (illicit tobacco violations are essentially treated as misdemeanors). This
contradicts a key provision of the Protocol.

The illicit tobacco trade is mostly fragmented through multiple small shipments to evade
prison sentences if caught. Organized crime is not usually targeted via law enforcement on
tobacco, even though illicit tobacco trade involves a substantial fiscal revenue loss and a
serious health problem for Uruguay. The criminal courts and the General Prosecutor´s office
have not yet aligned their practices to deal with criminal groups involved in illicit tobacco
trade and do not view this as a priority. Investigations are conducted by the economic sec-
tion of the General Prosecutor´s Office and do not usually end in criminal prosecution. The
Customs Court has the approach that goods “in transit” need not be controlled, since they
involve no fiscal revenue loss for Uruguay.

The tobacco industry and its proxies will continue to fight back against increases in tobacco
taxes, but this strategy has lost force in view of companies’ pricing policies since Uruguay’s
modern tobacco control tax policy began in 2005. The tobacco industry has tried to inter-
fere with tobacco control policy in various ways, and with tax policy in particular.

»» Every time there has been an increase in taxes on cigarettes, industry spokespeople have
launched press releases53 and presentations in the media warning about a purported
imminent increase in smuggling. Meanwhile, despite its concerns about higher taxes
made public through the media, the tobacco industry has seized the opportunity of tax
hikes to raise prices above the level of pass-through of the tax.

50
WHO-FCTC Article 6 Guidelines. Available at: http://www.who.int/fctc/treaty_instruments/Guidelines_
article_6.pdf
51
GTCR 2016
52
Tobacco Tax Reform: At the Intersection of Health and Development, World Bank, 2017.
53
See for example. https://www.elobservador.com.uy/
consumo-tabaco-formal-crecio-pero-el-contrabando-gana-terreno-n271171

384 // Uruguay: Tackling Illicit Tobacco Trade
»» In the period from March 2010 to December 2014, when no tax changes occurred, the
tobacco industry also increased its profits per unit by raising product prices. The con-
sequences of such aggressive pricing policies included a decrease in the tax share of
cigarette retail prices.

»» The small retailers‘ association attempts to use the same arguments as the tobacco indus-
try against Uruguay’s tobacco tax policy.54

»» Surveys and studies sponsored by the industry systematically report much higher levels of
illicit cigarettes than independent, scientifically sound surveys. The industry´s studies are
not normally made public, but the results are disseminated in the media.

A whole-of-government approach to tobacco tax increases (and tobacco control generally)
is lacking. During the period 2010 to 2014, the MEF was particularly concerned with tax
hikes’ potential impact on inflation. In Uruguay, the weight of cigarettes and RYO within the
CPI is substantial. Prosecution and judicial decisions also signal a lack of whole-of-govern-
ment integration in dealing with illicit tobacco trade.

11. The Road Ahead
Uruguay has taken steps to address its declining but still unacceptable smoking prevalence
among men and the stagnant rate among women. An important policy issue is whether the
country should be making more aggressive use of tax policy. The issue is urgent because,
as we have shown, poorer citizens and women have not yet garnered the full benefits of
tobacco tax hikes. Among other strategies, maximizing such benefits will require confronting
the illicit tobacco trade.

There are several potential legal changes to deal more effectively with illicit tobacco. An
ideal scenario would involve a new, tailored piece of legislation addressing all illicit trade
control (contraband, counterfeit, and illicit manufacturing) in line with the Protocol.

Uruguay and the Implementation of the Protocol to
Eliminate Illicit Trade of Tobacco Products
Uruguay’s ratification of the Protocol in 2015 led to the creation of an Inter-Agency
Commission for the Implementation of the Protocol.55

Through periodic meetings, the different sectors of government have received information
and exchanged views on the illicit tobacco trade and the best way to solve the problem. The

54
http://www.montevideo.com.uy/Noticias/Asociacion-de-Kioscos-del-Uruguay-ve-suba-del-precio-de-
cigarrillos-como--campana-para-recaudar--uc297507
55
The Commission comprises a delegate from the MOH (who serves as chair), along with representatives of
the Ministries of Foreign Affairs, Economics and Finance, Homeland Security (Interior), Defense, Agriculture,
Industry, and Education. The Commission also includes representatives of the tax authority, DNA, and the
judiciary. Two delegates represent non-governmental organizations.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Commission has received private suppliers dealing with track-and-trace technology. It has
also collected information from national experts from countries with tracking and tracing
systems currently in place.

The Inter-Agency Commission for the Implementation of the Protocol has also conducted
analysis of current legislation and the changes that are necessary to make it more robust.
One example is a draft law for establishing licensing, as set out in the Protocol. This would
address the supply chain of tobacco products including manufacturing, distribution, and
marketing equipment.

MERCOSUR as a Potential Lever
Among MERCOSUR countries, Paraguay is an FCTC Party, but is not expected to ratify the
Protocol in the near future. Argentina would be interested in better control of illicit tobacco
trade, even though it is not a Party to the FCTC. Brazil is also one of the countries in the
region most affected by illicit tobacco and would be an important partner. For each Party,
even those that have themselves ratified the relevant accords, it is important that the other
countries in the region also ratify and implement the Protocol. Important features of the
Protocol refer to the exchange of information on law enforcement, technical assistance
and cooperation, training, research, and prosecution of infringements, along with reciprocal
administrative assistance, reciprocal legal assistance, and extradition.56

The drive to ratify the Protocol will surely be one of the most important issues on the agenda
of MERCOSUR’s Inter-Governmental Commission for Tobacco Control (CICT), in order to
produce the results that government authorities are expecting in the immediate future.

When Uruguay ratified the FCTC in 2004, it acquired obligations but also support to apply
the policy measures contained in the agreement. This has been fundamental in the evolu-
tion of tobacco control in the country. The text of the treaty served as the basis for the 2008
Tobacco Control Act that gave the necessary legal foundation to tobacco control policy in
Uruguay. Now, with the entry into force of the Protocol, there is once again an opportunity
to advance comprehensive approaches and implement needed tax and legislative changes.
The country may be poised to make fresh advances towards the goal of eliminating the illicit
trade in tobacco products.

12. Final Suggestions and Recommendations
»» Priority should be given to illicit tobacco trade by the Prosecutor´s Office. Criminal pro-
cedures are currently placed within the “economic crime” unit and do not constitute a
priority. Appropriate changes will require additional resources for the Prosecutor´s Office,
including a larger and more specialized staff. A percentage of tobacco fiscal revenue
could be earmarked and directed to this objective.

56
Part V of the Protocol to Eliminate the Illicit Trade in Tobacco Products.

386 // Uruguay: Tackling Illicit Tobacco Trade
»» DNA has all the tools and connections to coordinate relevant transport surveillance at the
regional level with neighboring and other countries. However, there may be a need for
a political perspective on these activities, with governments agreeing to cooperate and
promote a higher level of tobacco control efforts in the region.

»» Uruguay has the opportunity to develop a long-term fiscal policy for tobacco products,
thanks to the IMESI tax legislation endowing the Executive Branch with a wide mandate
to set the tobacco tax base. This is unusual, since in most other countries, legislation fixes
the tax base and rate, and changes require a new law.

»» A system for tracking and tracing tobacco products should be established, even though
presently the bulk of illicit trade comes from illicit manufacturing (Paraguayan illicit
whites). Uruguay as a ratifying Party to the Protocol will have to comply with Article 8 and
acquire a traceability system within the next five years. This will be part of a regional and
global effort to improve control and share information, and as such a key policy.

»» The situation of the illicit whites entering from Paraguay should receive attention and
become a MERCOSUR priority. Without a political focus, the solution to this form of illicit
tobacco trade will prove extremely difficult. The Brazilian and Uruguayan experiences
offer an example to consider, as does the European Union’s experience with the illicit
cigarette trade from Belarus.57

»» A full risk analysis of illicit trade in Uruguay should be undertaken to evaluate the strengths
and weakness of DNA and other participating agencies, as well as the key legislation
that requires modification. Changes may include provisions for greater coordination and
sharing of information among agencies including law enforcement and others, with the
designation of a focal point to gather data and lead the new policy. Overall, changes will
aim at a more efficient illicit tobacco control policy.

The main areas where changes in legislation would be required are as follows:

»» New legislation on licensing and due diligence regarding the supply chain of tobacco
products. This would allow for better control of tobacco companies, importers, distribu-
tors, and retailers. At present, surveys show that many formal retailers sell both legal and
illicit cigarettes.

»» Better legislation is needed for criminalization of illicit tobacco trade and to ensure
appropriate sanctions against perpetrators, in line with the Protocol. This could be done
in several ways, such as changes in legislation to penalize tobacco smuggling and other
forms of illicit tobacco trade. Legislative changes could be similar to those in place for
intellectual property rights and counterfeit, or the illicit trade of weapons and narcotics.
This would allow seizures of illicit tobacco cargo by DNA and other law enforcement
agencies to be submitted directly to criminal courts without first being submitted to the
Customs Court.

57
https://www.euractiv.com/section/trade-society/news/minsk-under-pressure-to-take-action-against-illicit-whites

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

»» There is a clear need for a whole-of-government approach to deal with illicit cigarette
trade in Uruguay. The Inter-Agency Commission created to deal with the implementation
of the Protocol could be upgraded and given more coordinating capabilities with par-
ticipating agencies, in addition to its present mainly advisory role. With new legislation,
agencies could in turn receive a mandate to prioritize illicit tobacco trade, since the country
will have ratified a Protocol that has entered the stage of full implementation.

Annexes

ANNEX A – Calculations on the Evolution of Retail
Prices, Taxes, and Tax Share of Tobacco Products.

388 // Uruguay: Tackling Illicit Tobacco Trade
APR-04
DEC-04
MAY-05
NOV-06
JUN-07
JUN-09
MAR-10
NOV-11
JUN-14
DEC-14
JUN-15
FEB-16
DEC-16
wholesale price 5,22 5,60 5,50 6,17 6,8 6,80 6,80 9,15 11,0 12,3 14,5 16,9 18,5
DEC-17
20,7

tobacco tax (IMESI) 16,48 17,68 20,79 23,32 21,50 28,00 38,00 38,00 38,00 41,10 45,21 52,22 60,05 67,26

COFIS (VAT after 29 June 2007) 0,68 0,73 0,80 0,93 7,72 9,45 12,01 12,87 13,38 14,59 16,30 18,88 21,45 24,02

distribution margin 1,4 1,5 1,4 1,9 2,3 2,8 3,0 3,8 3,9 4,3 4,8 5,5 6,3 7,0

retail margin 4,2 4,5 4,5 5,7 6,8 8,3 10,2 11,3 11,7 12,8 14,3 16,5 18,8 21,0

TOTAL RETAIL PRICE 28,0 30,0 33,0 38,0 45,0 55 70,0 75,0 78,0 85,0 95,0 110,0 125,0 140,0

Tobacco tax/retail price 58,9% 58,9% 63,0% 61,4% 47,8% 50,8% 54,3% 50,7% 48,7% 48,3% 47,6% 47,5% 48,0% 48,0%

Overall tax burden 61,3% 61,4% 65,4% 63,8% 64,9% 68,0% 71,5% 67,8% 65,9% 65,5% 64,8% 64,6% 65,2% 65,2%

Nominal tobacco tax rate 68,5% 68,5% 70% 70% 70% 70% 70% 70% 70% 70% 70% 70% 70% 70%
manufactured cigarettes (in current UR$ and %)

tax coefficient 4,61 4,61 5,4 5,4 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Tax base
24,06 25,82 29,70 33,32 30,72 40 54,29 54,29 54,29 58,71 64,59 74,6 85,79 96,08
(wholesale price x multiplier)
Table A1. Uruguay: Evolution of tax and retail price of best selling brand of

Tax Reform of 2007.
services since 2003, in
a general consumption
Note: The tax base was
calculated as a multiplier

addition to VAT. Tobacco
for all brands, COFIS was
set periodically by decree

fixed value in UR$, unique

VAT rate was zero until the
tax levied on all goods and
price of each brand before
multiplied by the wholesale

June 2007. Afterwards it was

389
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table A2. Evolution of tax and retail price per 20 cigarette pack in constant UR$ of
December 2017

TOBACCO
VAT (OR WHOLESALE,
RETAIL PRICE IMESI
COFIS) DISTRIBUTION
AND RETAIL
Apr-04 76,1 44,8 1,9 29,5

Dec-04 79,4 46,8 1,9 30,7

May-05 85,9 54,1 2,1 29,7

Dec-06 89,0 54,6 2,2 32,2

Jul-07 100,7 48,1 17,3 35,3

Jun-09 106,6 54,2 18,3 34,1

Mar-10 129,5 70,3 22,2 37,0

Nov-11 122,6 62,1 21,0 39,4

Jun-14 103,0 50,2 17,7 35,1

Dec-14 107,6 52,0 18,5 37,1

Jun-15 115,0 54,7 19,7 40,5

Feb-16 125,0 59,3 21,5 44,2

Dec-16 133,3 64,0 22,9 46,4

Dec-17 140,0 67,3 24,0 48,7

Source: Author with data from Table A1.

390 // Uruguay: Tackling Illicit Tobacco Trade
Table A3. Evolution of manufactured cigarettes retail prices, taxes and tobacco
industry shares in current and in constant December 2017 prices

TAX SHARE INCLUDING

AND RETAIL SHARE, %

AND RETAIL SHARE IN
DECEMBER 2017 UR$
TOBACCO INDUSTRY

TOBACCO INDUSTRY
RETAIL PRICE RYO IN

CPI BASE JANUARY
TOTAL TAX SHARE
CIGARETTE PACK
IMESI TAX PER 20

(IMESI + VAT) OF
RETAIL PRICE, %

RETAIL PRICE, %
IMESI SHARE OF

CONSTANT UR$

CONSTANT UR$
CIGARETTES IN

(IMESI+VAT) IN
RETAIL PRICE

TOTAL TAXES
VAT IN UR$

2017 = 100
UR$

Apr-04 28,0 16,48 17,2 58,9% 61,3% 38,7% 36,8 76,1 46,7 29,5

Dec-04 30,0 17,68 18,4 58,9% 61,4% 38,6% 37,8 79,4 48,8 30,7

May-05 33,0 20,79 21,6 63,0% 65,4 34,6% 38,4 85,9 56,2 29,7

Dec-06 38,0 23,32 24,2 61,4% 63,8% 36,2% 42,7 89,0 56,7 32,2

Jul-07 45,0 21,50 29,2 47,8% 64,9% 35,1% 44,7 100,7 65,4 35,3

Jun-09 55 28,00 37,5 50,8% 68,0% 32,0% 51,7 106,6 72,5 34,1

Mar-10 70,0 38,00 50,0 54,3% 71,5% 28,6% 54,1 129,5 92,5 37,0

Nov-11 75,0 38,00 50,9 50,7% 67,8% 32,2% 61,2% 122,6 83,2 39,4

Jun-14 78,0 38,00 51,4 48,7% 65,9% 34,1% 75,8 103,0 67,8 35,1

Dec-14 85,0 41,10 55,7 48,3% 65,5% 34,5% 79,0 107,6 70,5 37,1

Jun-15 95,0 45,21 61,5 47,6% 64,8% 35,2% 82,6 115,0 74,5 40,5

Feb-16 110,0 52,22 71,1 47,5% 64,6% 35,4% 88,0 125,0 80,8 44,2

Dec-16 125,0 60,05 81,5 48,0% 65,2% 34,8% 93,8 133,3 86,9 46,4

Dec-17 140,0 67,26 91,3 48,0% 65,2% 34,8% 100,0 140,0 91,3 48,7

Source: Author's calculations based on Table A1, INE for the CPI and market prices

391
APR-04
DEC-04
MAY-05
NOV-06
JUN-07
JUN-09
MAR-10
NOV-11
JUN-14
DEC-14
JUN-15
FEB-16
DEC-16
DEC-17
11,99 12,99 13,04 16,02 18,98 25,03 39,97 42,01 45,03 47,06 55,02 60,01 69,96 79,99

wholesale price 6,6 7,15 6,8 8,35 7,6 7,95 8,10 9,40 11,30 11,30 14,45 14,45 17,20 20,30

tobacco tax (IMESI) 2,69 2,92 3,31 4,07 4,32 7,79 17,00 17,00 17,00 18,30 20,13 23,26 26,75 29,96

COFIS (VAT after 29 June 2007) 0,30 0,33 0,33 0,40 3,26 4,29 6,86 7,21 7,72 8,07 9,44 10,30 12,01 13,73
Roll-Your-Own Tobacco (RYO)

distribution margin 0,6 0,65 0,65 0,80 0,95 1,25 2,00 2,10 2,25 2,35 2,75 3,00 3,50 4,00

retail margin 1,8 1,95 1,95 2,4 2,85 3,75 6 6,3 6,75 7,05 8,25 9 10,5 12

TOTAL RETAIL PRICE 12 13 13 16 19 25 40 42 45,00 47 55 60 70 80

392 // Uruguay: Tackling Illicit Tobacco Trade
Tobacco tax/retail price 22,9% 22,9% 27,4% 26,6% 22,4% 31,6% 42,5% 40,5% 37,8% 38,9% 36,6% 38,8% 38,2% 37,5%

Overall tax burden 25,3% 25,3% 29,9% 29,0% 40,4% 49,7% 60,5% 58,5% 55,8% 57,0% 54,6% 56,8% 56,2% 55,5%

Nominal tobacco tax rate 27% 27% 28% 28% 29% 50% 70% 70% 70% 70% 70% 70% 70% 70%

Tax base 9,97 10,80 11,83 14,53 14,90 15,58 24,29 24,29 24,29 26,14 28,76 33,23 38,21 42,80
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

DGI and markets.
Source: Author with data from
TABLE A4. Uruguay: Evolution of Tax and Retail Price for the Best-Selling Brand of
Table A5. Evolution of RYO retail prices, taxes and tobacco industry shares in
current and in constant December 2017 prices

TAX SHARE INCLUDING

AND RETAIL SHARE, %

AND RETAIL SHARE IN
DECEMBER 2017 UR$
TOBACCO INDUSTRY

TOBACCO INDUSTRY
RETAIL PRICE RYO IN

CPI BASE JANUARY
TOTAL TAX SHARE
CIGARETTE PACK
IMESI TAX PER 20

(IMESI + VAT) OF
RETAIL PRICE, %

RETAIL PRICE, %
IMESI SHARE OF

CONSTANT UR$

CONSTANT UR$
CIGARETTES IN

(IMESI+VAT) IN
RETAIL PRICE

TOTAL TAXES
VAT IN UR$

2017 = 100
UR$

(A) (B) (C) (D) (E) (F) (G) (H) (I) (J)

Apr-04 12 2,7 3,0 22,4% 24,9% 75,1% 36,8 32,6 8,1 24,5

Dec-04 13 2,9 3,2 22,4% 24,9% 75,1% 37,8 34,4 8,6 25,8

May-05 13 3,3 3,6 25,5% 28,0% 72,0% 38,4 33,8 9,5 24,4

Dec-06 16 4,1 4,5 25,4% 27,9% 72,1% 42,7 37,4 10,5 27,0

Jul-07 19 4,3 7,6 22,7% 39,9% 60,1% 44,7 42,5 17,0 25,6

Jun-09 25 7,8 12,1 31,2% 48,3% 51,7% 51,7 48,4 23,4 25,0

Mar-10 40 17,0 23,9 42,5% 59,7% 40,3% 54,1 74,0 44,1 29,8

Nov-11 42 17,0 24,2 40,5% 57,6% 42,4% 61,2 68,7 39,6 29,1

Jun-14 45 17,0 24,7 37,8% 54,9% 45,1% 75,8 59,4 32,6 26,8

Dec-14 47 18,3 26,4 38,9% 56,1% 43,9% 79,0 59,5 33,4 26,1

Jun-15 55 20,1 29,6 36,6% 53,8% 46,2% 82,6 66,6 35,8 30,8

Feb-16 60 23,3 33,6 38,8% 55,9% 44,1% 88,0 68,2 38,1 30,1

Dec-16 70 26,7 38,8 38,2% 55,4% 44,6% 93,8 74,7 41,3 33,3

Dec-17 80 30,0 43,7 37,5% 54,6% 45,5% 100,0 80,0 43,7 36,3

Source: Author's calculations based on Table A5, INE and market prices

Annex B: Affordability of Cigarettes and RYO
in Uruguay58
»» A measure commonly used to define affordability59 is the relative income price (RIP),
which measures the percentage of real income (a proxy is GDP per capita) needed to

58
The measure used was the share of GDP per capita needed to purchase one hundred 20-cigarette packs or one
hundred 45g packs of RYO tobacco.
59
Blecher, E. and Van Walbeck, C. An analysis of cigarette affordability. https://www.tobaccofreekids.org/
assets/global/pdfs/en/TAX_Cigarette_affordability_report_en.pdf

393
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

buy given amounts of tobacco products. Figure B1 shows trends in RIP. It indicates that
tobacco tax policy after 2008 was successful in reducing affordability until March 2010,
when in the case of cigarettes RIP reached a maximum. At that time, 3 percent of GDP
was needed to buy 100 packs of the most-sold brand of cigarette, while 1.6 percent of
GDP was needed to buy a 45g pack of RYO tobacco.

»» During the following period (March 2010 to December 2014), real taxes and retail prices
decreased. Since GDP increased over the same period, tobacco products became
increasingly affordable. The maximum level of affordability was reached at the end of
2014, when just 2.1 percent of GDP was needed to buy 100 packs of cigarettes.

»» Tobacco tax policy regained momentum after the new government took office on March
1, 2015. It continued the previously abandoned policy until March 2010 and then began
increasing the tax base at levels higher than inflation and real income change. This has
resulted in periodic decreases in affordability from early 2015 to the present, however at a
slower pace than in the 2008-2010 period.

Figure B1 – Affordability of Tobacco Products, 2005-2017 (Higher RIP values
indicate lower affordability)

% of per capita GDP required to purchase 100 packs of the most
sold brands of cigarettes and RYO, 2005-2017
3.5% 2.0%
Relative income price, cigarettes

Relative income price, RYO

3.3%

3.1%
1.5%
2.9%

2.7%

2.5%
1.0%
2.3%

2.1%

1.9% 0.5%
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

RIP Cigarettes RIP RYO

Source: Authors, using data from INE and the Central Bank of Uruguay.

ANNEX C – Tobacco Tax Legislation in Uruguay

394 // Uruguay: Tackling Illicit Tobacco Trade
LEGISLATION ON TOBACCO TAXATION IN URUGUAY

APPLICABLE
TAX STRUCTURE
TAX RATE

RYO
RYO

DATE

DECREE
LAW OR
CONCEPT
CIGARETTES
CIGARETTES

OBSERVATIONS
Title 11 is excise taxes. Art. 1.
Structure. The "Impuesto Especifico A proxy of the retail price was legally
Title 11 Texto
Interno" (IMESI) will be levied at the allowed and traditionally used by DGI
Ordenado
first sale of a list of goods sold by by means of setting (by Government
(Comprehensive
the producer or importer; rate for all Decree) a multiplier of the factory
tax legislation 08/28/96 66,5% 27% ad valorem ad-valorem
tobacco products had a maximum price. Until 2001 the proxy used was
restated and
of 70% rate on retail sale (art. 9) or equal to: factory price x 4.6 (the
updated), Dec.
a proxy. At the time the MEF set the multiplier), and the tax rate 66,5% for
338/96
cigarette rate at 66,5% and RYO at cigarettes, 27% for RYO
28%
Traditionally the excise tax had been
an ad-valorem, but since this law
of 2001 was passed the Executive
The tax system had been ad-valorem
current and in constant December 2017 prices

Power was allowed to change the
until this law was passed. Even when
Law 17.296, art. structure to a specific system or a
02/21/2001 66,5% 27% the law allowed for a different tax ad valorem ad-valorem
562 mixed specific ad-valorem system in
structure, changes were not done until
the case of tobacco products (art.9
later with Decree 142/03 in 2003
of the 1996 Texto Ordenado). No
change in tax rates by Decree in the
previous 5 years.
VAT had been traditionally (since the
seventies) set at 0% rate for tobacco
products. This law of 2001 intoduced
COFIS rate was set at 2,5% of retail
Law 17.345 05/31/2001 the COFIS (Cofinanciamiento de 66,5% 27% ad valorem ad-valorem
price (without COFIS tax)
la Seguridad Social) as a general
consumption taxes and tobacco
Table A5. Evolution of RYO retail prices, taxes and tobacco industry shares in

products were not exempt.
Art. 4 increased the tax rate of
Decree 245/002 6/28/2002 68,5% 27% ad valorem ad-valorem

395
cigarettes to 68,5%
LEGISLATION ON TOBACCO TAXATION IN URUGUAY

APPLICABLE
TAX STRUCTURE
TAX RATE

RYO
RYO

DATE

DECREE
LAW OR
CONCEPT
CIGARETTES
CIGARETTES

OBSERVATIONS
If the tax base (calculated by means
First time and for the next four years
of the multiplier and the factory price
the DGI used the legal authorization
as before) was found a value below
given by law 17.296 and establishes
the minimum tax base for any given
a mixed tax system. There was a
brand, the latter would be used as
minimum tax base (not a minimum
the base. The tax system would be

396 // Uruguay: Tackling Illicit Tobacco Trade
tax) periodically adjusted by the
specific. However, if the tax base was
Decree 142/03 11/04/03 Government taking into account 68,5% 27% mixed ad-valorem
found to be higher than the minimum,
inflation (but it was not indexed). The
then the base would be the sum of
new system applied only to cigarettes
the minimum with the addition of the
and not RYO. For lower priced brands
current and in constant December 2017 prices, Cont.

difference with the retail price. Then, it
the system became specific, but
would be an ad-valorem system since
soon there were no brands with retail
it took account of a price (in this case,
prices below the minimum.
the retail price) of each brand.
The tax rate for cigarettes is
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Decree 164/05 05/30/05 increased to the maximum and the 70,00% 28%
rate for RYO increased to 28%
The tax base for cigarettes changed
to a specific amount provided by the The cigarette tax system became
tax authority (to be approved and fully specific, since it was calculated
Table A5. Evolution of RYO retail prices, taxes and tobacco industry shares in

updated by Decree the following as the base value provided by the tax
Law 18.083
years), the system for RYO continue authority multiplied by the tax rate.
(Comprehensive 12/27/2006 70,00% 28% specific ad-valorem
to be ad-valorem. Another main This calculation was independent of
Tax Reform)
change was that VAT at 22% rate any price; the tax was the same for
applied to all tobacco products. all 20 cigarettes pack. RYO taxation
COFIS was abandoned. The tax continued as previously.
reform was effective JUly 2007.
LEGISLATION ON TOBACCO TAXATION IN URUGUAY

APPLICABLE
TAX STRUCTURE
TAX RATE

RYO
RYO

DATE

DECREE
LAW OR
CONCEPT
CIGARETTES
CIGARETTES

OBSERVATIONS
Specific tax base for all cigarettes was
Main change was increasing the RYO updated and also the multiplier of the
Decree 268/09 03/06/09 70,00% 50% specific ad-valorem
tax rate to 50% tax base of RYO, same ad-valorem
system as before.
RYO tax structure also went
specific. The DGI set the base for
This was the last increase of
all RYO brands at a specific amount
President Vazquez first presidential
and also raised the tax rate to 70%.
Decree 069/10 02/20/20 70% 70% period. During the following years specific specific
This Decree also raised the tax
there were no changes in the tax
rate to free-shop cigarette sales at
base.
70% (after this Decree the only tax
exemption of free-shops is VAT).
current and in constant December 2017 prices, Cont.

An update of the tax base was There were two tobacco industry
Decree 375/014 12/19/2014 approved at the end of this 70% 70% price increases in the period, in specific specific
government period. November of 2011 and June 2014
Decrees New Vazquez government in Since 2017 there is a yearly update
064/2015, power since March 1, 2015 of the tax base over the inflation
70% 70% specific specific
04/2016, updated periodically tax bases of rate and real income, but the
380/2017 all tobacco products; Government has not set any targets.
Table A5. Evolution of RYO retail prices, taxes and tobacco industry shares in

from

IMPO.
Author
Source:

DGI and
with data

397
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Annex D - Illicit Trade Legislation
The new Criminal Procedure Code (CPP) and a major
change in criminal law
The “Codigo de Proceso Penal” (Criminal Procedure Code) is a major change in criminal
law in Uruguay. It was approved in 2015, and its implementation began in November 2017. It
fundamentally reshapes the procedural approach to dealing with criminal investigation and
prosecution. Previously, the responsibility was part of the judge´s functions; prosecutors
were not on the frontline during the investigation phase and participated only when evi-
dence of a crime had been gathered by the judiciary. The new Code transfers to prosecutors
the main responsibility for the investigative process, gathering of evidence, and formulation
of charges.

The new law also includes other provisions, such as the option for prosecutors to negotiate
a reduced sentence with the accused (“plea bargaining”). Another important feature of the
new Code is the possibility for the Prosecutors Office to organize itself in a more specialized
fashion, in the interest of faster and more efficient proceedings. Thus, in November 2017, the
General Prosecutors Office was reorganized in six areas. One corresponds to economic crime
and involves contraband, asset laundering, and tax fraud.

The Office of the Prosecutor, according to the new functions attributed to it by the CPP,
has fresh options for improving the control of organized crime. For example, as noted, the
new rules give prosecutors the power to negotiate reduced penalties for accused persons in
exchange for cooperation.

The Code has faced several problems during initial implementation and may require minor
adjustments. Overall, however, it will be a valuable mechanism to strengthen Uruguay’s
judicial procedures.

A summary of legislation applicable to contraband is shown below.

398 // Uruguay: Tackling Illicit Tobacco Trade
SUMMARY OF URUGUAYAN ILLICIT TOBACCO TRADE LEGISLATION

DESCRIPTION RATIONALE
There is no systematic approach to dealing with illicit tobacco
Customs Code, Penal Code,
trade. Customs law in Uruguay, as in other countries, exists
Criminal Procedures Code,
primarily to facilitate and protect legal trading operations. However,
anti-asset laundering, intellectual
penalties and mandatory referral to criminal courts exist to respond
Overview of property rights protection law
to violations. The country has a single Customs Court with limited
applicable (counterfeiting), Tax Code
territorial responsibility. In addition to the Penal Code, some
legislation (other illicit trade such as illicit
provisions of other laws are also applicable, such as the recent
manufacturing. The tobacco
Criminal Procedural Code (CPP), the Anti-Asset Laundering Law
control Act, Law 18.256 and
(Ley N° 19574 of 2017). Counterfeit and illicit manufacturing have
Decree 284 are also applicable)
their own crime legislation.
DNA (Customs Authority) since DNA´s main functions include control, inspection, intelligence
contraband is the main crime gathering and tax collection. DNA has no customs police functions,
Main illicit
related to cigarette illicit trade. and customs officers cannot carry weapons. However, DNA has
trade
The Ministry of Interior (police, been assigned leadership in fighting illicit trade in Uruguay’s primary
control
national and local forces), the customs territory (almost the whole national territory). The law
agencies
Prefectura Nacional Naval allows DNA to enlist other state authorities and law enforcement
(Coastguard), the Tax Authority agencies (Police, Coast Guard) for help when needed.
DNA has an intelligence unit (RILO) that is normally in contact with
similar units in regional Customs agencies and elsewhere. DNA has
Intelligence
also been allowed to engage an outsourced group of law enforcers
and There are border control and
(Grupo de Respuesta e Inteligencia Aduanera, GRIA). GRIA has a
contraband other divisions in charge of
robust record of seizures of illicit goods, including tobacco. GRIA’s
control contraband control.
human resources are mainly retired and active policemen (who may
operations
carry guns) on commission work from the Ministry of the Interior
(Homeland Security).
Principal enforcer within the main customs zone of Uruguay,
defined as all the national territory except for areas specially
designated by law. Article 11 of the Customs Code establishes
DNA has full authority in the the preeminence of DNA´s responsibility with respect to any
DNA
primary customs zone and may other public agency or body (except the judiciary) in the primary
authority
require the use of police at any customs zone, and then empowers it to ask for the help of any
and reach
time. public security force (e.g., the police) to successfully discharge
its functions (Article 12). This article also establishes that DNA
can perform seizure procedures without police support if it so
determines.
DNA and
other
special Except free trade zones, free DNA’s authority excludes customs "exclaves" (special customs
customs ports, and other economic zones zones that are part of foreign customs responsibility). However,
zones (FTZ, so declared by law almost no such special zones are currently operative.
free ports,
etc.)
The Customs Code and the Penal Code treat the crime of tobacco
smuggling in different ways, but the approach is mainly that of a
Misdemeanor or felony, misdemeanor and receives penalties accordingly. A criminal court
Legislation
depending on aggravating sentence could be for misdemeanor (less than two years in jail,
on penalties
circumstances eligible for parole) or for a felony (from two to six years, always
involving jail time, but parole may be requested after one-half of
the assigned jail time has been served).

399
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

SUMMARY OF URUGUAYAN ILLICIT TOBACCO TRADE LEGISLATION

DESCRIPTION RATIONALE
Article 150 of the Penal code criminalizes the act of "association
Additional Organized crime, association to for criminal offence" with a sentence of six months to five years. If
penalties commit a crime the association is to commit the crime of smuggling, the penalty
increases from 18 months to eight years in prison.
Most confiscation procedures end in the Customs Court (with
authority only in Montevideo and a neighboring Department), but
if the judge considers that a felony may have been committed,
Customs Court of Montevideo the case is transferred to criminal court. In the remainder of the
Judicial
and Canelones, penal courts, country, proceedings are held in regular judicial courts. Here again,
proceedings
organized crime courts if a felony is suspected, the judge may send the case to criminal
court. The trial should be held in a special organized crime court, if
the value of the contraband exceeds USD 20,000 (according to the
Anti-Asset Laundering Law).
DNA has authority over incoming
DNA´s and outgoing merchandise. The
There is no compliance with article 12 of the Protocol. Traditionally,
customs information systems available
“in-transit” goods are not inspected, not because DNA lacks
authority and the obligation to report
relevant authority, but due to judicial interpretation. The Customs
in other all movements have improved
Court has held that seized illicit “in-transit” cargo (tobacco or other
special surveillance and control. There
products) should be allowed to go free, given that this form of illicit
customs is also full authority during
trade implies no fiscal revenue loss for Uruguay.
zones transportation of goods through
the primary territory.
How seized
Auction is the general rule after customs confiscation of illicit
cigarettes Destruction (not auction), but not
goods in Uruguay. However, seized cigarettes are not auctioned;
are by means of burning.
confiscation implies destruction (following Article 12 of Law 18,256).
disposed of

400 // Uruguay: Tackling Illicit Tobacco Trade
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Abascal W, Lorenzo A. Impact of tobacco control policy on teenager population in Uruguay. Salud
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Hana Ross et al. A closer look at ‘Cheap White’ cigarettes. https://tobaccocontrol.bmj.com/content/
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Consumo de Drogas, 1994

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Junta Nacional de Drogas. Observatorio Uruguayo de Drogas. 4ta. Encuesta Nacional sobre Consumo
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de Drogas en Estudiantes de Enseñanza Media. JND/OUD. October 2012

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Ley 19259. Available at: http://archivo.presidencia.gub.uy/sci/leyes/2014/08/mrree_3855.pdf

Ley 18.256 – Ley de Control del Tabaquismo. (Tobacco Control Act, 2008) - https://parlamento.
gub.uy/documentosyleyes/leyes/ley/18256 http://archivo.presidencia.gub.uy/_web/leyes/2008/03/
S405_19%2010%202007_00001.PDF

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Ramos, A. “The illegal trade in tobacco in the Mercosur Countries”. Trends in Organized Crime
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fact-sheets/illicit-trade/278-inb3-fact-sheet-illict-trade-in-mercosur

Ramos Carbajales, A; Clemente, A; Gonzalez Rozada, M. Impuestos al tabaco y políticas para el control
del tabaco en Uruguay. Fundacion Interamericana del Corazón, México 2013 - http://tabaco.ficmexico.
org/wp-content/uploads/2014/08/uruguay_web.pdf

Ross, Hana. Understanding and Measuring Illicit tobacco trade. A methodological guide. Tobacconomics
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Trade_03-17-15.pdf

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(First Survey of risk factors for Non-communicable diseases).2006 http://www.msp.gub.uy/sites/default/
files/archivos_adjuntos/1er_enfrecnt_2006_1.pdf

Tobacco Tax Reform: At the Intersection of Health and Development, World Bank, 2017.

US Department of Health and Human Services. Public Health Services. Preventing tobacco use among
youth and young adults. A Report of the Surgeon General. Atlanta, GA: US Department of Health and
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article_6.pdf

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402 // Uruguay: Tackling Illicit Tobacco Trade
403
SOUTH ASIA
& EAST ASIA
BANGLADESH
14

INDONESIA
15

M A L AY S I A
16

PHILIPPINES
17

405
BANGLADESH
14

BANGLADESH:

Illicit Tobacco Trade
Sadiq Ahmed, Zaidi Sattar, and Khurshid Alam1

Chapter Summary
In step with the country’s notable recent tobacco taxation reforms, Bangladesh is taking
action to fight the illicit tobacco trade. Bangladesh currently has a low estimated illicit
cigarette trade incidence (2 percent), compared to estimated global rates of 10-12 percent.
Annual revenue losses from illicit cigarette trade are about Taka 8 billion ($100 million), or
around 4 percent of total tobacco revenues. It is crucial to keep the illicit cigarette trade
from expanding.

Bangladesh has established a strong legal and institutional foundations for tackling illicit
tobacco. The Ministry of Health (MoH) has responsibility for setting, implementing, and
monitoring health-related tobacco policies, while the Ministry of Finance (MoF) has primary
responsibility for tobacco taxation and oversees the fight against illicit tobacco trade. Within the
MoF, primary responsibility for illicit tobacco rests with the National Board of Revenue (NBR).

Cigarette taxation in Bangladesh is enforced through the cigarette stamp and banderole
system, introduced in 2002. This system, together with control of smuggling and tightening
of cigarette intelligence, has helped keep the illicit cigarette trade in check.

Illicit trade incidence for biri (cheap, hand-rolled cigarettes) is unknown owing to lack of
data. However, industry intelligence reports suggest that the incidence of illicit biri trade

1
Policy Research Institute of Bangladesh. Additional guidance for this chapter was provided by Sher Shah Khan
(World Bank Group) and Ceren Ozer (World Bank Group).

407
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

could be significantly higher than for cigarettes. Despite the likely high volume of illicit biri
trade, the revenue loss is presently not significant owing to the low effective tax rate for
biri. However, recent reforms have for the first time aligned the biri tax base to the prod-
ucts’ actual retail price. This change, coupled with a projected increase in the biri tax rate to
match the rate for cigarettes, will raise the opportunity cost of illicit biri trade in Bangladesh.

The following recommendations are made:

»» Monitor biri production and distribution: The monitoring of biri production and distri-
bution presents a major challenge for Bangladesh. The government could potentially
improve the security of the biri banderole in a similar manner to cigarettes.

»» Strengthen regional VAT offices: The regional VAT field offices and the customs intelli-
gence administration are two critical NBR agencies for the control of illicit tobacco trade
and would need to be strengthened.

»» Strengthen local-level task forces: Policy makers have begun to test the innova-
tive idea of establishing low-cost implementation task forces at the local level to
implement tobacco laws, including those concerning illicit trade. This approach has
potential and needs to be fully developed, including through allocation of resources.
Local task forces could be made functional in all districts and sub-districts, as envis-
aged by the government.

»» Ratify the Illicit Tobacco Trade Protocol: Bangladesh was the first country to sign the
FCTC. Consistent with its significant achievements in the areas of tobacco control,
Bangladesh should sign and ratify the Illicit Tobacco Trade Protocol.

Overview
In recent years, Bangladesh has made progress in reducing tobacco use by implementing
a comprehensive tobacco control program. The prevalence of both smoked and smoke-
less tobacco use in the country has fallen (Table 1). Tobacco use prevalence significantly
declined among adults from 43.3 percent in 2009 to 35.3 percent in 2017 (GATS 2017).

408 // Bangladesh: Illicit Tobacco Trade
Nevertheless, the overall prevalence of smoking in Bangladesh remains high at 18 percent,
and nearly 21 percent of the Bangladeshi population uses smokeless tobacco (GATS 2017). In
2016, 25.54 percent of male deaths and 9.68 percent of female deaths in the country were
estimated to have resulted from tobacco-related diseases (American Cancer Society 2018).
As a result, despite recent progress, the challenge ahead for tobacco control in Bangladesh
remains formidable.

Table 1. Prevalence of Tobacco Use in Bangladesh

GATS BANGLADESH GATS BANGLADESH
INCIDENCE OF TOBACCO USE (%)
REPORT OF 2009 REPORT OF 2017
Overall tobacco use among adults 43.3 35.3

Tobacco use among males 58.0 46.0

Tobacco use among females 28.7 25.2

Overall smoking prevalence 23.0 18.0

Smoking prevalence among males 44.7 36.2

Smoking prevalence among females 1.5 0.8

Overall smokeless tobacco (SLT) use 27.2 20.6

Smokeless tobacco use among males 26.4 16.2

Smokeless tobacco use among females 27.9 24.8

Source: Global Adult Tobacco Survey, Bangladesh 2009 and 2017. 2017 Fact Sheet & Comparison Fact Sheet
(issued on August 7, 2018).
http://www.searo.who.int/bangladesh/gatsbangladesh2017comparison14aug2018.pdf
http://www.searo.who.int/bangladesh/gatsbangladesh2017fs14aug2018.pdf

Bangladesh is a small player in the global tobacco market. The country’s total production
of cigarettes and “biris” (low-cost, low-quality, hand-rolled cigarettes) was estimated at 128
billion sticks in FY2016/17, equivalent to 2.3 percent of total estimated global cigarette pro-
duction (BAT 2018). Illicit trade is estimated to represent between 10 and 12 percent of total
global tobacco trade, and there are wide variations in the incidence of illicit tobacco trade by
countries (CDC 2016). Available estimates suggest that Bangladesh has a comparatively low
level of illicit cigarette trade (2 percent). No data are available for the volume of illicit biris.
The database on smokeless tobacco products is almost non-existent because of the home-
based nature of their production and consumption.

Bangladesh’s revenue losses from illicit cigarette trade are about Taka 8 billion (US$100
million) per year, roughly 4 percent of total revenues from tobacco. The loss from illicit biri
trade is not likely to be high, because of the low tax rate currently applied to biri. On the
other hand, the potential gains from higher and better-structured tobacco taxes are con-
siderable. Bangladesh taxes low-end cigarettes at a substantially lower rate than higher-end

409
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

cigarette products. Indeed, biris were barely taxed at all until very recently. Consequently, the
tax incentives for continued consumption of lower-end cigarette products and biris have not
only affected public health adversely, but have also reduced tax revenues.

1. Bangladesh’s Tobacco Production, Revenues, and
Illicit Trade: A Situation Analysis
Production Trend and Control Policies: Figure 1 shows the recent trend in the production
of smoked tobacco products in Bangladesh, by main categories. Total cigarette and biri pro-
duction rose rapidly from FY2007/08 to FY2011/12, growing at a pace of 27 percent per year.
Production then fell sharply from the peak level of 154.9 billion sticks in FY2011/12 to 111
billion in FY2012/13. It recovered to 126.5 billion in FY2013/14 but has remained basically flat
since then. This remarkable drop in smoked tobacco production reflects the government’s
efforts to reduce smoking in Bangladesh through a range of measures including anti-smok-
ing regulations, educational campaigns, and taxation measures.

Figure 1. Recent Trend in Cigarette and Biri Production

180
160
140
120
100
80
60
Cigarettes
40
Biri
20
Total smoked
0 Tobacco
2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

2016-17

Sources: National Board of Revenue

A list of non-tax government regulations aimed at discouraging smoking is contained in
Annex 1, at the end of this chapter. Bangladesh has no separate law on tobacco taxation.
Rather, tobacco taxation is implemented as part of the Value-Added Tax (VAT) Law of 1991.
Anti-tobacco laws and regulations, including taxation, have been progressively tightened
since Bangladesh signed the WHO Framework Convention on Tobacco Control (FCTC) in
2003. Bangladesh has the distinction of being the first country to sign the FCTC and was
among the first to ratify the treaty, in May 2004. The country’s tobacco control laws, regula-
tions, and policies now encompass all four major areas of anti-smoking strategy: smoke-free
places; advertising, promotion, and sponsorships; packaging and labeling; and taxation
aimed at increasing prices and lowering the affordability of tobacco products.

410 // Bangladesh: Illicit Tobacco Trade
Despite the progress noted above, results regarding the changing composition of tobacco
products are mixed. Smoked tobacco in Bangladesh comprises two major products:
cigarettes and biris. Biri is a crude hand-rolled tobacco product that creates more health
damage than cigarettes, on average. It is also very cheap, incurs low tax rates, and yields
very little revenue compared with cigarettes. Over time, the share of biri in total production
has declined from 72 percent in FY2001/02 to 34 percent in FY2016/17 (Figure 2). This is a
positive development in terms both of health outcomes and government revenues. Within
the cigarette market, there are four lines of products for pricing and taxation purposes in
Bangladesh: Premium, High, Medium, and Low. Much of the country’s cigarette production
is concentrated around the low grade, and its relative share has risen substantially over time
(Figure 3). Low-grade cigarettes have a relatively higher health hazard compared with higher
grades and yield lower revenues owing to lower tax rates.

Figure 2. Shares of Cigarettes and Biri in Total Production (%)
28%

29%

30%

34%

36%

37%

40%

48%

52%
51%

53%

60%

63%

65%

66%

66%
72%

71%

70%

66%

64%

63%

60%

52%

49%

48%

47%

40%

37%

35%

34%

Cigarette
Biri
2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

2016-17

Sources: National Board of Revenue

Figure 3. Share of Low-Grade Cigarettes Among Total Cigarettes (%)
100 94
90
80 79 79

68 70
70
60 60 63
60 57
51 49
50 43
40 40 37
40
32 30
30
21 21
20
Share of Low
10 6
0 Other
2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

2016-17

Sources: National Board of Revenue

411
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Pricing and Taxation Policies: Although the government has not banned cigarette imports,
it imposes high taxes on imported cigarettes (Table A3.1, Annex 3). Tobacco imports in all
forms are heavily taxed, but the tax rates are particularly high for imported cigarettes, ranging
from 220 percent to 476 percent. Such high import taxes effectively function as an import
ban on foreign cigarettes.

Domestic smoked tobacco products in Bangladesh are governed by a four-tiered ad
valorem price and tax system, reflecting the four cigarette quality categories cited above.
The effective tax rate is such that the premium and high segments are more heavily taxed
than the lowest segment. Most importantly, biri is taxed at a much lower rate than other
product types. Until recently, the effective tax rate for biri was reduced even further by taxing
on a government-defined fixed base value that was much lower than the actual retail price
(Mansur 2015).

The cigarette industry is subject to profit taxation like all other enterprises in Bangladesh.
However, unlike most other enterprises, which are taxed at 25-35 percent, the cigarette
industry pays the highest allowed rate of corporate taxation on profits (47.5 percent). While
the main goal here is revenue collection, this arrangement serves indirectly to discourage
investments in cigarette production. The main policy instrument to influence cigarette prices
is indirect taxation on production. The most recent indirect tax structure for cigarettes is
shown in Table 2.2

The government imposes three types of indirect taxes on domestic cigarettes: a uniform
value-added (VAT) of 15 percent, a variable supplementary duty (excise tax) that presently
ranges from 52 percent to 65 percent, and a health surcharge of 1 percent. Total taxes thus
range from 68 percent of retail price for low-quality cigarettes to 81 percent for premium
cigarettes. To increase revenues, in FY2016-17, the government merged the medium seg-
ment with the high segment classification and adjusted the “dead zones” (basically, price
ranges that cannot be used to price cigarettes in practice). The supplementary duty (SD) rate
has been periodically adjusted to increase revenues and discourage smoking. The supple-
mentary duty gap between the low and higher segments has also been narrowed (Figure 4).

Bangladesh’s weighted average tax rate for cigarettes is now 71.5 percent, which attests to
the government’s commitment to fight cigarette smoking by creating serious price disincen-
tives, while implementing other control measures (warning labels on packaging, restrictions
on advertisements, restrictions on promotional activities, and spatial restrictions). Frequent
recent increases in cigarette taxes have raised prices substantially for all categories of ciga-
rettes in Bangladesh (Figure 5).

A more contentious policy area is the taxation of biris. Traditionally, these products have
been taxed very lightly, based on the faulty logic that biris are consumed by the poor and
that high taxes will hurt poor smokers. A strong political lobby also militates against higher

2
Data for FY2014/15–FY2017/18 are contained in Annex Tables A3.3 – A3.6, Annex 3.

412 // Bangladesh: Illicit Tobacco Trade
Table 2. Pricing Slab and Levied Tax for Cigarettes (2017-18)

RETAIL PRICING HEALTH
SEGMENT SD VAT TOTAL TAX LEVIED
SLAB (10S PACK) SURCHARGE
Premium BDT 70+ 65% 15% 1% 81%

High BDT 45 - BDT 69 63% 15% 1% 79%

Dead Zone BDT 27.01-44.99

Low BDT 27 52% 15% 1% 68%

Source: National Board of Revenue

Figure 4. Trends in Tobacco Taxation (Percentage of Retail Price)

90
80
70
60
50
40
Premium
30
High
20
10 Medium

0 Low
2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

2016-17

2017-18

Sources: National Board of Revenue

Table 3. Tax Structure for Biri FY2017-18

RETAIL
TAX AMOUNT
TYPE PACK SIZE PRICE SD VAT
(BDT)
(BDT)
25 Sticks 12.50 30% 15% 5.60

Without Filter 12 Sticks 6.00 30% 15% 2.70

8 Sticks 4.00 30% 15% 1.80

20 Sticks 12.00 35% 15% 6.00
With Filter
10 Sticks 6.00 35% 15% 3.00
Source: National Board of Revenue

413
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 5. Nominal Price of Cigarettes (Taka per 10 sticks)
120
Taka per 10 sticks

101 101 101
100 91
81
80 71 70 70 70
60
60 52 54
46.5 45 45 45 45
37 41 36.5 Premium
40 31 35.5 35
26.5 29
23 26 22.5 25.3 High
18.4
20 12.5 13.3 16.5 27
23 Medium
15 18
11 12.3 13.7
7 7.5 8.8 8.8 Low
0
2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

2016-17

2017-18
Sources: National Board of Revenue

taxes on biris (Ahmed 2013). In FY2017/18 the government enacted a major policy shift by
aligning the tax base for biri pricing to the actual retail price, as is done for cigarettes. This
policy move will likely increase revenues and discourage biri consumption. The latest round
of statutory tax rate structure for biris is shown in Table 3.3 While this progress is laudable, the
tax gap between biri and cigarettes remains high. The statutory tax rate for biri is 50 per-
cent for filter and 45 percent for non-filter, as compared with 68-81 percent for cigarettes.
Appropriate taxation for biri remains a challenge despite recent advances.

Figure 6. Recent Trend in Tobacco Revenues (Taka Billion, Current Prices)

2500 193
Taka billion

2000 164
124 145

1500

1000 2185
1567 1634 1774
Smoked Tobacco
500 Revenues (Tk bl)
Total Revenues
0 (Tk bl)
2013-14 2014-15 2015-16 2016-17

Sources: National Board of Revenue

Tobacco Revenues: Tobacco taxation is an important source of revenues for the govern-
ment in Bangladesh. Tobacco revenues (excluding profit taxation) surged from Taka 124
billion ($1.6 billion) in FY2013/14 to Taka 193 billion ($2.4 billion) in FY2016/17, growing at a

3
Data for FY2014/15 – FY2017/18 are provided in Tables A3.7 – A3.10, Annex 3.

414 // Bangladesh: Illicit Tobacco Trade
healthy pace of 16 percent per year (9 percent in real terms), which is faster than the 12 per-
cent growth in total revenues (Figure 6). As a result, the share of tobacco in total revenues
increased from 7.9 percent to 8.8 percent over the same period. Some 97 percent of the rev-
enues came from cigarettes, and only 3 percent came from biri, even though biri accounted
for over 35 percent of the total volume of tobacco smoked (Figure 7).

Figure 7. Sales Volume and Revenue from Tobacco Products

50
48
45
40
35
30
30

20
19
15
Volume
10 contribution (%)

5 Revenue
0 3 contribution (%)
Premium High Low Biri

Sources: National Board of Revenue

Illicit Tobacco Trade: Available evidence suggests that the incidence of illicit cigarette trade
in Bangladesh is small relative to the global incidence (Figure 8). Bangladesh’s illicit cigarette
trade incidence is roughly estimated at about 2 percent of total cigarettes sold in the market,
as compared with 50 percent for Latvia, 38 percent for Pakistan, 36 percent for Malaysia and
17 percent for India. Much of this illicit trade (92 percent) is in terms of cigarettes that escape
the tax net. Of the remaining 8 percent, some 5 percent are contraband cigarettes (smug-
gling), while counterfeit products represent 3 percent. The estimated revenue loss from illicit
trade is about Taka 8 billion ($100 million), which is 4 percent of total tobacco revenues.

The illicit trade incidence for biri is not known owing to lack of data. It is likely to be sub-
stantially higher than for cigarettes because of the prevalence of home-based, small-scale
biri enterprises that may not be in the tax net. Despite the possibly larger volume of illicit
biri trade, it does not lead to significant revenue loss presently because of the low effective
tax rate for biri. However, the recent reform to align the biri tax base to the actual biri price,
along with the projected increase in the biri tax rate to levels similar to those applied to ciga-
rettes, will raise the opportunity cost of illicit biri trade moving forward. Intensified efforts are
needed to improve compliance with biri taxation.

The Bangladeshi government has a strong legal foundation for addressing illicit tobacco
trade. The laws are a part of the government’s broader policy for controlling all forms of illicit
trade and abuse of government stamp papers and trademarks. They cover all aspects of ille-
gal trade including laws against forged stamps, falsified brands, smuggling, and tax evasion.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 8. Incidence of Illicit Tobacco Trade in Selected Countries

Latvia 50
Lithunia 43
Dominican Republic 40
Pakistan 38
Malaysia 36
Bolivia 36
Ireland 33
Ecuador 32
Peru 31
Brazil 29
South Africa 28
Iran 28
Poland 24
Egypt 24
Bulgaria 23
Canada 18
Austria 18
UAE 18
France 17
India 17
Phillipines 15
UK 13
Turkey 12
China 9
Germany 9
USA 8
Bangladesh 2

Sources: CDC 2016, except Bangladesh. Data for Bangladesh are industry estimates.

The legal framework also provides for stiff penalties and enforcement mechanisms including
surveillance, premise raids, seizures, mobile courts, check points in land, air, and sea ports,
and surveillance of courier services and mobile phones. The details of the legal framework
for control of illicit tobacco trade are discussed in Section 2 below.

The possible link between illicit tobacco trade and other criminal activities is not considered
a substantial law-and-order issue in Bangladesh, since the incidence of cross-border smug-
gling is small and much of the country’s illicit cigarette trade takes the form of tax evasion by
firms. In the case of biris, while there could be some tax evasion by registered biri produc-
ers, a bigger challenge is the production and sale of biris by small, home-based enterprises,
which are not registered with the government. The challenge is representative of those
posed by many other small and micro-enterprises that remain unregistered (Ahmed et al.
2018). The main difference between biri enterprises and other small enterprises, however, is
that biri enterprises sell a product that causes health damage and therefore need to comply
with all the safety laws. Also, while government policy encourages non-tobacco small and
micro-enterprises and is therefore less concerned about licensing and registration issues, the
same is not true of tobacco enterprises. Hence, much stronger efforts are needed to bring
all biri enterprises under the government registration and licensing net.

416 // Bangladesh: Illicit Tobacco Trade
2. Progress with Illicit Tobacco Trade Control
Policies and Enforcement
As noted above, the incidence of illicit cigarette trade in Bangladesh is low, but no data exists
for biris. The low incidence of illicit trade in cigarettes is explained by several factors, includ-
ing the production structure, cooperation between the cigarette manufacturers association
and the NBR, effective use of the stamp and banderole system for cigarette taxation, and the
government’s surveillance efforts. Cigarettes are a large source of government revenues, and
as such NBR is particularly vigilant in protecting this revenue source. Since revenues from
biris have been negligible so far, the policy attention to tax avoidance regarding biri has been
much less intense. As the revenue significance of biri taxation grows, policy engagement to
prevent tax evasion will likely improve.

Illicit Trade in Cigarettes: The NBR does not compile data to measure the incidence of illicit
trade in cigarettes. However, the tobacco industry makes yearly estimates based on field
intelligence data gathered through surveys of retail market outlets. The total number of illicit
cigarettes was estimated at 1.5 billion sticks in FY2016/17, which is about 1.8 percent of the
total cigarette market for that year. This is small, but the trend is growing (Figure 9). Of the total
illicit trade volume, an estimated 5 percent is contraband cigarettes; 3 percent is counterfeit;
and 92 percent belongs to the category of illicit whites: cigarettes produced by registered
enterprises but which escape taxation through firms’ under-reporting of true production.

Figure 9. Incidence of Illicit Cigarette Trade (Percent of Total Market)

2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4 Sources: Bangladesh
0.2 cigarette industry
0 estimates
2014-15 2015-16 2016-17

The low incidence of smuggling or contraband cigarettes despite the open border with India
is a surprising result. Industry experts believe this is partly because of the adequate supply of
a large range of well-known brands of cigarettes in Bangladesh. The incidence of counterfeit
cigarettes is low due to the vigilance of the Bangladesh Cigarette Manufacturing Association
(BCMA), whose individual members gather regular intelligence about smuggling and brand-
name violation and report to NBR. The biggest risk is tax evasion, especially as tax rates have

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

progressively increased. This risk will likely grow further as the tax differentials between low-
end and premium products are reduced and eventually eliminated. To counter this, the NBR
has entered into a partnership with BCMA to improve tax compliance, which is reinforced by
NBR oversight through the administration of stamps and banderoles. This is made feasible
by the fact that some 97 percent of the cigarette market share is concentrated among three
large producers: the British American Tobacco Company of Bangladesh (BATB), the Dhaka
Tobacco Company, owned by the Akij Group, and the Abul Khair Tobacco Company. Of the
three, BATB, a multi-national company, accounts for 70 percent of the market.

As in other countries, cigarette manufacturers in Bangladesh argue that taxes are too stiff
and have often lobbied against tax increases. However, once the taxes are approved by
Parliament and become a law of the land, the BATB has a good track record of compli-
ance with the tax laws. It also has a strong research and monitoring team that does regular
marketing research and surveillance based on field visits. Information is regularly shared with
NBR, thereby assisting in the implementation of the tobacco tax laws. Nevertheless, there is
a need for NBR to conduct regular independent monitoring of the illicit cigarette trade.

Illicit Trade in Biri: In the case of biris, smuggling and counterfeit issues are believed to
be negligible. Despite Bangladesh’s large border with India, industry experts judge that
biri smuggling from India is not a major issue for two reasons. First, biri production in
Bangladesh is very cheap. Secondly, the biri leaf used in India, known as tendu leaf, is
generally not preferred by Bangladeshi consumers.

However, while biri smuggling may not pose a significant threat, tax compliance regarding
biri could be a major challenge for Bangladesh. Unlike for cigarette production, where man-
ufacturing units and production are centralized and controlled by the three large registered
manufacturing companies, biri production is disseminated across numerous small production
units that are not all registered with the government, substantially complicating oversight
and enforcement.4 Assessing tax compliance for biri manufacturing is difficult, given the
dearth of relevant data. However, historically, biri prices and the corresponding tax rate were
very low until the biri pricing and taxation reform in July 2017. Thus, the incentive for tax
avoidance by organized biri manufacturers was minimal. The story is different for the unreg-
istered small biri manufacturers. To bring these enterprises into the tax net, the government
made biri tax compliance easy by allowing manufacturers to buy the banderole used for biri
taxation from post offices. Despite such efforts, the incidence of tax avoidance could grow
with the latest reform, as the biri tax rate is now significant.

Locational Aspects of Illicit Trade: Industry research shows that much of the illicit ciga-
rette trade in terms of tax evasion occurs in the northern districts of Bangladesh. Almost
50 percent of tax-not-paid factories are in the northern region, producing 85 percent of all
tax-not-paid brands. This intelligence finding should help NBR improve its tax administration.

4
Two large cigarette manufacturing companies, the Akij Group and the Abul Khair Tobacco Company, also
have a large stake in biri manufacturing, controlling an estimated 50 percent of biri production in Bangladesh

418 // Bangladesh: Illicit Tobacco Trade
To the extent that these factories also produce biri, this will also strengthen biri tax admin-
istration. However, while the early intelligence reports are valuable, the true distribution of
biri factory locations remains unknown and requires a special-purpose survey.

Use of Stamps and Banderoles for Illicit Tobacco Control: Stamps and banderoles are
the two main instruments used for controlling the illicit tobacco trade and reconciling
with the tax revenue collected. In Bangladesh, stamps and banderoles are all printed at
the Government Security Printing Press in Dhaka. Both are used for cigarette packets,
while for biri, only banderoles are used. The tobacco companies producing cigarettes take
upfront delivery of the banderole and stamp sheets from the Security Printing Press based
on their production projections. These are distributed free of charge. The companies are
allowed a maximum 1 percent wastage on the banderoles and stamps for reconciliation
with the production and tax revenue collected. In contrast, biri producers take delivery of
the banderoles from Post Offices. The producers buy these banderoles as a tax levy on
the production of biris. The price paid for the banderole is the final tax obligation for biri
manufacturers, as the NBR does not have the capacity to monitor and cross-check with
the true volume of biri production. This approach to biri taxation aims to simplify tax com-
pliance for biri manufacturers.5

The cigarette stamp and banderole system works well, with a small incidence of abuse relating
to illicit whites and counterfeit cigarettes. The banderole system used for taxing biris is less
effective. Due to low revenue yields from biris, the quality of the biri banderoles is low, making
them less secure. Along with the potential for forgery of biri banderoles, there are reported
instances of torn legal biri banderoles being glued and reused in rural areas. The vigilance of
both the government and the biri industry in maintaining the integrity of the biri banderole
system is relatively lax, as compared with the stricter standards of the cigarette industry.

It is illegal in Bangladesh to sell cigarettes without the appropriate banderole. The VAT office
tries to ensure that the number of banderoles that manufacturers obtain from the secure
printing press matches the number of cigarette packets actually produced. For this, they
have a dedicated officer at the factory. VAT officials collect taxes based on actual production
going out of the factory gate, where a VAT official is present and signs off on the chalan
(paper document). To further ensure traceability, VAT officials also check each truck consign-
ment once it departs from the factory premises to see that the number of packets/cartons
matches the invoice. At a subsequent road junction, there is another level of checking by
VAT officials, who again verify the transported tobacco products against the chalan that had
been issued at the factory gate. Later, the total tax revenue collected is reconciled with the
stamps and banderoles that each producer has received, allowing for the permissible 1 per-
cent wastage. This is an elaborate and secure cross-checking system that works well, except
in some instances of collusive behavior of NBR staff and the cigarette manufacturer.

5
Additional details concerning the application of stamps and banderoles in Bangladesh are provided in Annex 4.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Policies, Strategies, Laws, and Reforms Undertaken to
Control Illicit Tobacco Trade
As noted in Part 1, Bangladesh has made substantive efforts to control tobacco use as
well as illicit tobacco trade. The 56th World Health Assembly unanimously adopted the
Framework Convention on Tobacco Control (FCTC) in May 2003, and Bangladesh was
the first country to sign the Convention. The FCTC entered into force and became part of
international law on 27 February 2005 after ratification by 40 countries. Bangladesh enacted
a Tobacco Control Law in 2005 in accordance with some of the provisions of the FCTC. The
country’s anti-tobacco laws have been progressively strengthened, and implementation has
been good.

To implement the 2005 Law, the National Strategic Plan of Action for Tobacco Control
(NSPATC) 2007-2010 was prepared and adopted by the Ministry of Health. The Strategic Plan
calls for partnership-building to strengthen collaboration between the Ministry of Health and
Family Welfare and other ministries, including Finance, Commerce, Home, Law, Foreign
Affairs, and Information. Subsequently, the incorporation of NSPATC in the country’s Sixth
Five Year Plan further reinforced Bangladesh’s momentum in tackling the smoking problem.

The measures outlined under the Strategic Plan to control the illicit trade of tobacco prod-
ucts included:

»» Control of smuggling, which includes adopting appropriate measures to ensure that all
packages of tobacco products sold or manufactured carry the necessary markings, such
as prominent tax stamps, easily visible local language (Bengali) warnings, country of origin
and country of destination, and product information that will allow the products to be
effectively tracked and traced. Smuggling control measures also include the aggressive
enforcement and consistent application of tough penalties to deter smugglers. All persons
engaged in the business of manufacturing, importing, exporting, wholesale, storage and
transport of tobacco products should be licensed.

»» Control of illicit manufacturing and counterfeiting.

»» Monitoring and collecting data on cross-border trade in tobacco products, including
illicit trade.

»» Exchange of information among related departments such as tax, customs, and law
enforcement agencies and local authorities, as well as among countries of the region.

»» Development and enforcement of collaborative interventions with neighboring countries
to regulate tobacco products and reduce the illegal cross-border trade, promotion, and
advertising of tobacco products.

Actions proposed to implement the measures/goals of the Strategic Plan included
the following:

»» Establishment of a national tobacco committee and enforcement of national legislation.

420 // Bangladesh: Illicit Tobacco Trade
»» Setting appropriate price and tax policies.

»» Protection from exposure to secondhand smoke.

»» Prohibition of all forms of advertisement, promotion, and sponsorship.

»» Education, communication, training, and public awareness.

»» Promotion of cessation of tobacco use and adequate treatment for tobacco dependence.

»» Ban on sale of tobacco products to and by minors.

»» Support for laboratory analysis of tobacco products for tobacco product regulation
and disclosures.

»» Packaging and labeling of tobacco products.

»» Research, surveillance, and exchange of information.

»» Control of illicit trade in tobacco products.

»» Partnership building for tobacco control.

»» Identification and mobilization of financial resources.

Laws and Regulations to Control Illicit Tobacco Trade: To support these actions, the
Bangladeshi government has created a variety of legal and regulatory mechanisms. Some
impose stringent requirements on the packaging and distribution of tobacco products, for
example. Tobacco laws are backed by heavy penalties and work synergistically with tax tools,
including VAT, supplementary duty, health surcharge, and customs duty. The overall results
have been encouraging, with a substantial reduction in the incidence of tobacco use and an
increase in revenues.

Penalties for Violation of Tobacco-Related Laws: Under the prevailing Tobacco Control Laws,
authorized officers will be able to enter and inspect any public place or mode of transport as
defined by the law and expel or remove any person violating the anti-smoking law. Officers
can also destroy or seize illegal tobacco products. This violation is a cognizable offence.
Thus, police can arrest those violating the law and produce them in court. In addition, there
are specific laws to deter activities such as smuggling, the production of counterfeit tobacco
products, violating customs prohibitions, and non-payment of duties. Tobacco smuggling can
lead to jail terms of from one to seven years. Different levels of fines can also be imposed by
the courts. Violation in paying VAT or other duties also carries penalties.

The following are criminal offenses punishable under the Penal Code:

»» Using a false trademark to mislead consumers about the origin of goods

»» Counterfeiting a trademark used by another enterprise.

The punishment for using a false trademark is imprisonment for up to one year, or a fine, or
both. The punishment for counterfeiting is imprisonment for up to two years, or a fine, or
both. The courts also have the power to set the prison term and the amount of any fine. In

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

addition, the Penal Code identifies several activities as criminal offenses and sets out various
enforcement measures available to rights holders. Two such offenses, and their punish-
ments, are as follows:

»» Making or possessing any instrument for counterfeiting a trademark – the punishment for
this offence is imprisonment for up to three years, or a fine, or both;

»» Selling, exposing, or possessing for sale or any purpose of trade or manufacture any
goods bearing a counterfeit mark – the punishment for this offence is imprisonment for
up to one year, or a fine, or both.

In cases of counterfeiting, a rights holder may file a criminal complaint with the police. If
the complaint is genuine, the case then goes to trial before a court. In addition, police offi-
cials may launch raids to seize counterfeit and pirated goods and take additional legal and
enforcement actions. All criminal cases relating to false trademarks or counterfeiting are tried
by a magistrate’s court (first or second class, or a metropolitan magistrate in an urban area).
Any appeal against the magistrate’s order must be made to a district magistrate or session
judge. Remedies available in criminal actions include the following:

»» Raids on the premises where the counterfeit goods are stored;

»» Seizure of the goods;

»» Destruction of the counterfeit goods; and/or

»» Imposition of penalties on the infringer.

Administrative Arrangements for Implementation of
Tobacco Policy
The government recognizes that tobacco policy administration is a multi-sectoral task
requiring coordination among many agencies at national and district levels. Administrative
arrangements are summarized in Table 4.

Four ministries -- the Ministry of Health (MoH), the Ministry of Finance (MoF), the Ministry of
Agriculture, and the Ministry of Home -- and the Cabinet Division are involved with the imple-
mentation of tobacco policy. The MoH and MoF are the two key coordinating ministries.

Ministry of Health: The MoH develops medium-term tobacco control strategies, policies,
and programs. It is also responsible for overall coordination, implementation, and monitoring
of non-tax related tobacco control programs and policies. The National Tobacco Control
Cell (NTCC) was established within the MoH in 2007. The NTCC has become the national
hub for the coordination of tobacco control activities and a referral and support center for
all tobacco control stakeholders, including NGOs, in Bangladesh.

To help the MoH develop and implement tobacco-related strategies and policies, the
government has set up several multi-sectoral bodies. At the national level, the government
established the National Task Force for Tobacco Control (NTFTC). All relevant government

422 // Bangladesh: Illicit Tobacco Trade
Table 4. Tobacco Policy Administration in Bangladesh

RELEVANT ENFORCING
MINISTRY RESPONSIBILITY
DEPARTMENT DEPARTMENT(S)
Border Guard Keep check of smuggled products in land/maritime
Coast Guard & BGB
Bangladesh boundaries
Ministry of Police
Home Police On ground enforcement against any non-
Rapid Action Battalion
Administration compliance
Armed Police Battalion

VAT & Customs Intelligence Identify and investigate revenue shortfalls

VAT Implementation Tax stamp, banderole check

VAT Policy Any policy creation / amendment

On the ground revenue authorities. Right to
Ministry of National Board
All 13 VAT Commissionerate enforce if any loopholes related to revenue
Finance of Revenue
collection found

Customs Intelligence Cell

Customs Intelligence & Keep check of smuggled products in various entry
Investigation Directorate points

All custom houses

Department of
Ministry of
Agriculture & Keep check of practices related to cultivation
Agriculture
Extension
National
Ministry of Develop Tobacco control policies and check
Tobacco Control
Health compliance to TCA
Cell (NTCC)
Divisional
Enforcement against TCA non-compliance and
Cabinet Commissioner
Magistrates ensure legit trade and commerce in relevant
Division Deputy division/district
Commissioner

institutions, NGOs, legal and media organizations, and international partners that could influ-
ence tobacco control policies are represented here. The NTFTC serves as the overarching
coordinating and supervising body that provides oversight to the NTCC in the development
and implementation of tobacco control laws. On the implementation front, the NTCC is
supported by two local-level task forces – one at the District (Zila) level and the other at the
sub-district (Upazila) level. These local-level task forces are innovative mechanisms for low-
cost delivery of tobacco control policies at the consumer level. When developed to their full
potential and adequately funded, they may contribute crucially to further strengthening the
government’s tobacco control administration (Jackson-Morris et al. 2015).

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

The combination of the NTCC and the three task forces (one at the national level and two at
local level) provides a solid institutional foundation for tobacco control in Bangladesh.

The Ministry of Finance National Board of Revenue: The MoF’s National Board of Revenue
(NBR) is the lead agency for tobacco taxation and pricing policies. Tobacco taxation in
Bangladesh is governed by the country’s 1991 Value-Added Tax (VAT) Law. There is no sep-
arate law for tobacco taxation per se, and there are no subnational tobacco taxes. Tobacco
tax rates are periodically reviewed in the context of the annual national budget cycle. The
enforcement of tobacco tax is carried out by a VAT Commissionerate and its field offices,
namely Divisions and Circles.

The NBR customs unit monitors cross-border movements of goods and services, including
tobacco. Air and sea ports are well monitored with modern equipment to control smuggling.
There are allegations of customs abuses in clearance of air and sea port cargoes, but these
are governance issues for the customs system as a whole that require constant monitor-
ing. The land border check-ports are less well equipped and staffed. Also, Bangladesh’s
land border is large, open, and nearly impossible to oversee fully, creating the potential for
tobacco smuggling via land routes.

Enforcement of Tobacco Laws through the Mobile Court System: The mobile court drive
is an exceptional element of the judiciary system in Bangladesh. It is being used for rapid
dispensation of justice in certain non-criminal cases, including the violation of anti-to-
bacco laws (for example, smoking in public places or displaying tobacco advertisements).
On-the-spot actions are taken, such as removing billboards containing tobacco product
advertisements and removing other tobacco advertising materials from locations such as
fast-food corners, sports facilities, and restaurants. When tobacco advertisements are tar-
geted, an empowered mobile court magistrate can try the case immediately, ensure removal
of the offending materials, and punish the perpetrators as per the law. Members of law
enforcement agencies, including the police, provide the magistrate with necessary support.

Under the powers of the 2005 Tobacco Control Act, the Deputy Commissioners of dif-
ferent Zillas (Districts) are authorized to conduct mobile courts within their jurisdictions to
apprehend any violation of tobacco-related legislation, including retail-level selling of illicit
tobacco. But these efforts are conducted sporadically, based on the availability of budgetary
resources. The NTCC head has informed that a part of the resources now being raised as
Health Surcharge will be used to fund such mobile court operations at regular intervals. In
a recent order, the Cabinet Division has asked the Deputy Commissioners to regularly hold
mobile courts in their Districts and send monthly reports to the NTCC.

The NTCC head believes that one of the key enforcement challenges in stopping the illicit
tobacco trade is to target small retail outlets in rural and urban areas. Cigarettes, biris, and
SLT are largely sold to consumers in small shops and tea stalls across the country without
any licensing needs. Had there been designated tobacco selling points, then much of the
illicit tobacco trade would disappear. The NTCC head stated that, as a pilot initiative, the

424 // Bangladesh: Illicit Tobacco Trade
NTCC is working with the Mayor of Rangpur to define a limited number of designated and
licensed tobacco retailers across the city. If the pilot works, then the NTCC will expand this
effort in other parts of the region. As noted earlier, a large part of Bangladesh’s illicit tobacco
trade is concentrated in the greater Rangpur region.

3. Reform Agenda to Control Illicit Tobacco Trade
Tobacco control in Bangladesh, including the control of illicit trade, offers a positive story. The
country’s progress in reducing the use of tobacco is encouraging. Adoption of laws, regula-
tions, and taxation policies is consistent with international good practice. Of particular note,
the average tax share of retail cigarette prices in Bangladesh is now 71.5 percent. Despite this
positive track record, a large unfinished agenda must be addressed as Bangladesh moves
ahead with its tobacco control agenda. Key reform priorities are discussed below.

»» Monitor biri production and distribution: The monitoring of biri production and dis-
tribution presents a major challenge for Bangladesh. Knowledge on biri production,
the geographical distribution of factories, and compliance with tax laws remains weak.
The recent reforms of biri pricing and taxation have now raised the stakes for potential
revenue gains and for reduction of those gains through tax evasion revenue loses. The
government could improve the security of the biri banderole in a similar manner as it
has done for cigarettes. The monitoring of biri banderole use by posting NBR staff in
all factories may be difficult, owing to the wider dissemination of biri manufacturing.
However, several steps can be taken to strengthen the biri banderole system. First, NBR
staff could potentially be posted in larger production units managed by the major biri
producers. Second, the government potentially could encourage the formation of a Biri
Manufacturers Association and encourage manufacturers to self-police the system. Third,
the pilot program being run in Rangpur to monitor the sale of tobacco products in retail
shops might be studied and developed for replication in other major cities. In addition,
research could enable a better understanding of the distribution of biri manufacturing
across the country, the industry’s ownership structure, total production, the marketing
chain, and illicit trade issues.

»» Monitor both inputs and outputs to prevent tax evasion: While the government needs to
continue enforcement against illegal tobacco products at the different manufacturing
points as well as at the retail level, officials should also increase their vigilance in mon-
itoring tobacco sourcing. Cigarettes and biris require processed tobacco, and processed
tobacco can only be obtained in Bangladesh from a few Green Leaf Threshing Plants
(GLTPs) run by the large cigarette and biri manufacturers. Ensuring effective accountabil-
ity around inputs and outputs will help unearth processed tobacco leakage that may be
flowing to the manufacturers of illegal cigarettes and biris.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

»» Strengthen regional VAT offices: The regional VAT field offices and the customs intel-
ligence administration are two critical NBR agencies for the control of illicit tobacco
trade. Given the concentration of illicit tobacco trade in the northern part of Bangladesh,
the related regional Commissionerates of Rajshahi and Rangpur need to be strengthened
to improve tax compliance and monitoring. Regular progress reports on enforcement
efforts in the northern districts should be required, along with evidence of implementa-
tion progress.

»» Strengthen local-level task forces: Policy makers have begun to test the innovative
idea of establishing low-cost implementation task forces at the local level to implement
tobacco laws, including those concerning illicit trade. This approach has potential but
would need to be fully developed, including through allocation of resources. Support to
conduct regular mobile court operations also would seem to hold potential to strengthen
tobacco control at the local level.

»» Develop and publish a database on the incidence of illicit tobacco trade and actions
taken: Presently there is no reliable NBR database on the incidence of illicit tobacco
trade. This gap should be addressed systematically. This should involve going beyond
industry sources to develop independent estimates of illicit tobacco trade. The govern-
ment should supplement industry illicit trade data with its own efforts to estimate illicit
cigarette trade. Regarding biri, the estimated data on production based on revenue yields
and prices can be strengthened and supplemented by the findings of the proposed sur-
vey-based research on biri production, consumption, and distribution. The reconciliation
of the survey data with the revenue data can then provide an estimate of illicit biri trade.
The NBR takes many actions to enforce compliance with tobacco tax laws. The kinds of
steps taken, the volume of illicit tobacco products involved, and the penalties imposed for
non-compliance should be documented and published on the agency’s website.

»» Ratify the Illicit Tobacco Trade Protocol: As noted, Bangladesh was the first country to
sign the FCTC. Consistent with its significant achievements in the areas of tobacco con-
trol, Bangladesh should sign and ratify the Illicit Tobacco Trade Protocol.

426 // Bangladesh: Illicit Tobacco Trade
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Annexes

Annex 1. List of Non-Tax Tobacco Control Laws
English versions of all tax laws and the implementation of these laws in the three major areas
relating to anti-smoking strategy -- smoke free places; advertising, promotion and sponsor-
ships; and packaging and labeling-- are available and can be downloaded from the following
website: https://www.tobaccocontrollaws.org/legislation/country/bangladesh/laws

Table A1.1. Bangladesh Non-Tax Tobacco Control Laws

SL. EFFECTIVE DATE
NAME OF LAW / RULE
NO OF LAW
1. May 1, 1890 Article 110 of the Railways Act, 1890 (Act No. IX 1890)

2. February 1, 1919 The Juvenile Smoking Act, 1919

3. March 12, 2005 Smoking and Using of Tobacco Products (Control) Act, 2005

4. May 29, 2006 Smoking and Using of Tobacco Products (Control) Rules, 2006

Smoking and Tobacco Products Usage Control (Amendment) Act,
5. May 2, 2013
2013 (Act No. 16 of 2013)
Smoking and Tobacco Products Usage (Control) Rule, 2015 (S.R.O.
6. March 12, 2015
No 58).
Ministry of Health and Family Welfare Pictorial Health Warnings
(Issued pursuant to Smoking and Tobacco Products Usage
7. March 12, 2015
(Control) (Amendment) Act, 2013 and Smoking and Tobacco
Products Usage (Control) Rule, 2015
Ministry of Health and Family Welfare, National Tobacco Control
8. July 4, 2017
Cell, Public Notice

Source: Ministry of Health

428 // Bangladesh: Illicit Tobacco Trade
Annex 2. Contents of Non-Tax Tobacco
Control Laws

Table A2.1. Links of Law/Rule

SL. EFFECTIVE DATE
LINKS OF LAW / RULE
NO OF LAW
1. May 1, 1890 Article 110 of the Railways Act, 1890 (Act No. IX 1890)

2. February 1, 1919 The Juvenile Smoking Act, 1919

3. March 12, 2005 Smoking and Using of Tobacco Products (Control) Act, 2005

4. May 29, 2006 Smoking and Using of Tobacco Products (Control) Rules, 2006

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Annex 3. Analytical Tables and Graphs

Table A3.1. Trend of Cigarette and Biri Production (billion sticks)

2007- 2008- 2009- 2010- 2011- 2012- 2013- 2014- 2015- 2016-
08 09 10 11 12 13 14 15 16 17
Premium 2.9 3.3 4.1 4.4 5.2 4.2 3.8 4.1 4 4.4

High 7.5 6.8 9.2 7 8.1 8.1 8.8 8 4.6 4.5

Medium 11.7 18.8 19.2 19.9 19.4 14.6 16.8 12.5 9.4 8.8

Low 1.4 13.7 33.6 41.5 49.4 39.7 50.3 58.1 65.9 66.8

Total Cigarette 23.5 42.7 66 72.8 82.1 66.6 79.7 82.7 83.8 84.5

Biri 35.3 46.3 63.4 67.2 72.8 44.4 46.8 44.5 43.2 43.5

Total Cigarette
58.8 89 129.4 140 154.9 111 126.5 127.2 127 128
& Biri

Source: National Board of Revenue

430 // Bangladesh: Illicit Tobacco Trade
Table A3.2. Import and Domestic Taxes on Tobacco and Tobacco-related Products
FY2017/18
TARIFF ON
TARIFF ON IMPORTS DOMESTIC
HARMONIZED
HS CODE PRODUCTION NPR
DESCRIPTION
CD SD VAT RD AIT ATV TTI SD VAT

Tobacco not stemmed/
2401.10.00 25 60 15 3 5 4 150.897 0 0 135.520
stripped
Tobacco partly or
2401.20.00 wholly stemmed/ 25 60 15 3 5 4 150.897 0 15 104.800
stripped

2401.30.00 Tobacco refuse 25 60 15 3 5 4 150.897 0 15 104.800

Cigars, cheroots &
2402.10.00 cigarillos, containing 25 350 15 3 5 4 596.585 0 15 476.000
tobacco
Cigarettes containing
2402.20.00 25 350 15 3 5 4 596.585 65 15 249.091
tobacco
Cigars, cheroots,
cigarellos and
2402.90.00 25 150 15 3 5 4 289.214 35 15 137.037
cigarettes, of tobacco
substitutes
Smoking tobacco,
...substitutes in any
proportion: Water pipe
2403.11.00 25 150 15 3 5 4 289.214 0 15 220.000
tobacco specified in
Subheading Note 1 to
this Chapter
Smoking tobacco,
whether or not
2403.19.00 containing tobacco 25 150 15 3 5 4 289.214 0 15 220.000
substitutes in any
proportion: Other
"Homogenised" or
2403.91.00 25 150 15 3 5 4 289.214 0 15 220.000
"reconstituted" tobacco
Other manufactured
2403.99.00 tobacco/tobacco 25 150 15 3 5 4 289.214 100 15 60.000
substitutes
Yellow base paper
imported by VAT
registered cigarette
4802.54.10 25 10 15 3 5 4 74.054 0 15 40.800
manufacturing
industries of weighing
less than 40 g/m²
Cigarette paper in the
form of booklets or
tubes: Imported by
4813.10.10 25 100 15 3 5 4 212.371 20 15 113.333
VAT registered tobacco
products manufacturing
industries

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Table A3.2. Import and Domestic Taxes on Tobacco and Tobacco-related Products
FY2017/18, Cont.

TARIFF ON
TARIFF ON IMPORTS DOMESTIC
HARMONIZED
HS CODE PRODUCTION NPR
DESCRIPTION
CD SD VAT RD AIT ATV TTI SD VAT

Cigarette paper in the
4813.10.90 form of booklets or 25 100 15 3 5 4 212.371 20 15 113.333
tubes: Other
Cigarette paper
in rolls of a width
<=5 cm: Imported
4813.20.10 by VAT registered 25 100 15 3 5 4 212.371 20 15 113.333
tobacco products
manufacturing
industries
Cigarette paper in rolls
4813.20.90 of a width <=5 cm: 25 100 15 3 5 4 212.371 20 15 113.333
Other
Cigarette paper:
Other: Imported
by VAT registered
4813.90.10 25 100 15 3 5 4 212.371 20 15 113.333
tobacco products
manufacturing
industries
Cigarette paper: Other:
4813.90.90 25 100 15 3 5 4 212.371 20 15 113.333
Other
Bottle/Refill used in
3824.99.40 Electronic Nicotine 25 100 15 3 5 4 212.371 0 15 156.000
Delivery System (ENDS)
Other machines and
apparatus: Electronic
8543.70.50 25 100 15 3 5 4 212.371 0 15 156.000
Nicotine Delivery
System (ENDS)

Source: National Board of Revenue (NBR)
Notes: CD= Custom Duty; SD = Supplementary Duty; VAT = Value Added Tax; RD= Regulatory Duty; AIT =
Advance Income Tax; ATV= Advanced Trade VAT; TTI= Total Tax Incidence; NPR= Nominal Protection Rate;

432 // Bangladesh: Illicit Tobacco Trade
Table A3.3. Pricing Slab & Levied Tax for Cigarettes FY2014-15

SEGMENT PRICING SLAB (10s PACK) SD VAT HEALTH SURCHARGE TOTAL TAX LEVIED

Premium BDT 90 & Above 61% 15% 1% 77%

Dead Zone BDT 55-89

High BDT 50 - BDT 54 61% 15% 1% 77%

Dead Zone BDT 36-49

Medium BDT 32 - BDT 35 60% 15% 1% 76%

Dead Zone BDT 17-32

Low BDT 15 - BDT 16.5 43% 15% 1% 59%

Source: National Board of Revenue (NBR)

Table A3.4. Pricing Slab & Levied Tax for Cigarettes FY2015-16

SEGMENT PRICING SLAB (10s PACK) SD VAT HEALTH SURCHARGE TOTAL TAX LEVIED

Premium BDT 70+ 63% 15% 1% 79%

High BDT 44 - BDT 69 61% 15% 1% 77%

Dead Zone BDT 42.01-43.99

Medium BDT 21- BDT 42 60% 15% 1% 76%

Dead Zone BDT 19-20

Low BDT 18 48% 15% 1% 64%

Source: National Board of Revenue (NBR)

Table A3.5: Pricing Slab & Levied Tax for Cigarettes FY2016-17

SEGMENT PRICING SLAB (10s PACK) SD VAT HEALTH SURCHARGE TOTAL TAX LEVIED

Premium BDT 70+ 65% 15% 1% 81%

High BDT 45 - BDT 69 63% 15% 1% 79%

Dead Zone BDT 23.01-44.99

Low BDT 23 50% 15% 1% 66%

Source: National Board of Revenue (NBR)

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Table A3.6. Pricing Slab & Levied Tax for Cigarettes FY2017-18

SEGMENT PRICING SLAB (10s PACK) SD VAT HEALTH SURCHARGE TOTAL TAX LEVIED

Premium BDT 70+ 65% 15% 1% 81%

High BDT 45 - BDT 69 63% 15% 1% 79%

Dead Zone BDT 27.01-44.99

Low BDT 27 52% 15% 1% 68%

Source: National Board of Revenue (NBR)

Table A3.7. Tax Structure for Biri FY2014-15

TYPE PACK SIZE TRUNCATED TARIFF VALUE SD VAT

25 Sticks 4.27 25% 15%
Without
12 Sticks 2.05 25% 15%
Filter
8 Sticks 1.37 25% 15%

20 Sticks 4.64 30% 15%
With Filter
10 Sticks 2.32 30% 15%

Source: National Board of Revenue (NBR)

Table A3.8. Tax Structure for Biri FY2015-16

TYPE PACK SIZE TRUNCATED TARIFF VALUE SD VAT

25 Sticks 4.91 25% 15%
Without
12 Sticks 2.36 25% 15%
Filter
8 Sticks 1.58 25% 15%

20 Sticks 5.34 30% 15%
With Filter
10 Sticks 2.69 30% 15%

Source: National Board of Revenue (NBR)

434 // Bangladesh: Illicit Tobacco Trade
Table A3.9. Tax Structure for Biri FY2016-17

TYPE PACK SIZE TRUNCATED TARIFF VALUE SD VAT

25 Sticks 7.10 30% 15%
Without
12 Sticks 3.40 30% 15%
Filter
8 Sticks 2.25 30% 15%

20 Sticks 7.75 35% 15%
With Filter
10 Sticks 3.85 35% 15%

Source: National Board of Revenue (NBR)

Table A3.10. Tax Structure for Biri FY 2017-18

TYPE PACK SIZE RETAIL PRICE (BDT) EXCISE VAT

25 Sticks 12.50 30% 15%
Without
12 Sticks 6.00 30% 15%
Filter
8 Sticks 4.00 30% 15%

20 Sticks 12.00 35% 15%
With Filter
10 Sticks 6.00 35% 15%

Source: National Board of Revenue (NBR)

Annex 4. The Functioning of Tobacco Stamps and
Banderoles in Bangladesh
Stamps and banderoles are the two instruments used for controlling illicit tobacco trade and
to reconcile with the tax revenue collected. These are all printed at the Government Security
Printing Press in Dhaka. Stamps and banderoles are both used in the case of cigarette pack-
ets, while for biri only banderoles are used.

The tobacco companies producing cigarettes take upfront delivery of the banderole and
stamp sheets from the Security Printing Press based on their production projections. On the
other hand, the banderoles for biri producers are distributed through the Post Offices, since
a substantial amount of biri is produced in remote areas in homesteads and cottage-level
industry. The stamps and banderoles for cigarette companies are distributed free of charge.
The cigarette companies are allowed a maximum 1 percent wastage on the banderoles and
stamps for reconciliation with the tax revenue collected. For biris, the banderoles must be
purchased at the specified tax value. These are final tax obligations for biri manufacturers,

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since the NBR does not have the infrastructure to monitor biri production among the large
number of small-scale biri producers.

The stamps and banderoles have built-in security features. The security features are not
usually visible to the naked eye but can be detected by tax officials using special hand-held
instruments. One feature on the banderole used on cigarette packets is a small rectangular
piece of silver colored foil. The paper used for printing stamps and banderoles for cigarette
packets is of better quality than the banderoles for biris.

For cigarettes, false stamps and banderoles are uncommon because of higher production
quality and security features. However, industry officials point out that the legally produced
banderole could be un-glued through a warming process and reused on illicit white and coun-
terfeit cigarettes. In the case of biris, the forging of banderoles is easier owing to low quality.
The use of forged banderoles and reused banderoles is more common, and it is extremely
difficult to monitor with retailing taking place in millions of wayside small shops across the
country. The reuse of stamps and banderoles on illicit white and counterfeit cigarettes is facil-
itated by the fact that many people buy single sticks and retailers then can remove the stamp
or banderole through warming and sell it to those marketing counterfeit cigarettes.

Cigarette Boxes: There are two types of boxes used for retailing cigarettes. These are what
are termed in the industry (a) hinge-lid packs, and (b) shell and slide packs. The hinge-lid
pack cigarettes are opened at the top after the cellophane cover is taken off. The shell and
slide pack, on the other hand is opened by opening the lid after the cellophane cover is
removed and then sliding out the cigarettes by pushing them out of the shell. In the case of
cigarettes, hinge–lid packs are increasing in popularity and now account for 95 percent of
packets sold. Thus, for cigarettes, stamps are the most important means of tobacco trade
control. The number of cigarette sticks in a packet and the cigarette quality as pre-deter-
mined by NBR (Premium, High, and Low) are clearly printed on stamps and banderoles on
cigarette packs. The packets can contain 10 or 20 sticks.

Stamps are used only on hinge-lid packets. The stamps are placed at the point where the
lid is flipped open so that the stamp tears out while opening. Stamp colors vary for different
cigarette segments.

Banderoles are only used on shell and slide cigarette packs. The banderoles are longer and
placed on one side and extended to top and bottom ends of the packets. When displaced to
remove the cigarettes, the banderole breaks.

Biri boxes and packs: Biri is sold in three forms – (a) hinge-lid packs, (b) shell and slide packs,
and (c) paper-wrapped packs (Mutha Biri in local language). The hinge-pack is used for
filter-tipped biri sold as handmade cigarettes. Even for the hinge-lid type pack, only a ban-
derole is used. It is pasted on the side and extended to the top and bottom of the box. The
banderoles are similarly fixed on shell and slide and paper-wrapped biri packs. The bande-
roles are of three different colors for the three types of packaging used. The number of biris
in each pack is stamped. Packs can contain 20, 22, or 25 biris.

436 // Bangladesh: Illicit Tobacco Trade
Cigarette Tax Collection: The VAT officials collect taxes based on actual production going
out of the factory gate, where a VAT official is present and signs off on the chalan (paper
document). At a subsequent road junction, there is another level of checking by VAT officials
who again verify vehicle contents against the chalan issued at the factory gate. Later, the
total tax revenue collection is reconciled with the stamps and banderoles that each pro-
ducer has received, allowing for the 1 percent permissible wastage.

Biri Tax Collection: Operates through the value of biri banderoles sold at Post Offices.

437
INDONESIA
15

INDONESIA:

Tackling Illicit Cigarettes
Abdillah Ahsan1

Chapter Summary
Indonesia exhibits a high prevalence of smoking among adults. Indeed, among adult men,
the rate of tobacco use is the highest in the world. Among Indonesian smokers, 95 per-
cent use kretek, a tobacco and clove cigarette that is produced domestically. The biggest
machine-made kretek (sigaret kretek mesin) producer, who also sells the most expensive
cigarette in the market, has a 63 percent market share. This highlights that most smokers can
still afford the most expensive brand. Cigarettes are affordable in Indonesia.

Although the government of Indonesia has not ratified the Framework Convention on
Tobacco Control (FCTC), it already implements some tobacco control policies. It relies
on a specific multitiered tobacco product excise system that protects domestic, espe-
cially kretek, producers, but also fosters a wide range of prices. However, the affordability
of cigarettes represents a public health challenge: public health is deteriorating because
cigarettes are inexpensive.

There are three types of taxation on cigarettes: the excise tax, the value-added tax, and local
cigarette taxes. While the excise tax is aimed at controlling consumption, local cigarette
taxes are effectively designed to increase the revenue of local governments.

The average excise tax rate is 49.1 percent of the retail price, which is below the 70 percent
recommended by the World Health Organization (WHO). The value-added tax is 9.1 percent

1
Faculty of Economics and Business, Universitas Indonesia

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

of the retail price, and the local cigarette tax is 10 percent of the excise tariff. Combined, the
average total tax burden on a cigarette is around 62.7 percent of the retail price. Although this
seems quite high, the cost is so low that even primary-school students can afford to buy ciga-
rettes using their daily school allowance. (Individual cigarettes are widely offered for sale.)

The illicit trade in cigarettes nonetheless increases cigarette consumption, because the
price is even lower as a consequence of the tax evasion. The greater cigarette consumption
threatens public health and government revenue.

The Indonesian tobacco industry is tolerant of current public policy making on cigarettes.
It often points to the illicit trade in cigarettes in arguing for lower tobacco excise taxes.

Indonesia has comprehensive excise regulations that govern many aspects of excise admin-
istration. The enthusiasm for local autonomy has created avenues for the enforcement of
regulations on illegal cigarettes because local governments are also mandated to carry out
some enforcement of two fiscal mechanisms, tobacco excise revenue sharing and the local
cigarette tax. The government has used excise stamps for cigarettes since 1950. The security
features of the excise stamps are quite difficult to counterfeit. The inclusion of the successful
supervision of the trade in illegal excise goods in working contracts and key performance
indicators since 2017 has had a positive impact on the enforcement activities of the
Directorate General of Customs and Excise (DGCE) on illegal cigarettes. The DGCE, which is
under the Ministry of Finance, runs the High-Risk Excise Control Program, a flagship program
under the Customs and Excise Strengthening Reform Program launched by the Ministry of
Finance in December 2016.

Domestic free trade zones (FTZs) have generated challenges in the enforcement of regu-
lations on illegal cigarettes because cigarette production and trade in the FTZs are exempted
from excise duties. The problem arises because non-FTZ areas are becoming exposed to the
cigarette trade in the FTZs. The DGCE has explained that, if there were no excise exemption
in the FTZs, then their burden of enforcement would decrease by 40 percent.

As a result of the reform in the excise tax and enforcement, the number of enforcement
operations aimed at illegal cigarettes has increased by a factor of almost four, from 996
operations in 2014 to 3,950 in 2017. The estimated share of the domestic illicit trade in the
total cigarette market thus shrank from 12.1 percent in 2016 to 7.0 percent in 2018. The
decline is evidence that raising the tobacco excise tariff in 2016–18 and accompanying this
with enforcement has been an effective reform.

For the future, the institutional capacity of the excise administration in the DGCE should be
enhanced. Moreover, raising the tobacco tax and the price of cigarettes would help signifi-
cantly reduce the affordability and consumption of cigarettes. The tobacco excise system
should also be simplified to reduce the incentives for illegal cigarette activities.

440 // Indonesia: Tackling Illicit Cigarettes
1. Background
Tobacco Use in Indonesia
The prevalence of smoking among adults in Indonesia rose from 27.0 percent to 32.8
percent over the period 1995–2016 (Figure 14.1). However, from 2013 to 2016, it declined
from 36.3 percent to 32.8 percent. The prevalence of smoking among adult men exhibited
a rising trend, from 53.4 percent in 1995 to 68.1 percent in 2016. The is among the highest
prevalence rates globally.

Figure 1. Smoking Prevalence among Adults (15+), by Sex, Indonesia, 1995–2016

80
70
60
50
40
30
20 Male
10 Female
0 Total
1995

2001

2004

2007

2010

2013

2016

1995 2001 2004 2007 2010 2013 2016

Male 53.4 62.2 63.1 65.6 65.8 66. 68.1

Female 1.7 1.3 4.5 5.2 4.1 6.7 2.5

Total 27 31.5 34.4 34.2 34.3 36.3 32.8

Source: Zheng et al. 2018.
Note: Tobacco use includes daily and occasional cigarette smoking and tobacco chewing.

Most Indonesian smokers (74.2 percent) begin smoking at between 10 and 19 years of
age (Table 14.1). The share of new smokers among the 10–14 age group almost doubled,
from 9.0 percent to 17.3 percent, in 1995–2013. Indonesia has recently begun to register a
demographic dividend. The proportion of the productive-age population is large and will
peak in 2030–35, when the dependency ratio will be at its lowest. The rise in young smokers
can potentially ruin the benefits of the demographic dividend. The future burden of disease
related with tobacco use can compromise the potential improvement in welfare.

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Table 1. Age at First Use of Tobacco, Adults (Ages ≥ 15), Indonesia, 1995–2013

AGE 1995 2001 2004 2007 2010 2013

5–9 0.6 0.4 1.7 1.9 1.7 1.5

10–14 9.0 9.5 12.6 16.0 17.5 17.3

15–19 54.6 58.9 63.7 50.7 43.3 56.9

20–24 25.8 23.9 17.2 19.0 14.6 16.3

25–29 6.3 4.8 3.1 5.5 4.3 4.4

30+ 3.8 2.6 1.8 6.9 18.6 3.6

age cohort, %
Source: TCSC 2015.
Note: Tobacco use includes daily and occasional cigarette smoking and tobacco chewing.

The number of smokers in Indonesia in 2013 was 65.2 million (Figure 14.2). Indonesia
accounts for the highest number of smokers in the region. This is because of the large share
of adult smokers among the large population. The prevalence of smoking among adults in
Indonesia is the highest in the region (36.3 percent). The high smoking prevalence and the
large size of the population have drawn multinational tobacco corporations to enter the
cigarette market in Indonesia.

Figure 2. Adult Smoking Prevalence and Total Number of Smokers,
ASEAN Countries
Adult Smoking
Numbers don’t lie: Percentage of adult smokers in ASEAN

65,188,338

16,500,000
15,600,000

10,947,037

6,240,000
4,991,458

1,680,867 824,016
74,142 375,000
16.9 36.3 27.9 22.8 26.1 23.8
18 13.3 19.9 22.5
Brunoi (2014)

Cambodia(2014)

Indonesia (2013)

Lao PDR (2015)

Malaysia (2015)

Myanmar* (2014)

Philippines (2015)

Singapore (2013)

Thailand (2015)

Vietnam (2015)

Total numbers of adult smokers
Adult smoking prevalence (%)

Source: Lian and Dorotheo 2016.
Note: ASEAN = Association of Southeast Asian Nations.

442 // Indonesia: Tackling Illicit Cigarettes
The number of deaths attributed to tobacco was 230,862 in 2015. The macroeconomic
losses associated with tobacco use consist of four components, as follows: expenditure
for the purchase of cigarettes; lost disability-adjusted life years; productive years lost to
morbidity, disability, and premature mortality; and medical expenditures associated with
tobacco-attributable disease. In 2015, the total macroeconomic losses caused by tobacco use
in Indonesia have been estimated at US$45.9 billion (Kosen et al. 2017).

Market Share and Consumer Preferences
In Indonesia, there are three types of cigarettes: machine-made kretek (sigaret kretek mesin),
hand-rolled kretek (sigaret kretek tangan, which contains tobacco and clove), and white
(tobacco-only) cigarettes (sigaret putih mesin). Kretek is a cigarette consisting of tobacco,
clove, and other ingredients. It is domestically produced in Indonesia. In 2010–17, there
was a shift in market share toward machine-made kretek (Figure 14.3). This market share
rose from 62.3 percent in 2011 to about 74.8 percent in 2017. At the same time, the market
shares of hand-rolled kretek and white cigarettes were shrinking. The market share of the
former fell from 31.4 percent to 20.2 percent in 2010–17. The market share of white ciga-
rettes (mostly international brands) dropped from almost 6.3 percent to a little less than 5.0
percent over the same period. This has several implications. First, the cigarette industry in
Indonesia has recently become more capital intensive. Hence, the industry demand for labor
will fall because of the substitution effect between labor and machines. Second, the greater
concentration on machine-made kretek will mean that the industry can sell more cigarettes
more efficiently, thereby raising their profits significantly. This situation represents a pub-
lic-health threat.

Because of the Ministry of Finance regulation on tobacco excise, the cigarette industry is
stratified by type of cigarette, production group, and minimum price group. The three types
of cigarettes are white cigarettes, hand-rolled kretek, and machine-made kretek. The two
production groups of machine-made cigarettes (both white and kretek) are defined as: (1)
below 3 billion and (2) above 3 billion individual cigarettes a year. There are four production
groups for hand-rolled kretek: below 25 million, 25 million–100 million, 100 million–2 billion,
and above 2 billion individual cigarettes a year. The last category, the minimum price group,
depends on Ministry of Finance decisions, so that there are one or more price groups in
each excise tier.

This stratification system was launched around the time of Indonesian independence in
1945. The government has maintained the system, with some modification, ever since. The
system is designed to protect domestic and kretek producers in the face of competition
from multinational cigarette corporations. However, from a public-health perspective, the
tiered excise system creates wide price discrepancies, thereby hindering the effectiveness of
tobacco price increases in controlling consumption (Fiscal Policy Board 2016).

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 3. Market Shares, by Type of Cigarette, Indonesia, 2010–17

100.00
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
White Cigarette (SPM)
10.00
0.00 Hand Made Kretek (SKT)
Machine Made Kretek (SKM)
2010

2011

2012

2013

2014

2015

2016

2017

2010 2011 2012 2013 2014 2015 2016 2017

White Cigarette (SPM) 6.28 5.87 6.08 5.99 5.71 5.77 5.47 4.98

Hand Made Kretek (SKT) 31.41 30.37 28.63 25.43 21.67 20.88 20.72 20.23

Machine Made Kretek (SKM) 62.31 63.75 65.29 68.58 72.62 73.35 73.82 74.79

Sources: Zheng et al. 2018.

The cigarette industry in Indonesia is becoming more concentrated on the largest pro-
duction group of machine-made kretek, more than 3 billion units per year (machine-made
kretek 1) (Figure 14.4). This group has a 63.4 percent market share and the highest price. The
other type of cigarette producers who have a dominant market share are hand-rolled kretek
production group 1 and price group 2 (hand-rolled kretek 1.2) and machine-made kretek pro-
duction group 2 and price group 2 (machine-made kretek 2.2). These cigarettes also have a
relatively higher price. This is an anomaly, given that products at higher prices typically draw
lower demand.

The Status of Tobacco Control Policies
Indonesia is the only country in Asia that has not ratified the Framework Convention on
Tobacco Control (FCTC). The government has nonetheless implemented some degree of
tobacco control, such as the national tobacco control roadmap, tobacco taxation, graphic
health warnings, a limited ban on tobacco advertising, and local regulations on smoke-free
areas in public places (Table 14.2).

444 // Indonesia: Tackling Illicit Cigarettes
Figure 4. Cigarette Market, by Type, Production Group, and Price Group, Indonesia,
2010–17

100.00
90.00
80.00
70.00
60.00
50.00
40.00
30.00
63.37
20.00 63.34
63.10
50.57
45.31
35.45
10.00 15.23 23.31

0.00
2010

2011

2012

2013

2014

2015

2016

2017
SKM1.1 SKM2.3 SKT2.2 SMP1.2
SKM1.2 SKT1.1 SKT2.3 SPM1.3
SKM1.3 SKT1.2 SKT3.1 SPM2.1
SKM2.1 SKT1.3 SKT3.2 SPM2.2
SKM2.2 SKT2.1 SPM1.1 SPM2.3

Sources: Zheng et al. 2018.

Indonesia’s Tobacco Tax Policies
Indonesia imposes three types of taxes on tobacco products: the tobacco excise tax, the
value-added tax, and the local cigarette tax. As noted above, the tobacco excise system is
brand-specific and multi-tiered, based on the type of the product, the production group,
and the minimum price group (Table 14.3). This complicated system creates wide price gaps
that hinder the effectiveness of increasing tariffs and prices to reduce consumption. The
system also creates complicated administrative requirements and generates incentives for
illicit cigarette activities through the production of counterfeit excise stamps. However, the
government raises the excise tariff and the minimum retail price on cigarettes every year at a
rate greater than the inflation rate, and it thus decreases the affordability of cigarettes (Zheng
et al. 2018). The government also plans to simplify the multitiered system from 10 tiers in
2018 to five tiers in 2021. The maximum allowable excise tariff is 57 percent of the retail
price (Law No. 39 year 2007), and the 2017 excise tariff averaged 49.1 percent of the retail
price (Ministry of Finance 2016). The second tax on tobacco products is the value-added tax.
In 2017, the tariff was at 9.1 percent of the retail price. The third tax on cigarettes is the local
cigarette tax implemented in 2014. The rate is at 10.0 percent of the excise tariff. Therefore,
the average total tax burden on tobacco products is 62.7 percent of the retail price.

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Table 2. Status of Tobacco Control, Indonesia, 2018

TOBACCO
CONTROL STATUS REGULATION
POLICY
Framework
Convention on Not signed; not ratified
Tobacco Control
The policy target is to decrease smoking prevalence by
Ministry of Health Regulation No. 40
National tobacco 1 percent a year (2015–19) and decrease prevalence by
year 2013 on Roadmap of Controlling
control roadmap 10 percent in 2024 relative to 2013 (from 36 percent
the Health Impact of Tobacco Use
to 26 percent).
Multitiered excise system (10 tiers) based on type
of product, production scale, and price range. The
system hinders the effectiveness of tobacco excise
policy to reduce tobacco use because it encourages
downward substitution. The government also levies Tobacco excise: Ministry of Finance
Tobacco tax local taxes and value added taxes on cigarettes. The Regulation No. 146/PMK.010/2017
average excise tariff is 49 percent of the retail price, Tobacco Product Excise Tariff
compared with the WHO recommendation of 70
percent. The local tax tariff is 10 percent of the excise
tariff (4.9 percent of the retail price). The value added
tax is 9.1 percent of the retail price.
Government Regulation No. 109 year
2012 on Health Protection of Addictive
Limited ban on tobacco advertising on television.
Tobacco Substances in the form of Tobacco
The ban allows advertising from 9.30 pm, when
advertising, Use. Several cities have issued local
adolescents may still be watching, to 5 am local time.
promotion, and government regulations to ban outdoor
There is an increasing trend toward a ban on local
sponsorship ban tobacco advertising, for example,
outdoor tobacco advertising.
Jakarta Province, Bogor City, and
Pekalongan City
Government Regulation No. 109 year
Graphic health Graphic health warnings cover 40 percent of each
2012 on Health Protection of Addictive
warnings pack of cigarettes (since 2014).
Substances in the form of Tobacco Use
It is mandatory for local governments to make public Government Regulation No. 109 year
Smoke-free areas places smoke free by issuing local government 2012 on Health Protection of Addictive
regulations. Substances in the form of Tobacco Use
Source: World Bank analysis.
Note: WHO = World Health Organization

Although this rate seems quite high, making cigarettes less affordable, the majority of
Indonesians can still afford to buy cigarettes. Indeed, the most-sold cigarette group is the
one sold at the highest price. Based on the Ministry of Finance regulation, the minimum
price of cigarettes ranges from Rp 4,800 (US$0.34) to Rp 15,120 (US$1.08) per pack of 12.
The regulation allows cigarettes to be sold individually. Even primary-school children ages
7–12 can afford cigarettes, because their daily allowance averages Rp 10,000, which is suffi-
cient to buy seven of the most expensive cigarettes (Susanto 2017).

446 // Indonesia: Tackling Illicit Cigarettes
Table 3. Tobacco Excise System, Indonesia, 2017–18

2017 2018
TYPE OF PRODUCTION
MINIMUM EXCISE MINIMUM EXCISE
CIGARETTE GROUP TIERS, TIERS,
RETAIL TARIFF, RETAIL TARIFF,
NUMBER NUMBER
PRICE RP PRICE RP
1 (3 billion units or
1 1,120 530 1 1,120 590
more)
Machine-
made kretek 2 820 365 2 895 385
2 (less than 3 billion)
3 655 335 3 715 370

1 (3 billion and more) 4 1,030 555 4 1,130 625
White
5 900 330 5 935 370
cigarettes 2 (less than 3 billion)
6 585 290 6 640 355

7 1,215 345 7 1,260 365
1 (2 billion or more)
8 860 265 8 890 290

9 730 165 9 470 180
Hand-rolled 2 (500 million–2 billion)
kretek 10 470 155

3 (25 million–500
11 465 100 10 400 100
million)

3B (below 25 million) 12 400 80

Source: Ministry of Finance 2016, 2017a.

The Context of the Illicit Trade in Cigarettes
Indonesia is an archipelago of more than 10,000 islands. This is a challenge for law enforce-
ment because of the wide area to be monitored. However, more than 60 percent of the
population live on Java, where most of the tobacco industry is also located, in East Java,
Central Java, and West Java. The cigarette market is dominated by kretek, a tobacco and clove
cigarette, that is mainly produced domestically. The market share for kretek (machine-made
or hand rolled) is 95 percent (Zheng et al. 2018). Hence, the demand for international white,
tobacco-only cigarettes is low. This implies that the demand for smuggled white cigarettes is
also low, but there could be high demand for illegal domestically produced kretek cigarettes.

Based on Ministry of Finance definitions, there are six types of illegal domestic cigarettes
in Indonesia, as follows: unpacked cigarettes, cigarettes packed without excise stamps,
cigarettes packed with forged or otherwise counterfeit excise stamps, cigarettes packed
with excise stamps with incorrect business excise identification numbers, cigarettes packed
with wrong designations, and cigarettes packed with used excise stamps (Ahsan et al. 2014).
Another identifier of illegal cigarettes is the lack of a graphic health warning, which has been
mandatory for every pack of cigarettes sold in Indonesia since June 24, 2014.

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The regulations related to illicit cigarettes are listed in the Excise Law, No. 11 year 1995, and
the revision, Law No. 39 year 2007. The responsible institution is the DGCE. After Indonesia’s
reformasi era (1998), local governments enjoyed greater power and autonomy, including
enforcement in the illicit trade in cigarettes. Because of the tobacco excise revenue-shar-
ing mechanism, the central government mandated that local governments contribute to
the enforcement exercise on illicit cigarettes in their jurisdictions. Moreover, the DGCE, in
enforcing regulations, may request assistance from the police and army. If such a request is
made, the institution receiving it must fulfill the request (Law No. 39 year 2007, article 34).

The tobacco industry is readily accepted as a partner in the public policy-making process
in Indonesia. It is still perceived as an important stakeholder. The excise law even states that
the government must consider the aspirations of the tobacco industry in determining any
increase in the tobacco excise tariff. While the interference of the tobacco industry in public
policy making may be strictly prohibited in other parts of world, it is mandated in Indonesia
by the current excise law (Law No. 39 year 2007, article 5). The tobacco industry often lob-
bies against raising the tobacco excise tax by referencing the need to inhibit the market for
the less-expensive illicit cigarettes.

2. The Reform in Tackling Illicit Cigarettes
The Legal Framework
The approach adopted by the government to reduce the illicit trade in cigarettes is mainly
embodied in Law No. 11 year 1995 and the partial revision in Law No. 39 year 2007. The
former is a comprehensive law on excise collection and enforcement. It consists of 14 pro-
visions (Table 14.4). This case study explores the regulations on illicit cigarettes contained in
these laws and other government directives. It examines regulations on licensing, bookkeep-
ing and monitoring, point-of-tax collection, excise-free and exemption facilities, restrictions
on sales of tobacco products, details about cigarette production plants, and sanctions.

LICENSING

The government requires every factory owner, warehouse owner, importer, distributor, and
retailer of excised goods to have a special license, the business excise identification number
for excised goods producers. However, a special license is not required of distributors and
retailers of tobacco products. The requirement only applies for ethyl alcohol and alcoholic
beverages (Law No. 39 year 2007, article 14). The government can revoke the license for
any one of eight reasons: no activity for one year; licensing requirements are no longer
being met; the license holder no longer legally represents a legal entity or an individual who
resides outside Indonesia; the license holder has been declared bankrupt; the license holder
has not fulfilled the provisions laid out in paragraph (3), on inheritance of the license; the
license holder has been sentenced for violating the provisions of this law; and the license

448 // Indonesia: Tackling Illicit Cigarettes
Table 4. Legal Provisions, Law No. 11 Year 1995 on Excise

NO. TITLE DESCRIPTION

1 General rule General definitions used in the law

2 Excise goods, tariffs, and reference prices Type of excise goods, tariffs, and reference prices

3 Payment and special facility Procedure for payment and special facilities

4 Billing, refunds, and expiration Administration and regulations on billing, refunds, and expiration

5 Licensing Regulation on licensing

Detailed procedures on recording and enumeration by the
6 Bookkeeping and enumeration
relevant authorities

7 Warehouse Regulations on warehousing

8 Inflow, release, transportation, and trade Regulations on inflow, release, transportation, and trade

9 Prohibition Details on prohibition related to excise administration

10 Mandated authority in excise enforcement Span of authority in excise enforcement by various institutions

11 Objection, appeals, and lawsuits Procedures for objections and appeals

12 Criminal provision Details on the criminal provision and sanctions

13 Investigation Regulations and procedures in investigation

14 Other

Source: World Bank analysis of Law No. 11 year 1995, on excise.

holder violates the provisions of article 30, the prohibition of production other than as stated
in the license.

BOOKKEEPING AND MONITORING

Factory owners and warehouse owners involved with excised goods, including tobacco
products, must register, in an inventory book, any product that has been produced at the
factory, has entered the factory, or has been removed from the factory. Factory owners
must periodically notify the head of the local Customs and Excise Office of details about
their output (article 14). Factory owners and warehouse owners who do not record goods
as required are liable to an administrative fine equal to the excise value that has not been
recorded (article 16).

A customs and excise officer may at any time monitor the excised goods, including tobacco
products, in the factory or warehouse. The owner of the factory and storage building must
provide the officer with any equipment needed for the monitoring process (Law No. 11 year
1995, article 20). If the quantity of a product found during the monitoring process is less than
the amount specified in the accounts, the factory or warehouse owners may be entitled to

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receive a maximum 10 percent rebate (article 21). In the factory, import facility, or retail sales
location where excise stamps are affixed, used excise stamps and used packs of cigarettes
with excise stamps in good condition may not be stored (Law No. 39 year 2007, article 32).

POINT-OF-TAX COLLECTION

On domestically produced cigarettes, the excise tariff must be paid when the goods are
released from the factory or warehouse. On imported cigarettes, the excise tariff must be
paid when the product is imported for final consumption. The excise may be paid without
affixing an excise stamp or the stamp may be affixed after the payout. If the payment of the
excise tariff is associated with affixing the excise stamp, then the stamp must be affixed in
accordance with the provisions of the law; otherwise, the tariff shall be considered unpaid
(Law No. 39 year 2007, article 7).

EXCISE-FREE AND EXEMPTION FACILITY

An excise-free facility indicates that an excise tax is still levied on the tobacco product, but
the owners do not have to pay the excise tariff if they meet certain conditions. There are
five conditions under the excise-free facility, as follows: if the product is to be transported
to locations outside the customs area, if it is exported, if the product enters a factory or
warehouse, if it is used as a raw material or auxiliary material for the production of other
final excised goods, and if it has been destroyed or damaged before being released from the
factory, or warehouse, or prior to import approval (Law No. 39 year 2007, article 8).

An excise exemption may be granted on excise goods, tobacco products included, if these
meet one of six conditions, as follows: it they are used as raw materials or auxiliary materials
in the production of nonexcised final products; if they are used for scientific research and
development; if they are to be used for the purposes of representatives of foreign govern-
ments or their officers who are assigned to Indonesia and based on reciprocal principles; if
they are carried by passengers, transport crews, border crossers, or on consignment from
abroad in specified amounts; if they are used for social purposes, for example, for disaster
relief; and if they are being sent to bonded areas, that is, special areas set aside mainly for
processing export goods (Law No. 39 year 2007, article 9). The maximum amount of excise
exemptions on tobacco products per traveler is 200 cigarettes, 25 cheroots, or 100 grams
of shredded tobacco or other tobacco product (Ministry of Finance Regulation No. 188/
PMK.04/2010, article 9).2 For transport crews, the maximum amount of excise exemptions
on tobacco products is 40 cigarettes, 10 cheroots, and 40 grams of shredded tobacco or
other tobacco product (Ministry of Finance Regulation No. 188/PMK.04/2010, article 11).

2
Peraturan Menteri Keuangan Republik Indonesia No. 188/PMK.04/2010 tentang Impor Barang yang Dibawa
oleh Penumpang, Awak Sarana Pengangkut, Pelintas Batas dan Barang Kiriman (Ministry of Finance Republic
Indonesia Regulation No. 188/PMK.04/2010 on Import Goods Bring by Passenger, Crew, Border Crosser and
Shipment Goods).

450 // Indonesia: Tackling Illicit Cigarettes
RESTRICTIONS ON THE SALE OF TOBACCO PRODUCTS

There is no prohibition on the sale of tobacco products over the Internet or in duty-free
shops. However, the sale of tobacco products through vending machines, the sale of
tobacco products to minors ages under 18, and the sale of tobacco products to pregnant
women is prohibited (Government Regulation No. 109 year 2012, article 25).3

REGULATIONS ON PRODUCTION AND STORAGE PLANTS

Before applying for a business excise identification number (Nomor Pokok Pengusaha
Barang Kena Cukai), a factory owner or importer must submit an application to the DGCE
for an inspection of the location, building, or place of business. The location, building, or
places of business where the tobacco products are manufactured or stored must comply
with four provisions (Ministry of Finance Regulation No. 200/PMK.04/2008, article 3), as
follows.4 First, the building must not be directly connected to other buildings or areas that
are not part of the factory for which permission is sought. Second, the building must not be
directly contiguous with or in a residential area. Third, the building must be adjoined to and
accessible from public roads. Fourth, the building must have an area of at least 200 square
meters (2,150 square feet). This regulation makes cigarette production more difficult and is
considered a tool to control tobacco production.

SANCTIONS

There are two types of enforcement mechanisms regarding illicit cigarettes, administrative
provisions and criminal provisions. The administrative enforcement provisions are associated
with penalties involving only the payment of fines. The criminal enforcement provisions
are associated with penalties involving imprisonment or the payment of fines. The criminal
provisions are contained in Law No. 11 year 1995 on the excise tax and the revision Law No.
39 year 2007 (Table 14.5).

THE GOVERNANCE AUDITING AND INSPECTION PROCESS

All municipal, provincial, and national government units are subject to internal audit and
inspection, including the DGCE in enforcing regulations on illicit cigarettes. The internal
inspections are conducted by the government internal control officers through audits,
reviews, evaluations, monitoring, and other supervisory activities (Government Regulation
No. 60 year 2008, article 48).5 The internal government supervisory officers include

3
Peraturan Pemerintah Republik Indonesia No. 109 tahun 2012 tentang Pengamanan Bahan yang Mengandung
Zat Adiktif Berupa Produk Tembakau bagi Kesehatan (Republic Indonesia Government Regulation No. 109 year
2012 on Health Protection of Addictive Substances in the form of Tobacco Use).
4
Peraturan Menteri Keuangan Republik Indonesia No. 200/PMK.04/2008 tentang Tata Cara Pemberian,
Pembekuan, dan Pencabutan Nomor Pokok Pengusaha Barang Kena Cukai untuk Pengusaha Pabrik dan
Importir Hasil Tembakau (Republic of Indonesia Ministry of Finance Regulation No. 200/PMK.04/2008 on
Procedure of Getting, Freezing and Revoking Identity Number for Tobacco Product Owner and Importer).
5
Peraturan Pemerintah Republik Indonesia No. 60 Tahun 2008 Tentang Sistem Pengendalian Intern Pemerintah
(Republic Indonesia Government Regulation No. 60 year 2008 on Government Internal Controlling System).

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Table 5. Examples of Criminal Provisions, Excise Law No. 39 Year 2007

ARTICLE STATEMENT

Any person without a license, as provided in article 14, who is running a factory or a storage facility or
who imports excisable goods that require the payment of affixed excise stamps and who thereby causes
50
losses to the state shall be subject to imprisonment of no more than five years and a fine of no less than
2 times and no more than 10 times the excise value that should have been paid.
Anyone offering, delivering, selling, or providing for sale any excisable goods that is not packaged for
retail sale or to which an excise stamp has not been affixed, as provided for in article 29, paragraph (1),
54
shall be subject to imprisonment of at least one year and at most five years and (or) a fine of at most 10
times the excise value that should have been paid.
Anyone offering, selling, or trading excise stamps to unauthorized persons or buying, receiving, or using
58 excise stamps to which they are not entitled shall be subject to imprisonment of at least one year and at
most five years and (or) a fine of at most 10 times the amount of the excise that should have been paid.
Source: Law No. 39 year 2007, on the excise.

representatives of the Government Internal Financial Audit Board, the Inspectorate General,
and other internal auditors and control personnel, such as provincial inspectorates and
district or city inspectorates (Government Regulation No. 60 year 2008, article 49). All gov-
ernment units are also subject to external supervision by the Financial Audit Board and the
Corruption Eradication Commission.

INTERNATIONAL COLLABORATION TO TACKLE THE TRADE IN ILLICIT CIGARETTES

As a member of the Association of Southeast Asian Nations, Indonesia cooperates with other
countries in the region in tackling the trade in illicit cigarettes. Border security is coordinated
among the countries of the regional association, for example. Indonesia is also active in the
annual meeting of the Association of Southeast Asian Nations Forum on Taxation, discussing
many taxation issues, including illicit cigarettes.

The Institutional Framework
The leading institution on illicit cigarette regulation and enforcement is the DGCE. The
DGCE has a dedicated directorate for enforcement and prevention to make sure that all reg-
ulations on the excise tax are followed by all stakeholders. If needed, the DGCE may request
assistance from the police and army (Law No. 39 year 2007, article 34).

Local, municipal, and provincial governments are also involved in enforcement in the illicit
trade in cigarettes. Under Indonesia’s tobacco excise revenue-sharing mechanism, 2 percent
of the tobacco excise revenue going to the central government is transferred to provinces
that produce tobacco and cigarettes. Recently, 17 provinces were receiving these funds. The
funds may only be used by the local governments for five activities (Law No. 39 year 2007,
article 66A), as follows: quality improvements in raw materials, industrial development and
monitoring, development of the social environment, implementation of the regulations on
the excise tax, and eradication of illegal excised goods.

452 // Indonesia: Tackling Illicit Cigarettes
Five activities are aimed at the eradication of illegal excised goods, especially cigarettes. First,
the collection of information on tobacco products on which counterfeit excise stamps have
been affixed during distribution or at the point of sale. Second, the collection of informa-
tion on tobacco products on which excise stamps have not been affixed during distribution
or at the point of sale. Third, the collection of information on tobacco products on which
excise stamps have been affixed during distribution or at the point of sale that bear incorrect
names or business excise identification numbers. Fourth, the collection of information on
tobacco products on which excise stamps have been affixed that bear an incorrect category
designation, such as a stamp indicating a product is hand-rolled kretek, though the product
is machine-made kretek, during distribution or at the point of sale. Fifth, the collection of
information on tobacco products on which previously used excise stamps have been affixed
during distribution or at the point of sale.6

Local governments that have received these funds must carry out these activities at least
twice a year. In conducting these activities, the heads of the local governments must coop-
erate and coordinate with the head of the local DGCE office (Ministry of Finance Regulation
No. 222/PMK.07/2017, article 10).

The other avenue taken by local governments in enforcing the regulations on illegal ciga-
rettes is the local cigarette tax mechanism. Since 2014, the government has applied a local
cigarette tax mandated by Law No. 28 year 2009 on local taxes and retribution. This local tax
earmarks 50 percent of the revenue for public health, law enforcement on the illicit trade in
cigarettes, and the establishment of smoke-free areas. Every local government in Indonesia
received this local cigarette tax revenue based on the size of the population. However,
because this is provincial tax revenue, the central government, the Ministry of Finance in this
case, does not provide detailed guidance on using the funds for enforcement.

The Technological Solution
The DGCE has long been using excise stamps as fiscal markers for tobacco products and
alcohol. All tobacco products that are domestically produced or imported must bear an
excise stamp on the packaging. This regulation was introduced on July 1st, 1950, under
Government Regulation No. 2 year 1950, which was a revision of the Dutch colonial
tobacco excise regulation. To prevent forgery, the government has added features to the
excise stamps that were difficult to falsify.7 These features include information on the type of
cigarette production, the excise tariff, and the fiscal year; the garuda bird symbol (a leg-
endary bird); a banderol with the price, the number of cigarettes, and a slogan, “Cukai Hasil

6
Smokers can resell used excise stamps that are in good condition. They merely remove the stamp carefully
from the pack and then sell it to another cigarette producer, who benefits to the extent that the used excise
stamp is less expensive.
7
Peraturan Direktur Jenderal Bea dan Cukai No. PER-29/BC/2017 tentang Bentuk Fisik dan atau Spesifikasi
Desain Pita Cukai Hasil Tembakau dan Pita Cukai Minuman yang Mengandung Etil Alkohol tahun 2018
(Directorate General Customs and Excise Regulation No. PER-29/BC/2017 about Design Specification of Excise
Stamp for Tobacco Product and Alkoholic Beverages 2018).

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Tembakau Indonesia” (Indonesia, excise on tobacco product); and the logo of the DGCE.
The regulation established government stamps of distinct colors according to the rate of the
excise. Thus, green represented a 30 percent excise; black, 40 percent; and dark blue, 50
percent. However, the color is changed every year, and colors are also added to the stamp
depending on the type of cigarette (Directorate General Excise and Customs Regulation No.
29 year 2017). In 2018, the DGCE used five colors to represent the cigarette type, as follows:

»» Blue, combined with orange: machine-made kretek, white cigarettes, hand-rolled kretek,
group 1

»» Red, combined with orange: machine-made kretek, white cigarettes, hand-rolled kretek,
group 2

»» Purple, combined with red: hand-rolled kretek, group 3

»» Gray, combined with green: shredded tobacco, cigarettes wrapped in corn leaf, and rhu-
barb cigarettes

»» Gray, combined with orange: imported tobacco products

The DGCE also produced stamps of different sizes. There are three series by stamp size,
as follows:

»» Series 1: 0.8 centimeters wide and 11.4 centimeters in length

»» Series 2: 1.3 centimeters wide and 17.5 centimeters in length

»» Series 3: 1.9 centimeters wide and 4.5 centimeters in length

Each excise stamp contains a hologram, a feature that is difficult to forge. The size of the
holograms is as follows:

»» Series 1: 0.7 centimeters wide

»» Series 2 and 3: 0.5 centimeters wide

On the hologram were two acronyms BC and RI, which stand for Bea dan Cukai (customs
and excise) and Republik Indonesia (Republic of Indonesia), respectively. Excise stamp series
1 and 2 were used for hand-rolled kretek, some white cigarettes, shredded tobacco, ciga-
rettes wrapped with corn leaf, and rhubarb cigarettes. Excise stamp series 3 was used for
machine-made kretek, some white cigarettes, and cigars.

The DGCE also issued specially coded stamps for selected producers whose products were
prone to be linked to illegal activities because of similar features, as follows:

»» Producers of group 2 who manufactured machine-made kretek and white cigarettes

»» Producers of groups 2 and 3 who manufactured hand-rolled kretek and white cigarettes

»» Producers of shredded tobacco, cigarettes wrapped with corn leaf, and rhubarb cigarettes

To detect whether excise stamps are authentic or counterfeit, DGEC officers use ultraviolet
light and a magnifying glass to determine if the stamp contains the microtext “INDONESIA,”

454 // Indonesia: Tackling Illicit Cigarettes
the excise tariff, and the acronym RI, which becomes BC if the stamp is rotated to the left.
Under ultraviolet light, the stamp will not glow, but absorb the rays and show images, writing
colors, a hexagon symbol, and red fibers.

The track and trace system (TTS) for tobacco products includes monitoring production and
tracking the movement of and the trade in tobacco products using the unique identifiers
on the tobacco products. The system has not been implemented in Indonesia so far. It is
not clear why the government does not require the tobacco industry to pay for as well as
implement such a system.

Enforcement Reform in the DGCE
An in-depth interview has been conducted with the DGCE official responsible for enforce-
ment against the illegal cigarette trade to learn what has been done by the DGCE.8 The
DGCE performance report for 2015–17 and other DGCE materials have also been analyzed.
This subsection describes the relevant missions and human resources of the DGCE, a perfor-
mance contract between the DGCE and the Ministry of Finance, key performance indicators
that represent milestones, and the reform of the enforcement mechanism.

THE RELEVANT MISSIONS AND HUMAN RESOURCES OF THE DGCE

There are three missions of the DGCE, namely:

»» To facilitate trade and industry

»» To safeguard the Indonesian border and protect Indonesians from smuggling and other
illegal trade (which would thus include law enforcement on the illicit trade in cigarettes)

»» To optimize state revenues from customs and excise taxes

The DGCE has 20 branch offices spread throughout Indonesia. They are located in Aceh, Bali,
Banten, Central Java, East Java, East Kalimantan, East Nusa Tenggara, Jakarta (headquarters),
Maluku, North Sulawesi, North Sumatra, Papua, Riau, Riau Islands, South Kalimantan, South
Sulawesi, West Java, West Kalimantan, West Nusa Tenggara, West Sumatra, and Yogyakarta.
In addition, there are 104 Customs and Excise Supervisory and Service Offices and three
Main Customs and Excise Service Offices. These are located in Batam, Soekarno-Hatta
Airport, and Tanjung Priok Seaport. Currently, 14,169 people work at the head office, regional
offices, the main service office, supervisory and services offices, and the operation facilities
office. Of the total, 12,219 are men (86.2 percent), and 1,950 are women (13.8 percent).

8
The in-depth interview was conducted with the head of the section on tobacco excise enforcement,
Directorate of Enforcement and Investigation, DGCE, at the DGCE, Jakarta, on July 13, 2018. See also Ministry
of Finance (2016), (2017a), (2017b).

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PERFORMANCE CONTRACT AND KEY PERFORMANCE INDICATORS

Through the interview with the chief DGCE officer, it was learned that the reform in ille-
gal cigarette enforcement was marked by a new dedicated key performance indicator on
enforcement. The reform was launched in 2017. The key performance indicator was agreed
in the performance contract between the DGCE and the Ministry of Finance. The key perfor-
mance indicator in enforcement is accompanied by information on the target performance
to be achieved each year. Before this key performance indicator existed, enforcement
activity in DGCE was unplanned and sporadic. DGCE enforcement activities are now better
coordinated and more comprehensive nationwide.

The 2016–18 performance contracts between the DGCE and the Ministry of Finance set
14 targets and the corresponding indicators. One target is related to effective law enforce-
ment, and the indicator is the rate at which DGCE investigations are judged complete by the
state prosecutor’s office. The effectiveness target is 60 percent (table 14.6).9 Illegal cigarette
enforcement was part of this target. In 2017, there were two additional indicators related to
law enforcement: the winning percentage of appeals in the tax court (the 2017 target was
35 percent) and the percentage of successful supervisions of illegal excised goods, among
which the illicit trade in cigarettes is dominant (the target was 70 percent). In 2018, the three
indicators of effective law enforcement remained the same, but the targets associated with
each indicator were increased. The target for indicator 1, the share of DGCE investigations
marked complete by state prosecutors, was 70 percent. For indicator 2, the winning share of
appeals in tax court, the target was 38 percent. For indicator 3, the successful supervision of
illegal excised goods, the target was 70 percent.

Table 6. DGCE Performance Indicators, Effective Law Enforcement, Indonesia,
2016–18

2016 2017 2018

TARGET, TARGET, TARGET,
INDICATOR INDICATOR INDICATOR
% % %
DGCE investigation DGCE investigation
judged complete by 65 judged complete by 70
DGCE investigation state prosecutors state prosecutors
judged complete by 60 Winning share of appeals Winning share of appeals
35 38
state prosecutors in tax court in tax court
Successful supervision of Successful supervision of
70 70
illegal excised goods illegal excised goods

Source: Ministry of Finance 2016, 2017a, 2017b.

9
The dossier on the investigation of the DGCE is transmitted to the State Prosecutors Office, which is
responsible for filing the case with the courts. The prosecutor can mark the DGCE investigation as complete or
not complete.

456 // Indonesia: Tackling Illicit Cigarettes
Indicator 3, the successful supervision of illegal excised goods, involves a series of supervi-
sion activities on the distribution of tobacco products using market operation schemes. The
market operations consist of three programs. First is the monitoring of the banderol price
and the market transaction price on products. The difference between the banderol price
and the market transaction price determines whether the DGCE undertakes a follow-up
action.10 Second is the distribution of information on the regulations on illegal cigarettes to
the public, mainly the cigarette seller and the consumer. Third are enforcement activities
such as investigation, seizure, and prosecution on activities related to the trade in illicit ciga-
rettes (Ministry of Finance 2017a).

Planning for supervision activities on illegal excised goods is launched in the beginning
of the year and involves consideration of smoking prevalence, the share of smokers in
the population, income per capita, the size of the market, the available human resources,
and the available budget in each DGCE unit. The implementation of supervision activities
is undertaken by DGCE units following reception of a letter of assignment and a letter of
enforcement authorization. After transmitting enforcement authorization letters, the DGCE
follows up according to several options depending on the context and the nature of the
illegal activities. These options are as follows

»» Imposition of an administrative sanction, that is, a fine

»» Investigation

»» Determination whether seized goods are under the control of ownership of the state

»» Blocking the seized goods and closing down the location

»» Recommending an additional audit

»» Reexport of the goods

»» Recommending that excise banderols no longer be provided to relevant suppliers

»» Delegation of the case to other institutions

»» Freezing the business excise identification number

»» Revocation of the business excise identification number

»» Destruction of the seized goods

»» Cancellation of export license

»» Issuance of an authorization letter to a related institution for further action

»» Changing the excise tariff

»» Return of the seized goods to the owner

10
If the market transaction price, that is, the actual consumer price, is higher by more than 5 percent of
the banderol price, then the DGCE will group the product in the upper group of excise tariffs. The market
transaction price cannot be lower by more than 15 percent of the banderol price, the price decided by
the DGCE based on producer characteristics (type of cigarette and production and price group) and the
corresponding tier in the regulation.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

In 2017, over 97 percent of the planned supervision activities were carried out during the
year by the various DGCE units (Table 14.7). This surpassed the target of 70 percent. This
achievement could not be compared with the results during the previous year because 2017
was the first year this indicator was used.

REFORM OF THE ENFORCEMENT MECHANISM

Table 7. Planning and Realization, Supervision Activities on Illegal Excise
Goods, 2017

INDICATOR QUARTER 1 QUARTER 2 TOTAL TO Q2 Q3 TOTAL TO Q3 Q4 YEAR

Plan 10.0 30.0 30.0 60.0 60.0 70.0 70.0

Result 65.4 69.5 69.5 78.6 78.6 97.1 97.1

percent
Source: Ministry of Finance 2017a.

The DGCE organizational reform launched in 2017 was implemented through the Custom
and Excise Strengthening Reform Program (Program Penguatan Reformasi Kepabeanan dan
Cukai). The program was designed to increase organizational effectiveness in responding to
public expectations and supporting national development goals. The program was launched
on December 20, 2016, by the Ministry of Finance. It has four main components, as follows:

»» The High-Risk Importer Control Program (Program Penertiban Importir Berisiko Tinggi)

»» The High-Risk Excise Control Program (Program Penertiban Cukai Berisiko Tinggi)

»» The Synergy Program of the DGCE and the Directorate of Taxation

»» The Ease in Doing Business Fostering Program

The objective of the excise control program is to reduce the distribution of and trade in ille-
gal excisable goods, especially cigarettes. Some of the program activities related to tobacco
products are the following:

»» The STOP Illegal Cigarette Campaign is conducted through the distribution of information
on laws and regulations, STOP Illegal Cigarettes stickers, videos, and other media

»» In-depth follow-up research based on recommendations of regional cigarette
control offices

»» Enforcement and post-enforcement activities

There are four challenges facing the program (Ministry of Finance 2017a). First, the increase
in the tobacco excise tariff is tending to push up the demand for illegal cigarettes. Second,
the target for the maximum share of illegal cigarettes in total consumption is 6.0 percent,
but, based on current estimates, the share was 10.9 percent in 2017. Third, other types of

458 // Indonesia: Tackling Illicit Cigarettes
smoking products are rapidly coming on line, such as electronic cigarettes and vape. Fourth,
links among the DGCE offices throughout the country require improvement.

The DGCE Directorate of Enforcement and Investigation has developed an action plan to
monitor tobacco products. The plan revolves around the following:

»» Supporting massive, coordinated, and nationwide distribution of literature on illegal cigarettes

»» A synchronized enforcement program targeting producers of illegal cigarettes and
enforcement of the laws on money laundering

»» Monitoring illegal cigarettes as a key performance indicator

»» The registration of cigarette machines as a mandatory part of the application process for
business excise identification numbers

»» Promoting the eventual tobacco industry–wide implementation of the integrated digital
inventory system for tobacco

The directorate has also created a special team to monitor full time the compliance with
regulations on the excise tax. The team members all have a cross-disciplinary background.
The team is responsible for expanding enforcement activities significantly and thereby reduc-
ing illegal cigarette consumption. In support of the excise monitoring team, the Ministry
of Finance issued Regulation No. 144/PMK.02/2016 on incentives for the excise enforce-
ment team. The regulation is designed to help motivate the team to achieve the goals.
The incentive includes a monetary premium, the amount of which depends on the level
of achievement of the goals. To improve coordination in excise and custom enforcement
activities, the Ministry of Finance has also signed a relevant memorandum of understanding
with the army (2017) and the national police (2012) on excise and custom enforcement. The
memorandum is aimed at strengthening the enforcement effort by the DGCE, especially in
the area of illegal cigarettes.

CHALLENGES IN OPERATIONS AGAINST ILLEGAL CIGARETTES

Operations focusing on points of production and distribution of illegal cigarettes have been
carried out by regional and central DGCE offices. The operations have been supported by
police and the army. The main challenge facing these operations is the resistance of the
people living around the factories. The factory owners incite local residents against the offi-
cers. Under these circumstances, operations have usually been canceled. Meanwhile, DGCE
officers have begun working closely with local governments to win the hearts of the people.
Operations aimed at means of transportation and at points of sale have been easier because
there is no resistance from local residents. The officers confiscate illegal cigarettes brought
by vehicles and sold in shops without encountering any resistance.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

DOMESTIC FREE TRADE ZONES: A CHALLENGE FOR ENFORCEMENT

There are four FTZs in Indonesia: Sabang (Aceh Province) and Batam, Bintan, and Karimun
(Riau Islands Province). Within these FTZs, otherwise excisable goods are not subject to
duties, value-added taxes, or excise taxes. This is clarified in Law No. 36 year 2000, article 1:11

Free Trade Zone and Free Seaport are an area within the territory of Republic of Indonesia
separated from the customs area so that it is free from imposition of import duty, val-
ue-added tax, sales tax on luxury goods, and excise.

The law thus establishes that the production of and trade in cigarettes in the FTZs are not
subject to excise. Cigarettes produced and distributed in the FTZs are exempted from the
excise stamp. The price is therefore much lower. The problem is that the cigarettes leak
out of the FTZs. The cigarettes become illegal because the packs bear no excise stamps.
This obliges the DGCE to undertake extra effort in supervising and enforcing cigarette
control activities. If the government were to remove the reference to the excise tax in
Law No. 36, article 1, the overall burden of the DGCE with respect to illegal cigarettes
would be reduced by around 40 percent.12

3. Result of the Reform
Increasing Illegal Cigarette Enforcement Operations
One component of the Custom and Excise Strengthening Reform Program of the Ministry
of Finance is the High-Risk Excise Control Program. The aim of this program is to combat
illegal commerce and unfair competition in excised goods, especially to secure the lost
government revenue. Several activities related to illicit cigarettes in this program are the
STOP Illegal Cigarette Campaign, research based on recommendations of regional cigarette
control offices, and sustainable enforcement and post-enforcement activities. The program
has more than tripled the number of enforcement operations, from 996 in 2014 to 3,950 in
2017 (Figure 14.5).

The rising number of enforcement operations has significantly raised the number of illegal
cigarettes seized (Figure 14.6). This number increased by a factor of 3.6, from 94.2 million
cigarettes in 2013 to 341.9 million in 2016. The monetary value of the seized cigarettes
also rose, by a factor of 4.5, from Rp 52 billion (US$3.6 million) in 2013 to Rp 232.5 billion
(US$16.1 million) in 2016 (Figure 14.7).

11
Undang-undang Republik Indonesia No. 36 year 2000 tentang Kawasan Perdagangan Bebas dan Pelabuhan
Bebas (Republic of Indonesia, Law No. 36 year 2000 on Free Trade Zone and Seaport).
12
In-depth interview with the head of the Section of Illegal Cigarette Enforcement, Directorate of Enforcement
and Investigation, DGCE.

460 // Indonesia: Tackling Illicit Cigarettes
Figure 5. Illegal Cigarette Enforcement Operations, Indonesia, 2014–17

5000

4000

3000

2000

1000

#Cases
0
2014

2015

2016

2014 2015 2016 2017
2017

#cases 996 1474 2259 3950 Source: Ministry of Finance 2017b.

Figure 6. Number of Illegal Cigarettes Seized, Indonesia, 2013–16

400,000,000

350,000,000 341,910,761

300,000,000

250,000,000

200,000,000

150,000,000
119,958,790
100,000,000 94,149,352 89,607,917

50,000,000
Source: Data of the DGCE.
2013

2014

2015

2016

Figure 7. The Value of Seized Illegal Cigarettes, Indonesia, 2013–16 (Rp, Millions)

300,000
232,465
200,000
118,562
100,000 52,016
90,689

Source: Data of the DGCE.
2013

2014

2015

2016

461
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

The Decline in the Market Share of Illegal Cigarettes
Several studies have estimated the market share of illicit cigarettes in Indonesia. Relying on
a comparison of legal cigarette sales and domestic consumption estimated from surveys,
Ahsan et al. (2014) estimate the consumption of illicit cigarettes at 8 percent of the total
market in 2013. In their study, Satriawan, Adji, and Jaya (2010) survey 256 villages in 64
municipalities in 16 provinces. They collected 18,200 packs of cigarettes and examined them
to estimate the market share of illegal cigarettes in Indonesia. Based on in-depth interviews
with DGCE officials and the survey material, the study presents a reduction in illegal ciga-
rettes as a target in Indonesia. The authors project that, by 2018, the market share of illegal
cigarettes would reach as little as 6 percent. However, based on estimates of the Universitas
Gajah Mada, the market share of illegal cigarettes was slightly more than 7 percent in 2018.

The DGCE deserves a great deal of appreciation. The market share of illegal cigarettes has
decreased significantly, although it has not reached the target. The estimated share fell 42
percent, from 12.1 percent in 2016 to 7.0 percent in 2018 (Figure 14.8). This also shows that
a rise in the tobacco tax rate is not always followed by the greater use of illegal cigarettes, as
the tobacco industry claims. A substantial reform in enforcement has succeeded in decreas-
ing the prevalence of illegal cigarettes in Indonesia. The government should therefore be
more confident in raising the tobacco excise tariff and the price of cigarettes because, with
effective enforcement, illegal cigarettes can be suppressed.

Figure 8. Estimated Market Share, Illegal Cigarettes, Indonesia, 2010–18

14.19
11.74 12.14
10.9
8.38
7.04
6.14
2010

2012

2014

2016*

2016**

2017

2018

Sources: Data of the DGCE; Ministry of Finance 2017a; Nursalikah 2018; Satriawan, Adji, and Jaya 2010.
* Projection of the DGCE. ** Estimate of the Universitas Gajah Mada.

According to the DGCE, there are five types of illegal domestic cigarettes: cigarettes in a
pack without an excise stamp, cigarettes in a pack with a forged or counterfeit excise stamp,
cigarettes in a pack with a used excise stamp in good condition, cigarettes in a pack with an
excise stamp with the wrong business excise identification number, and cigarettes in a pack
with an excise stamp with the wrong designation (Ahsan et al. 2014). In 2018, the trade in
illegal cigarettes was dominated by cigarettes in packs without excise stamps (52.6 percent),
while, in 2010–14, the trade was dominated by cigarettes in packs with wrong identity num-
bers (Figure 14.9).

462 // Indonesia: Tackling Illicit Cigarettes
Figure 9. Composition of the Illegal Cigarette Trade, Indonesia, 2010–18

100.00
90.00
80.00
70.00
60.00
50.00
No Excise Stamp
40.00
Counterfeit Excise Stamp
30.00
Used Excise Stamp
20.00
10.00 Wrong Designation

0.00 Wrong Identity
2010

2012

2014

2016*

2016**

2017

2018
2010 2012 2014 2016* 2016** 2017 2018

No Excise Stamp 23.1 29.2 28.1 28.1 32.4 37.5 52.6

Counterfeit Excise Stamp 16.2 5.7 14.4 14.4 9.6 15.5 15.8

Used Excise Stamp 7.6 7.1 8.8 8.8 16.1 8.8 9.1

Wrong Designation 24.6 15.5 10.0 10.0 13.0 21.2 14.9

Wrong Identity 28.6 42.4 38.7 38.7 29.0 16.9 7.7

Sources: Data of the DGCE; Ministry of Finance 2017a; Nursalikah 2018; Satriawan, Adji, and Jaya 2010.
* Projection of the DGCE. ** Estimate of the Universitas Gajah Mada.

4. Lessons Learned and Policy Recommendations
Lessons Learned
Indonesia has a detailed and comprehensive tobacco excise tax administration. Regulations
on tobacco excise taxes are issued by top policy makers. There is a dedicated excise Law
No. 39 year 2007 and several ministerial implementation regulations. Many aspects of the
tobacco trade are regulated, from production to distribution and marketing. The tobacco
industry is thus a highly regulated business. The excise stamp technology is also quite
advanced. These factors represent serious hurdles to illicit cigarette activities.

However, these advantages are offset because of the complicated tobacco excise system.
The system currently relies on 10 tiers, each with a different excise stamp specification. This
favors illicit cigarette activities because of the numerous ways in which excise stamps and
cigarette packs may be misappropriated for the illegal trade. Thus, for example, tobacco
producers in a lower tier who pay lower excise tariffs can resell used excise stamps or affix
their excise stamps to higher-tiered cigarettes at higher prices. The multitiered excise system

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

means that the process involved in ordering, printing, distributing, and affixing the excise
stamps is a long one. The recent 10-tiered excise system where each tier has different excise
stamp specification will make a longer process.

The estimated market share of illegal domestic cigarettes shrank from 11.7 percent to 7.0
percent in 2014–18. The market is dominated by cigarette packs with no excise stamp
(52.6 percent). This represents a success of the efforts of the DGCE reforms in enforce-
ment. During the same period, the government raised the tobacco excise tariff annually
by more than the inflation rate. This is proof that increasing the tobacco excise tariff is not
necessarily a significant factor in illegal cigarette activities. Comprehensive and concerted
enforcement efforts are key to suppressing these activities.

Policy Recommendations
ADDRESSING THE ILLICIT CIGARETTE TRADE

»» Focus efforts on addressing the illicit trade especially through prosecution of tax evasion
in domestic production, where, because of the strong consumer preference for kretek,
the risk of smuggling is not yet large

»» Improve the institutional capacity of excise tax administration

The DGCE is responsible for the implementation of customs and excise regulations. It
must monitor all border areas to make sure that customs duty procedures are imple-
mented effectively. It must also implement all excise tax regulations, which mostly deal with
tobacco products. However, there is an imbalance in resource allocation in terms of human
resources, budgets, and institutional support. Excise tax administration is too complicated
and faces more challenges than customs administration. This is because the DGCE must
supervise a large tobacco industry and manage a tremendous amount of excise revenue. To
address these challenges, the government should improve institutional capacity, especially in
excise tax administration. This can be accomplished by increasing budgets, human resource
capacity, and institutional support for excise tax administration and enforcement.

LINK BETWEEN ILLICIT CIGARETTES AND TOBACCO TAX REFORM

»» The experience of other countries indicates that the main determinant of the illicit
tobacco trade is poor tax administration and enforcement, not high prices (Marquez and
Moreno-Dodson 2017). This is also the model of the trade in Indonesia: rising tobacco
taxes and prices are not the main determinant of the illicit trade.

»» The government should be more confident in improving the tobacco tax system because
this system is not the main determinant of the illicit trade.

464 // Indonesia: Tackling Illicit Cigarettes
Improving the tobacco tax system involves two steps:

»» Go big and go fast: increase taxes and prices to reduce cigarette affordability
and consumption

»» Simplify the tobacco excise system

The simpler the tobacco excise system, the better the result. Currently, the government
plans to simplify the system from one based on 10 tiers in 2018 to one based on five tiers
in 2021 (Ministry of Finance Regulation No. 146/PMK.10/2017).13 Although it is considered a
significant advance, the five-tier system to be implemented over the next four years is still
sufficiently complicated to facilitate the illicit cigarette trade. Ideally, there should be only
one excise tariff for all cigarettes because they all have a similar negative health impact.

However, for the sake of employment, a two-tiered system would be acceptable. One tariff
would be for machine-made cigarettes and large-production hand-rolled kretek; the other, at
a slightly lower excise tariff, would be for small-production hand-rolled kretek. This change will
reduce the incentive for illicit cigarette activities and will decrease cigarette consumption and,
hence, save lives.

13
Peraturan Menteri Keuangan Republik Indonesia No. 146/PMK.010/2017 tentang Tarif Cukai Hasil Tembakau
(Ministry of Finance Republic Indonesia Regulation No. 146/PMK.010/2017 on Tobacco Product Excise Tariff).

465
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

References
Ahsan, Abdillah. 2018. “Peran Kekuatan-Kekuatan Politik Dalam Perdebatan Penentuan Tarif Cukai Rokok
Maksimal Pada Pembahasan Undang-Undang No. 39 Tahun 2007 Tentang Cukai” [Role of political
actors in the debate on maximum cigarette excise tariff in law no. 39 year 2007 about excise]. PhD
Thesis in Political Science, Universitas Indonesia, Jakarta.

Ahsan, Abdillah, Nur Hadi Wiyono, Diahhadi Setyonaluri, Ryan Denniston, and Anthony D So. 2014. “Illicit
Cigarette Consumption and Government Revenue Loss in Indonesia.” Globalization and Health 10 (1): 75.

Chandra, Ardan Adhi. 2017. “Sri Mulyani Naikkan PPN Rokok Jadi 9,1%.” detikFinance, Jakarta, January 10.
https://finance.detik.com/berita-ekonomi-bisnis/d-3392664/sri-mulyani-naikkan-ppn-rokok-jadi-91.

Fiscal Policy Board. 2016. “Harga Rokok, Dilema Pembangunan, dan Kualitas Hidup, Badan Kebijakan
Fiskal” [Civil society organization workshop: cigarette price, development dilemma, and quality of life].
December 20, Fiscal Policy Board, Ministry of Finance, Jakarta.

Kosen, Soewarta, Hasbullah Thabrany, Nunik Kusumawardani, and Santi Martini. 2017. Health and
Economic Costs of Tobacco in Indonesia. Review of Evidence Series. Jakarta: Lembaga Penerbit Badan
Penelitian dan Pengembangan Kesehatan.

Lian, Tan Yen, and Ulysses Dorotheo. 2016. The Tobacco Control Atlas: ASEAN Region. 3rd ed. Bangkok:
Southeast Asia Tobacco Control Alliance.

Marquez, Patricio V., and Blanca Moreno-Dodson. 2017. Tobacco Tax Reform: At the Crossroads of
Health and Development; A Multisectorial Perspective. Washington, DC: World Bank.

Ministry of Finance, Indonesia. 2016. Laporan Kinerja Direktorat Jenderal Bea dan Cukai Kementerian
Keuangan (Directorate General Custom and Excise Ministry of Finance Performance Report). Annual
publication. Jakarta: Ministry of Finance.

———. 2017a, Laporan Kinerja Direktorat Jenderal Bea dan Cukai Kementerian Keuangan (Directorate
General Custom and Excise, Ministry of Finance Performance Report). Annual publication. Jakarta:
Ministry of Finance.

———. 2017b. Laporan Kinerja Kementerian Keuangan (Ministry of Finance Performance Report). Annual
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———. 2017c. Direktorat Penindakan dan Penyidikan, Direktorat Jenderal Bea dan Cukai, Kementerian
Keuangan, Pengawasan Barang Kena Cukai Illegal, 16 Februari 2017 (Directorate Enforcement and
Investigation, Directorate General Custom and Excise, Ministry of Finance, “Monitoring of Illegal
Excise Goods”).

Nursalikah, Ani. 2018. “Bea Cukai Tanggapi Menurunnya Jumlah Rokok Ilegal.” Republika,
Jakarta, May 25. https://www.republika.co.id/berita/beacukai/berita-beacukai/18/05/25/
p99p32366-bea-cukai-tanggapi-menurunnya-jumlah-rokok-ilegal.

Satriawan, Elan, Arti Adji, and Wihana K. Jaya. 2010. Survei Cukai Rokok Ilegal 2010 [Survey on tax on
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Susanto, Elik. 2017. “Survei Menyebutkan Promosi Harga Rokok Murah Bidik Anak-anak.”
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in Indonesia: 2002–2017.” Global Tobacco Control Program (May), World Bank, Washington, DC.

467
MALAYSIA
16

MALAYSIA:

Addressing the Illicit Flow
of Tobacco Products
Noraryana Hassan, Subromaniam Tholasy, Norliana Ismail, Hasazli Hasan, Norashidah
binti Mohamed Nor, and Wency Bui Kher Thinng1

Chapter Summary
The Government of Malaysia is concerned with illicit tobacco on public-health and fiscal
grounds. Action against the illicit tobacco trade is a key component of the country’s tobac-
co-control strategy.

The World Health Organization Framework Convention on Tobacco Control (WHO FCTC)
sets standards and provides international legal foundations for anti-tobacco policies.
Following Malaysia’s ratification of the FCTC in 2005, the Tobacco Control Unit and FCTC
Secretariat were established within the Ministry of Health (MOH). The Royal Malaysian
Customs Department (RMCD) is the lead agency involved in law enforcement against illicit
cigarette smuggling in Malaysia.

Recent key changes in Malaysia’s tobacco tax policy include a 2015 increase of 42.8 percent
in the tobacco excise duty and the introduction of the Goods and Services Tax (GST), which
boosted the overall excise duty on cigarettes from 0.28 cents per stick in 2014 to 0.40 cents
in 2015.

1
FCTC & Tobacco Control Unit, Disease Control Division, Ministry of Health, Malaysia

469
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Tobacco smuggling in Malaysia follows two main pathways. One is direct smuggling, in
which perpetrators use illegal entry points to introduce tobacco products from neighboring
countries without customs inspection. Indirect smuggling, meanwhile, employs methods
such as concealing cigarettes among shipments of other imported goods. The currently
most popular modality for smugglers in Malaysia is under-declaring or mis-declaring the
value or quantity of transported cigarettes.

The RMCD’s enforcement activities include monitoring the movement of goods on
Malaysia’s duty-free islands, for example physically inspecting goods entering Free Trade
Zones. Special operations, road blocks, and regular land and sea patrols are carried out at
strategic locations. Special operations target outlets, shops, and restaurants selling illicit
cigarettes. The RMCD has also initiated the Collaborated Border Management (CBM) system.
Using pre-defined risk rules, Enforcement, Customs, and Technical Services officers work
together to target high-risk consignments. The RMCD controls the issuance or renewal of
tobacco-product import licenses through vetting by a high-level management panel.

The launch of the National Blue Ocean Strategy (NBOS) has further strengthened co-op-
eration among law-enforcement agencies in tackling illicit tobacco trade. Inter-agency
collaborative action can: break illicit cigarette supply chains by identifying trafficking
“hotspots”; propose legal amendments to stiffen penalties for smugglers; revise procedures
for licensing of private jetties; and accelerate revocation of cigarette import licenses if
license holders are caught in smuggling activities.

International cooperation is key to fighting illicit tobacco. International coalitions in which
the RMCD is involved include the Regional Intelligence Liaison Office (RILO); United Nations
Office on Drugs and Crime (UNDOC); Container Control Program (CCP); Indonesia-
Malaysia Coordinated Customs Patrol (PATKOR KASTIMA), and Malaysia-Thai Border Joint
Cooperation (MTBCO).

The RMCD is currently working on a system overhaul under Malaysia’s Customs Project.
This reform is expected to include the creation of a National Targeting Centre. Assistance
from the United States, United Kingdom, and the Australian Border Force is reinforcing best
practices in targeting and risk analysis.

The measures being taken by the MOH, RMCD, and other agencies are expected to reduce
illicit cigarette consumption in Malaysia, ultimately cutting smoking prevalence among
the country’s adults and adolescents. Authorities aim to reduce smoking prevalence to 15
percent by 2025 and to less than 5 percent in 2045. All countries should cooperate to fight
illicit tobacco, as it compromises public health, weakens the rule of law, and costs govern-
ments billions annually due to unpaid duties and taxes. Intensified information sharing and
collaboration between enforcement agencies in Malaysia, authorities in other countries, and
international partners will help curb illicit tobacco while strengthening international ties.

470 // Malaysia: Addressing the Illicit Flow of Tobacco Products
1. Introduction
The Government of Malaysia is concerned with illicit tobacco on public-health and fiscal
grounds. Illicit trade increases the availability of affordable cigarettes in the local market. As a
result, cigarette consumption and smoking-related diseases threaten to increase in Malaysia,
undermining the government’s heath policy goals. The influx of cheap cigarettes places
Malaysia’s youth at particular risk of falling prey to addiction. Even as they compromise
public health, illicit cigarettes also mean lost tax revenue that the government could have
invested in programs that benefit all Malaysians.

While it appears that legal tobacco companies are on the losing end of illicit trade, because
they are paying taxes and duties, this picture is at best incomplete. In reality, tobacco com-
panies may profit from rising sales of illicit cigarettes. Legitimate tobacco firms manufacture
the majority of cigarettes that end up being sold illegally. Moreover, cheap illegal cigarettes
entice the younger generation and induce the habit of smoking. Each individual who
becomes addicted to smoking is a market entrée for the tobacco industry, regardless of the
person’s initial brand preferences (Rejab & Zain 2016). Thus, enforcement to control the illicit
flow of tobacco is a crucial component of a robust cigarette tax and public-health policy.

This chapter provides an overview of Malaysia’s efforts to combat the illicit tobacco trade. It
starts by reviewing the legislative framework that supports Malaysia’s action on illicit tobacco.
It then outlines the country’s strategic plan for tobacco control, with a focus on Malaysia’s
tobacco taxation regime. The later parts of the chapter discuss the “nuts and bolts” of
cigarette smuggling in Malaysia and detail the country’s major enforcement actions. Inter-
agency collaboration and cooperation with international partners receive special focus. In
conclusion, we consider some results achieved and paths to strengthen future outcomes in
controlling illicit tobacco.

2. Tobacco Control in Malaysia: Legal and
Policy Framework
The International Framework
Malaysia adopted the World Health Organization Framework Convention on Tobacco
Control (WHO FCTC) in 2005. The FCTC identifies the elimination of illicit trade in tobacco
products as an important component of global tobacco control. To accelerate progress
in this area, in 2012, WHO introduced the Protocol to Eliminate Illicit Trade of Tobacco
Products, which builds upon FCTC Article 15. The Protocol provides guidance on topics
including: anti-smuggling legislation; how to monitor cross-border trade; the marking of
tobacco packaging to enable tracking and tracing; and the confiscation of proceeds derived
from the illicit tobacco trade. Malaysia has implemented multiple strategies to reduce illicit
tobacco trade and is considering ratification of the Protocol.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Tobacco Control Legislation in Malaysia
The gazettement of Malaysia’s Control of Tobacco Product Regulation (CTPR) was com-
pleted in 1993 (with subsequent revisions up to CTPR 2004). This marked an important
milestone for legislation and the enforcement of tobacco control in Malaysia. The CTPR pro-
vided the MOH with legal powers for enforcement activities, not only to discourage people
from smoking, but also to prevent smoking initiation among young people and to protect
the general public from the dangers of second-hand smoke. The MOH regularly amends the
CTPR to keep pace with tobacco industry strategies, which capitalize on loopholes in laws
and regulations to reinforce tobacco-product marketing.

The WHO FCTC sets the standards for tobacco control worldwide and provides legal foun-
dations at the international level. Following Malaysia’s ratification of the Convention, the
Tobacco Control Unit & FCTC Secretariat was established within the MOH in 2006, under
the Non-Communicable Disease Section of the Disease Control Division.

The National Strategic Plan for Tobacco Control
WHO’s MPOWER strategy has been integrated into the Malaysian National Strategic Plan for
Tobacco Control. Activities pertaining to the MPOWER strategy can be outlined as follows:

(M) Monitor tobacco use: Continuous surveillance of the smoking population in Malaysia
is carried out by the MOH through instruments and institutions such as the National
Health Morbidity Survey (NHMS), Global Adult Tobacco Survey (GATS), Global Youth
Tobacco Survey (GYTS), Global School Health Survey (GSHS), The E-Cigarette Survey
among Malaysian Adolescents (TECMA), National E-Cigarette Study (NECS), and Tobacco
Tax Study. These government initiatives are in addition to local studies conducted by
universities throughout the country.

(P) Protect people from tobacco use: This is done by creating a smoke-free environment
for the betterment of the people. Relevant statutes include Articles 11 and 22 of the CTPR
2004, which enumerate places where smoking is prohibited and specify that the Minister
has the power to prohibit smoking in buildings, premises, or public areas. A program
known as “Rumah Bebas Asap Rokok” (RBAR), or “Smoke-Free Homes,” has been intro-
duced by the government under the Community Empowerment Programs (KOSPEN)
to encourage a smoke-free environment within the community, while the Blue Ribbon
Certification program aims to create smoke-free corporate buildings.

(O) Offer help to quit tobacco use: Existing smokers are not left out of the national effort
to reduce the number of smokers in Malaysia. As part of the government’s effort, Quit-
Smoking Clinics are established in public clinics and government hospitals. The Malaysian
Quit-Smoking Services (mQuit) have enabled the unification of various smoking cessation
services offered by public and private entities. These services are available from certified

472 // Malaysia: Addressing the Illicit Flow of Tobacco Products
mQuit providers, including retail pharmacies, private general practitioners, private hospi-
tals, and in-house quit-smoking programs in workplaces.

(W) Warn people about the danger of tobacco: The MOH has collaborated with other
government agencies to spread the word about the dangers of smoking. The “Refuse
Smoking” (Tak Nak) campaign was introduced nationwide in 2004 and has been one of
the most prominent campaigns directed against the use of tobacco. Television, radio,
and social media have been used extensively to spread the message, and younger audi-
ences have been especially targeted. School curricula have incorporated anti-tobacco
messages, for example via the IMFree program and annual school dental checkups with
the theme “Kesihatan Oral Tanpa Asap Rokok” (KOTAK) (Quit Smoking for Oral Health).
The KOTAK program also helps students who are caught smoking in schools with behav-
ioral interventions to help them quit smoking.

(E) Enforce bans on tobacco advertisement, promotion, and sponsorship: Malaysia’s
banning of tobacco advertisements began in 1982. The CTPR 2004 Part II (Articles 4
through 6) has clarified the legal framework. Indirect promotion through free samples,
gift products / prizes, retail price, and packaging of cigarettes are also controlled by
the CTPR 2004. To enforce the legislation, the Tobacco Control Unit and the MOH’s
FCTC Secretariat act as coordinators, while the MOH enforcement team is responsible
for implementation. Tobacco enforcement in Malaysia is generally initiated either at
the MOH level (for coordinated nationwide enforcement); at state level by state health
departments; or at district level by the District Health Office. Enforcement activities are
carried out regularly, and any offense against the CTPR 2004 spurs a legal notice (with
fine), or the perpetrator is brought to court.

(R) Raise the price of tobacco: Taxation is a cost-effective measure to prevent or reduce
tobacco usage, especially among youth. Tobacco tax hikes, leading to higher retail ciga-
rette prices, reduce the demand for cigarettes. CTPR 2004 Regulation 8A deals with the
pricing of cigarettes and aims to prevent the tobacco industry from manipulating prices
to increase tobacco product sales (for example, by price reductions or price comparison
against competitors).

Cigarette Taxation Policy in Malaysia
In Malaysia, all types of tobacco and tobacco products are subject to excise and import
duties, as well as the Goods and Services Tax (GST). Previously, tax on tobacco / tobacco
products was imposed according to weight. However, from 2004 forward, all duties and
taxes for cigarettes were calculated based on number of sticks.

2015 saw important changes in Malaysia’s tobacco tax policy, including an increase of 42.8
percent in the tobacco excise duty and the introduction of the GST. The GST was initially set
at 6 percent, boosting the overall excise duty on cigarettes from 0.28 cents per stick in 2014

473
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

to 0.40 cents in 2015. Table 1 summarizes the taxes imposed on tobacco / tobacco products
in Malaysia from 1990 to 2015.

Table 1. Tobacco Taxation in Malaysia (1990–2015)

AD
SALES
YEAR SPECIFIC EXCISE DUTY (RM/KG OR RM/STICK) VALOREM
TAX %
%
1990 13.0 /kg 15 -

1991 14.0 /kg 15 -

1992 – 1998 28.6 /kg 15 -

1999 – 2000 40.0 /kg 15 -

2001 40.0 /kg 25 -

2002 48.0 /kg 25 -

2003 58.0 /kg 25 -

2004 0.081 /stick 25 -

2005 0.22 /stick 5 20

2006 0.12 /stick 5 20

2007 0.15 /stick 5 20

2008 0.17 /stick 5 20

2009 0.18 /stick 5 20

2010 – 2012 0.21 /stick 5 20

2013 0.26 /stick 5 20

2014 0.28 /stick 5 20

2015 - current 0.40 /stick 6 0

3. The Evolution of Malaysia’s Tobacco Epidemic
Smoking Prevalence and Trends in Malaysia
Malaysia’s MOH conducted its first morbidity survey in 1986 to determine the prevalence of
cigarette smoking and related behaviors. In 2015, the National Health and Morbidity Survey
(NHMS) estimated that five million Malaysians smoked. In that year, current smokers repre-
sented 24.0 percent of the population aged 15 years and older (NHMS, 2015). Figure 1 tracks
the prevalence of smoking among Malaysian adults aged 18+ from 1996 to 2015, based on
NHMS data. Overall prevalence did not fall substantially during this period. Smoking prevalence
among males dropped modestly from 49.1 percent in 1996 to 45.1 percent in 2015.

474 // Malaysia: Addressing the Illicit Flow of Tobacco Products
Figure 1. Smoking Prevalence Among Malaysian Adults Aged 18 Years and Above

Trend of smoking among Malaysian adults

50% 49.1
48.8
46.6 45.1

40%

30%
24.7 24.6 24
22.8
20%
Overall
10%
Male
3.5 1.9 1.1 1.4 Female
0%
1996 2006 2011 2015

Figure 2 shows the pattern of smoking among Malaysian youth aged 13 to 15 years, from
2003 to 2016. The results show a significant decrease in youth smoking prevalence, from
20.2 percent in 2003 to 14.8 percent in 2016. Data are based on the Global Youth Tobacco
Survey (2003 and 2009), the Global School Health Survey (2012), and the Tobacco and
E-Cigarette Survey Among Malaysian Adolescents (TECMA) (2016). Notable changes were
recorded among boys, whose smoking prevalence fell from 36.3 percent in 1996 to 26.1
percent in 2016. Prevalence of smoking among girls was initially low at 4.2 percent in 1996
and fell further to 2.4 percent in 2016.

Figure 2. Prevalence of Smoking Among Malaysian Youth Aged 13 – 15 Years

Trend of smoking among Malaysian youth

50%

40%
36.3

30.9
30% 26.1

20.2
20% 18.2 17.1
14.8
Overall
10% 9.4
5.3 Male
4.2 2.4
1.9
0% Female
2003 2009 2012 2016

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 3. Relationship Between Excise Duty Rate Per Pack, Retail Price, and Total
Consumption of Cigarettes from 1980 to 2014 (Real Prices)

Cigarettes (billion sticks) Tax, Price (RM per pack)

30 16
14
25
12
20
10
Total Cigarette
15 8 Consumption
6 Retail Price
10 (per pack)
4
5 Excise Tax Rate
2 (per pack)

0 0 Linear
(Total Cigarette
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Consumption)

Cigarette Consumption
Figure 3 illustrates the relationship between cigarette prices, excise duties, and cigarettes
consumption in Malaysia. Total cigarette consumption is reflected by the blue line (and the
black trend line). They show a decreasing trend in cigarette consumption, while the red line
denotes the rising excise duty. The reduction of total cigarette consumption observed since
1980 is small, due to the inelastic demand for cigarettes in Malaysia, as discussed by Ross and
Al-Sadat (2007). The inelastic demand for cigarettes implies that to obtain a significant reduc-
tion in cigarette consumption requires a relatively large increase in taxation and retail price.

4. Tackling Illicit Tobacco in Malaysia: Enforcement
Challenges and Solutions
Types of Illicit Cigarettes
As defined by the FCTC, illicit trade is “any practice or conduct prohibited by law and which
relates to production, shipment, receipt, possession, distribution, sale or purchase, includ-
ing any practice or conduct intended to facilitate such activity” (Calderoni et al. 2016; WHO
FCTC 2015). This definition covers:

»» Smuggling – The unlawful movement or transportation of tobacco products (including
counterfeit products) from one tax jurisdiction to another without the payment of taxes or
in breach of laws prohibiting their import or export (Joossens et al. 1998).

»» Counterfeiting – Cigarettes manufactured and packaged to imitate an established brand
without the brand owner's consent.

476 // Malaysia: Addressing the Illicit Flow of Tobacco Products
»» Cheap or illicit whites – Cigarettes produced legally in one country but intended for
smuggling into other countries where there is no prior legal market for them. Taxes in the
country of production are typically paid but avoided in the destination countries.

»» Unbranded tobacco – Manufactured, semi-manufactured, and loose leaves of tobacco
carrying neither labelling nor health warnings.

»» Bootlegging – Tobacco legally bought in a low-tax country by individuals or small groups
and then smuggled into a country with higher tax rates and illegally resold.

»» Illegal manufacturing – Cigarettes manufactured for consumption which are not declared
to the tax authorities. These cigarettes are sold without tax and may be manufactured in
approved factories or illegal covert operations.

In Malaysia, cigarettes are considered illicit if any of the following conditions exist: no duties
or taxes have been paid; the cigarettes are sold below MYR10.00 per pack (under Regulation
8C, Control of Tobacco Product Regulation 2004); cigarettes are not imported under a valid
permit; tax stamps are absent; importers or manufacturers of the cigarettes are unlisted; the
brands are unregistered; the pack size includes fewer than 20 cigarettes; or packaging lacks
the six rotational graphic health warnings mandated by the MOH.

Cigarette Smuggling in Malaysia: The Nuts and Bolts
Tobacco smuggling in Malaysia follows two main pathways. One is direct smuggling, in
which illegal entry points are used by perpetrators to directly introduce tobacco products
via sea or land from neighboring countries without customs inspection. Indirect smuggling,
meanwhile, employs additional deceptive methods, such as concealing cigarettes in secret
compartments aboard ships or other vehicles, or among other imported goods. The cur-
rently most popular modality for smugglers in Malaysia is under-declaring or mis-declaring
the value or quantity of transported cigarettes, rather than trying to conceal the cigarettes’
existence altogether.

Cigarette smuggling can adopt a land mode (through entry points on Malaysia’s borders
with Thailand, Singapore, and Indonesia); sea mode (involving ports, jetties, and coastal
areas throughout the country); or air mode (via air cargo or by passengers, air crews, or
employees working within the airport area). Most illicit cigarettes are smuggled through the
country’s main ports of entry, such as Port Klang and Johor Port, located in West Malaysia.

Malaysia has a coastline of approximately 4,600 km and land borders of about 3,100 km
shared with countries including Thailand, Brunei, and Indonesia. Malaysia also shares mar-
itime borders with Singapore, Indonesia, Thailand, Brunei, Vietnam, Philippines, and to a
certain extent with China. Malaysia’s geography, with extensive coastline and porous jungles,
poses significant challenges for anti-smuggling enforcement. Smuggling of illicit cigarettes –
mainly by sea and land – is a lucrative business for organized crime and is expanding.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 4. Regional Cigarette Price Disparities, 2016 (Price per pack, most
popular brand)

MYANMAR
USD 0.57 LAOS
USD 0.86
THAILAND PHILIPPINES
USD 1.94 USD 1.08
VIETNAM
CAMBODIA
USD 0.90
USD 0.50

MALAYSIA BRUNEI DARUSSALAM
SINGAPORE USD 4.17 USD 5.10
USD 9.62
INDONESIA
USD 1.42

Source: The Tobacco Control Atlast ASEAN Region, Third Edition (November 2016) SEATCA

Drivers of this expansion include: cigarette price disparities among countries in the region,
with the market price for cigarettes in Malaysia being the second highest in Southeast Asia
(Figure 4); correspondingly high profits from cigarette smuggling versus low risks taken by
smugglers; the abuse of facilities at duty-free islands; and the rapid influx of foreign workers
into Malaysia, who may be more inclined to purchase and consume smuggled cigarettes.

Do Higher Tobacco Taxes Boost Illicit Trade?
The tobacco industry offers systematic resistance to higher tobacco taxes and other control
measures. Documented industry tactics include: claiming that higher taxes will increase
smuggling and other forms of illicit trade; threatening governments that raise tobacco taxes
with lawsuits; labeling tobacco taxes as anti-poor; and asserting that higher tobacco taxes
will reduce government revenue and weaken employment.

Research evidence in the Malaysian context does not support the industry claim that higher
taxes prompt substantially greater tobacco smuggling. Indeed, figures on illicit tobacco derived
by the Royal Malaysia Custom Department (RMCD) contradict the main arguments advanced
by the industry (Figure 5). The true incidence of tobacco smuggling in Malaysia is likely to be
about half what the industry claims. Meanwhile, impartial research shows that raising tobacco
taxes is likely to reduce the number of smokers in Malaysia and to increase tax revenue.

The RMCD analysis emphasizes the impact on tobacco smuggling of non-tax factors such
as the presence of a large population of foreign workers who prefer to smoke their own
brands of cigarettes, along with the geographical particularities discussed above. It is worth
noting, moreover, that the large tobacco companies themselves are sometimes engaged
in illicit cigarette trade. Ultimately, the key strategies to fight smuggling and illicit trade are
stringent enforcement and cracking down on corruption. It is to such enforcement issues
that our discussion now turns.

478 // Malaysia: Addressing the Illicit Flow of Tobacco Products
Figure 5. Illicit Tobacco Incidence in Malaysia as Estimated by the Tobacco
Industry and the RMCD, and Tobacco Taxes Collected, 2013-2017

60% 56.10% 54.50%
5
55%
50% 3.91 3.83 4
3.67 4.29
45% 3.59
40%
35% 38.90% 32.80% 41.50% 3
30%
25% 28.27%
25.99% 26.67% 25.34% 26.62% 2 Illicit Tobacco
20% (RMCD)
15%
1 Illicit Tobacco
10% (Industry)
5%
0% 0 Collection
(RM BIL.)
2013 2014 2015 2016 2017

Enforcement Practices Against Illicit Cigarettes
in Malaysia
In Malaysia, the RMCD is the leading agency involved in law enforcement against illicit
cigarette smuggling, alongside the Royal Malaysian Police Force (RMP), the Malaysian
Maritime Enforcement Agency (MMEA), the Ministry of Domestic Trade, Co-operatives and
Consumerism (MDTCC), and the Ministry of Health. Besides cooperation with other govern-
ment ministries and agencies, the RMCD also works closely with Interpol to address the illicit
cigarette trade.

The current legislation under the purview of the RMCD regarding illicit cigarettes is summa-
rized in Table 2.

Control of Tobacco Product Regulations 2004 (CTPR 2004) provided legal powers to the
MOH to enforce the law pertaining to illicit cigarettes. Among the legal instruments that
can be directed against perpetrators of illicit tobacco trade are CTPR 2004 Regulations 8A,
15, and 16. Regulation 8A requires every manufacturer or importer of tobacco products
to submit an application for retail price of new tobacco products to the MOH. In addition,
Regulation 8A (5A) requires individuals to sell tobacco products only with an approved retail
price, and Regulation 8A (5B) prohibits any individual from selling tobacco products without
a price label or an approved retail price. The practice in Malaysia is that manufacturers or
importers must inform retailers of the approved price of a tobacco product. Illicit cigarettes
brought in from other countries do not carry approved retail prices and are deemed illegal.
Persons who sell cigarettes without approved prices in Malaysia are subject to a fine of up to
MYR 10,000.00 or imprisonment for up to two years or both.

Regulation 15 of the CTPR 2004 requires specific health warnings on cigarette packaging,
as depicted in Schedules 5 and 6. Regulation 15A also instructs the placement of labeling
on cigarette packs as specified in Schedules 7 and 8 of the CTPR 2004. Illicit cigarettes

479
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table 2. Legal Framework for Import and Export of Tobacco Products

REGULATION DETAILS

Import license is compulsory for importation of cigarettes and liquor. No person shall
import intoxicating liquor, tobacco or denatured spirit except under and in accordance
with a license issued by or under the direction of the Director General; provided that
1. Regulation 18, Customs
intoxicating liquor or tobacco which a senior officer of customs is satisfied is intended
Regulations 1977
for the private consumption of the importer and not for sale or intoxicating liquor or
tobacco exempted from the payment of customs duty under the provisions of section
14 of the Act may be imported without such license.
2. Regulation 19 (2), Import license is subject to yearly period. Such license shall be for any period not
Customs Regulations exceeding one year but shall expire not later than 31st December next following of the
1977 date of issue.
3. Third Schedule, Part II, Refer to item no 1. Cigarettes 2402.20.20 and 2402.20.90 (All importers shall apply;
Customs Order 2017 health warning & tax stamp on each cigarette packaging; tax stamp for every bottle, can,
(Prohibition of Imports) keg or other container of liquor.)
Management procedures on tax stamp and security ink. This order is to describe the
accounting and procurement, management, and account management processes:
4. Financial Standing
“Treasury Collection Management Trust Fund (Banderol) for intoxicating Cigarettes and
Order 2017
Liquor” at the headquarters level, states, and all responsibilities centre (PTJ) of the Royal
Malaysian Customs Department.
Importation of cigarettes / tobacco and liquor requires a license issued by the Director
General of Customs under regulation 18. The Customs Regulations 1977 include
5. Customs Standing importation by foreign diplomats and organizations. For effective control purposes, the
ORder 2014 Customs Director General has set out from 1 January 2009 that the authority to approve
the application for cigarette import licenses is under the jurisdiction of cigarette / liquor
headquarters licensing panel.
The provisions of this Act so far as they are applicable shall apply, with such
6. Food Act Part 5
modifications as may be provided in regulations made under this Act, to tobacco, cigars,
Miscellaneous
cigarettes, snuff, and other like substance in the same manner as the 9 provisions apply
Provisions No. 36
to food.

generally carry health warnings, texts, and labels different from those required by the law.
CTPR 2004 Regulation 16 also mandates only 20 sticks of cigarettes per pack. Anyone who
contravenes this regulation faces a fine of up to MYR 10,000 or maximum imprisonment of
up to two years or both.

Improvements in Importation Procedures for Tobacco
and Tobacco Products
The RMCD has recently introduced several improvements in the import procedures for
tobacco and tobacco products. Importers of tobacco and tobacco products for commercial
purposes are required to obtain import licenses and to submit a valid bank guarantee for
the consignments to the RMCD. In addition, imported and locally manufactured cigarette
packets are required to bear RMCD tax stamps. Tax stamps protect customers from purchas-
ing counterfeit cigarettes, while enabling the RMCD to better curb the smuggling and sale

480 // Malaysia: Addressing the Illicit Flow of Tobacco Products
of illicit cigarettes. The RMCD has also taken the initiative to conduct physical inspection of
every shipment that contains cigarettes or tobacco.

Taking Enforcement to the Next Level
As part of its ongoing effort to strengthen anti-smuggling enforcement mechanisms, the
RMCD closely monitors the facilities established on Malaysia’s duty-free islands so that
traders do not abuse them. Customs control at duty-free islands has been restructured such
that only certain areas within the islands have been gazetted as duty-free. All other areas of
the islands are considered Principal Customs Areas (PCAs) where normal customs control
is observed. Goods which are moving from a PCA to a Free Trade Zone (FTZ) are physically
inspected. The Customs No. 8 Form (K8) has to be declared to the RMCD in order for goods
to be moved. Once the goods reach the FTZ, a copy of the K8 form must be returned to
the original station at the PCA. Failure to comply with this regulation leads to the forfeiture
of the bank guarantee submitted by the importer to the RMCD. An additional RMCD control
mechanism on the issuance or renewal of tobacco-product import licenses is vetting by
a high-level management panel. Special operations, road blocks, and regular land and sea
patrols are carried out periodically at strategic locations. These special operations target
outlets, shops, and restaurants selling illicit cigarettes.

The RMCD has also initiated the Collaborated Border Management (CBM) system. Using
pre-defined risk rules, Enforcement, Customs, and Technical Services officers work together
to target high-risk consignments. RMCD officers stationed at border entry and exit points
are often exposed to threats from organized crime syndicates. To enhance security, they are
armed and work closely with the police.

Many illegal activities carried out by smugglers lead to money laundering. Therefore, a
special task force called the National Revenue Recovery Enforcement Team (NRRET) has
been formed. The task force comprises the RMCD, Police Force, Malaysian Central Bank,
Malaysian Anti-Corruption Commission (MACC), and the Attorney-General Chambers. The
task force takes action against offenders under Malaysia’s Anti-Money Laundering, Terrorist
Financing, and Proceeds of Unlawful Activities Act.

The RMCD has also introduced a demerit system on forwarding agents engaged in the
import of tobacco products. Those found to have misused the facilities given by the RMCD
are penalized. To date, the licenses of 31 agents have been suspended for various offenses.
In the near future, the RMCD will also impose a similar demerit system on public and private
warehouse operators. Operators who fail to comply with customs regulations will face
immediate cancellation of their licenses.

Co-operation with Other Agencies
The launch of the National Blue Ocean Strategy (NBOS) further strengthens co-opera-
tion among law-enforcement agencies. Inter-agency collaborative action can: break illicit

481
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

cigarette supply chains by identifying trafficking “hotspots”; propose legal amendments to
stiffen penalties for smugglers; revise procedures for licensing of private jetties; and accel-
erate revocation of cigarette import licenses if license holders are caught in smuggling
activities. Under the NBOS, the RMCD cooperates with the RMP in information-exchange
and capacity-building programs. Periodic joint operations are also carried out with the
MOH, MACC, and MDTCC, as well as local authorities and town councils. The RMCD works
in close partnership with the Malaysian Border Security Agency, which is a special agency
responsible for curbing smuggling and other illegal activities along the country’s land bor-
ders. In addition to regional collaboration, the RMCD also links with international agencies
to further strengthen the control of cigarette smuggling.

International coalitions in which the RMCD is involved include the Regional Intelligence
Liaison Office (RILO); United Nations Office on Drugs and Crime (UNDOC); Container
Control Program (CCP); and the Indonesia-Malaysia Coordinated Customs Patrol (PATKOR
KASTIMA), as well as Malaysia-Thai Border Joint Cooperation (MTBCO). The RMCD is also an
active member of the World Customs Organization (WCO) and is strongly connected with
the United States Customs and Border Protection Agency, the Australian Border Force, and
HM Revenue and Customs of the United Kingdom, among others. Special joint operations
among partners are conducted on a regular basis to combat the illicit movement of ciga-
rettes and tobacco.

The RMCD is currently working on a system overhaul under the Customs Project. This
reform is expected to include the creation of a National Targeting Centre. Assistance from
the United States, United Kingdom, and the Australian Border Force fosters the sharing of
best practices on targeting and risk analysis. Close collaboration with Local Councils assists
in cancelling the licenses of outlet operators who are found guilty of selling illicit cigarettes.

Expected Effect of Reforms to Address the Illicit
Tobacco Trade
The measures and initiatives being taken by the MOH, RMCD, and other agencies are
expected to reduce illicit cigarette consumption in Malaysia, ultimately cutting smoking
prevalence among the country’s adults and adolescents. Authorities’ long-term target is to
reduce smoking prevalence to 15 percent by 2025 and less than 5 percent in 2045. This will
cut government health expenditures on smoking-related diseases, an especially important
consideration, since almost 70 percent of such treatment costs in Malaysia are currently
government funded. With all the steps taken to combat illicit cigarettes, together with the
MPOWER strategies, Malaysia hopes to achieve a Smoke Free Generation and Tobacco
Endgame by the year 2045.

482 // Malaysia: Addressing the Illicit Flow of Tobacco Products
5. Conclusions
Intensified information sharing and collaboration between enforcement agencies in
Malaysia, authorities in other countries, and international partners will help curb illicit
tobacco while strengthening international ties. Through such partnerships, Malaysia is
committed to control the flow of illicit cigarettes into and within the country.

References
Aljunid S. M. 2007. Health care cost of smoking in Malaysia, SEATCA Report.

Calderoni F, Savona EU, Solmi S. Crime-proofing the policy options for the revision of the Tobacco
Products Directive: Proofing the policy options under consideration for revision of EU Directive 2001/37/
EC against the risks of unintended criminal opportunities. Transcrime - Universita degli Studi di Trento,
2012 http://transcrime.cs.unitn.it/tc/fso/pubblicazioni/AP/Transcrime-CP_of_the_EU_TPD.pdf.

Institute for Public Health (IPH). 2012. Report of the Global Adults Tobacco Survey (GATS) Malaysia, 2011.
Kuala Lumpur: Ministry of Health Malaysia.

Institute for Public Health (IPH). 2015. National Health and Morbidity Survey 2015 (NHMS 2015). Vol. II:
Non-Communicable Diseases, Risk Factors & Other Health Problems.

Joossens L, Raw M. 1998. Cigarette smuggling in Europe: who really benefits? Tob Control 7:66–71.

Ministry of Health Malaysia. 2015. National Strategic Plan for Tobacco Control 2015-2020.

Ministry of Health Malaysia. 2016. The Relationships between Tobacco Taxation and Demand
Determinants to Reduce Cigarettes Consumption and Smoking Prevalence in Malaysia.

Rejab, Ismail & Zarihah Zain. 2006. The Modus Operandi Of Cigarette Smuggling In Malaysia. The
Collaborative Funding Program for Southeast Asia Tobacco Control Research.

Ross H, Al-Sadat NA. 2007. Demand analysis of tobacco consumption in Malaysia. Nicotine Tob Res.
2007 Nov;9(11):1163-9.

WHO (World Health Organization). 2003. WHO Framework Convention on Tobacco Control.
Geneva: WHO.

483
PHILIPPINES
17

PHILIPPINES:

Addressing the Illicit Flow
of Tobacco Products
Kim Henares and Malou B. Recente1

Chapter Summary
The Philippines has recently made progress in addressing illicit tobacco trade, within an
ambitious overall reconfiguration of the country’s tobacco control efforts. The Philippines’
widely discussed 2012 excise tax reform eliminated previous weaknesses in the excise tax
structure on tobacco products. Earlier design flaws had limited the tax system’s capacity to
curb tobacco consumption and raise government revenues. These weaknesses had also
complicated efforts to check illicit trade flows. The 2012 reform introduced broad changes,
notably abolishing the previous multi-tiered classification of cigarettes based on net retail
price. A single-tier cigarette excise tax structure is operational in the Philippines as of 2018.
Philippine leaders have continued to raise tobacco tax rates and are weighing further
increases to reach World Health Organization (WHO) recommended levels. These reforms
set the context for the Philippines’ action to control illicit tobacco flows.

The Bureau of Internal Revenue and the Bureau of Customs, the two major revenue-gen-
erating agencies of the Philippine government, are at the forefront of the fight against illicit
tobacco. Both bureaus employ a wide range of enforcement tools, including the affixture of

1
K. Henares (Former Commissioner, Bureau of Internal Revenue, Philippines) and M. Recente (Former
Undersecretary, Department of Finance, Philippines)

485
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

revenue stamps, profiling, licensing, monitoring and surveillance of taxpayers and import-
ers, use of x-ray machines and other technology, audit programs, and the imposition of stiff
penalties for violators. The mechanisms deployed are aligned with the principles of the WHO
Framework Convention on Tobacco Control and the Protocol to Eliminate Illicit Trade of
Tobacco Products. Opportunities now exist to implement a tighter track-and-trace system
involving reinforced collaboration between the two bureaus, other government agencies,
and legitimate industry players.

Tax policy and enforcement mechanisms to combat illicit tobacco flows in the Philippines
can be enhanced by (a) strengthening capacity, technology, and the use of data; (b) expand-
ing partnerships with legitimate business; and (c) stronger coordination among enforcement
agencies. Our findings support the following specific recommendations:

1. There should be stronger coordination between the Bureau of Internal Revenue and the
Bureau of Customs, along with other law enforcement agencies and legitimate industry
players, to better enforce the law regarding excise tax on cigarettes. Monitoring illicit
tobacco products in the market and aggressively prosecuting violators are key parts of
the agenda. Policy makers can boost results by creating a system wherein all regulatory
agencies share a common database to monitor tobacco product flows.

2. International collaboration to curtail the illicit tobacco trade should be actively pursued
within the ASEAN integration initiative and other forums. A priority aim for international
collaboration would be ensuring that, in future, no cigarettes leave an exporting country
without bearing the legal tax stamps of the importing country. To this end, customs
authorities in exporting countries can and should share export documents with the
importing countries. Region-wide collaboration in the use of revenue stamps and
sharing of trade documents among governments of exporting and importing countries
would go far in reducing illicit tobacco flows.

3. Government should resolve illicit tobacco cases quickly and ensure the enforcement of
heavier penalties for violations.

4. The security features of tax stamps should be guarded and continuously updated to
prevent counterfeiting.

5. Open data on tobacco trade and tax statistics are necessary to improve estimates of illicit
trade and better evaluate tax and administrative measures used to control illicit tobacco.

6. Stronger capability-building programs for the Bureau of Internal Revenue and the
Bureau of Customs should be prioritized. These should include training to sharpen ana-
lytical, profiling, and audit skills, and the use of technology.

486 // Philippines: Addressing the Illicit Flow of Tobacco Products
1. Introduction
This chapter presents a case study on the Philippine experience in curtailing illicit tobacco
flows. It discusses recent structural changes that corrected weaknesses in the country’s
tobacco tax structure. Administrative and enforcement measures are reviewed, including
operational issues. The chapter details actual frontline interventions against illegal tobacco
trading and analyzes how these came about through the joint efforts of the two agencies
mainly responsible for controlling illicit tobacco in the Philippines: the Bureau of Internal
Revenue (BIR) and Bureau of Customs (BOC). The concluding portions of the study formu-
late recommendations and identify areas for further progress for the BIR and BOC.

Methods and sources
In preparing the study, literature on tobacco taxation, curtailing illicit tobacco flows,
and related topics were reviewed, as well as laws, rules, and regulations governing the
implementation of excise taxes on tobacco products in the Philippines. Interviews were
conducted with tax and customs administrators to determine specific processes in the
implementation of tobacco excise taxes, including how controls and safeguards have been
aligned to monitor the flow of tobacco products from manufacturers to final consumers.
Data cited in this chapter, e.g., import data, volume of removals of tobacco products, and
information on excise tax and total tax collections, are official data from the BIR and BOC.
Other data such as smoking prevalence figures were drawn from the Global Adult Tobacco
Surveys conducted in 2009 and 2015.

2. The Context of Action on Illicit Tobacco
2.1 The Philippines 2012 Excise Tax Reform
On December 19, 2012, the Philippine Congress enacted an ambitious reform law which
restructured the excise tax system for cigarettes as well as alcohol products. This was
Republic Act No. 10351,2 which became effective in 2013. The reforms addressed many of
the policy and implementation weaknesses found in the previous tax structure. The mea-
sures: (1) made the excise tax system more robust in generating revenues for government;
(2) reduced cigarette consumption, fulfilling health objectives; and (3) helped reduce the
illicit movement of tobacco that escapes taxation and other forms of government regulation.

RA 10351 abolished the multi-tiered classification of cigarettes based on net retail price,
which had imposed different excise taxes on low-priced, medium-priced, and high-priced
cigarettes. The new law reduced the previous four-tiered arrangement to a two-tiered struc-
ture from 2013 to 2017, then a unitary structure starting in 2018 (Table 1).

2
“An Act Restructuring the Excise Tax on Alcohol and Tobacco Products by Amending Sections 141, 142, 143,
144, 145, 8, 131 and 288 of Republic Act No. 8424, otherwise known as the National Internal Revenue Code of
1997, as Amended by Republic Act No. 9334, and For Other Purposes.”

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Table 1. Comparative Tobacco Excise Tax Structure Before and After RA 10351

BEFORE RA 10351 TAX RATES IN 2012

Cigarettes packed by hand (in 30s) Php 2.72/ pack

Cigarettes packed by machine (in 20s)

Net retail price (NRP):

Below Php 5.00 Php 2.72/pack

Php 5.00 but not over Php 6.50 Php 7.56/pack

Over Php 6.50 but not over Php 10.00 Php 12.00/pack

Over Php 10.00 Php 28.30/pack

AFTER RA 10351 TAX RATES PER RA 10351
2018 AND
2013 2014 2015 2016 2017
THEREAFTER
The specific tax rate shall
Cigarettes packed by hand Php 12.00 Php 15.00 Php 18.00 Php 21.00 Php 30.00
be increased by 4%
Cigarettes packed by
The specific tax rate shall
machine, where the NRP
be increased by 4%
is:
P11.50 and below Php 12.00 Php 17.00 Php 21.00 Php 25.00 Php 30.00

More than P11.50 Php 25.00 Php 27.00 Php 28.00 Php 29.00 Php 30.00

What some had perceived as an “equity” feature of the previous system, subjecting low-
priced cigarettes to low excise tax, had in reality became an invitation for manufacturers to
misclassify higher-end cigarette brands as low-priced, low-tax brands as a means to evade
taxes. This had made the work of tax administrators especially challenging. The Philippines
Department of Finance (DOF) referred to the misclassification as a form of technical smug-
gling. The removal of the multi-tiered system and the imposition of a unitary tax of Php
30.00 under RA 10351 shut down these opportunities to cheat the system.

Along with the multi-tiered classification system, the previous excise tax structure had
included other features that kept cigarette prices low, and which were addressed to an
extent by RA 10351. A price classification freeze on numerous brands of cigarettes (indeed,
90 percent of all brands) meant that these products were taxed based on their prices prior to
October 1996. On the other hand, all new brands introduced after October 1996 were taxed
based on their current prices. This “legislative protection” spelled unfair competition and at
the same time made cigarettes, on the whole, a relatively cheaper commodity than food,
utilities, and education. This approach constrained the capacity of the new excise model to
curtail consumption of a “sin product” (Sta. Ana and Latuja 2010).

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2.2 Smoking Trends and Tobacco Tax Revenues in
the Philippines
Smoking Trends. Various published studies have shown that smokers of any form of
tobacco products have declined as a proportion of the Philippine population from 1989 up to
the latest survey results in 2015. In 2009, 28.2 percent of the country’s adult population (aged
15 and above) were reported to be tobacco smokers. This figure dropped to 22.7 percent in
2015. Some 22.7 percent of adults in urban areas are reported to be current tobacco smokers.
The proportion is 25.3 percent in rural areas.

Daily smokers of any tobacco product represented 22.5 percent of the adult population in
2009, but this figure had shrunk to 18.7 percent in 2015. On the other hand, the GATS 2015
survey reported that daily smokers consumed 16.5 cigarettes per day on average in 2015,
compared to 15.7 cigarettes per day in 2009. Considering all smokers (i.e., both daily and less
frequent smokers), men (11.2 cigarettes per day) consume more cigarettes than women (8.6
cigarettes per day).

The government’s anti-smoking campaign has had a striking effect on the attitudes and per-
ceptions of the adult population regarding the effects of smoking. In the most recent surveys,
about 95 percent considered smoking as a cause of serious illness, 93.5 percent believed that
inhaling other people’s smoke causes serious illness to non-smokers, and 97.2 percent of
adults favored complete prohibition of smoking in indoor workplaces and public places.

The GATS 2015 results conveyed that more and more smokers made quit attempts (47.9
percent in 2009, rising to 52.2 percent in 2015), although the proportion of smokers who
successfully quit remained almost unchanged from 2009 (4.5 percent) to 2015 (4.0 percent).

Table 2. Proportion of Tobacco Smokers Among Adult Population in the
Philippines, Various Studies

YEAR PREVALENCE SOURCE

1989 58.6 Lung Center of the Philippines, DOH

1995 33.0 Social Weather Station Survey

1996 32.0

1998 31.6 National Nutrition & Health Survey

2001 23.5 DOH - UPM Survey

2003 23.6 World Health Survey

2007 27.0 Social Weather Station Survey

2009 28.2 GATS, 2009

2015 22.7 GATS, 2015

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Results of the Global Youth Tobacco Surveys in 2007 and 2015 indicate that 17.5 percent of
Filipino youth surveyed in 2007 were cigarette smokers, but that by 2015 the proportion had
dropped to 12 percent.

Table 2 indicates that the Philippines saw a remarkable decline in smoking prevalence from
1989 to 1995, then a more gradual decline until 2001, followed by rising prevalence in 2007-
2009. A new, strong downtrend then emerged that, by 2015, had almost returned the country
to its 2001 prevalence level. This pattern shows that the Philippines has the ability to cut
smoking prevalence. That capacity, coupled with the robust public support for tobacco control
described above, shows the country’s potential to take the anti-tobacco fight much further.

Cigarette Consumption and Excise Tax Revenues. The 2012 excise tax reform altered ciga-
rette consumption patterns but at the same time boosted government tax collections. Legal
domestic sales of cigarettes in the Philippines dropped from 4.3 billion packs in 2013 to 3.1
billion packs in 2016, a 28.3 percent decline in four years. Annual domestic cigarette sales
declined by 24 percent from 2013 to 2014 and by 18.4 percent from 2015 to 2016 (Table 3).

Table 3. Domestic Consumption of Cigarettes, Philippines, 2013 – 2016, in millions

DOMESTIC CONSUMPTION,
LOCALLY MANUFACTURED & ANNUAL INCREASE FROM
YEAR IMPORTS GROWTH RATE 2013 – 2016
PACKS PIECES
2013 4,339.4 86,787.95

2014 3,295.9 65,918.4 -24.0%

2015 3,812.8 76,256.8 15.7%

2016 3,111.5 62,229.9 -18.4% -28.3%

Source: Bureau of Internal Revenue

Despite this steep decline in sales, the Philippines’ tobacco excise tax collection in 2016 had
risen by approximately 289.6 percent over its 2009 level. Clearly, the drop in the volume of
cigarettes sold during this period was not enough to negatively impact cigarette tax collection.

Excise Tax State of Play as of 2018. Republic Act (RA) No. 10963, otherwise known as the
“Tax Reform for Acceleration and Inclusion (TRAIN)” Law, enacted on December 27, 2017,
increased the unitary tax rates mandated by RA 10351. Effective on January 1, 2018, RA
10963 is set to increase tax rates by Php 2.50 four times from 2018 through the end of 2023,
and then to apply an annual adjustment of 4 percent starting in 2024. While this is intended to
make the excise taxes more revenue productive, the increments of tax increase still remain
far below optimal levels that would sharply curb tobacco consumption.

490 // Philippines: Addressing the Illicit Flow of Tobacco Products
Table 4. Excise Tax Rates under the TRAIN Law

BEFORE THE TRAIN LAW UNDER THE TRAIN LAW

Effective January 1, 2017, unitary rate of Php 30.00 per pack
(on cigarettes packed by hand and cigarettes packed by
machine) January 1, 2018 to June 30, 2018 –
Php 32.50 per pack
January 1 to December 31, 2018 – Php 31.20
July 1, 2018 to December 31, 2019
January 1 to December 31, 2019 – Php 32.45 – Php 35.00 per pack

January 1 to December 31, 2020 – Php 33.75 January 1, 2020 to December 31,
2021 – Php 37.50 per pack
January 1 to December 31, 2021 – Php 35.10
January 1, 2022 to December 31,
January 1 to December 31, 2022 – Php 36.50 2023 – Php 40.00 per pack

January 1 to December 31, 2023 – Php 37.96
Tax shall increase by 4% annually
Tax shall continue increasing by 4% annually
starting January 2024

According to the World Bank, citing studies from the World Health Organization, the tax per
pack of cigarettes must be around 75 percent of the price in order to make a sharp dent in
consumption (World Bank 2017). As of December 2017, the Php 30 excise tax represents some
40 percent of the retail price of a Php 75 pack of Marlboro cigarettes. At the new tax rate of
Php 32.50/pack, clearly, the rate still does not approach the WHO-recommended level.

Will Tax Hikes Mean More Illicit Trade? Would higher excise taxes, resulting in higher-priced
cigarettes, induce illicit tobacco flows? One of the risks of imposing higher taxes is that
it provides a high economic return for evading taxes. Thus, there is a need to provide
additional administrative and enforcement measures, strict implementation thereof, and
aggressive criminal prosecution as a deterrent to the illicit tobacco trade, as tobacco tax
hikes take effect.

3. Administrative Mechanisms to Control Illicit
Tobacco Flows
3.1 At the Point of Taxation
The provisions of the Philippines’ National Internal Revenue Code (NIRC) are sufficiently
broad to encompass taxable events under the excise tax regime. Importation of tobacco
products by duty-free shops, a huge loophole in the past, is no longer exempt from excise
taxes. If exemption is requested, such as for direct export, an export bond and a transfer
bond must be posted.

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The Tax Code has been further clarified under several Revenue Regulations (RR) issued by
the Bureau of Internal Revenue, in particular RR 3-2006, RR 3-2008, and RR 17-2012. These
regulations stipulate that the excise tax on locally manufactured cigarettes shall be paid by
the manufacturer or producer before removal of the cigarette product from the place of
production. If the tobacco product is consumed within the premises of the tobacco pro-
ducer, the tobacco producer becomes liable for the excise tax on said consumed tobacco. If
the manufacturer removes the tobacco products from the place of production for purposes
of exportation or sale to a tax-exempt entity (for example, foreign embassies) or international
carriers, the manufacturer may pay the excise tax upon removal and claim excise tax credit
or a refund later. Or the manufacturer may use the so-called product replenishment scheme
provided under RR 3-2008, by applying previous excess excise tax payments to the current
removals to cover current excise tax dues. Both schemes provide tightened controls. They
require presentation of proofs, instead of simply granting outright exemption of a tobacco
product once the taxpayer declares it to be for export or sale to a tax-exempt entity, a model
prone to abuse and leakage.

Imported tobacco products are subject to excise taxes unless there is a qualification pro-
vided by law. A bond is also to be posted by the importer to guarantee payment of excise
taxes. For imported manufactured cigarettes, the importer is liable for the excise tax. The
importer prepays the tax upon acquiring revenue stamps from the BIR for affixture by
the foreign supplier on the cigarettes being imported. If the specific tobacco product is
imported on a smaller scale, for example semi-prepared tobacco to be used as raw material
in producing twisted cigarettes, the excise tax is paid by the importer prior to release of the
imported product.

If the imported semi-prepared tobacco product or imported stemmed tobacco leaves are to
be directly exported or are to be used as an input in producing tobacco products for export,
the importation is not excisable, but the importer posts an additional amount as bond
equivalent to the excise tax that was not imposed. In addition to the export bond, a transfer
bond is required if the exporter intends to transfer the good from the place of production to a
bonded facility.

Importation of tobacco products by Duty-Free Philippines, Inc., and by duty-free shops in the
country’s special economic zones, along with other imports into these special economic
zones or free ports, are no longer exempt but have become subject to excise taxes. They
may be exempt from customs duties but are subject to the excise tax and the value-added
tax (VAT).

Tobacco products imported into the Philippines for transshipment to a foreign country shall
be subject to a bond equivalent to the amount of excise tax, VAT, and duties had the product
been imported and sold on the domestic market. This is clarified under RR 17-2012. The
bond serves as guarantee to the government that the imported products are to be directly
exported to a foreign country and are not intended for sale in the local market.

492 // Philippines: Addressing the Illicit Flow of Tobacco Products
3.2 Key Agencies and Regulatory Requirements in the
Production or Importation of Tobacco Products
Several Philippines government agencies play roles in regulating the production or importa-
tion of tobacco products.

The National Tobacco Administration (NTA) issues an annual permit to import, export,
or transship unmanufactured tobacco or manufactured tobacco, and an annual permit
to manufacture tobacco products. The Import Commodity Clearance issued by NTA is a
pre-requisite for the release of all importations of tobacco products, as well as tobacco-re-
lated equipment, supplies, raw materials, and ingredients.3 It is listed among the documents
to be submitted to the Bureau of Customs (BOC).

The legal basis of NTA is Executive Order No. 245, issued on July 24, 1987, which gave the
NTA the power to regulate the tobacco industry. The agency has the primary mandate to set
tobacco prices so as to guarantee tobacco farmers a minimum return of 25 percent on their
investments. Floor prices have an indirect effect of dampening any plan to flood the market
with cheap cigarettes. According to the NTA, the floor price considers prevailing market con-
ditions such as production cost and a reasonable return to the farmer. Tobacco is the only
product that is regulated in this manner.

The Bureau of Internal Revenue requires that producers, importers, and exporters of tobacco
products register annually as taxpayers. An Authority to Release Imported Goods (or “ATRIG”) is
issued by the BIR prior to release of all imported excisable goods, including all tobacco prod-
ucts. This is a requirement every time an importation is made. Revenue Memorandum Order
No. 35-2002 and Revenue Memorandum Order No. 35-2014 are the pertinent issuances,
with the latter implementing the electronic ATRIG system, using the Philippine National Single
Window (NSW) system at the Bureau of Customs. The importer files the eATRIG through the
NSW system but still submits a hard copy and duly notarized application form to the Excise
Large Taxpayers Regulatory Division of the BIR, which is the designated approving officer.
Electronic filing has eliminated the falsified ATRIGs that were observed when these documents
were manually filed and processed. The eATRIG system has allowed the “least manual inter-
vention and personal representation of the importer or his representative."

One requirement for the approval of the eATRIG application is that the applicant must have
a Permit to Operate as Importer of Excisable Articles. Likewise, applicants must be able to
present their latest Annual Income Tax Return and Audited Financial Statements. If docu-
mentation is complete, an application can be approved on the next working day.

3
“Provided under NTA Memorandum Circular 3-2004 issued on July 28, 2004.

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The Bureau of Customs lists tobacco products as regulated imports. As such, the BOC
requires the tobacco importer to submit the following clearances issued by other govern-
ment regulatory agencies prior to release of any imported tobacco product:

1. ATRIG from the BIR

2. Authority to Import Leaf Tobacco and Tobacco Products or Import Commodity
Clearance from the NTA

3. Sanitary and Phytosanitary Import Clearance from the Bureau of Plant Industry for
importation of tobacco dust, stems, leaves, and other related materials.

Customs Memorandum Order (CMO) No. 9-2015, issued on April 10, 2015, lays down the
strict enforcement of rules on regulated imports. Rules require that the importer or broker
must be accredited with the BOC. In the process of accreditation, the importer or broker
submits several documents including registrations or clearances secured from other govern-
ment agencies, which the BOC uses for profiling. These include:

a. Latest General Information Sheet (if a corporation) or Registration with the Department
of Trade and Industry (if a sole proprietor) or Articles of Partnership or Articles of
Cooperation (if a cooperative)

b. Corporate Secretary Certificate (if a corporation) or Affidavit (if sole proprietor) or
Partnership Resolution for designated signatories in the import entries

c. Original copy of the National Bureau of Investigation (NBI) Clearance of Applicant
(issued within three months prior to the date of application)

d. Company Profile with pictures of office and warehouse premises with proper signage

e. Previous Certificate of Accreditation, if applicable

f. License / Permit / Accreditation from the concerned agency, when applicable, i.e., from
NTA or BPI.

As part of data transparency, the customs website has a window on “tobacco importation”
that shows the lists of tobacco importers and data on importation by port.

3.3 Submission of Manufacturer’s or Importer’s
Sworn Statement
Under Revenue Regulations 17-2012, every manufacturer or producer or importer of an
excisable product like cigarettes is required to submit a sworn statement as a supporting
document to the application for initial registration of his product. An updated sworn state-
ment is thereafter required to be submitted on or before the end of the months of June and
December of every year. The following information must be contained in the manufacturer’s
or importer’s sworn statement, as enumerated in the regulations:

494 // Philippines: Addressing the Illicit Flow of Tobacco Products
»» Name, address, Taxpayer Identification Number (TIN), and assessment number or con-
trol number of the manufacturer or importer assigned to him by the Excise Taxpayer
Regulatory Division of the BIR

»» Complete root name of the brand as well as the complete brand name with modifiers

»» Complete specifications of the brand detailing the specific measurements, weights,
manner of packaging, etc.

»» Names of the regions where the brand is to be marketed

»» Wholesale price per case, gross and net of VAT and excise tax

»» Suggested retail price, gross and net of VAT and excise tax, per pack or per bottle

»» Detailed production or importation costs and all other expenses incurred or to be
incurred until the product is finally sold

»» Applicable excise tax rate

»» Corresponding excise and VAT.

If there is a change in the cost to manufacture, or a change in the actual selling price of the
brand, the BIR requires that the sworn statement shall be updated and submitted five days
before the removal of the product from the place of production or before release of the
product from customs’ custody.

The sworn statement is then verified by the BIR for accuracy and completeness. For instance,
the BIR uses the reference books kept by the Bureau of Customs in determining the proper
valuation of imports. If these are found to be erroneous or inaccurate, a revised sworn state-
ment is required to be filed, and the taxpayer can be subject to corresponding penalties.

Section 13 of Revenue Regulations 17-2012 provides for the following penalties:

a. “Any manufacturer or importer who misdeclares or misrepresents in his or its sworn
statement herein required any pertinent data or information shall, upon discovery, be
penalized by a summary cancellation or withdrawal of his or its permit to engage in
business as a manufacturer or importer of alcohol or tobacco products;

b. “Any corporation, association or partnership liable for any of the acts or omissions in
violation of the Act and implemented by these Regulations shall be fined treble the
aggregate amount of deficiency taxes, surcharges and interest which may be assessed
pursuant to the provisions of the Act;

c. “Any person liable for any of the acts or omissions prohibited under the Act and imple-
mented by these Regulations shall be criminally liable and penalized under Section 254
of the NIRC of 1997; and

d. “If the offender is not a citizen of the Philippines, he shall be deported immediately after
serving the sentence, without further proceedings for deportation.”

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If the BIR finds out that there is an understatement of the suggested net retail price by as
much as 15 percent, the manufacturer or importer shall be liable for additional excise tax
equivalent to the tax due and difference between the understated net retail price and the
actual net retail price, as provided for under Section 144 of the National Internal Revenue
Code of 1997 as amended by Republic Act No. 10351.

From experience, the manufacturer’s or importer’s sworn statement is not misdeclared,
because it is a sworn statement. If changes occur during the production process, for exam-
ple regarding prices, these may be corrected through an amended statement submitted
prior to release of the product from the warehouse.

The submission of the manufacturer’s or importer’s sworn statement is important for the
following reasons:

1. To ensure that the government has a complete list of cigarette brands that are duly
registered. Any brand that is not in the list provided by the manufacturer or importer is
presumed to have been manufactured or imported illicitly, and it is presumed that no
excise tax thereon has been paid;

2. To ensure that the brand is properly classified and the proper excise tax due thereon is
collected under the multi-tier excise tax system;

3. As third-party information aiding in the collection of other taxes.

3.4 Affixture of Revenue Stamps on Cigarette Packs
Although the requirement to affix internal revenue stamps in the form of a bar code or
fuson stamps has been mandated since 1997, this was actually implemented only in 2014.
The BIR developed the Internal Revenue Stamp Integrated System (or “IRSIS”) to implement
the affixture of new internal revenue stamps on both imported and locally manufactured
cigarettes, whether sold domestically or for export. Through the IRSIS, revenue stamps can
be ordered, distributed, and monitored in real-time. The stamps have specific dimensions
and different color designs. There are multi-layered security features, an IRSIS-assigned
“Quick Reference Code,” which is a two-dimensional bar code holding information about
the revenue stamp, and a “Unique Identifier Code” which is a code or serial number refer-
ring to the revenue stamp.

The manufacturer or importer must enroll in the IRSIS. To order revenue stamps through
the system, the taxpayer must have made his excise tax payment through the electronic
Filing and Payment System (or “eFPS”). Under RR 7-2014, the price of a revenue stamp had
been computed at Php 0.13 per piece. This has been adjusted to Php 0.15 per piece under
RR 6-2017. Changes in the cost of raw materials and equipment incurred by APO Inc., the
government agency mandated to print the revenue stamps and implement the IRSIS, caused
an adjustment in the price by the BIR.

496 // Philippines: Addressing the Illicit Flow of Tobacco Products
In 2016, BIR issued Revenue Memorandum Circular 51-2016 introducing the use of a Stamp
Verifier app in verifying the authenticity of revenue stamps. The Stamp Verifier app is inno-
vative and smart, as it uses modern technology as well as involving the cigarette user or
smoker in identifying illegal cigarettes. This technology encourages consumers to download
the mobile application and use it to check the validity of the revenue stamp affixed to the
cigarette pack (either domestically manufactured or imported) that they are purchasing.
The app will read the QR code, a two-dimensional code which is a security feature of the
revenue stamp that contains information about the product. If the app shows a non-valid QR
code, this would mean that the Unique Identifier Code (or UIC) for the cigarette pack is not
in the database of UICs in the BIR, and one can conclude that the cigarette is counterfeit.
BIR personnel received training in the use of the new technology.

Effective monitoring using mobile verification devices is, however, dependent on internet
connection which could be weak in many areas. The BIR thus continues to conduct on-the-
spot surveillance of production facilities as well as markets. Outstanding excise taxes are
collected, in addition to penalties and sanctions, if discrepancies are detected during these
surveillance activities.

RR 6-2017 mandates the affixture of new revenue stamps on all locally manufactured ciga-
rettes starting on January 1, 2018, and on imported cigarettes starting on June 1, 2018. This
is in line with the policy that security features of the revenue stamps should not be com-
promised and thus should be replaced every three years or sooner, if there is evidence of
counterfeiting of stamps.

With the affixture of tax stamps, it has become easy for the BIR to determine whether the
excise tax due on the cigarette pack has been properly paid or not. The BIR can easily con-
fiscate cigarettes for which taxes were unpaid or erroneously paid, and assess the proper
taxes due thereon. The tax stamps have greatly helped the government in conducting raids
and bringing airtight cases against tax evaders.

The presence of revenue stamps on cigarette packs, to gauge implementation, was mea-
sured in a World Bank project in partnership with PREMISE. Simply described, the project
identified sites nationwide and asked surveyors to collect evidence of revenue-stamp usage,
such as pictures of stamps on cigarette packs bought by individuals from stores. The sur-
veyors used mobile technology to send this data for analysis by PREMISE. Results of surveys
conducted in the week of September 25, 2016, showed a high revenue stamp presence
in several places, notably, Quezon and Pampanga with a 100 percent stamp usage rate,
Bulacan with 98.7 percent, Laguna with 88.6 percent, and Metro Manila with 83 percent.4
In addition to tax stamps presence, the project also tracked tobacco prices. However, this
project has lapsed and the decision to continue the project has not been made by the BIR
and the DOF.

4
World Bank Philippines Sin Tax Dashboard, April 5, 2015 – September 25, 2016.

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Notable in the BIR experience with the use of tax stamps is the success in engaging the
public, especially young people who are comfortable with new technology, in the drive to
detect illicit tobacco in the market. Another possible innovation is developing a website that
could receive reports of illicit cigarettes from the public or consumers themselves.

The presence of a tax stamp on a pack of cigarettes is, in the first instance, a visual “proof”
that tax must have been paid. The BIR has advised the BOC that cigarettes being imported
without properly affixed stamps (for example, inside the clear plastic covering of the ciga-
rette case and not outside the plastic cover) should immediately be confiscated. Determining
whether the brand is fake, or the stamp is counterfeit, or the importer is unregistered all
involve additional steps for the BIR and the BOC. Thus, both agencies should strengthen
their track-and-trace capabilities, tighten their coordination, including linking up with relevant
agencies and legitimate industry players, and continuously equip themselves with training
and technology to go after illicit activities.

3.5 Other Administrative Monitoring Measures
All manufacturers and/or importers of cigarettes must be registered with the Bureau of
Internal Revenue and are required to obtain permits from the Bureau for every sale, export,
and import of their products. This rule also applies to suppliers of the following raw materi-
als: tobacco leaves, tipping paper, filter rod, and cigarette papers. Cigarette manufacturers/
importers are required to register themselves and obtain appropriate permits before they
can operate. Necessary documents may include the Permit to Operate as Manufacturer of
Cigarettes, Permit for a Storage Warehouse of Leaf Tobacco Within Factory Premises, Permit
to Operate as a Dealer of Leaf Tobacco, and Permit for a Storage Warehouse of Cigarette
Paper and Non-Tobacco Materials. Factories and warehouses relating to the manufacture
and importation of cigarettes require the prior approval of the BIR. The taxpayer is required
to provide a plot and plan of the premises which are in compliance with security measures
that will ensure that the entry and exit points are limited in number and location and are
specifically identified so that no raw materials and cigarettes can enter or exit without being
observed by the Revenue Officer on Premises (ROOPs) assigned by the BIR.5

The BIR posts a number of ROOPs on the premises of each cigarette manufacturer/importer
to ensure that the movement of cigarettes is not impeded, as a Withdrawal Certificate signed
by the ROOPs is required for raw materials to enter and for cigarettes to be withdrawn from
the facility. A cigarette manufacturer cannot transport cigarettes from its premises without
the ROOPs issuing a Withdrawal Certificate, and this certificate can only be issued when
the ROOPs is satisfied that the proper excise tax has been paid, and the tax stamp has been
properly affixed. In theory, the facilities of each cigarette manufacturer need to be mon-
itored 24 hours a day, seven days a week, since no cigarettes may be released without a
withdrawal certificate. In practice, however, the surveillance is not strictly continuous, as the

5
Revenue Memorandum Order 38-2003.

498 // Philippines: Addressing the Illicit Flow of Tobacco Products
BIR personnel assigned as ROOPs are limited in number, and they follow standard working
hours. The BIR relies on voluntary declarations by the taxpayer for withdrawals made outside
working hours and without the ROOPs’ presence. Declaration is subsequently verified during
audit. Because ROOPs cannot be present 24/7, the BIR had planned to install close circuit
television (CCTV) monitoring systems on all production and withdrawal points on the prem-
ises of the manufacturers, but this has yet to be implemented.6 One issue that remains to be
settled is responsibility for the maintenance and upkeep of the CCTVs.

The whole process of cigarette manufacturing is intended to be highly controlled. The
design of packaging materials from the individual pack to the master cases requires BIR prior
approval before it can be used. A graphic warning design on a cigarette pack that is not
BIR-approved and is found in the market is already proof of illegal tobacco trade. Disposal of
any raw materials or finished cigarettes requires prior approval from the BIR and may only be
carried out when a BIR officer is present to witness the destruction.

As an additional monitoring measure, the tobacco industry is required to maintain an Official
Registry Book, wherein daily transactions of receipts and removals of regulated raw materials,
goods-in-process, and finished products must be entered and submitted to the BIR. All raw
materials have a specific conversion rate to finished products. For a defined input quantity of
tobacco leaves, cigarette paper, tipping paper, and filter rod, the conversion rate can be used
to determine whether an appropriate quantity of cigarettes have been reported as manufac-
tured and withdrawn. In 2013, the BIR developed the Electronic Official Registry Book (eORB)
System, and on July 23, 2013, Revenue Memorandum Order No. 23-2013 mandated that the
submission of the ORB be conducted electronically through the eORB mechanism.

Using the data submitted by taxpayers, the BIR can also conduct audits, assess possible
reporting deficiencies, and/or order an inventory of raw materials, goods in process, and
finished products to verify the accuracy and completeness of taxpayers’ reports.

3.6 Profiling of Importers, Developing “Alert Orders,” Use
of X-Ray Machines, and Stiffer Penalties on Smuggling
The BOC employs several techniques to arm itself against smuggling activities. The infor-
mation provided when the importer or customs broker applies for accreditation or permit
to import goes to the Account Management Office of the BOC. The Account Management
Office administers the Client Profile Registration System for importers and customs brokers, as
mandated by Customs Memorandum Order No. 4-2014, and provides guidelines for risk profil-
ing of importers and brokers. The BOC also inputs information on past importations, data from
the exporting country, industry data, and information from other third-party sources.

6
To further enhance the monitoring of the premises and the affixture of tax stamps on cigarettes packs, Section
14 of Revenue Regulation No. 7-2014 provided that the BIR shall study and cause the installation of CCTVs.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

The Bureau issues so-called “alert orders” to effect apprehension of suspicious shipments
coming into the country. Alert orders are formulated based on information coming from
third-party sources and records obtaining from within the BOC itself. Outside sources
include foreign customs authorities, Interpol, the business sector, or other government
authorities. Again, the BOC relies on past records of importations and experience with the
type of product being imported. For instance, if an importation deviates from the normal
or average weight, volume, value, measurement, or tariff classification based on industry
practice, this raises a red flag among customs operatives, and an alert order for an incoming
shipment may be issued to the port collector.

The BOC has procured x-ray machines for key ports like the Port of Manila, Manila International
Container Port, Port of Batangas, Subic Port, among others, which are mainly containerized
ports. The proposal is to arm all containerized ports with x-ray machines and to consider doing
this for non-containerized ports to strengthen border controls against illicit importations.

Under RA 10863, or the “Customs Modernization and Tariff Act (CMTA),” enacted on June
10, 2016, stiffer penalties and surcharges are now imposed for misdeclaration, misclassifica-
tion, or undervaluation of importation and on unlawful importation or exportation of goods.
The cost of committing these illegal acts should be greater than the reward, thus, the stiffer
sanctions under the CMTA are long overdue. The surcharge for misdeclared, misclassified,
or undervalued importation has risen from 100 percent to 250 percent of the taxes and
duties due. If fraudulent intent has been established, the surcharge shall be equivalent to 500
percent. The good is also subject to seizure. Unlawful importation or exportation of goods
subjects the person to imprisonment or a fine of up to Php 50 million, depending on the
value of unlawful importation or exportation, but up to Php 200 million only. Beyond Php
200 million, the act is already deemed a heinous crime punishable with imprisonment of 20
to 40 years and a fine of not less than Php 50 million.

4. BIR and BOC Initiatives at Work in Recent Cases
Against Illicit Tobacco Trade
Illicit tobacco trade activities were curtailed in three recent apprehensions carried out by
teams from the BIR and BOC. Both bureaus have successfully harnessed modern technol-
ogy and equipment, taxpayer profiling, and third-party information in their operations. A
proposal has now been advanced to create a composite team and formalize coordination
among the BIR, BOC, and DOF in addressing illicit tobacco trade. Other government agen-
cies may also join the initiative, given the diverse and wide-ranging nature of illicit trade.

4.1 The Case of Mighty Corporation
The Mighty Corporation was a very large manufacturer and seller of cigarettes, cigars, and
other tobacco products in the Philippines. The firm was also engaged in importing tobacco

500 // Philippines: Addressing the Illicit Flow of Tobacco Products
leaves, rolling paper, and acetate used in cigarette filters, as well as buying and selling
machinery, equipment, and appliances used for making cigarettes and tobacco products.

The joint efforts of the BOC and BIR led to the filing of tax evasion charges against Mighty
Corporation in 2017, as part of the revenue agencies’ campaign against evasion, smuggling,
and all forms of illicit trading.

Several raids of Mighty’s warehouses confirmed that the company had stored master cases
of cigarettes with false tax stamps in its facilities. The warehouses were allegedly owned by
a local chief executive and had no business permit. With the use of the BIR Stamp Verifier,
the BIR-BOC team proved that the cigarettes had received forged stamps. The BOC’s Bureau
Action Team Against Smugglers (BATAS) suspended the firm’s import accreditation, which
effectively prevented it from importing or sourcing raw materials outside the country for
use in its production. A Php 38 billion tax evasion case was filed against the company. In
September 2017, Japan Tobacco International (JTI) acquired Mighty Corporation’s cigarette
business, paving the way for settlement of the tax case. In October 2017, Mighty/JTI settled
the case for Php 30.4 billion, of which Php 25 billion was paid to the government in settle-
ment of Mighty’s tax obligations, linked to three criminal cases for seized goods, assessment
for open years with the BIR, and documentary stamp tax and withholding taxes payable. An
additional Php 5.4 billion was paid as VAT on the deal.

4.2 Two Recent Apprehensions of Illicit Tobacco Imports
by the BOC
In the first quarter of 2018, an intervention led by the BOC captured misdeclared cigarettes
worth Php 8.2 million. The cigarettes came from China and were consigned to the firm
Paragon Platinum International Trading Corporation (PPITC). They were hidden in container
vans, and the importation was initially declared as brackets. Through the BOC profiling
system, an alert order on the shipment was immediately issued by the Port of Manila. The
shipment received a warrant of seizure and detention, and the importers face charges under
Section 1400 of the Customs Modernization and Tariff Act (CMTA), which establishes sanc-
tions for misdeclaration, misclassification, and undervaluation of goods.

A second interception, in April 2018, seized counterfeit cigarettes worth Php 18.5 million,
again allegedly smuggled from China. The shipment was consigned to Marid Industrial
Marketing and contained counterfeit cigarettes bearing the brands “Jackpot,” “Fortune,”
“John,” “Marvels,” and “U2.” The BOC reported that the shipment was declared as industrial
artificial fur texture, but was intercepted when the container passed the x-ray machine, and
the contents were found to be in boxes (as cigarette cartons are) instead of rolls (the typical
format for industrial fur textures). Formal investigation is currently ongoing for both of these
cases of intercepted illicit cigarettes.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

5. Conclusion and Recommendations
The tax policy response and administrative mechanisms to combat illicit tobacco flows
in the Philippines may be judged broadly sufficient and successful. They are aligned with
the principles espoused under the Framework Convention for Tobacco Control, as well
as the World Health Organization Protocol to Eliminate Illicit Trade in Tobacco Products.
Nonetheless, these mechanisms can be further reinforced in a number of ways, through
capacity, technology, and database build-up, partnerships with legitimate business, and
stronger coordination among enforcement agencies. The analysis presented here also
highlights the importance of international collaboration through the sharing of information
and best practices among trading partners, especially at regional level. Together, these strat-
egies may create a stronger track-and-trace system to combat and ultimately halt the illicit
tobacco trade.

The evidence presented in this chapter supports the following recommendations:

1. There should be stronger coordination between the BIR and the BOC, along with other
law enforcement agencies and legitimate industry players, to better enforce the law
regarding excise tax on cigarettes. Monitoring illicit tobacco products in the market and
aggressively prosecuting violators are key parts of the agenda. Policy makers can boost
results by creating a system wherein all regulatory agencies share a common database
to monitor tobacco product flows.

3. Government should resolve illicit tobacco cases quickly and ensure the enforcement of
heavier penalties on violations.

4. The security features of tax stamps should be guarded and continuously updated to
prevent counterfeiting.

5. Open data on tobacco trade and tax statistics are necessary to improve estimates of the
extent of illicit trade and better evaluate the impact of tax and administrative mecha-
nisms in controlling illicit tobacco.

6. Stronger capability-building programs for the BIR and BOC should be prioritized. These
should include training to sharpen analytical, profiling, and audit skills, and the use of
technology.

502 // Philippines: Addressing the Illicit Flow of Tobacco Products
References:
Abola, V., Sy, D., Denniston, R., and Sy A. 2014. “Empirical Measurement of Illicit Tobacco Trade in the
Philippines.” https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4737979/

Chaloupka, F.J., Yurekli, A., Fong, G.T. 2012. “Tobacco Taxes as a Tobacco Control Strategy.”http://tobac-
cocontrol.bmj.com/content/tobaccocontrol/21/2/172.full.pdf

Depasupil, W. “Mighty Corp. Import Accreditation Suspended,” Manila Times. March 15, 2017.

GATS (Global Adult Tobacco Survey). 2015. Philippines country report. http://www.doh.gov.ph/sites/
default/files/publications/GATS-PHL2015-Executive_Summary.pdf

GYTS (Global Youth Tobacco Survey). 2015. Philippines country report. http://www.doh.gov.ph/sites/
default/files/publications/FinalGYTS_CountryReport.pdf

“Price increase will worsen the crisis of illegal cigarette trade,” The Sun Daily. March 31, 2017.

Raj, A. “Government seen getting less tobacco revenue despite hefty duty hikes,” The Edge Malaysia.
July 20, 2016.

Santos, T. “BOC Seizes P8.98M Worth of Smuggled Cigarettes, Fireworks,” Philippine Daily Inquirer.
March 6, 2018.

Sta. Ana, F., and Latuja, J. 2010. Cigarette Affordability and the Impact of Tobacco Taxation on Health and
Revenue. Action for Economic Reforms. http://www.aer.ph/tobaccotax/wp-content/pdf/Cigarettes.pdf

Surendran, S. “ Malaysia’s Taxation on Cigarettes Excessive,” The Edge Financial Daily. May 11, 2017.

Tamayo, M.A. “Changes Under the Customs Modernization and Tariff Act: An Overview,” Business World.
June 20, 2016.

Unite, B. “Customs Creates Anti-Smuggling Task Force,” Manila Bulletin. January 26, 2018.

WHO (World Health Organization). 2005. WHO Framework Convention on Tobacco Control. Geneva:
WHO. http://www.who.int/tobacco/framework/WHO_FCTC_english.pdf

WHO (World Health Organization). 2013. Protocol to Eliminate Illicit Trade in Tobacco Products. Geneva:
WHO. http://apps.who.int/iris/bitstream/10665/80873/1/9789241505246_eng.pdf?ua=1&ua=1

WHO (World Health Organization). 2015. WHO Report on the Global Tobacco Epidemic, 2015. Raising
Taxes on Tobacco. Geneva: WHO. http://apps.who.int/iris/bitstream/handle/10665/178574/9789240694
606_eng.pdf?sequence=1

World Bank Group. 2017. Tobacco Tax Reform at the Crossroads of Health and Development: A
Multisectoral Perspective. Prepared by a team led by Patricio Marquez and Blanco Moreno-Dodson.
https://openknowledge.worldbank.org/bitstream/handle/10986/28494/119792-REVISED-v2-FI-
NAL-WBG-TobaccoTaxReform-FullReport-web.pdf?sequence=1&isAllowed=y

World Bank Philippines Sin Tax Dashboard, April 5, 2015 – September 25, 2016.

503
SUB-
SAHARAN
AFRICA
SOUTHERN AFRICA CUSTOMS UNION (BOTSWANA, LESOTHO,
NA M I B I A , S OU T H A F RIC A , A N D E SWAT I N I ) A N D Z A M B I A
18

BOTSWANA-LESOTHO AND SOUTH AFRICA
19

K E N YA
20

SENEGAL
21

505
SOUTHERN AFRICA
CUSTOMS UNION
(BOTSWANA,
LESOTHO, NAMIBIA,
SOUTH AFRICA, AND
ESWATINI)
AND ZAMBIA
18
SOUTHERN AFRICA CUSTOMS
UNION (BOTSWANA, LESOTHO,
NAMIBIA, SOUTH AFRICA, AND
ESWATINI) AND ZAMBIA:

Addressing the Illicit Flow
of Tobacco Products
Michael Eads, Telita Snyckers, and Ziyaad Butler1

Chapter Summary
Background and Methods
This chapter examines efforts to combat illicit tobacco trade flows in the countries of the
Southern African Customs Union (SACU): Botswana, Lesotho, Namibia, South Africa, and
Swaziland (renamed eSwatini in April 2018), along with Zambia. The approach is based pri-
marily on desk research relying on information available in the public domain or experience
with initiatives conducted in some SACU countries. An electronic survey was sent to each
of the countries, however Swaziland/eSwatini, Lesotho, and Zambia were the only countries
that responded.

Report preparation highlighted the challenges in assessing the volume and share of illicit
trade as a percentage of total tobacco consumption in the relevant countries. South Africa
was the only country for which academic estimates were available. Nevertheless, the
chapter presents sufficient data to provide an overview of relevant issues and offer recom-
mendations. Additionally, this chapter can serve as a gap analysis to guide future studies
towards areas that require further investigation.

1
Sovereign Border Solutions, Cape Town, South Africa

507
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Key Findings on Policy and Enforcement
In SACU and Zambia, relatively poor maturity is noted across key indicators, resulting in a
weak capacity to combat illicit tobacco trade in the region. The contributing factors and key
issues facing governments include:

»» Weak demand-reduction policy implementation;

»» The lack of reliable data regarding the share of illicit trade as a percentage of total
consumption, fueled by a lack of independent research in the field, and inconsistencies
between industry and academic estimates;

»» Limited control over tobacco supply chains – from growers to manufacturers through
to retail;

»» Under-capacitated and inadequately skilled government agencies;

»» Legal frameworks which do not necessarily reflect contemporary good practices;

»» Limited focus on excise modernization and controls, resulting in mainly manual and
paper-intensive processes and control measures;

»» Lack of robust risk management approaches; and

»» An aggressive tobacco industry that leverages its power to influence political, economic,
and enforcement activities.

In their survey feedback, country officials also noted the following constraints:

ZAMBIA LESOTHO SWAZILAND

›› Limited staff ›› Limited staff ›› Limited staff
›› Ineffective risk ›› Inability to distinguish licit from illicit on market ›› Limited investigations
management systems capacity
›› Inability to identify where in the supply chain packs
›› Corruption are being diverted ›› Inabilities to distinguish
licit from illicit on market
›› Obtaining data from ›› Lack of industry liability for diversion once
other agencies cigarettes have been sold ›› Obtaining data from
other agencies
›› Lack of industry liability ›› Industry failure to respond to information requests
for diversion once
›› Tampering with Customs seals, locks, labels,
cigarettes have been sold
gauges

Despite these obstacles, SACU and Zambia have made some progress in addressing illicit
tobacco trade, but countries require a concerted and coordinated approach to meet the
rising challenge of illicit trade in the region.

Recommendations
Detailed recommendations for policy makers have been set out in the body of the chapter
and include the following. Governments may:

508 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
SACU AND ZAMBIA TOBACCO CONTROL RELATIVE MATURITY

RELATIVE
INDICATOR COMMENTS
MATURITY
Demand reduction ›› Limited demand reduction measures: poor progress with advertising
measures bans; very low tax rates; weak cessation support; weak health warnings
›› Licensing obligations only apply to manufacturers of tobacco products
›› No know-your-customer or commensurate demand obligations on
Licensing manufacturers or exporters
›› No obligations re manufacturing equipment
›› Limited instances of licenses being withdrawn
Production input ›› No specific controls over inputs into production, e.g. acetate tow,
controls tobacco leaf production etc.
Product markings/ ›› No secure tax stamps except for Zambia which has a rudimentary tax
stamps stamp

Track-and-trace ›› No traceability of packs across the supply chain

›› Limited enforcement — worsened by removal of specialist units in
South Africa
›› Poor data quality; limited insights from data; data not seen to be driving
Enforcement activities
›› Seized cigarettes destroyed but by industry
›› No region-wide enforcement strategy
›› Limited local coordination
Agency
›› Some regional coordination in general, but not targeting illicit cigarettes
Coordination
›› Exclusion of key players like SARS in South Africa
›› Generally strong legislative frameworks but which do not translate into
Penalties prosecutions
›› No penalities for downstream supply chain actors

Public awareness ›› Some illicit cigarette media campaigns, but mostly driven by industry

Meeting FCTC None of the countries currently have legislative or operational frameworks
supply chain- tat meet the minimum requirements relating to supply chain security under
related measures the WHO's FCTC Protocol.

KEY TO RATINGS

Absent Policy in Implemented; Implemented; Fully meets
place poorly notable some international
implemented opportunities for opportunities for good practice
improvement improvement

»» Better understand the character, market share, and evolution of the illicit tobacco trade
by supporting high-quality, independent research. This research should include critically
reviewing enforcement agencies’ capabilities and challenges in responding to illicit trade

509
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

»» Initiate remediation efforts including, inter alia, excise modernization programs; imple-
mentation of fiscal marking and track-and-trace programs; non-intrusive inspection; audit
management solutions; due diligence regarding know-your-customer requirements;
more focus on risk-management policies, procedures, and tools; stronger data analysis;
and capacity building

»» Establish formal inter-governmental structures to share information and collaborate on
anti-illicit tobacco enforcement within the region

»» Complement enforcement by strengthening demand-reduction measures.

1. Overview of Illicit Trade and Efforts to Address It
1..1 Overview of Tobacco Trade in SACU Region and Zambia
This chapter uses the definition of illicit trade set out in Article 1.6 of the World Health
Organization’s (WHO) Framework Convention on Tobacco Control (FCTC)2: “any practice or
conduct prohibited by law and which relates to the production, shipment, receipt, posses-
sion, distribution, sale or purchase, including any practice or conduct intended to facilitate
such activity.”

General estimates put the illicit trade in tobacco in Africa at around 43 billion sticks a year
– with a trade share in some countries as high as 41 percent (Cameroon) and 38 percent
(Ethiopia,) and in several others hovering around an estimated 25 percent (e.g., Algeria,
Nigeria, South Africa, Zambia3), resulting in annual tax losses of around $10 billion a year
across Sub-Saharan Africa alone.4

SACU IN THE CONTEXT OF A UNIQUE AFRICAN PARADIGM

Academic estimates of illicit trade are not readily available (except for South Africa, where
the work is some years old). A South African Revenue Service (SARS) estimate put the loss
to illicit cigarettes at between R2 and R4.5 billion in 2012.5 Industry estimates6 range from a

2
Framework Convention on Tobacco Control, World Health Organization 2003, updated reprint 2004, 2005,
available at http://www.who.int/fctc/text_download/en/
3
http://www.tobaccoecon.uct.ac.za/sites/default/files/image_tool/images/405/Training/Emerging_Researcher_
Programme_2015/Illicit-Trade-Africa.pdf
4
http://www.tobaccoecon.uct.ac.za/sites/default/files/image_tool/images/405/Training/Emerging_Researcher_
Programme_2015/Illicit-Trade-Africa.pdf
5
http://www.sars.gov.za/AllDocs/SARSEntDoclib/Ent/SARS-Strat-07%20-%20SARS%20Strategic%20Plan%20
2012%202013%20to%202016%202017.pdf
6
The data for the illicit cigarette market share used in the map comes from a range of sources, including:
http://www.tobaccoecon.uct.ac.za/sites/default/files/image_tool/images/405/Training/Emerging_Researcher_
Programme_2015/Illicit-Trade-Africa.pdf; http://www.pagemarkafrica.com/products/tax-stamps/;https://www.
standardmedia.co.ke/business/article/2001235698/how-african-countries-lose-sh1tr-to-illicit-tobacco-trade

510 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
low 2 percent for Lesotho, to 23 percent in South Africa7, but should be treated with caution,
as the methodologies used to develop the estimates are opaque. Being industry-funded,
such estimates are likely to reflect arguments that support industry positions, and they lack
the objectivity one would associate with an independent academic study. (The most recent
academic study for South Africa – conducted in 2010 - estimated the share of illicit trade in
the country at that time at around 10 percent.8)

Numerous reports note the tobacco industry’s turning to increasingly aggressive tactics across
Africa, both in marketing its products and in pressuring governments to block anti-smoking
regulations. Reported industry tactics include threatening and bullying governments and filing
lawsuits to delay or stop further regulation.9 Much of the industry’s argument turns on vaunting
its position as a key revenue contributor. Governments are warned that further regulation or
tax increases will result in plant closures and job losses.10 Tobacco industry revenues far exceed
the gross national income of many African countries, making the playing field unequal, and
giving tobacco firms extensive lobbying power in the region.

As tobacco firms face increasingly strong regulation elsewhere in the world, dramatically
reduced smoking rates in Europe, and increasingly hostile regulatory environments, Africa
holds a number of strategic advantages for the industry.11 Africa, with its growing wealth,
booming youth market, generally low excise taxes (and cigarette prices), patchwork reg-
ulations, and relatively weak government structures, is a strategic growth market for the
tobacco industry – and consequently also for the illicit tobacco trade.

KEY RISKS FACED BY REVENUE AGENCIES IN RELATION TO EXCISABLE PRODUCTS

The risks posed by the illicit trade in cigarettes across the region are largely similar to those
found around the world, centering on import fraud, production fraud, export fraud, and
transit fraud (Figure 1).

In contrast to other jurisdictions (where regulations and enforcement controls may be
stronger), media reports note some instances of bootlegging in South Africa, though this is
not as prevalent as in Europe, arguably in part because the tax differentials between neigh-
boring African countries are not as high as between, for example, the UK and its neighbors.
However, bootlegging in Africa is also limited by the fact that commercial-scale smuggling

7
See e.g. www.tobaccosa.co.za; http://pmg-assets.s3-website-eu-west-1.amazonaws.com/150424tisa.
pdf; http://www.tobaccosa.co.za/tobacco-farming/ ; https://www.whoownswhom.co.za/store/
info/3200?segment=Manufacturing; https://citizen.co.za/news/south-africa/1263756/the-day-pravin-took-on-
big-illegal-tobacco/
8
http://www.fctc.org/images/stories/INB-3/INB3_report_illicit_trade_in_South_Africa.pdf
9
https://www.theguardian.com/world/2017/jul/12/big-tobacco-dirty-war-africa-market and https://www.
theguardian.com/world/2017/aug/18/british-american-tobacco-cigarettes-africa-middle-east
10
See for instance https://www.theguardian.com/world/2017/jul/12/big-tobacco-dirty-war-africa-market and
https://www.theguardian.com/world/2017/aug/18/british-american-tobacco-cigarettes-africa-middle-east
11
http://articles.latimes.com/2012/dec/12/world/la-fg-south-africa-smoking-20121213; https://www.theguardian.
com/world/2017/jul/12/big-tobacco-dirty-war-africa-market and https://www.theguardian.com/world/2017/
aug/18/british-american-tobacco-cigarettes-africa-middle-east

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 1. Fraud Archetypes
ORIGIN

Foreign

1 4
Import Fraud Transit Fraud
Under-declare/smuggle Transit products diverted
goods into local market into local markets

2 3
Production-Fraud
Production-Fraud Fictitious exports that are
Under-report production sold back into local market
Local

Local Foreign

DESTINATION

of full containers is far more lucrative and far easier to perpetrate than in more regulated
markets, making the relatively smaller profits per bootlegging trip less attractive.

Considering the ratio of production and movement across the region, South Africa and
Zambia present the largest production and export fraud risks, making production and sup-
ply-chain controls critical in those countries, whilst the remaining SACU countries display the
highest transit and import fraud risks, emphasizing the need for border, entry, and move-
ment controls.

Figure 2 provides an overview of the tobacco context of the countries studied. South Africa
has by far the largest population and GDP amongst the countries, although its GDP per
capita ranks second-highest behind Botswana. Smoking prevalence across the region is sta-
tistically highest in Lesotho at 21 percent and lowest in Swaziland/eSwatini at 9 percent.

In 2015, the price of the most-sold cigarette brand across SACU countries was low relative to
the rest of the world,12 and there have been no significant price increases in SACU countries
in the past two years. None of the SACU countries meet the minimum WHO-prescribed
cigarette tax level (75 percent of retail price). Zambia’s tax incidence is the lowest across the
countries under review. WHO tobacco control country profiles13 suggest that, in 2016, the
estimated average cost of a pack of 20 cigarettes of the most-sold local brand across the
reviewed countries (excluding Lesotho) was $2.55. Botswana had the highest cost at $3.12
and Zambia the lowest at $1.66.

12
http://chartsbin.com/view/38424
13
http://www.who.int/tobacco/surveillance/policy/country_profile/en/

512 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
Table 1. SACU and Zambia Tobacco Trade Profile

BOTSWANA NAMIBIA SOUTH AFRICA
Population 2.3M Population 2.5M Population 54M

Border Length 4347 Km Border Length 4220 Km Border Length 5244 Km

GDPperCapita (thousand) $ 7,67 GDPperCapita (thousand) $5,36 GDPperCapita (thousand) $6,09

Smoking Prevalence 19% Smoking Prevalence 21% Smoking Prevalence 20%

Smoked per person, per yr 433 Smoked per person, per yr 298 Smoked per person, per yr 510

Total taxes on retail price 49,7% Total taxes on retail price 43% Total taxes on retail price 52,4%

Price of most sold brand $3,12 Price of most sold brand $3,11 Price of most sold brand $2,33

Illicit trade 8% Illicit trade 12% Illicit trade 23%

ZAMBIA SWAZILAND LESOTHO
Population 16.7M Population 3.7M Population 2.3M

Border Length 6043 Km Border Length 546 Km Border Length 1106 Km

GDPperCapita (thousand) $1,48 GDPperCapita (thousand) $3,51 GDPperCapita (thousand) $1,41

Smoking Prevalence 21% Smoking Prevalence 9% Smoking Prevalence 26%

Smoked per person, per yr 145 Smoked per person, per yr 92 Smoked per person, per yr 448

Total taxes on retail price 37,3% Total taxes on retail price 49,1% Total taxes on retail price No data

Price of most sold brand $1,66 Price of most sold brand $2,54 Price of most sold brand n/a

Illicit trade 20% Illicit trade 20% Illicit trade 2%

Figure 2. SACU and Zambia Tobacco Metrics14
EFFICIENCY
OF VAT
CIGARETTES ILLICIT TRADE SYSTEM
SMOKING TAXES ON
SMOKED PP/ (INDUSTRY (AS PROXY
PREVALENCE RETAIL PRICE
PA ESTIMATES) INDICATOR
OF AGENCY
EFFICIENCY)
Botswana 19% 443 38% 8% 56%

Lesotho 26% 448 n.a. 2% 48%

Namibia 21% 298 30% 12% 56%

South Africa 20% 510 40% 23% 67%

Swaziland 9% 92 36.7% 20% n.a.

Zambia 21% 145 23.5% 20% 34%

Source: *IMF rating: How effective is VAT administration out of 100?

14
https://tobaccoatlas.org/topic/consumption/ http://chartsbin.com/view/38424 http://www.who.int/tobacco/
surveillance/policy/country_profile/en/

513
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 3. Estimated Number of Entities Involved in the Tobacco Supply Chain in
SACU and Zambia (Tobacco Industry Estimates)
9000 8550
Industry distribution size: South Africa
8000
70,000
60,000
7000 60,000 55,000
50,000
6000
40,000
5000 30,000

20,000
4000 3770
10,000 3100
3000 350
0
Wholesalers Formal Informal
2000 retailers retailers

1000 900
500 600 450
400
56 7 90 96
0
Botswana Lesotho Swaziland Zambia BLNS combined

South African industry significantly Wholesalers
larger than rest of region
Formal retailers
Informal retailers
Source: Own diagram; Data from www.tobaccosa.co.za

LICIT/LEGAL TRADE OVERVIEW

Relatively little has been published on the tobacco trade in SACU and Zambia from a gov-
ernment perspective, although the tobacco industry itself commissioned studies some years
ago that provide at least basic insights into the relative size of the industry (Figure 3).15

DOMINANT PLAYERS

British American Tobacco (BAT) is the dominant cigarette producer and distributor in South
Africa (Figure 4). Because of its dominance, BAT had significant pricing power to increase
the net-of-tax price of cigarettes. Around 2010, the South African cigarette market changed
substantially. High profit margins began to attract many smaller cigarette manufacturers and
distributors, who were primarily competing in the low-price segment.16 The larger manufac-
turers are represented by the Tobacco Institute of Southern Africa (TISA). TISA is active across
the region and is funded by the three largest companies: BAT, Philip Morris International
(PMI), and Japan Tobacco International (JTI). Smaller firms – accounting for around 80 per-
cent of manufacturers - are represented by the Fair-Trade Independent Tobacco Association
(FITA). FITA firms routinely argue that bigger companies like BAT(SA) are abusing their market

15
Tobacco Institute of Southern Africa funded study, 2012, http://www.tobaccosa.co.za/wp-content/uploads/
NKC-Tobacco_Value_Chain_Report-October_2012.pdf
16
http://tobaccocontrol.bmj.com/content/early/2017/03/24/tobaccocontrol-2016-053340

514 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
Figure 4. Key Tobacco Industry Players, South Africa

Small Local Large
Manufacturers Manufacturers

Carnilinx
BAT(SA)
~80% Market Share
Africa Tobacco

FOLHA
PMI
JTI
United Africa
Tobacco

FITA TISA

Fair-Trade Independent Tobacco Institute of
Tobacco Association Southern Africa

Represents ~ 80% of Funding: BATSA 50%; PMI
manufacturers in number 30%; JTI 20%

dominance to the detriment of smaller manufacturers, a situation reportedly exacerbated by
TISA’s close relationship with government agencies.

GOVERNMENTS’ ENGAGEMENT WITH THE LEGAL TOBACCO INDUSTRY

TISA has signed memorandums of understanding (or is in the process of negotiating them)
with a number of customs agencies in the region, including those in Mozambique, Lesotho,
Botswana. Swaziland/eSwatini, Zimbabwe, and Zambia.17 By all accounts, Lesotho, Swaziland/
eSwatini, and Namibia have a relatively low focus on the industry, as there is limited or no
production occurring locally, while South Africa and Botswana have a far stronger focus on
engagement. The South African Revenue Service (SARS) has traditionally maintained a good
relationship with the industry body representing big tobacco (TISA), which meets regularly with
SARS, conducts training for customs officers, and destroys seized tobacco products on behalf
of SARS (a similar situation is seen in Botswana). FITA and its members argue that they have not
enjoyed similar opportunities for access and engagement.

The Botswana Unified Revenue Service (BURS) is generally highly facilitative to industry.
However, in the absence of an adequate system of controls and checks and balances, this
facilitative approach has left Botswana unnecessarily exposed. Government was forced to

17
http://pmg-assets.s3-website-eu-west-1.amazonaws.com/150424tisa.pdf

515
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

cancel an MOU with TISA after it was heavily criticized by the Ministry of Health and the
Anti-Tobacco Network for violating the FCTC Protocol on Illicit Trade in Tobacco Products
(hereafter “FCTC Protocol”18). The Botswana Police Service was similarly criticized for violat-
ing the Protocol by accepting a vehicle from BAT. Concerns have also been raised that the
lack of progress in updating excise controls is possibly attributable to the industry’s putting
pressure on government, ostensibly arguing that industry could not absorb the cost of such
measures, and that the program would result in job losses and plant closures.

A substantial percentage of all vehicle hijackings in the region relate to trucks transport-
ing cigarettes. In the Gauteng province in South Africa, for example, 20 percent of vehicle
hijackings involve trucks carrying BAT cigarettes.19 As a result, BAT(SA) has negotiated for
police escorts for its trucks – a concession that has raised the ire of smaller manufacturers
who are not afforded similar protection.20

ILLICIT TRADE OVERVIEW

Magnitude of Illicit Trade

Customs-agency estimates on the size of the illicit trade in cigarettes are not readily avail-
able. The most widely-quoted industry estimates put the penetration rate in South Africa
as high as 23 percent, though curiously situating the rate as low as 2 percent in Lesotho.
An analysis of industry estimates quoted in the media seems to suggest a recent decline in

Figure 5. TISA Estimates of Illicit Trade Over Time

40
BAT(SA) 34%
34
35
31
30

25 23
25
20
20 Static since 2014?

5
6

0
2008
2008

2012

2014
2014
2014

2015
2018

18
http://f-ita.co.za/govt-tricked-into-promoting-tobacco/
19
https://www.timeslive.co.za/news/south-africa/2015-07-28-police-foil-cigarette-truck-hijacking/
20
https://city-press.news24.com/News/Tobacco-giant-gets-free-police-protection-20150719

516 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
Figure 6. Tobacco Industry Descriptions of Illicit Trade, 2006-2012

Industry’s Description of the Illicit Market
“INCREASED
FROM 7.9% IN
ILLICIT MARKET SHARE*

2008 TO 27.8
“ALARMING “EXPECTED “DOUBLED IN 2012”
30% GROWTH” TO GROW” IN 2010” 22.5%
20% 20% 22.5%
15% 22.5%
“GROWING ILLICIT “SIGNIFICANT
0% TRADE PROBLEM” INCREASE”
2006

2007

2008

2010

2011

2012
*MEDIAN FROM SURVEY OF MEDIA REPORTS CITING THE INDUSTRY

illicit trade in South Africa, from a high of 34 percent in 2012 to a 23 percent rate since 2014
(Figure 5). It should be noted, however, that the methods underlying the industry analysis are
not clear. Academic studies have challenged industry claims, concluding that industry ana-
lysts inflate illicit trade numbers to support their case against further tobacco tax increases.
Figure 6 tracks the vocabulary used by the industry to describe the illicit tobacco trade
in South Africa over a recent six-year period. Academic researchers have observed: “The
tobacco industry appears to rewrite history, apparently to emphasize the rapidity with which
the illicit market has ostensibly increased. [Industry] claims that illicit trade in South Africa has
consistently increased over the past 15 years, and has continued its sharp increase since 2010,
are proven to be inaccurate.”21

As in many jurisdictions around the world, industry estimates differ significantly from those of
government and academics. However, with industry conducting its own assessments more
regularly, its estimates get more prominence in the media, and are more widely quoted.

»» South Africa: In 2012, SARS noted that it estimated its losses from the illicit trade in
cigarettes at R2 to R4.5 billion per annum (it is not clear on what basis this estimate
was produced). Research commissioned by the industry body TISA estimated the illicit
cigarette market in South Africa at approximately 5.3 billion sticks for 2014 (between 20
and 25 percent of total sales). An earlier 2010 academic study estimated that the share of
illicit trade as a percentage of total consumption sat at around 10 percent; new aca-
demic research is now in process. Since 2010, the South African Government is reported
to have lost well over R21 billion in unpaid taxes (excise duty and VAT on excise) due to
illicit cigarettes.22 If treated as a single collective tobacco company, illicit trade would be
the second-biggest tobacco company in South Africa. South Africa faces a number of
challenges from an enforcement perspective – one of them being the country’s 1,840 km

21
“Are the tobacco industry's claims about the size of the illicit cigarette market credible? The case of South
Africa,” https://www.ncbi.nlm.nih.gov/pubmed/24920576
22
http://tobaccosa.co.za

517
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

border. This border includes some 96 illegal points of entry,23 50 of them with Zimbabwe,
and many of them used by cigarette smugglers.24 While some smuggling happens cor-
ruptly at legal border crossings (for around $350-750 per container25), much smuggling
is believed to take place at illegal crossings away from border posts. Meanwhile, most
of the illicit packs in South Africa are believed to originate from domestic illicit manu-
facturing. (Industry estimates that around 60 percent of illicit packs are manufactured
locally.) However, the country is also the main destination point of illicit cigarettes that
are smuggled from source countries like Zimbabwe.

»» Botswana: Industry estimates put the illicit trade in cigarettes in Botswana at around 10
percent, but given the research findings on how the industry inflated illicit trade numbers
in South Africa, these estimates should be viewed with caution. No independent aca-
demic studies are readily available.

»» Namibia has been noted as a transit country, with illicit cigarettes being routed from
China and the United Arab Emirates (UAE) through Namibia’s Walvis Bay port mostly to
South Africa, but also other neighboring countries in SACU.

»» Swaziland/eSwatini: Industry estimates put illicit market penetration in Swaziland/eSwatini
at around 10 million sticks (20 percent of the market), accounting for estimated tax losses
of $0.8 million a year. No independent academic studies are available.

»» Zambia: Industry estimates put illicit trade in Zambia at around 20 percent. No indepen-
dent academic studies are available. Zambia is largely positioned as a transit country for
illicit cigarettes, with indications that illicit cigarettes are largely smuggled from Zimbabwe,
Botswana, Tanzania, Malawi, and the Democratic Republic of Congo (DRC).26

SOURCE OF ILLICIT CIGARETTES

Aside from locally manufactured illicit sticks, a significant source of illicit cigarettes imported
into all of the SACU countries is widely believed to be Zimbabwe, where it is estimated that
six factories are manufacturing more than 20 brands of cigarettes.27 While no academic or
official study could be found detailing the smuggling routes that feed the illicit trade across
SACU, it is possible to piece together a view based on customs agency experience and limit-
ed-scope information in the public domain28.

23
https://audioboom.com/posts/2419944-50-illegal-crossing-points-from-zimbabwe-to-south-africa-pose-a-
major-health-terrorism-threat-to-the-population
24
https://www.idsa-india.org/an-may-8.html
25
Major General Meetsi, South African Police Service, https://www.saps.gov.za/resource_centre/publications/
maj_gen_kr_meetsi_presentation.pdf
26
http://zambiainformer.blogspot.co.id/2014/08/cigarette-smuggling-to-cost-zambia.html
27
“The Illicit Trade in Tobacco Products and How to Tackle It”. International Tax and Investment Center http://
www.iticnet.org/images/AIT/English-FirstEd-TheIllicitTradeinTobaccoProductsandHowtoTackleIt.pdf
28
Based on agency experience. See also e.g. http://www.thepatriot.co.bw/news/item/1794-tobacco-smuggling-
scourge.html; www.icij.org/investigations/tobacco-underground/; www.theguardian.com/world/2013/jan/27/
cigarette-smuggling-mokhtar-belmokhtar-terrorism

518 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
»» According to TISA, an estimated 60 percent of South Africa’s illicit cigarettes are produced
domestically, while 38 percent are smuggled from Zimbabwe (making that country pivotal
for any illicit trade strategy) and the remainder from other countries;

»» Additional volumes – notably in respect of counterfeits – are attributed to manufacturing
plants in countries like China, which either smuggle the consignments to South Africa
directly, or through free trade zones in places such as Singapore or Dubai, or through
transit countries like Namibia;

»» Because customs and excise controls are perceived to be relatively weak in Lesotho,
experience shows that the country has been used as a destination market for round
tripping or diversion of other commodities. Goods are exported tax-free from South Africa
to Lesotho but subsequently smuggled back into South Africa, or are declared for export
to Lesotho but are diverted to the local South African market before physically leaving the
country. These goods can then be sold on the local market with no duties having been
paid. It is likely that this weakness is exploited for cigarettes, as well as other commodities.

REGION-SPECIFIC ILLICIT TRADE ISSUES

Enforcement sources have noted a number of relatively unique manifestations around illicit
cigarettes and the concomitant tax losses, including:

»» Single stick sales: It is commonplace to find vendors breaking up cigarette packs and sell-
ing single cigarette sticks (often to children).29 Of course, the sale of single sticks severely
limits the traceability of packs;30

»» Wastage allowances: Agency sources suggest that manufacturers have managed to negoti-
ate for a 5 to 20 percent wastage allowance from their production – which does not appear
to be mandated by legislation. Internationally, other agencies do not generally grant wast-
age allowances for tobacco products (or limit wastage allowances to around 1 percent);

»» Prison sales: Informal interviews with enforcement experts suggest that a significant
volume of illicit cigarettes is being supplied to prisons, where their consumption largely
goes undetected, unmeasured, and unchallenged. This may warrant further investigation
as a new destination market for illicit cigarettes.

The cigarette supply chain across most of SACU is largely unsecured, significantly contribut-
ing to the relatively high regional share of illicit trade as a percentage of total consumption.

29
https://www.theguardian.com/world/2017/jul/12/big-tobacco-dirty-war-africa-market; https://www.
pressreader.com/south-africa/pretoria-news-weekend/20161210/281659664671990
30
Other commodities pose unique challenges too, like beer being sold in plastic bags.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

1.2 Legal Frameworks
LEGAL FRAMEWORKS AIMED AT REDUCING DEMAND AND CONSUMPTION

Most of the studied countries have made relatively poor progress in establishing legislative
frameworks to reduce demand and consumption of cigarettes (Table 2). Only Namibia and
Zambia have declared six or more categories of public places smoke-free; only Lesotho,
South Africa, and Swaziland/eSwatini bear some of the costs of cessation treatment; only
Namibia has large health warnings31; not one of the countries has recently had a national
anti-smoking campaign lasting more than three weeks; Botswana is the only country with a
complete ban on both direct and indirect advertising; only Namibia and Swaziland/eSwatini
have adopted all seven of the advertising bans recommended by the WHO; and the recom-
mended indirect advertising bans have been very poorly adopted.

REDUCING DEMAND THROUGH TAXATION

SACU countries tax imports from outside the customs union upon entry at an ad valorem rate
of 45 percent, in proportion to the estimated value of the goods or transaction concerned.
Products originating from SACU, SADC, EU, and EFTA countries are imported duty-free.32

South Africa, Botswana, Lesotho, and Zambia (the only countries with cigarette manufacturing)
apply specific excise duties at source (that is, as close as possible to the point of manufacture).
This is administered via periodic (post-sale and distribution) self-declared excise declarations.
South Africa offers deferred payment of duties, whilst the other countries require payment at
the time of declaration. Over-reliance on tobacco company self-declaration, coupled with
insufficient audit resources, poses a considerable risk in the region.

The cigarette tax burden across SACU and Zambia is well below the WHO-recommended 75
percent of retail sales price, and Botswana continues to use ad valorem excise taxes.

»» Botswana: Excise 39 percent; and ad valorem duty 9.4 percent.

»» Lesotho: Excise 33 percent.33 Lesotho is somewhat different from neighboring coun-
tries, in that 68 percent of its tax revenue comes from customs/excise, making efficient
customs and excise administration a core strategic priority for the country. While limited
information is available, indications are that government is in the process of approving a
levy on tobacco following World Bank recommendations. Combined with a levy on alco-
hol, the IMF estimates that this will result in an additional 200 million Maloti ($16 million) in
government revenues.34

»» Namibia: Excise 30 percent.

31
The Tobacco atlas: https://tobaccoatlas.org
32
http://www.sars.gov.za/AllDocs/LegalDoclib/SCEA1964/LAPD-LPrim-Tariff-2012-04%20-%20Schedule%20
No%201%20Part%201%20Chapters%201%20to%2099.pdf
33
http://www.who.int/tobacco/global_report/2015/appendix2.pdf
34
IMF Staff Country Report, Lesotho

520 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
Table 2. Legislative Frameworks for Demand Reduction, SACU Countries and Zambia

LEGISLATIVE FRAMEWORK: DEMAND REDUCTION
SOUTH
BOTSWANA LESOTHO NAMIBIA SWAZILAND ZAMBIA
AFRICA
Demand reduction
Poor adoption of demand-reduction measures
measures: General

Health warnings Small or none Small or none Large Medium Small or none Small or none

Direct advertising bans
(out of a recommended 5/7 5/7 5/7 5/7 5/7 5/7
7 types)
Indirect advertising bans
(out of a recommended 1/10 0/10 3/10 6/10 6/10 1/10
10 types)
39% 30% 37% 40% 24%
Tax rates (Excise; Total) --
50% 43% 41% 52% 37%
200 cigarettes 200 cigarettes 400 cigarettes 200 cigarettes 200 cigarettes 400 cigarettes

Exemptions for travelers 20 cigars 20 cigars 50 cigars 20 cigars 20 cigars 500g cigars

250g pipe tob 250g pipe tob 250g pipe tob 250g pipe tob 250g pipe tob 500g pipe tob

Figure 7. SACU Tax Rates as Percentage of Retail Price

50
14
12.3 10.7
40 13.04 75
13
9.4
30 13.8
40
20 36.8 Excise duty as % of price
33.15 30 26.9
23.5 Ad valorem as % of price
10

0 Vat as % of price
Swaziland

Lesotho

Namibia

Botswana

South Africa

Zambia

WHO benchmark

521
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

»» South Africa has the highest tax rates among the SACU member countries: 52 percent
of cigarette retail prices is accounted for by taxes. South Africa’s tax ratios are close to
the world average, but still far below the recommended norm.35 After steadily increas-
ing over a number of years, real excise collections from tobacco products have more
recently been declining. For the tax year 2017/18, specific excise duties were R900m (-9.2
percent) lower than the published estimate, mainly because of collections on cigarettes
and tobacco being lower by R1.2bn (-30.2 percent).36 The reasons for this shortfall are
not clear and contradict other data points which show smoking prevalence rising. From
a tobacco control perspective, although there was a decline in adult consumption from
the 1960s to the late 2000s, attributed to an array of government actions, developments
in South Africa since 2010 have been disappointing. In 1994, government announced
that it would aim to impose a total tax burden on cigarettes of 50 percent. This level was
reached in 2005. In 2006, the total tax target was increased to 52 percent. Since 2006,
the tax regime and the targeted tax percentage have remained unchanged.37

Although SACU legislation seeks to harmonize tax rates across the different countries, there
is a fairly inconsistent approach to taxation of cigarettes, with some countries adopting a
mixed model that levies both specific excise and ad valorem duties, others just levying excise
duties, and still others adopting an additional levy on tobacco products. Inconsistencies in
tax rates create opportunities for arbitrage – and contribute to incentives for smuggling.

MANAGING DEMAND BY LIMITING EXEMPTIONS: DUTY-FREE ALLOWANCES

Zambia has an exceptionally high duty-free allowance for travelers: 400 cigarettes, 500g of
cigars, and 500g of pipe tobacco. Tax- and duty-free sales generally erode the effects of tax
and price measures aimed at reducing the demand for tobacco products. In line with WHO
recommendations, a growing number of countries are prohibiting or restricting tax- or duty-
free sales, for example by limiting the number of tobacco products that can be bought duty
free (number of packs per purchase, or number of purchases within a particular period of
time), or by imposing excise duties on tobacco products sold in duty-free shops.38 39

35
WHO Technical Manual on Tobacco Tax Administration 2010, p. 103; World Bank, 1999, Curbing the Epidemic
(Washington: World Bank), 1999, p. 83.
36
https://www.businesslive.co.za/bd/national/2017-09-12-sars-has-a-r13bn-shortfall-and-these-are-th
37
http://tobaccocontrol.bmj.com/content/early/2017/03/24/tobaccocontrol-2016-053340
e-culprits/
38
http://www.sars.gov.za/ClientSegments/Customs-Excise/Travellers/Pages/Arrival-in-SA.aspx http://www.lra.org.
ls/sites/default/files/2017-03/Guidelines%20for%20Extra%20SACU%20importation%20and%20exportation%20
2010.pdf https://www.booknamibia.com/travel-information/duty-free-allowances http://www.burs.org.bw/index.
php/customsexcisemain/travelers-guide/duty-free-allowance http://www.sra.org.sz/customs/general-import-
and-export-rules.php https://www.worldtravelguide.net/guides/africa/zambia/money-duty-free/
39
WHO Guidelines on Implementing FCTC Article 6, http://www.who.int/fctc/guidelines/adopted/Guidelines_
article_6.pdf

522 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
Table 3. Duty-Free Allowances for Tobacco

DUTY-FREE ALLOWANCES FOR TOBACCO

Botswana, Lesotho, South Africa, Swaziland 200 cigarettes, 20 cigars, 250 g pipe tobacco

Namibia 400 cigarettes, 50 cigars, 250 g pipe tobacco

Zambia 400 cigarettes, 500g cigars, 500 g pipe tobacco

Table 4. Legislative Frameworks for Supply Management

LEGISLATIVE FRAMEWORK: SUPPLY MANAGEMENT
SOUTH
BOTSWANA LESOTHO NAMIBIA SWAZILAND ZAMBIA
AFRICA
General supply chain
Very weak tobacco supply chain management
management

Secure serialized tax stamp None Basic tax stamp
Draft Draft but poorly
traceability traceability enforced – 20% of
Traceability None packs on market
legislation but legislation but
long delayed long delayed are not marked

Institutional capacity Weak Some strategic strengths

Administrative mechanisms
Weak production controls, audit controls, inspections capacity
to control supply chain

LEGAL FRAMEWORKS AIMED AT MANAGING SUPPLY

Most of the customs and excise-related legislation in the region had its genesis in the South
African Customs and Excise Act of 1964 (along with the Act’s subsequent revisions). Member
countries’ respective laws – although not identical - mirror each other to a large degree in
terms of general principles and policy positions. The legislative underpinning for measures
to combat illicit trade is not as robust as it should be. Indeed, in some cases the legislation
actually imposes archaic measures (for example, the use of a physical imprint diamond
stamp) or limits governments’ ability to address the dynamic illicit trade problem. South
Africa’s tobacco-control legislation was thought to be one of the most comprehensive in
the world at the time of its adoption, but it is now falling behind newer laws in many other
countries. Out of a total of 24 tobacco-control measures identified by the WHO, South Africa
currently complies with only 11.40

40
Shisana, et al., SANHANES-1 Team, 2013, South African National Health and Nutrition Examination Survey
(SANHANES-1), (Cape Town: HSRC Press), 2013, p. 38

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table 5. Key Requirements of the FCTC Protocol on Illicit Tobacco
FCTC PROTOCOL ON TOBACCO – KEY
RATING COMMENT
REQUIREMENTS
Licensing for any person involved
Don't mandate licensing across the supply
in the manufacture/import/export
Licensing chain. No licensing requirements in respect
of tobacco products and tobacco
of manufacturing equipment.
manufacturing equipment
No due diligence or know-your-customer
Due diligence checks of all
obligations on tobacco companies; No
Due customers/their agents, to ensure
commensurate demand obligations or
diligence that sales are commensurate with
calculations done; No substantive controls
legitimate demand
after ex factory sales
Unique identification markings to
Zambia: Rudimentary tax stamp
assist in determining the origin and
Tracking and implemented but not appropriately enforced.
the point of diversion; enable the
tracing SACU: No tracking and tracing of tobacco
monitoring of the movement of
packs
tobacco products
All persons engaged in the supply
Record-keeping obligations for
Record chain of tobacco, tobacco products
manufacturers and importers, but not other
keeping and manufacturing equipment
economic entities across the supply chain
maintain complete records
Destruction of confiscated Tobacco is destroyed, but in most countries
Destruction manufacturing equipment, tobacco, by an industry representative body.
of goods non-tobacco materials and illicit Only one known case of manufacturing
tobacco products equipment that was seized–not destroyed.
No traceability requirements; No
Obligations on all licenses to
Preventing know-your-customer obligations; No
prevent the diversion of tobacco
diversion commensurate demand calculations; No
products into illicit trade channels
obligations to prevent diversion
Prosecutions and sanctions for Generally appropriate legislative powers in
Offenses criminal activity, seizure of evidence, place
and confiscation of assets, destruction Limited investigative capacity and capabilities
enforcement of seized products and investigative Limited impact from prosecutions – not
techniques. targeting kingpins
Strong general regional coordination but still
Sharing a wide range of
relatively limited in terms of illicit tobacco
International enforcement information and best
in particular, and should be expanded
cooperation practices; cooperation in providing
to include more source and destination
training and technical assistance
countries (e.g. Zimbabwe)
Competent authorities should MOU's with industry representative body.
interact with the tobacco industy Industry body sits on enforcement
Engagement
and those representing the interests structures; destroys seized goods on behalf
with industry
of the tobacco industry only to the of agency; trains customs officers.
extent strictly necessary Contravenes FCTC Protocol.

KEY TO RATINGS

Absent Policy in Implemented; Implemented; Fully meets
place poorly notable some international
implemented opportunities for opportunities for good practice
improvement improvement

524 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
LIMITED AWARENESS OF AND COMPLIANCE WITH WHO FCTC OBLIGATIONS

The FCTC Protocol contains a series of good practices aimed at better securing tobacco
supply chains and empowering law enforcement with tools to detect and investigate illicit
trade. Even for countries that are not signatories to the Protocol, tracking progress against its
provisions provides a useful means to measure an agency’s relative maturity, and to assess
opportunities for further strengthening tobacco supply chain control.

Interactions with agencies throughout SACU and a review of the agencies’ strategic docu-
ments both suggest a very limited awareness of the obligations customs and excise agencies
would face under the FCTC Protocol, once the Protocol is ratified and comes into opera-
tion. Table 5 highlights the extent to which the reviewed countries meet obligations under
the FCTC Protocol as one proxy for effective tobacco control.

Effective implementation of the FCTC Protocol requires that government agencies that
are not traditional network partners (e.g., agencies dealing with health and revenue) work
together. Considerable effort is required to secure a sustainable platform for mutual cooper-
ation across the departments of health, police, border security, tax, customs, and excise.

To date, none of the countries studied has adopted minimum good practice measures in
its legislation. FCTC compliance does not yet directly drive either strategy development or
operational initiatives, and all of the countries reviewed would need to secure a more strate-
gic focus on meeting their potential future obligations under the FCTC Protocol.

The various legislative frameworks fall short in respect of a number of good practices that
would significantly assist in curbing the illicit tobacco trade:

»» Licensing obligations only apply to manufacturers and importers of tobacco products,
and do not extend to other economic operators across the tobacco supply chain. Such
obligations currently fail to include regular audits of tobacco manufacturing equipment;

»» There are no due diligence obligations on any licensees, or other obligations that would
require them to conduct “know-your-customer” checks, or to assess whether the orders
they receive are commensurate with the demands in the intended destination markets;

»» There are no obligations on manufacturers or importers to introduce measures to pre-
vent the diversion of their products. Ex-factory sales are the norm, with no obligations
on tobacco manufacturers or importers to ensure that their products are not subse-
quently diverted into illicit channels;

»» Fiscal marks used are obsolete or are non-existent (aside from Zambia, which has intro-
duced a very rudimentary tax stamp). The diamond stamp employed by South Africa and
Botswana is a simple die impression placed on packs (as opposed to an affixed paper tax
stamp). The number of die stamps issued to industry is unaccounted for, and the mark itself
is easily counterfeited. The “stamp” provides absolutely no assurance that duty has been
paid or that the product is genuine. Nor does it confirm where a pack originated from;

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

»» No track-and-trace systems have been implemented: Currently, only Zambian leg-
islation provides for the use of a true tax stamp. Both South Africa and Botswana had
previously made progress with the preparation of draft legislation, and officials have
intimated that these countries may introduce a more secure fiscal marking regime, but
recent years have seen no progress in implementing solutions. The efforts now appear to
be tabled in South Africa and on hold in Botswana;

»» Most of the legislative frameworks have sufficiently strong punitive options, but these are
not translating into prosecutions or concrete punitive actions against the tobacco industry.

A significant first step should include the introduction of legislation that implements, at a
minimum, the good practices noted in the FCTC Protocol.

1.3 Institutional Frameworks
OPERATIONAL OVERVIEW

The capacity of the various administrations differs greatly across the region. There are
relatively broad disparities between countries on a range of fronts, including their GDP, the
estimated scope of illicit cigarette trade,41 the size of the shadow economy, and tax admin-
istration efficiency.42 The disparity makes the development of a region-wide strategy and
alignment of response plans more complex – but also more important.

SARS is arguably the most advanced, and its tax administration meets that of many devel-
oped countries in terms of efficiency and automation of taxes. SARS has a strong tradition
of rigorous strategy development, and its in-principle strategy aimed at targeting illicit trade
was relatively well-defined and comprehensive as far back as 2013. Components included:
modernizing warehousing management and acquittal systems; changing import and export
risk processes; targeting the entire supply chain; improving control of warehouses; automat-
ing the excise system and processes; increasing collaboration with key stakeholders; and
strengthening detection capabilities.43 There are no indications to what extent the strategy
has been effective, or that the strategy has subsequently been reviewed.

A similarly strong strategic focus was not immediately evident from this high-level overview
in respect of the other five countries, although Botswana is undergoing a modernization
program which includes a new information technology platform for customs and a review
of excise policies and processes, as well as the potential introduction of a fiscal marking
and track-and-trace solution for excisable goods. (BURS had made considerable progress in
conducting a thorough analysis and even published a tender to introduce a solution across
excise goods, but the tender was not awarded and ultimately expired.)

41
Using industry estimates, in the absence of more objective academic estimates
42
Using VAT-C efficiency as a proxy
43
SARS, 2014a, Strategic Plan 2014/15-2018/19.

526 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
LIMITED STRATEGIC FOCUS ON EXCISE ADMINISTRATION

Excise taxes contribute relatively little by way of revenues, compared to other taxes. Their
administration is typically underfunded and understaffed, and they are generally not priori-
tized from a modernization perspective.

The current approach is short-sighted: excise administration is critically important, not only
from a revenue or health-risk perspective, but because excisable products like cigarettes
offer an easy way for criminality to slip into the legitimate supply chain. Indeed, in South
Africa, there are a number of indications of links between the illicit trade in cigarettes and
other criminal activities.44

All the countries studied here have long borders to secure, but also a relatively low GDP
from which to fund such operations, requiring more innovative methods to secure borders
(Figure 8).

Over-reliance on industry self-declaration as the basis for taxation; the lack of an effective
risk management approach; and non-existent fiscal marking and track-and-trace regimes
place the region at high risk for the increased proliferation of illicit trade.

Figure 8. SACU Border Lengths (km) vs. GDP ($M)

2500 350,000

300,000
2000
250,000
1500 200,000

1000 150,000

100,000
500
50,000 Length of Border

0 0 GDP Million $
Botswana

Lesotho

Namibia

South Africa

Swaziland

Zambia

44
See e.g. https://blackopinion.co.za/2016/04/19/mazzotti-alleged-italian-criminal-
gave-julius-malemas-eff-r200-000/; https://www.news24.com/SouthAfrica/News/
R388m-tax-bill-for-Cape-gangster-20150412; https://www.enca.com/south-africa/has-a-cigarette-
smuggler-and-fraudster-been-helping-dlamini-zumas-campaign; https://www.maritime-executive.com/
editorials/north-korean-diplomats-smuggle-ivory-cigarettes-and-gold; http://defsec.csir.co.za/wp-content/
uploads/2016/05/1.-Dr-Louise-Shelley-Convergance-of-Illicit-Actors-and-Flows.pdf; https://khulumaafrika.
com/2018/02/07/fuel-tankers-center-drug-smuggling-operations-zim-sa/; https://www.biznews.com/
undictated/2016/03/03/ejected-sars-bosses-start-fighting-back-illicit-cigarette-industry-tagged/

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

INTERNAL CAPACITY AND CAPABILITY

This limited-scope study did not provide for a formal review of agency capacity and capa-
bilities. It relies on experience in the region. While not directly addressing agencies’ excise
capabilities, in the absence of other specific assessments, the IMF’s assessment of the
respective countries’ VAT C-efficiencies could be used as a rough proxy for agency effi-
ciency. (VAT C-efficiency is defined as actual VAT collections as a share of the potential VAT
base and is frequently used by organizations like the IMF as one measure of an agency’s
effectiveness.) Given that excise taxes are generally afforded less strategic priority than VAT
in most agencies, efficiency in respect of excise administration can be assumed to be below
that of VAT.

While South Africa and Zambia have relatively more advanced capabilities, all of the coun-
tries surveyed have relatively low maturity across the capabilities required to deliver on an
agency’s excise administration mandate. People, policy, processes and procedures, forms,
business rules, payment terms, and information technology systems all require varying
degrees of transformation. Audit and risk-management capabilities are generally weak across
the excise value chain within the region.

Despite this, some of the countries have made positive strides towards improving their
capacity and capability to manage and control excise processes, although these improve-
ments have not been targeted specifically at tobacco control.

»» South Africa generally has a more mature framework in terms of its ability to counter illicit
trade in cigarettes, being particularly strong in respect of strategy development, business
intelligence, and the use of technologies like scanners. SARS notes its commitment to

Figure 9. VAT C-Efficiency Ratings for Countries, as Proxy for Relative
Agency Efficiency

0.8

0.7 0.67

0.6 0.56 0.56
0.5 0.48

0.4
0.34
0.3

0.2

0.1

0
Swaziland

Lesotho

Namibia

Botswana

South Africa

Zambia

528 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
contributing to building capacity in the region,45 for example by improving its focus on
training excise officers;46 hosting a regional risk-accreditation event in 2017; conducting
direct technical assistance missions on data warehouse capabilities for the Swaziland/
eSwatini Revenue Authority; supporting risk management capacity building missions
to Zimbabwe, Kenya, and Zambia; and training eight dogs and their handlers as part of
detector-dog technical assistance missions to Botswana.

»» Botswana: Audit and risk management capabilities are relatively weak across the excise
value chain. A number of tax administration reforms are underway (including the estab-
lishment of a risk management unit), but progress has stumbled with Botswana’s failure to
enact the planned Tax Administration Act and with persistent capability gaps, particularly
from an audit and risk management perspective.47

»» Lesotho: The Lesotho Revenue Authority’s weak risk management capacity is exacer-
bated by the country’s customs information management system, ASYCUDA, sometimes
being down for weeks. Even when the system is operative, some features may not func-
tion fully, and information about inspections does not feed back into the risk assessment
process. As a result, audit effectiveness and general compliance levels are both low.48

»» Zambia: An IMF review notes that Zambia’s VAT efficiency and corporate income tax
productivity are well below those of SADC comparators, with relatively poor tax base
management, auditing capacity, and compliance monitoring capabilities. These weak-
nesses are all likely to extend to the country’s excise management capabilities and
maturity, contributing to poor revenue collection performance in Zambia.49

LIMITED ALIGNMENT ACROSS GOVERNMENT AGENCIES

The countries that achieve the best success in respect of moderating the illicit trade in ciga-
rettes tend to be those that adopt a whole-of-government approach, leveraging the powers
and capabilities of various enforcement bodies beyond just those of the customs/excise
administration. However, across SACU and Zambia there is generally limited evidence of any
significant amount of coordination and cooperation between relevant government agencies.

SARS historically had a good working relationship with a number of law enforcement
agencies, using intelligence gathered by the relevant agencies to drive its investigations, and
conducting many of its enforcement interventions in conjunction with the police. A national
illicit tobacco task team was established but excluded SARS. The creation of duplicate struc-
tures leave space for duplication of effort, arbitrage, misalignment, and missed opportunities.

45
http://www.sars.gov.za/AllDocs/SARSEntDoclib/AnnualReports/SARS-AR-22%20-%20Annual%20Report%20
2016-2017.pdf
46
http://www.sars.gov.za/AllDocs/SARSEntDoclib/AnnualReports/SARS-AR-22%20-%20Annual%20Report%20
2016-2017.pdf
47
IMF Staff Country Report, Botswana
48
IMF Staff Country Report, Lesotho
49
IMF Staff Country Report, Zambia

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Moreover, the industry is known to have built allies across a number of government institu-
tions outside of SARS, who were used to either thwart SARS’ efforts, or to put pressure on
SARS to be more sympathetic towards the tobacco industry. SARS noted: “Certain com-
panies and individuals in the tobacco industry have penetrated a fragmented government
system and have been using some elements and access to political parties and persons to
further their personal interest.”50 The agency voiced concern about state agencies not being
sufficiently aligned in respect of the challenges posed by the industry.

REGIONAL ALIGNMENT STRUCTURES

A SACU Regional Risk Management Working Group – with a regional risk register - has been
established. Its mandate focuses on identifying significant customs risks that are common
across the region and that require a collective mitigation approach. The group seeks to
maintain a central record of the results of countries’ interventions.51 Given the importance
that other neighboring countries such as Zimbabwe play in the illicit cigarette trade, it
would be prudent to consider expanding the regional group beyond just SACU members, to
include prominent illicit tobacco source or destination countries.

Recent regional joint operations focusing on the textile, alcohol, and tobacco industries
are reported to have yielded positive results,52 strengthening the case for more expansive
regional campaigns focused on illicit tobacco. Highlights of recent operations included 14
arrests for the smuggling of cigarettes and the seizure of 9,485,637 cigarettes, representing
a potential revenue loss of R72 million. Intensified action of this type could inform a regional
approach to stop contraband upstream, at the point of manufacture, long before goods
cross countries’ borders illegally.

SARS has made progress in establishing one-stop-border posts with Mozambique and
Zimbabwe. It has also piloted the WCO – SACU IT Connectivity Initiative with Swaziland/
eSwatini and Mozambique to enable interface capabilities for information and data
exchange. If further developed and fully implemented, these initiatives could better position
the agencies to target illicit trade.

INDUSTRY DRIVES MOST OF THE PUBLIC DISCOURSE ABOUT ILLICIT TRADE

Across SADC – but perhaps most markedly in South Africa – most of the discourse around
illicit trade in cigarettes is driven by the tobacco industry. This discourse presents illicit trade pri-
marily as a function of high tax rates; vaunts the importance of industry as a revenue generator
and employer; portrays industry as both victim and savior in the fight against illicit trade; and
pressures governments to reduce the regulations imposed on the tobacco industry.

50
https://www.dailymaverick.co.za/article/2017-01-23-state-capture-all-roads-lead-to-tobacco-some-to-
marius-fransman/#.Woo9N2aQ1E4
51
http://www.sacu.int/docs/reports/2017/SACU-Customs-Operation-External-Publication.pdf
52
http://www.sacu.int/docs/reports/2015/topliq.pdf

530 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
South Africa is widely cited in the local media as being “in the top five” countries with the
highest market share of illicit trade in cigarettes – a statement that is simply not true, but
that has become part of the lexicon in the local market, unchallenged by media or officials.
The statement can be traced back to the industry body TISA, which continues to frequently
cite this groundless assertion as fact. In reality, there are many countries around the world
with a far higher incidence of illicit trade, including Albania, Bolivia, Bosnia, Brazil, Ethiopia,
Georgia, Hong Kong, Iraq, Laos, Macedonia, and Uzbekistan (to name but a few).53 This high-
lights the importance of applying a critical lens to industry claims.

POLITICAL INTERFERENCE

Some observers express concern about criminal enterprises’ close ties to leading political
figures, at least in South Africa. Recently, a notorious cigarette smuggler’s lavish birthday
party is reported to have been attended by high-profile policemen and politicians.54 Similarly,
multiple reports allege that a leading cigarette smuggler met with South Africa’s ex-Presi-
dent to secure a votes-for-protection agreement.55 A number of sources have noted how
industry players sought to use senior political connections to halt SARS investigations into
the tobacco industry.56 57 All future policy and enforcement measures must reckon with the
reality that, in this region, the tobacco industry is disproportionately powerful.

53
See e.g. http://www.tobaccoecon.uct.ac.za/sites/default/files/image_tool/images/405/Training/
Emerging_Researcher_Programme_2015/Illicit-Trade-Africa.pdf; https://smokefreepartnership.eu/position-
papers-briefings-reports/download/196_d73fa3d27ef551c49b0d362932a698f8
54
https://select.timeslive.co.za/news/2018-02-13-the-tobacco-tycoons-birthday-bash-and-his-policemen-
guests-at-table-9/
55
http://ewn.co.za/2015/11/20/ANC-refutes-claims-on-Zuma-gang-bosses
56
See e.g. https://www.economist.com/news/briefing/21732086-ruling-african-national-congress-
ponders-choice-between-dynasty-and-reform-how-jacob-zuma; https://www.nation.co.ke/news/africa/
Book-links-Jacob-Zuma--his-family-to-illicit-money/1066-4177106-8ijq6u/index.html; https://www.
huffingtonpost.co.za/2017/10/29/zuma-worked-for-somebody-else-while-he-was-president_a_23259551/;
https://www.timeslive.co.za/sunday-times/news/2017-10-29-gangster-republic-dirty-
cigarette-money-is-funding-ndzs-bid-for-president/; https://www.thesouthafrican.com/
the-presidents-keepers-most-shocking-claims-jacques-pauw/; https://www.news24.com/SouthAfrica/Politics/
Cape-gangster-gets-VIP-invite-to-Zumas-party-20140427; https://www.biznews.com/sa-investing/2016/11/24/
zuma-lifman-sars/; https://www.biznews.com/undictated/2016/03/03/ejected-sars-bosses-start-fighting-back-
illicit-cigarette-industry-tagged/
57
Rogue: The Inside Story, Johann van Loggerenberg, https://www.amazon.com/Rogue-Inside-Story-
Sarss-Crime-Busting/dp/1868427404; The President’s Keepers, Jacques Pauw, https://www.amazon.com/
Presidents-Keepers-Those-keeping-prison-ebook/dp/B076YBL1WS/ref=sr_1_1?s=books&ie=UTF8&qid=
1524214766&sr=1-1&keywords=presidents+keepers; https://www.biznews.com/undictated/2016/03/03/
ejected-sars-bosses-start-fighting-back-illicit-cigarette-industry-tagged/

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

1.4 Administrative Mechanisms
DATA QUALITY AND ACCURACY

The compilation of this report was significantly hampered by the lack of credible, pub-
licly available information. A key example relates to countries’ readiness to implement the
traceability obligations under the FCTC Protocol. In the WHO country profiles, most of
these countries indicate that they mandate the use of secure tax stamps, when in fact this is
patently not correct. Although this possibly speaks to a definitional misunderstanding, it does
result in a skewed perspective on the readiness of countries to fulfil their obligations under
the Protocol.

DATA-CENTRIC DECISION-MAKING

It is not immediately evident to what extent the respective countries rely on data analytics
and business intelligence to drive policy development and enforcement targeting. However,
even superficial research highlights suggestive disparities in trade statistics between the
different countries. The volume of cigarettes declared for export from one country should in
theory match the volume of cigarettes declared for import in the destination country – they do
not.58 (See Figure 10.)

Figure 10. Tracking Trade Discrepancies: Value of Cigarettes Declared for Export
from South Africa, vs. Cigarettes Declared for Import in Destination Countries

2014 2015 2016
0 Size of trade discrepancy gap:
-47,844
-210,532 Difference between cigarettes
-309,656
-500,000 declared for export from South
-673,057 Africa v. declared for import
-1,000,000 into destination countries –
-1,071,131 by trade value
-1,500,000

-2,000,000 Not depicted: Significant
$77million trade discrepancy
gap with Namibia in 2013 -2,385,594
-2,500,000 Botswana
Namibia
-3,000,000
Source: Own diagram; Data: www.comtrade.un.org

In 2016, there were no reported imports of cigarettes into Lesotho or Swaziland/eSwa-
tini. Yet South African records for the same year show 3,452,659 cigarette packs having
been exported from South Africa to Lesotho. These goods are not reflected in any official

58
See data at https://comtrade.un.org/db/dqBasicQueryResults.
aspx?px=HS&cc=240220&r=710&p=894&rg=2&y=2016,2015,2014,2013,2012&so=8

532 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
accounts in Lesotho; 3,452,659 cigarette packs remain unaccounted for in the Swaziland/
eSwatini system. Conversely, Namibia, reports 2,385,594 more cigarettes having been
imported from South Africa than are recorded as exports on the South African side.

This makes Lesotho and Swaziland/eSwatini something of a black hole from a data per-
spective, which weakens insights into how the tobacco supply chain operates and limits the
effectiveness of enforcement activities. These findings suggest significant issues with data
capture and data quality – making it difficult for any agency to assess the extent to which
cigarettes are unaccounted for.

Additional work is required to raise awareness of the importance of trade statistics as some-
thing that goes far beyond a purely administrative task. Done properly, it affords valuable
insights into the nature and scope of illicit trade, allowing agencies to focus their efforts
where risks are greatest.

1.5 Enforcement Activities and Practices
RISK MANAGEMENT

An excise-specific risk engine was deployed by SARS in 2016/17 to improve the quality and
impact of excise audits. Audits based on the new risk rules yielded a relatively low 56 percent
hit rate / strike rate (in other words, the percentage of audits that result in a finding and addi-
tional assessment being issued)59. However, from a very quick review, it is unclear to what
extent this is attributable to issues with the risk rules themselves, or to a skills issue, or indeed
to what extent this presents an improvement over earlier excise audit success rates.

Table 6. Innovative and Technological Enforcement Solutions in SACU Countries
and Zambia

INNOVATIVE AND TECHNOLOGICAL ENFORCEMENT SOLUTIONS ADOPTED
Botswana, Lesotho, Namibia, Swaziland,
Zambia
South Africa

Tax stamps
Basic tax stamp only
Methods for applying tax stamps

Digital numbering and coding technologies for No secure, serialised tax stamps used
unique item identification No innovations or
advancements
Readers as authentication tools

Track and trace of supply chain Weak tobacco supply chain management

Enforcement and surveillance techniques

Monitoring, business intelligence, dashboards

59
http://www.sars.gov.za/AllDocs/SARSEntDoclib/AnnualReports/SARS-AR-22%20-%20Annual%20Report%20
2016-2017.pdf

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

There is no evidence of similar risk management initiatives from the other SACU countries
(Table 6). Controls are typically paper-based or heavily reliant on self-declared documents
related to production volumes. Audit controls are typically weak, and teams are under-
staffed. Given the labor-intensive nature of these controls (e.g., officers having to frequently
enter excise facilities), far too much interaction is forced with industry stakeholders - in the
customs/excise world, this too often results in integrity issues. Automated controls are far
more targeted and do not pose the same risks.

Table 7. Enforcement Approaches, Activities, and Gaps in SACU and Zambia to Date

ENFORCEMENT
RELATED ACTIVITIES
APPROACH
All authorities require registration of excise producers and importers, but with no specific control
Licensing over tobacco producers and importers. Additionally, each country processes licenses differently
with varying degrees of entity-based risk management.
South African and Botswana have adopted the 'diamond stamp' – an impression die-stamp as
their solution for marking cigarette packs. This is not an effective solution due to the lack of
control of stamps in circulation, the ease of duplicating the stamp itself, and its efficacy as an
Product markings/
enforcement tool due to the lack of ability to authenticate the mark as genuine. There is no
stamps
evidence of any marking solutions for the other SACU countries. Zambia has implemented a
rudimentary tobacco tax stamp, but reports note that around 22% of cigarettes on the market
remain unmarked.
None of the reviewed countries currently have track and trace solutions, although Botswana
made progress in developing a modernisation initiative and even published a tender for a track
Track-and-trace and trace solution for all excisable goods. However, this tender expired without being awarded.
South Africa has made some overtures and has published a tender for transaction advisor, to
advise on the feasibility of establishing a Public Private Partnership for a fiscal marking solution.
There is evidence of some co-ordinated enforcement effort at the SACU level, where joint
Customs/Excise enforcement projects occur targeting tobacco and liquor (see "TopLiq"
Enforcement reference above). At the individual country level, SARS seems quite active in targeting illicit
cigarettes being imported into the country, often seizing shipments of smuggled goods coming
in from Zimbabwe.
There is limited evidence of co-ordination of relevant government agencies in targeting and
enforcing cigarette control policies or anti-smuggling programmes. South Africa had a tobacco
Coordination task team, but this seems to have been driven by the "Big" tobacco companies for their own gain
among Agencies and notably excluded SARS as a key government agency. The other countries displayed little
or no co-ordination or risk-based approach to combating the production or importing of illicit
cigarettes.
Other than the imposition of specific excise duties for tobacco production and higher than
Penalties normal import duties for cigarettes in SACU, there seems to be no other targeted penalties for
tobacco products.
Public awareness about illicit trade is generally low across SACU, except for South Africa, where
the Tobacco Institute of South Africa (TISA) – an industry body-regularly flights ad campagins
and targeted media campaigns that highlight the impacts of illicit cigarette production. Although
Public awareness
this has a positive effect on public awareness, it inflates the size of the illicit trade in the
country; and creates the false impression that illicit trade is attributable only to smaller low-cost
manufacturers.

534 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
REGIONAL ENFORCEMENT INITIATIVES

The SACU secretariat has been responsible for driving initiatives to control illicit trade in the
region (Table 7). One such effort was Operation TopLiq,60 cited earlier, in which regional
member authorities embarked on a joint customs enforcement operation targeting tobacco
and liquor products, in 2014-15. The collaboration yielded 14 arrests and the seizure of nearly
10 million illicit cigarettes, avoiding a potential revenue loss of R72 million.

LACK OF PRODUCTION CONTROLS, TAX STAMPS, OR SUPPLY CHAIN SECURITY

As noted, apart from Zambia, none of the SACU countries surveyed have implemented
secure tax stamps or any other modern and secure fiscal marking regimes. None of the
countries effectively controls the cigarette supply chain, beyond the licensing of tobacco
manufacturers and periodic audits. All countries rely on the self-declaration of excise
production and imports. The information technology solutions utilized in all countries lack
robust controls for excisable goods. Lesotho’s ASYCUDA customs information system, for
example, is notoriously weak when it comes to excise declarations. Zambia does have a
tax stamp program, but it is generally viewed as a basic system lacking robust features and
controls. Reports suggest it has not been effective in combatting illicit trade.

As noted previously, South Africa and Botswana use a very rudimentary “diamond stamp” –
a physical die impression stamp that is meant to be impressed on each pack of cigarettes
produced. These stamps offer no modicum of control and provide no substantive insights
into either the tax status or legitimacy of packs found on the market. The issuing of these
stamps is largely manual and uncontrolled; there is no follow-up after the initial issuing to
check the status of the stamps or how often have been used; the stamps themselves are
easily reproducible; there is no production control or oversight of the stamps in the pro-
duction environment; and there is no compliance control or monitoring of products that
have been stamped. The use of the diamond stamp has thus led to a false sense of control
of tobacco production.

SARS has affirmed its intention to address illicit tobacco trade through increased con-
trols for many years,61 but implementation has lagged (Figure 11). Despite the agency’s
announcing in 2012 that it would “improve authentication markings on cigarettes to
enable identification of legal cigarettes,” there have been no changes to the diamond
stamp – which cannot be authenticated, as it contains no security features. (In contrast
to its slow action on tobacco controls, SARS previously transformed its entire tax and
customs systems platforms over a period of seven years, introducing a new operating
model and new IT systems across all major tax and customs operations.) Considering that
the vast majority of cigarettes consumed in the region are either manufactured in South Africa
or are transited through South Africa, the lack of a means of determining the duty-paid status

60
http://www.sacu.int/docs/reports/2015/topliq.pdf
61
https://www.biznews.com/budget/budget-2018/2018/02/21/full-malusi-gigaba-budget-speech/

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 11. Timeline of SARS Efforts to Replace Obsolete Diamond Stamp

SARS tables Customs and
Excise Act amendment to
allow for use of secure tax
stamps and track and trace
system. Tabled but not in
SARS includes focus on e ect.
illicit tobacco in compli-
ance program. Incl. inter “Completed track and trace
SARS includes alia “Improve authentica- study into cigarette industry
focus on illicit tion markings on supply chain movements –
this will replace the SARS publishes tender
tobacco in cigarettes to enable for transaction advisor
strategic plan identiﬁcation of legal diamond stamp”
for procurement of
cigarettes” track & trace system.
“Introduce Excise markers
to help identify and track Deadline March 2018.
Losing R2-4.5b p.a. to No public outcome
illicit cigarettes excisable goods”
known.

2007 2010 2012 2013 2016 2017 2018

SARS conducts SARS reported to be SARS commits to “Improving
tobacco marking considering replacing authentication marking on
pilot project with diamond stamp. cigarettes; Improving the
industry solution manual tracking of cigarettes;
Industry body TISA Working to develop a way of
criticises use of detecting illicit cigarettes”
diamond stamp.
“Amendments will be
considered for the marking,
tracking and tracing of
tobacco products”

of tobacco products in South Africa has the potential to negatively impact the entire region.
Draft legislation to enhance existing controls was tabled in Parliament in 2016 but is not yet in
effect.62 It is critical to introduce a secure fiscal marking and traceability solution in full compli-
ance with the FCTC Protocol in the region’s largest illicit tobacco market. This agenda should
receive priority attention.

Zambia has tax stamps on cigarettes, but industry complaints have been noted alleging that
packs not bearing tax stamps are openly sold in retail outlets, with no enforcement action
being taken. A survey conducted by the International Tobacco Control Policy Evaluation
Project supports this view. Survey respondents were asked to display their cigarette packets;
of the 75 cigarette packs shown, 22 percent did not have tax stamps.63

OTHER TECHNOLOGIES/ENFORCEMENT TOOLS

SARS continues to invest in other technologies, including non-intrusive detection solutions
like cargo scanners. Nine additional scanners were deployed by the agency in 2016/17, and

62
http://www.sars.gov.za/Procurement/Pages/TenderDetails.
aspx?tendernumber=30&year=2017&type=Request%20for%20Proposal%20(RFP)
63
http://www.itcproject.org/files/ITC_Zambia_Wave_2_National_Report-Dec7-FINAL.pdf
64
http://www.sars.gov.za/AllDocs/SARSEntDoclib/AnnualReports/SARS-AR-22%20-%20Annual%20Report%20
2016-2017.pdf

536 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
procurement processes were initiated for the purchase of two additional cargo scanners.64
This has increased the agency’s cargo scanning capacity to 300 vehicles a day. Given the
volume of trade, however, this is still woefully inadequate, as it represents less than 1 percent
percent of the total containers entering South Africa. The international benchmark for mini-
mum scanning is 3-5 percent.65 (Moreover, even where illicit goods are found, prosecutions
tend to focus on the transporters, and not on the manufacturers.)

Another successful enforcement tool has been the deployment of detector dog units, which
were first introduced in South Africa and have shown significant results in detecting ciga-
rettes hidden in shipments of other goods.

1.6 Effect of Enforcement on Illicit Trade
Very little information could readily be found relating to the various agencies’ impact on illicit
trade through enforcement activities (Table 8).

Table 8. Results of Reforms to Address Illicit Trade, and How Impact Has
Been Measured

EFFECT AND RESULTS OF REFORMS TO ADDRESS ILLICIT TRADE IN TOBACCO
Botswana; Lesotho
South Africa Zambia
Namibia; Swaziland
›› Nr and value of seizures have reduced in recent years;
20% of packs
Description
n.a. ›› Prevalence of illicit trade has decreased (industry estimate): on market
of results
not marked
›› 2012: 34% -> 2018: 23%
›› Number of seizures
How are ›› Number of sticks seized
results
n.a. ›› Value of seizures n.a.
measured?
(Metrics) ›› Number of prosecutions
›› Prevalence of illicit trade over time

SARS has had some measurable impact on the illicit cigarette trade: in 2016/17, it seized 17.5
million sticks; conducted 36 investigative audits with an 83 percent success rate; conducted
57 cigarette manufacturing audits with a 51 percent success rate; and conducted 2,156 gen-
eral excise audits (43 percent of which relate to diesel refunds66). Manufacturing audits tend
to focus simply on production measures and are aimed at establishing a potential tax liability.
By contrast, an investigative audit is used where criminality is suspected. Such audits apply a
structured investigative approach by criminal investigators who focus on uncovering fraud or
other serious offenses. These investigators are experts at preparing cases for prosecution.

65
https://pdfs.semanticscholar.org/868f/4a2166bcba3469712b2f2bc0d17e9fc5424a.
pdfaspx?tendernumber=30&year=2017&type=Request%20for%20Proposal%20(RFP)
66
http://www.sars.gov.za/AllDocs/SARSEntDoclib/AnnualReports/SARS-AR-22%20-%20Annual%20Report%20
2016-2017.pdf

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

A number of factors appear to have reduced the efficiency of SARS enforcement actions,
including a loss of experienced personnel and the effective shuttering of specialist investi-
gations units. As a result, in recent years, SARS has seen a decrease in both the number of
sticks seized and the value of the seizures.

A secure fiscal mark would give agencies the capability to determine whether a pack is gen-
uine or not; where the product originated; and how it potentially entered the illicit market.
(Currently, the agencies are reliant on the industry to assess whether packs found on the
market are counterfeit.) Moreover, in the case of South Africa, an industry representative
body - and not SARS itself - carries out the destruction of illicit goods. There are no recorded
instances of the destruction of manufacturing equipment.

1.7 Specific Policies or Reforms Enacted
Although a number of stand-alone reforms have been enacted, there does not seem to be a
concerted whole-of-government approach to an anti-tobacco campaign, or to combatting
illicit trade (Table 9).

The reviewed countries have introduced some policies and initiatives that have had an
impact on illicit trade (Table 10).

Table 9. Key Policy Reforms and Gaps Across the Study Countries

POLICY REFORMS
SOUTH
BOTSWANA LESOTHO NAMIBIA SWAZILAND ZAMBIA
AFRICA
Duty at
source; duty
Point of tax collection Duty at source; payment due at time of declaration Duty at source
deferments
granted
200 cigarettes 400 cigarettes 200 cigarettes 200 cigarettes 400 cigarettes 200 cigarettes
Exemption for travelers 20 cigars 50 cigars 20 cigars 20 cigars 500g cigar 20 cigars
250g pipe tob 250g pipe tob 250g pipe tob 250g pipe tob 500g pipe tob 250g pipe tob
Restrictions on out-of-
network sales (internet, None
duty-free sales)
Use of prominent tax Basic tax
No secure, serialised tax stamps
stamps, serial numbers stamp
Other package markings Small or no Small or no Large Medium Small or no Small or no
(e.g. health warnings) warnings warnings warnings warnings warnings warnings

538 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
Table 10. Major Policy Reforms and Their Impacts on Illicit Trade

WHAT HAS BEEN DONE TO ADDRESS ILLICIT TRADE?
LESOTHO,
NAMIBIA, BOTSWANA SOUTH AFRICA ZAMBIA
SWAZILAND
›› Plans to
›› Plans to introduce marking and traceability – no
introduce
substantive progress;
marking and
Major traceability ›› Use of canine units;
reforms – no Introduction of
n.a. ›› Increase in vehicle scanners;
over last substantive basic tax stamp
progress; ›› Comprehensive industry compliance investigation – initial
5 years inroads with 61 criminal cases prepared; investigations
›› Exploring
units disbanded before cases could go to court (attributed
use of
to political and industry interference)
canine units

22% of packs
Impact n.a. ›› n.a. ›› n.a. on market not
marked

CONTRIBUTORS TO SARS’ SUCCESSES INCLUDED:

»» Establishing strong multi-disciplinary project teams that combined expertise across a
range of topics, including excise, VAT, corporate income tax, criminal investigations, audit-
ing, intelligence and legal;

»» Ensuring that the illicit trade in cigarettes was aligned across the organization’s multi-year
compliance program, to its business planning and operational measures;

»» Comprehensive qualitative and quantitative research into the industry and players, focus-
ing on understanding the supply chains, the business practices, and the loopholes and
gaps that were allowing illicit trade to flourish;

»» A strong business intelligence capacity that allowed SARS to conduct relationship analysis
and develop comprehensive profiles of the subjects of their investigations, with access to
multiple third-party data sources and inputs from intelligence sources;

»» The use of special investigative techniques, including controlled deliveries, access to
undercover agents affiliated with the country’s intelligence structures, and access to the
surveillance capabilities of other law enforcement agencies;

»» Multi-tax investigations that included the following approaches: focusing on the subjects
from a holistic perspective – thus, covering their excise duty, customs duty, VAT, cor-
porate income tax, and other related obligations; expanding investigations to include,
for example, money laundering and fraud perspectives; and relying heavily on cross-tax
comparative analyses to highlight anomalies;

»» Robust project planning with clear phasing of appropriate actions, and with responsibili-
ties clearly mapped – both to ensure alignment and reduce opportunities for divergence;

539
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

»» The use of a range of tools within the tax administration legislative framework, including for
example the use of estimated assessments and agreed assessments (where appropriate);

»» Addressing instances of corruption through the use of income tax-based indirect lifestyle
audits – allowing for the identification of unexplained income sources as an indirect way
of targeting corruption, and paving the way for the removal of corrupt officials;

»» Not just targeting consignments, but targeting economic operators; and

»» The use of customs-specific tools like container scanners, x-ray scanners, detector dogs,
and mobile anti-smuggling teams.

Of note, in recent years SARS has unfortunately seen a dramatic loss of experienced per-
sonnel and the effective shuttering of specialist investigations units. This has resulted in the
organization’s delaying a series of tobacco industry prosecutions and tax assessments that it
had been ready to pursue as far back as 2014.

CONTRIBUTORS TO ZAMBIA’S SUCCESS INCLUDED:

A strategic focus on excise management; the introduction of a professionally staffed national
excise audit section; investing in the recruitment of professionally qualified auditors to spear-
head its national excise audits and inspections; a comprehensive anti-corruption strategy;
stronger oversight of excise producers; the development of a comprehensive excise audit
guide; and a strategic focus on securing voluntary compliance.

1.8 Tobacco Industry Role in Illicit Trade
The tobacco industry in Southern Africa has been noted to have a history of non-compli-
ance. Initially, this was limited to allegations of smuggling, but more recently some of the
bigger industry players are facing serious charges of money laundering, industrial espionage,
and abusing access to political structures to influence the outcomes of investigations related
to their potential frauds. From a big-tobacco perspective, the experience in Southern Africa
offers an interesting case study. The UK’s Serious Fraud Office and the EU Anti-Corruption
Unit67 are both known to be investigating serious allegations of corruption, bribery, corporate
espionage, and money laundering against BAT(SA) and BAT Plc.68

Extensive media reporting69 suggests how BAT set in motion a concerted and formalized
effort to disrupt the activities of smaller competitors. This included securing long-term
access to metro police cameras facing competitor’s premises; paying police officers to
detain competitors’ consignments just long enough to make them go moldy; paying a
tax auditor to audit competitors on a monthly basis, and to pass production and related

67
https://select.timeslive.co.za/news/2018-02-19-exclusive-british-american-tobacco-used-state-agency-to-
spy-on-competitors/
68
Confirmed by multiple industry sources. See e.g. also https://www.pressreader.com/south-africa/sunday-
times/20140330/282299613130796/TextView
69
See e.g. the Twitter account @espionageafrica that posted excerpts, copies and details of project plans,
payments made, surveillance photos, etc.

540 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
information on to BAT; paying an attorney and chair of the smaller local industry body to
both spy on her clients and to secure the removal of the SARS executive heading investi-
gations into criminality in the industry. In order to facilitate undetectable payments to their
extensive team of agents, BAT resorted to what the European Anti-Fraud Office (OLAF) has
termed “Al Qaeda-style” money-laundering tactics.70

2. Recommendations
As set out in the preceding sections, for the most part, agencies across the region have had
little impact on illicit trade, largely due to the following:

»» Lack of focus, priority, and resources allocated to tobacco regulation and to excise goods
in general;

»» Failure to adequately secure tobacco supply chains at key points (e.g., production, ship-
ment, retail environment);

»» Weak or non-existent controls related to production (e.g., tax stamps/fiscal marks)

»» Poor institutional capability in relation to excise controls;

»» Rudimentary risk management systems for targeting suspicious consignments;

»» Insufficient non-intrusive inspection assets (scanners, dog units, etc.); and

»» Considerable human-capacity gaps across the excise compliance and enforcement
value chain.

The various countries across the region largely suffer from similar maladies, and a number
of recommendations can be applied to the region as a whole. Excise in the region, and
by implication the ability to combat illicit trade in tobacco, has been neglected in terms
of transformation and modernization. South Africa has made some strides in advancing
their excise capability, but these are mostly limited to automation (introducing automated
processes for previously manual ones), rather than modernization and transformation (a
systematic approach to improving human capacity, processes, and systems).

Experience has shown that in order for real and beneficial change to occur in combating illicit
trade, governments should embark on a holistic health, economic, and enforcement program.
Customs, revenue, and excise agencies should lead the vanguard of this approach in their
oversight role of managing tobacco production, border entry, and movement control.

70
See e.g. Rogue: The Inside Story, Johann van Loggerenberg, https://www.amazon.com/Rogue-Inside-Story-
Sarss-Crime-Busting/dp/1868427404; The President’s Keepers, Jacques Pauw, https://www.amazon.com/
Presidents-Keepers-Those-keeping-prison-ebook/dp/B076YBL1WS/ref=sr_1_1?s=books&ie=UTF8&qid=152421
4766&sr=1-1&keywords=presidents+keepers; http://www.timeslive.co.za/local/2014/03/30/bat-s-smoke-and-
mirrors-war-on-rivals1; http://www.fin24.com/Economy/Sars-smokes-out-big-tobacco-20150516; http://www.
full-disclosure.co.za/wp-content/uploads/2013/08/bat-sucked-in-alleged-industrial-espionage.pdf; http://www.
politicsweb.co.za/news-and-analysis/sars-this-is-the-inside-story--adrian-lackay. https://www.pressreader.com/
south-africa/sunday-times/20140330/282299613130796/TextView

541
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 12. Roadmap of Recommendations to Combat Illicit Trade
Short Term Medium Term Long Term

INTERNAL
EFFICIENCIES Conduct an internal
Stronger focus on Capacity Building FCTC Compliance
AND REFORM and external
data analysis
environmental
scan/diagnostic

MANAGING
SUPPLY AND Understand tobacco
DEMAND Step up efforts to
fraud achetypes & reduce demand
prevalence

ENHANCE
ENFORCEMENT
Improve risk
APPROACH AND management
Introduce secure Improve audit Non-intrusive
CAPABILITY fiscal marks and controls enforcement control
capabilities and traceability
tools

REGIONAL
COORDINATION
AND INDUSTRY Manage relationship Improve regional
with industry coordination
ENGAGEMENT

2.1 Internal Efficiencies and Reform
CONDUCT AN ENVIRONMENTAL SCAN/DIAGNOSTIC

Following an understanding of the size and nature of illicit trade, a critical requirement for
agencies to be able to address and combat illicit trade is understanding and appreciating
their internal and external operational capacity and capabilities. Agencies need to be able to
better understand their own internal strengths and weakness; review their processes, finan-
cial resources, skills, capabilities, and systems; and establish a data-centric fact base from
which to guide their efforts. Major gaps should be identified, and remediation efforts should be
implemented in alignment with the overall findings. A comprehensive environmental scan/
diagnostic will provide a basis from which to design a responsive and appropriate program
aimed at combating illicit trade.

STRONGER FOCUS ON DATA ANALYSIS

This review highlighted various gaps in terms of both the scope and quality of data, and the
limited use of data and analytics to drive policy development and operational responses.

542 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
Additional work is required to raise awareness of the importance of sources like trade statis-
tics as something that goes far beyond a purely administrative task. Done properly, it affords
valuable insights into the nature and scope of illicit trade, allowing agencies to focus their
efforts where risks are greatest. Data sharing and analysis of the disparities between reported
import and export volumes among the different countries would be good first steps.

More comparative analysis across different tax types -- e.g., comparing declarations made
from an excise, VAT, corporate income tax, and payroll tax perspective, along with stron-
ger analysis of trade disparity gaps with neighboring countries -- would also likely provide
valuable insights into potential tax losses and anomalies. This would create a basis for more
targeted anti-illicit trade enforcement and policy measures.

CAPACITY BUILDING

Across the reviewed countries there is a dearth of resources with the relevant level of skill
and experience to deal with rising illicit trade in the region. This places governments in
potentially compromising situations and undermines the requirements of the FCTC Protocol.
It is recommended that agencies embark on capacity building exercises, emphasizing a
focus on the latest innovative solutions for combating illicit trade in tobacco. This should be
coupled with training programs for staff, and could include training on basic data analytics,
entity-based risk management, illicit financial flows, audit methodologies, and related topics.
Agencies also generally lack the human resources required to effectively control tobacco
supply chains. The primary focus should be on increasing the number of auditors and field
inspectors, equipped with the right tools, to conduct more interventions. Eliminating the cur-
rent largely manual, paper-based processes could be a source of additional human capacity
without having to necessarily hire additional staff.

FCTC COMPLIANCE

None of the reviewed countries comply with the obligations that would be imposed once
the FCTC Protocol comes into force, insofar as securing the tobacco supply chain is con-
cerned. It is recommended that the necessary legislative requirements be enacted, and the
relevant operational solutions be implemented to secure compliance with Part III, Supply
Chain Control, in particular. The respective agencies would benefit from establishing an
FCTC Protocol compliance working group to create a roadmap and track progress related
to implementation of relevant Protocol provisions.

543
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 13. Technique for Estimating the Size of a Country’s Illicit Cigarette Trade

SIMPLE ESTIMATE OF # ILLICIT STICKS IN A COUNTRY
2. Calculate number of cigarettes on the market
1. Calculate total cigarette consumption
legally

Population 1,000

% of population that 20% = 200,000
smokes smokers
Legal cigarette market 400 million cigarettes
Each smoker smokes (based on declared manufactured locally +
<10 a day -> 3,000 a
# cigarettes per day -> volumes from licensed 200 million cigarettes
year
#x365 manufacturers & imported legally – 100
Total cigarettes smoked 200,000 smokers x importers – cigarettes million cigarettes
in the country = # 3,000 cigarettes = exported) exported legally =
of smokers x #of 600 million cigarettes
cigarettes smoked per smoked in the country
year per person a year

= 600 million cigarettes smoked in the country - = 500 million legal cigarettes in the country

Illicit cigarettes = 600 million smoked - 500 million in the country legally = 100 million illicit sticks =
17% of the market

Table 11. Options to Improve Results in Tackling Tobacco Supply and Demand

WHAT CAN BE DONE TO IMPROVE RESULTS – SUPPLY AND DEMAND

SACU + ZAMBIA
›› Increase tax rates to WHO recommend 75%
›› Shift from ad valorem to specific excise tax
›› Eliminate or reduce duty free allowances
Demand reduction ›› Review duty free allowances
›› Impose direct and indirect advertising bans
›› Introduce plain packaging regulations
›› Adopt and enforce bans on smoking in public places
›› Impose use of secure, serialised tax stamps with traceability back to manufacturers
›› Impose know-your-customer obligations on manufacturer
Production sources ›› Impose commensurate demand calculation obligations
›› Impose licensing obligations for purchase, sale and importation of tobacco
manufacturing equipment

Methods of transportation ›› Impose licensing and reporting obligations on transporters

›› Impose legal liabilities for sale of illicit cigarettes
Points of sale ›› Ban sale of single stick cigarettes
›› Implement direct and indirect advertising bans
›› Increase regional focus on Zimbabwe as a source country of illicit cigarettes
Regional coordination and
›› Regional illicit cigarettes enforcement campaign
collaboration
›› Increase data analysis of trade gap data

544 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
2.2 Managing Supply and Demand
UNDERSTAND THE PROBLEM - SIZE AND MARKET SHARE OF ILLICIT TRADE

Aside from industry estimates – which have been criticized in a number of studies for inflat-
ing the size of illicit trade - very little objective analysis is available in respect of the size and
share of illicit trade as a percentage of total consumption across the region. This makes it
difficult to develop coherent policy positions, or to effectively track the impact that enforce-
ment and policy initiatives are having on illicit trade over time. Regional agencies would
benefit from engaging with academic institutions or qualified non-industry aligned NGOs for
assistance both with objectively assessing the extent to which illicit cigarettes are found on
the local market, and with developing a framework against which to assess the impact of
efforts aimed at curbing illicit trade.

The University of Cape Town’s Economics of Tobacco Control Project has developed a
guide to understanding and measuring cigarette tax avoidance, which constitutes an import-
ant resource for the countries surveyed to better understand the size of illicit trade in their
respective jurisdictions.71 (At its very simplest, this could be a calculation along the lines of
figure 13.72)

STEP UP EFFORTS TO REDUCE DEMAND

A number of opportunities are readily available to all of the countries reviewed to sig-
nificantly reduce the demand for tobacco products, by adopting the various WHO
demand-reduction measures around smoke-free policies; cessation support; large health
warnings on packs; introducing plain packaging regulations; mass media campaigns on the
health risks associated with smoking; direct and indirect advertising bans; review of duty free
allowances for travelers; shifting from ad valorem to specific excise taxes; and a dramatic
increase in the tax rates on tobacco products to assure that in each year prices rise as fast
as per capita income in current prices (proven to be one of the most significant factors in
reducing smoking prevalence) (Table 11).

2.3 Enhanced Enforcement Strategies, Tools,
and Capability
IMPROVE RISK MANAGEMENT CAPABILITIES AND TOOLS

Risk management lies at the core of any compliance/enforcement program for combatting
illicit trade. It provides the capabilities to:

»» Profile risk by understanding how and where illicit trade in tobacco can manifest;

71
http://www.tobaccoecon.uct.ac.za/sites/default/files/image_tool/images/405/Publications/reports/
Understanding-and-measuring-tax-avoidance-and-evasion-A-methodological-guide1.pdf
72
http://www.tobaccoecon.uct.ac.za/sites/default/files/image_tool/images/405/Training/Emerging_
Researcher_Programme_2015/Illicit-Trade-Africa.pdf

545
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

»» Assess the pertinent data related to supply chain actors and their transactions to under-
stand both the likelihood and consequences of illicit trade risks;

»» Act by implementing countermeasures and controls; and,

»» Adapt to the ever-changing nature of illicit trade.

A concentrated focus by agencies in the region should encompass a holistic review of their
risk management capabilities, which should include a review of excise audit strike rates / hit
rates, a review of the effectiveness of excise-specific risk rules, development of illicit tobacco
profiles based on previous investigations and increased data sharing with other agencies
internally and within the region. These measures would enable governments to better
manage compliance and more appropriately target their interventions. Considering the lim-
ited capacity of most agencies, automating their risk management capability should include
direct inputs from internal and third-party data sources, to drive their inspection, audit, and
enforcement activities.

Of course, appropriate case selection is only effective insofar as it is supported by specialist
criminal investigations units and audit experts who specialize in complex excise audits, and
by political support for prosecution of offenders.

INTRODUCE SECURE FISCAL MARKS AND TRACEABILITY

Several of the agencies in the region consider the current diamond stamp as a control
mechanism, when in fact it offers little more than a false sense of security. Perhaps the
most impactful investment governments in the region can make lies in adopting secure
fiscal marks on tobacco products, which would allow administrations to monitor pro-
duction volumes; track excisable goods through the supply chain; provide the means to
authenticate that products are genuine and that all duties and taxes have been paid; and
trace goods that are found on the market back to a specific manufacturer. Without these
controls, administrations have no means of distinguishing the illicit from the licit.

There are a number of approaches to implementing a secure fiscal marking and track-and-
trace program, but there isn’t a one-size-fits-all solution – making it all the more important
for agencies to conduct an upfront assessment, in order to gauge their real needs and
capacities. To this end, the following overview of the solution components required for an
effective, FCTC compliant solution is suggested (Figure 14).

A fiscal marking and track-and-trace solution will not solve all issues related to illicit trade in
tobacco. It will, however, go a long way to authenticating legitimate trade, thereby enabling
identification and enforcement of illicit trade.

This should be augmented with stronger production controls: imposing know-your-
customer obligations on manufacturers; imposing commensurate demand calculation
obligations on manufacturers; and imposing licensing obligations for the purchase, sale,
and importation of tobacco manufacturing equipment. Part III of the Protocol provides
specific guidance in these respects.

546 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
Figure 14. Tobacco Track-And-Trace Solution Components

• Independent of industry
• One of a kind • Use and/or relies on standards
• Alphanumeric & machine readable • Elements are auditable/measurable
• Should be standardised Governance
Model

Unique Security Features
Identiﬁer
• To add security to UID
• Overt and covert required
• Independently controlled
• Measurable

Supply Chain Fraud Detection
Events & Enforcement
• Standardised for • Field Authentication
interoperability • Alerts
• Minimal impact Data • Reports and Business
• Veriﬁcation of movement Management Intelligence
and detection of deviation
• Aggregation
• Secure (encryption)
© Soverrign Border Solutions • Done or validated by a 3rd Party

IMPROVE AUDIT CONTROLS

Most of the reviewed countries do not appear to have a dedicated, sophisticated tobacco
audit capability. Most agencies consider a post-declaration inspection an audit, basically
inspecting documentation presented by the declarant, and validating it against self-gen-
erated information from the same entity. In most cases, the actual goods are no longer
present, as they have moved on in the supply chain, making physical verification impos-
sible. There is normally no independent or third-party validation available for production or
movement control, rendering this type of control ineffective in the case of even moderately
sophisticated frauds. Further, agencies should have well defined audit procedures, audit
manuals, case management reporting systems, and adequate staffing to enable robust audits
of producers and importers.

NON-INTRUSIVE ENFORCEMENT CONTROLS

As tobacco products are relatively homogenous in terms of dimensions and weight, cargo
and baggage scanners are a viable means of detecting smuggled or mis-declared illicit
tobacco products. Detector dog units are also very effective at detecting mis-declared
tobacco products at borders and other control points. Coupled with a robust risk manage-
ment and targeting solution, these assets can serve as an efficient and effective means of
targeting illicit tobacco flows. Non-intrusive inspection provides a means of matching paper
declarations to the actual goods without having to unpack containers. This is considered
a trader friendly means of inspecting goods, as it is less time-consuming and cheaper than
traditional inspections that require labor-intensive physical unpacking of containers.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

2.4 Regional Coordination and Industry Engagement
RELATIONSHIP WITH INDUSTRY

Agencies in the region should be mindful of the FCTC recommendations relating to engage-
ment with the tobacco industry – engagement is not prohibited but should be limited to
what is strictly necessary and with absolute transparency, and with none of the agencies’
functions being delegated to the industry.73

REGIONAL COORDINATION

With the porous borders, and the close reliance across SACU on shared revenues, the
member countries’ respective successes are very much tied to their neighbors’ successes,
making the development of a regional strategy, and the enhancement of regional capabil-
ities and dramatically improved collaboration, critical components of the response plan to
better curb illicit trade. Part of a concerted regional focus should include the development
of strategies aimed at clamping down on production and smuggling of illicit cigarettes from
Zimbabwe, which is consistently noted as a key source country for illicit cigarettes across
the region. The illicit trade in tobacco should be made a focus area for the Regional Risk
Management Working Group.

73
“Competent authorities should interact with the tobacco industry and those representing the interests of the
tobacco industry only to the extent strictly necessary” - WHO FCTC Article 5.3; FCTC PROTOCOL 8(13)

548 // Southern Africa Customs Union (Botswana, Lesotho, Namibia, South Africa, and eSwatini)
and Zambia: Addressing the Illicit Flow of Tobacco Products
549
BOTSWANA,
LESOTHO,
AND SOUTH
AFRICA
19
BOTSWANA, LESOTHO,
AND SOUTH AFRICA

An Analysis of Alcohol
and Cigarette Prices
in Maseru, Gaborone,
and Neighboring South
African Towns
Kirsten van der Zee and Corné van Walbeek1

Chapter Summary
The government of Lesotho plans to implement a levy on tobacco and alcohol products.
The proposed measure is similar to levies that have been implemented in Botswana in recent
years. A concern is the possibility that Lesotho’s new levy may stimulate a significant increase
in bootlegging between Lesotho and South Africa. This chapter investigates the presence
and possibility of bootlegging between South Africa and Botswana, and South Africa and
Lesotho, by describing the differences in cigarette and alcohol prices between Gaborone,
Botswana, and the nearby South African towns of Mafikeng and Zeerust, as well as between
Maseru, Lesotho, and nearby Ladybrand, South Africa.

1
Economics of Tobacco Control Project, University of Cape Town, South Africa.

551
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

An analysis of comparative cigarette price data indicated the following:

Gaborone and Mafikeng/Zeerust. Overall, average cigarette prices are significantly higher in
Gaborone than in nearby South African towns. The cheapest pack price found in Gaborone
was nearly five times the cheapest price identified in South Africa.

Maseru and Ladybrand. Cigarette prices differ between Maseru and Ladybrand, but much
less than between Gaborone and Mafikeng/Zeerust. In fact, for a number of pack sizes and
outlet types, the price of cigarettes in Maseru is lower than in Ladybrand. Botswana’s levy
on tobacco products is a plausible reason for the far more acute cigarette price differences
observed between Gaborone and neighboring South African towns.

An analysis of comparative alcohol price data indicated the following:

Gaborone and Mafikeng/Zeerust. Alcohol is significantly more expensive on the Botswana
side of the border. The cheapest beer price observed in Botswana was more than double
that in nearby South Africa. The difference could provide motivation for bootlegging alcohol
products from South Africa to Botswana. However, we did not observe very low minimum
prices in Gaborone, which might be expected if bootlegging were common.

Maseru and Ladybrand. Alcohol prices were found to be significantly higher in Ladybrand
than in Maseru for each product category, so from the outset there is no significant motiva-
tion for bootlegging to Lesotho.

An analysis of local perceptions of cross-border trade indicated the following:

Gaborone border area: Informants’ general perception is that, although there may have been
bootlegging of cigarettes and alcohol into Botswana in the past, stricter border controls have
limited this activity in recent years. Where alcohol and cigarettes travel from the Mafikeng area
into Botswana, this is believed to be on a small scale, for personal consumption.

Maseru border area: Locals generally perceive that the price of alcohol and cigarettes is
similar on either side of the border, thus there is little incentive to transport goods across the
border for resale. One retail owner did admit to smuggling products into Lesotho, specifi-
cally certain alcohol products that have recently been banned from import, and cigarettes,
as these are easy to hide.

The data and analysis show that despite levies of, respectively, 30 and 40 percent on
tobacco and alcohol products in Botswana, smuggling is limited and has not even come
close to equalizing prices between South Africa and Botswana. This indicates effective mea-
sures by customs and border control in Botswana, which limit the illegal movement of these
goods. There have also been significant proceeds from the levies, which the government
has earmarked to anti-tobacco and anti-alcohol initiatives.

If Lesotho introduces similar levies, it appears likely that the country could also obtain substan-
tial revenues. Since Lesotho scores above the African region in terms of public management,
smuggling of tobacco and alcohol from South Africa to Lesotho could probably be limited.

552 // Botswana-Lesotho: An Analysis of Alcohol and Cigarette Prices in Maseru, Gaborone, and
Neighboring South African Towns
However, is it vital that Lesotho take complementary steps to strengthen customs administra-
tion. This is more important in the case of tobacco, where prices in Maseru are already above
those in Ladybrand, than in the case of alcohol, where prices in Maseru are lower.

1. Introduction
The government of Lesotho plans to implement a levy on tobacco and alcohol products.
A concern is the possibility that this may stimulate a significant increase in bootlegging
between Lesotho and South Africa (SA). This possibility is heightened because both Lesotho
and South Africa are part of the Southern African Customs Union (SACU) region, which
implies free movement of goods and services between the two countries. Geographically,
the capital of Lesotho, Maseru, neighbors the South African border, and is only about 15 km
away from Ladybrand in South Africa.

The proposed levy is similar to the tobacco and alcohol levies that have been implemented
in Botswana in recent years. Botswana is also a SACU member, and its capital, Gaborone, is
also close to the South African border and various South African towns, for example Zeerust,
which is approximately 50 km from the border.

This chapter investigates the presence and possibility of bootlegging between South Africa
and Botswana, and South Africa and Lesotho, by describing the differences in cigarette and
alcohol prices between Gaborone and nearby South African towns, as well as between Maseru
and nearby Ladybrand. We also summarize the perceptions of locals about cross-border trade
of alcohol and cigarettes. To do this, data on the price of cigarettes and alcohol have been
collected in Maseru, Ladybrand, Gaborone, Zeerust and other small South African towns and
villages close to the Botswana border. Furthermore, retailers, street vendors, consumers, and
border post officials were interviewed about purchasing patterns in these areas and across
these borders, to provide insight into local perceptions about bootlegging.

This chapter provides an analysis of the price data and the interviews, to inform the debate
on the prospective alcohol and tobacco levies in Lesotho. The first section of the report
describes the current structure of alcohol and tobacco taxes in Botswana, Lesotho, and
South Africa. The second section gives geographical context to the study. The third section
provides a summary of the data that have been collected. The fourth section of the chapter
compares cigarette prices between Gaborone and South African towns near the Botswana
border, as well as between Maseru and Ladybrand. In the fifth section, a similar analysis is
done for the price of alcohol products in these regions. The sixth section summarizes the
findings of the interviews with locals in these areas. An annex provides a detailed summary
of the price data by brand and packaging. Given the similarities between Botswana and
Lesotho in terms of the closeness of their capital cities to the South African border, the
Botswana analysis can inform the Lesotho situation on the possible cross-border trade
effects of the proposed levies.

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2. Alcohol and Tobacco Taxes in South Africa,
Lesotho, and Botswana
South Africa, Lesotho, and Botswana are all members of the Southern African Customs
Union (SACU). Under the 1969 SACU Agreement, South Africa holds sole discretion in setting
excise taxes and import tariffs, and thus the agreement extends South Africa’s excise tax
structure and rates to Botswana and Lesotho (SACU Agreement 1969).

The government of SA follows a formula-based approach to cigarette and alcohol excise
taxation. For tobacco, each year the excise tax is increased by either the expected inflation
rate or the amount required to maintain a 52 percent total tax burden on the price of the
most popular price category (whichever gives the higher tax increase). Similarly, the excise
taxes on beer and spirits are targeted at an excise burden of 23 and 36 percent, respectively
(this excludes the VAT amount). The SACU countries apply the same specific excise taxes
that are determined by South Africa.

For the 2017/18 financial year the tobacco excise tax is R14.30 (USD 1.10) per 20 cigarettes,
while the alcohol excise taxes are R86.39 (USD 6.60)/liter (of absolute alcohol) on malt beer
and ciders, 7.82c (USD 0.01)/liter and 34.70c (USD 0.03)/kg on traditional African beer and
traditional African beer powder, and R175.19 (USD 13.40)/liter (of absolute alcohol) on spirits
(National Treasury 2017).2

In recent years the government of Botswana has introduced levies on tobacco and alcohol
products. In 2008, the “Control of Goods (Intoxicating Liquor (Levy))(Amendment) Regulations,
2008” imposed a 30 percent levy on the price payable for alcohol beverages (or, in the case
of imports, the value for customs duty purposes). This levy has subsequently increased to 40
percent. In 2014, the government passed the “Public Finance Management (Levy on Tobacco
and Tobacco Products) Fund Order,” in which the government imposed a levy of 30 percent
of the value of tobacco products manufactured in or imported into Botswana.

The money raised by the Botswanan tobacco levy is aimed at anti-tobacco initiatives through
a variety of community and population-based interventions. The funds raised by the alcohol
levy are aimed at programs for youth deterrence from alcohol and social upbringing pro-
grams. In the 2015/16 fiscal year, the alcohol levy raised 325 million Pula (34.3 million USD),
and the tobacco levy raised 39 million Pula (4.1 million USD) (Botswana Unified Revenue
Service 2016).

3. Geography
This section provides geographical context for the study. Table 1 below presents the popu-
lations of the major cities/towns in Lesotho and Botswana, including Gaborone and Maseru,

2
Exchange rate for conversion is the average exchange rate for the 22nd February 2017, the date the National
Treasury Budget Review was published.

554 // Botswana-Lesotho: An Analysis of Alcohol and Cigarette Prices in Maseru, Gaborone, and
Neighboring South African Towns
which are mentioned throughout this report. The table also gives the distance between each
city/town and the nearest border crossing into South Africa.

Table 1. Population and Distance to South African Border for Major Cities,
Botswana and Lesotho

DISTANCE TO NEAREST BORDER CONTROL
CITY/TOWN POPULATION
(KM)
Botswana 2 024 904

Gaborone 231 592 26

Francistown 98 961 271

Molepolole 66 466 80

Maun 60 263 695

Mogoditshane 58 079 28

Lesotho 1 894 194

Maseru 178 345 11

Teyateyaneng 61 578 27

Maputsoe 48 243 3

Mafeteng 30 602 17

Butha-Buthe 30 115 44

Source: Population and Housing Census of Botswana 2011, and 2011 Lesotho Demographic Survey. The
distances are estimated with Google Maps, from the center of the city/town to the border crossing.

Roughly 10 percent of both countries’ populations are located in the capital, and the remain-
der of the population is spread across significantly smaller towns; the second largest towns
contain only 5 and 3 percent of the population in Botswana and Lesotho, respectively. The
capitals, Gaborone and Maseru, are also very close to the South African borders. More than
half of the population of both countries live in small villages or deep rural areas.

4. Data
To estimate the difference in cigarette and alcohol prices across South Africa and Botswana,
and South Africa and Maseru, as well as the local perceptions about cross-border shopping
in these areas, primary data collection was done.

Fieldworkers were tasked with collecting cigarette and alcohol prices in Maseru, Ladybrand,
Gaborone, and the Mafikeng/Zeerust area.3 Fieldworkers also conducted informal interviews

3
Numerous small South African towns near Gaborone were visited, including Mafikeng, Zeerust, Disaneng,
Lehurutshe and Ramatlabama. We refer to this general area as “Mafikeng/Zeerust,” as these are the largest
towns and the majority of data was collected there.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

with various locals, including shop owners, managers, employees, customers and border
officials. The fieldworkers who collected this data are part of an ongoing project of the
Economics of Tobacco Control Project, called the African Cigarette Prices (ACP) project.
The ACP project provided an appropriate platform for the collection of the required ciga-
rette, alcohol, and interview data, as fieldworkers were already trained to collect cigarette
prices in their hometowns in Africa, and were already in the field. Thus, the collection of the
data described below was a dedicated process of the ACP project. In total, seven fieldwork-
ers collected data in the three countries.

The University of Cape Town gave ethics clearance for the interviews to be conducted, while
ethics clearance was not required for the price collection element. All prices in the dataset
can be verified with a photograph, and both the photographs and raw dataset are available.

For the collection of price data, three types of outlets were identified. A retail outlet refers
to a formal shop, usually a grocery store, petrol station, liquor store, etc. Retail outlets are
located in a built structure, have electricity and offer a wide range of products. Secondly, a
spaza shop refers to outlets that are less formal and smaller than retail outlets. Spaza shops
are generally located in a permanent structure, and this may be made of brick, wood, clay, a
container, etc. Lastly, street vendors are informal stalls. These are generally operated on the
side of the road, often from a table, basket or tray, with no permanent structure.

For analysis purposes, alcohol products are grouped into five categories, namely beer, cider,
spirits, spirit coolers, and other. Spirit coolers are ready-to-drink spirits-based products that
are mixed by the manufacturer, for example pre-mixed brandy and cola. “Other” includes any
collected prices that did not fit into the other broad categories. This includes wine products
(wine, port, sherry, brut, and vermouth) and bitters. It is important to note that the spirits cat-
egory includes a large variety of products, including various aperitifs, liqueurs, gin, whisky, and
these can range from affordable to luxury products. For this reason, we foresee a large range
of prices in this alcohol category.

The alcohol prices can also be broken down into further categories, for example by brand,
can or bottle, pack size (for example, single, 6 pack, 12 pack, etc.), milliliters per item, etc.
However, for simplicity in the analysis, we standardize each price to a per-liter price of
the beverage. Annex 1 presents more detailed summaries of prices by product brand and
packaging. For comparability, all prices were converted into United States dollars using
the average of the exchange rate over the period in which the data was collected (4th of
December 2017 to 8th of January 2018).

A summary of the price data is presented in Table 2.

Of the four regions, the majority of cigarette prices were collected in Maseru, due to the fact
that the majority of the fieldworkers were located in this area. Overall, more cigarette prices
were collected than alcohol prices, with the majority of cigarette prices collected from street
vendors, followed by retail outlets.

556 // Botswana-Lesotho: An Analysis of Alcohol and Cigarette Prices in Maseru, Gaborone, and
Neighboring South African Towns
Table 2. Data Summary: Number of Observations

MAFIKENG/
GABORONE MASERU LADYBRAND TOTAL
ZEERUST
Cigarette Prices 531 381 1932 341 3185

Outlet Type

Retail Outlet 396 347 53 234 1030

Spaza Shop 19 24 88 48 179

Street Vendor 116 10 1791 59 1976

Alcohol Prices 1153 368 255 141 1917

Outlet Type

Retail Outlet 1153 320 241 141 1855

Spaza Shop 0 48 14 0 62

Street Vendor 0 0 0 0 0

Product Type

Beer 122 145 100 45 412

Cider 32 0 17 19 68

Spirit 52 2 67 51 172

Spirit Cooler 923 213 63 26 1225

Other 24 8 8 0 40

Interviews 22 20 30 8 80

Notes: “Other” includes wine products and bitters.

Alcohol prices were primarily collected from retail outlets, and no prices were collected
from street vendors, as fieldworkers were instructed to focus on formal retail establish-
ments. The majority of alcohol prices collected were of spirits, and this is driven by the large
number of spirit prices collected in Gaborone. After spirits, beer and cider prices were the
most common.

Data Limitations
The data has a number of limitations to keep in mind throughout the analysis.

The first is the small sample size and the non-representative nature of the data. As has
been mentioned, the data collection formed part of the African Cigarette Prices project.
Fieldworkers of the ACP project were not given strict instructions on what prices to collect,
thus the distribution of the collected prices is not representative of the actual distribution of
prices on the market; it is rather what the fieldworkers were able to collect. Thus, one should
not place any importance on the number of observations collected for each outlet type,

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

product packaging type, or alcohol category. For example, while spirits is the largest alcohol
category in the dataset, we should note that beer is the alcoholic beverage of choice for
most people in these areas. Although the data are not representative, we do find con-
sistent price differences for both cigarettes and alcohol, as well as across outlet type,
packaging type, and alcohol category.

We also only collect data around the Gaborone and Maseru borders, thus we cannot extend
the findings to the rest of these countries and other parts of the borders. However, as we saw
in Section 2, these areas are both centered around the national capital cities and represent
major economic hubs in these countries.

The data collection process involved fieldworkers asking vendors the price of cigarettes and
alcohol, rather than fieldworkers actually buying these products. Vendors may be cautious of
revealing the price of very cheap, illegal cigarettes. It is therefore possible that there is mea-
surement error in our estimates of the cheapest cigarettes. We do, however, find reasonably
consistent estimates of price at the bottom end of the distribution, across the regions,
brands, and outlet types.

Regarding the interview data, it is worth noting that, for the manager and owner inter-
views, there may be an under-reporting of cigarettes sourced illegally, as this admission
may be perceived as risky for the business. However, fieldworkers were trained to treat the
topic with sensitivity and reinforce the objective nature of the interview. The interviews were
treated as unintimidating informal discussions rather than formal surveys.

Wine was excluded from the analysis because of the significant brand variation among wine
products, and because of the low level of consumption of wine relative to the other alcohol
types, specifically beer, which dominate these markets.

An issue that was raised by the reviewers of the first draft of this report highlighted that we
need to consider the administrative capacity of these governments to implement levies. If a
country does not have the administrative capacity to collect higher taxes and/or a special
levy, it would be easily circumvented, and the revenue would be lost. According to the
Ibrahim Index of African Governance (IIAG) out of 100, Africa and Sub-Saharan Africa are
rated at 50.8, Lesotho at 58.2, Botswana at 72.7 and South Africa at 70.1 (IIAG, 2017). Thus,
all three of the countries in this study are ranked substantially above the region; however,
Lesotho ranks lowest.

5. Analysis of Cigarette Price Data
The following section reports the findings of the cigarette prices that were collected. We
first evaluate the difference in prices between Gaborone and nearby South African towns. A
levy on tobacco products of 30 percent is already in place in Botswana; thus, we review the
possible impact of this levy on the difference in prices between the two countries. We then

558 // Botswana-Lesotho: An Analysis of Alcohol and Cigarette Prices in Maseru, Gaborone, and
Neighboring South African Towns
focus on the difference in cigarette prices between Maseru and Ladybrand, where a levy on
cigarettes has been proposed.

Cigarette Prices in Gaborone, Botswana, and Mafikeng/
Zeerust, South Africa
The following table presents a summary of cigarette prices in both Gaborone and Mafikeng/
Zeerust and surrounding South African towns.

Table 3. Cigarette Price Summary Statistics, Gaborone and Mafikeng/Zeerust
(USD per pack)

MEAN MEDIAN ST. DEV. MIN MAX N

Gaborone

Retail Outlet 4,20 4,15 0,78 2,08 6,61 396

Spaza Shop 4,16 4,32 0,46 3,21 4,97 19

Street Vendor 4,69 4,97 0,63 3,15 5,96 116

Gaborone Total 4,31 4,15 0,77 2,08 6,61 531

Mafikeng/Zeerust

Retail Outlet 2,67 2,72 0,63 0,43 4,97 347

Spaza Shop 2,19 1,55 1,41 0,62 5,44 24

Street Vendor 3,50 4,27 1,38 1,55 4,66 10

Mafikeng/Zeerust Total 2,66 2,72 0,75 0,43 5,44 381

Notes: All prices displayed are in USD, per 20 cigarettes.
In all cases the difference in means between Gaborone and Mafikeng/Zeerust are statistically significant at the
1% level, with the exception of street vendors, where the difference in means is significant at the 5% level.

Overall, average cigarette prices are significantly higher in Gaborone than in nearby South
African towns. We find relatively cheap cigarettes in South Africa, where the cheapest pack in
Gaborone is nearly five times that in South Africa. In both regions, cigarette prices are high-
est at street vendors. Vendors generally sell very few products and sell cigarettes as loose
singles, while formal retail outlets sell cigarettes in packs, which may drive this difference in
price by outlet type.

To investigate this further, Table 4 summarizes the difference in cigarette prices by packag-
ing type. In both Gaborone and South Africa, the majority of observed cigarettes are sold
in packs of 20. When estimating the average price by packaging type, we observe signifi-
cant differences in prices between the two regions. For packs of 20, the average price in
Gaborone is 1.6 times that on the South African side of the border. The average price for a
single in Gaborone is almost twice that of Mafikeng/Zeerust.

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Table 4. Cigarette Prices by Packaging, Gaborone and Mafikeng/Zeerust (USD, per
pack equivalent)

MEAN MEDIAN ST. DEV. MIN MAX N

Gaborone

1 4,97 4,97 0,33 3,98 5,96 93

10 4,44 4,03 0,69 3,97 6,38 45

20 4,18 4,15 0,78 2,08 6,61 358

Gaborone Total 4,35 4,17 0,77 2,08 6,61 497

Mafikeng/Zeerust

1 2,94 2,33 1,52 0,78 5,44 23

10 3,09 3,11 0,71 1,94 4,97 31

20 2,58 2,61 0,63 0,62 3,88 310

Mafikeng/Zeerust Total 2,65 2,72 0,74 0,62 5,44 366

Notes: All prices displayed are in USD, per 20 cigarettes.
In all cases the difference in means between Gaborone and Mafikeng/Zeerust are statistically significant at the
1% level.

Overall, we observe that the price of cigarettes is significantly higher on the Botswana side
of the border than on the South African side, and this difference exceeds the 30 percent levy
on cigarettes in Botswana. This finding is consistent overall and across outlet and packag-
ing types. Table 9 of the Annex shows the price differences for identical products that were
found on both sides of the border. The table shows that every product was more expensive
in Botswana than in South Africa. The largest difference in price was 68.4 percent (Camel 20
pack), the median difference was 37.7 percent (Pacific 20 pack) and the smallest difference
was 7.8 percent (Benson & Hedges 20 pack).

While overall the variance in prices across the regions is similar, for single sticks there is
much more variation in South Africa than in Botswana.4 A test of the equality of variances
rejects the hypothesis of equal variances at the 1 percent level. The minimum price for a
single stick in South Africa is also significantly lower than in Gaborone where, as mentioned,
the cheapest loose cigarette observed is almost five times higher than in Mafikeng/Zeerust.
This strongly suggests that there is more illicit trade in single cigarettes in South Africa, where
prices vary more and very cheap cigarettes are found, than in Botswana, where the price
of singles is higher and more uniform. Because prices are lower on the South African side
of the border, it is highly likely that, to the extent that bootlegging exists, cigarettes move

4
The singles present in Gaborone and Mafikeng/Zeerust are the same brands, particularly Craven A, Dunhill
and Peter Stuyvesant, and the brands that are only present in one area are not the cause of the extreme price
variation. Thus, there exists a large variance in price, despite similar brands/quality.

560 // Botswana-Lesotho: An Analysis of Alcohol and Cigarette Prices in Maseru, Gaborone, and
Neighboring South African Towns
illegally from South Africa to Botswana. The absence of very cheap cigarettes in Gaborone
suggests that if South African cigarettes are sold illegally in Gaborone, they are either sold
at the local going rate, or that the data collection has not captured these illegal cigarettes.
Bootlegged cigarettes are also more likely to be sold at informal outlets such as spaza shops
and street vendors; however, we observe that the lowest prices of cigarettes sold in these
outlets are still significantly higher than the average prices of cigarettes sold in similar outlets
in South Africa. Thus, the evidence from the price data analysis suggests that, if smuggling
exists, there is not enough smuggling to equalize prices between the Mafikeng/Zeerust area
and Gaborone.

Lastly, it is also possible that citizens of Botswana travel to South Africa to purchase the
relatively cheap cigarettes for consumption purposes, and consume these on either side of
the border. The study's Botswana price data cannot pick up this activity, as these products
are not available for sale in Botswana, however, as we will see in Section 7, there is evidence
of this in the interviews.

Cigarette Prices in Maseru, Lesotho, and Ladybrand,
South Africa
In the previous section, we noted that cigarette prices are significantly higher in Botswana
than in South African towns near the border. It stands to reason that a main driver of this
difference in prices is the Botswana levy on tobacco. Considering that the government of
Lesotho intends to implement a similar levy, we now evaluate the current price difference
between Maseru and Ladybrand.

Table 5 below presents a summary of the cigarette prices collected in Maseru, Lesotho, and
Ladybrand, South Africa. For retail outlets and spaza shops respectively, the average price in
Maseru is 6 and 5 percent higher than in Ladybrand, and these differences are not statisti-
cally significant. Cigarettes sold at street vendors in are substantially cheaper (13 percent) in
Maseru than in Ladybrand.

In Table 6 we summarize cigarette prices by packaging type. When we compare the price of
packs of 20, we observe that packs in Ladybrand are cheaper than those in Maseru. Single
sticks, which are usually sold at street vendors, are more expensive in South Africa than Lesotho.

Table 10 in the Annex shows that, of the 20 cigarette products that appeared both in Maseru
and Ladybrand, 15 products were most expensive in Lesotho, while five were more expen-
sive in South Africa. The median comparable product (Camel 20 pack) was 8.1 percent more
expensive in Maseru.

Overall, we observe that there is a difference in the price of cigarettes between Maseru and
Ladybrand, but it is much less pronounced than the difference between Gaborone and
nearby South African towns. In fact, for a number of pack sizes and outlet types, the price of
cigarettes in Maseru is lower than in Ladybrand. The difference in cigarette prices is far more

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table 5. Cigarette Price Summary Statistics, Maseru and Ladybrand (USD per pack)

MEAN MEDIAN ST. DEV. MIN MAX N

Maseru

Retail Outlet 2,79 2,88 0,63 0,78 3,88 53

Spaza Shop 3,04 3,11 1,17 0,78 4,66 88

Street Vendor 3,12 3,88 1,35 1,55 6,21 1791

Maseru Total 3,11 3,88 1,32 0,78 6,21 1932

Ladybrand

Retail Outlet 2,62 2,68 0,71 0,62 4,97 234

Spaza Shop 2,91 3,11 0,74 1,24 3,88 48

Street Vendor 3,61 4,66 1,30 1,55 4,66 59

Ladybrand Total 2,83 2,84 0,92 0,62 4,97 341

Notes: All prices displayed are in USD, per 20 cigarettes.
The difference in means for the retail outlet and spaza shop groups are not statistically significant, while the
difference in means overall and for street vendors are statistically significant at the 1% level.

Table 6. Cigarette Prices by Packaging, Maseru and Ladybrand (USD, per
pack equivalent)

MEAN MEDIAN ST. DEV. MIN MAX N

Maseru

1 3,12 3,88 1,34 1,55 6,21 1874

10 3,26 3,11 0,22 3,11 3,57 5

20 2,62 2,76 0,61 0,78 3,11 52

Maseru Total 3,11 3,88 1,32 0,78 6,21 1931

Ladybrand

1 3,26 3,11 1,03 1,24 4,97 161

10 2,59 2,87 0,63 1,40 3,18 16

20 2,43 2,49 0,59 0,62 4,27 159

Ladybrand Total 2,84 2,84 0,92 0,62 4,97 336

Notes: All prices displayed are in USD, per 20 cigarettes.
The overall and 10 pack difference in mean cigarette price in Maseru and Ladybrand is statistically significant at
the 1% level, while the difference in means for 20 packs is significant at the 10% level. The difference in means
for single sticks is not statistically significant.

562 // Botswana-Lesotho: An Analysis of Alcohol and Cigarette Prices in Maseru, Gaborone, and
Neighboring South African Towns
acute in Botswana, and a highly plausible reason for this is the levy on tobacco products that
serves to increase the price of cigarettes.

6. Analysis of Alcohol Price Data
Besides placing a levy on cigarettes, the government of Lesotho is also planning to intro-
duce a levy on alcohol products, similar to the alcohol levy in Botswana. For this reason, this
section will report on the difference in the price of alcohol products between Gaborone and
nearby South African towns, as well as between Maseru and Ladybrand.

Alcohol Prices in Gaborone, Botswana, and Mafikeng/
Zeerust, South Africa
The table below presents the average alcohol prices in both Gaborone and the Mafikeng/
Zeerust area. We categorize the prices broadly according to the type of alcohol product.
The prices of beer are italicized because beer is the beverage of choice among drinkers in
these areas.

Table 7. Alcohol Price Summary Statistics, Gaborone and Mafikeng/Zeerust

MEAN MEDIAN ST. DEV. MIN MAX N

Gaborone

Beer 3,07 2,94 0,71 2,10 7,12 122

Cider 3,69 3,70 0,45 2,85 4,80 52

Spirits 41,66 27,72 63,77 5,55 1423,51 923

Spirit Cooler 5,07 5,49 1,81 1,88 8,28 32

Mafikeng/Zeerust

Beer 2,12 2,12 0,50 1,04 4,01 145

Cider 1,92 1,92 0,13 1,83 2,02 2

Spirits 19,10 16,31 18,74 5,18 230,56 213

Notes: All prices displayed are in USD, per litre of beverage.
“Other” is excluded from the analysis.
In all cases the difference in mean alcohol price in Gaborone and Mafikeng/Zeerust is statistically significant at
the 1% level.

From Table 7 we see that, for each product category, alcohol is significantly more expen-
sive on the Botswana side of the border. Beer products are approximately 45 percent more
expensive in Gaborone, while the cheapest beer price observed in Botswana is more than
double the price of the cheapest beer price on the South African side of the border. Ciders,

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

categorized similarly to beer, also have a significant price difference, where the average price
in Gaborone is more than 90 percent greater than in Mafikeng/Zeerust, although there were
only two prices collected there. Spirits also have a very large difference in price, however
this category includes a wide range of sometimes incomparable products, including cheap
and luxury products, which is a cause of this variation. Table 11 of Annex One describes
direct comparisons of products on either side of the border. From the table, we note that for
all—except one (Mokador 375 ml, Liqueur)—of the 119 products that were observed in both
Gaborone and South Africa, the average price in Botswana was higher than in South Africa.
The largest difference in directly comparable products was for a 750-ml bottle of Chivas
Regal whisky, which was 229 percent more expensive in Gaborone. The median percentage
difference in price between directly comparable products was 42.5 percent.

It stands to reason that the observed difference in prices is largely driven by Botswana’s
alcohol levy. As we observed for cigarette prices, the difference in alcohol prices across the
Botswana border could provide motivation for bootlegging from South Africa to Botswana.
However, we do not observe very low minimum prices in Gaborone which we might expect
if bootlegging were common, and the minimum price in Gaborone is more than 80 percent
higher than that in South Africa.

Alcohol Prices in Maseru, Lesotho, and Ladybrand,
South Africa
Considering that the government of Lesotho intends to implement a similar alcohol levy
to that in Botswana, we now investigate the current difference in alcohol prices between
Maseru and Ladybrand.

The table below presents the average prices by alcohol product category for the two areas.

From Table 8 we see that, for the various categories of alcohol, mean prices are slightly
higher in South Africa. The average beer price collected in Ladybrand is 20 percent higher
than in Maseru, while the average cider price is 27 percent higher in Ladybrand than in
Maseru. Spirits are significantly more expensive in South Africa, although it is again important
to note that this category includes a large range of products. From Table 12 of the Annex
(showing directly comparable products), eight of the 28 comparable products are more
expensive in Lesotho. Only three out of twelve beer products are more expensive in Lesotho
(Flying Fish 660 ml single bottle, Castle 340 bottle six pack, and Amstel 330 bottle 6 pack),
and the largest difference in beer prices is a single 440 ml Heineken can, which was 18.7
percent more expensive in South Africa. The median percentage difference in price is 7 per-
cent (more expensive in Ladybrand).

564 // Botswana-Lesotho: An Analysis of Alcohol and Cigarette Prices in Maseru, Gaborone, and
Neighboring South African Towns
Table 8. Alcohol Price Summary Statistics, Maseru and Ladybrand

MEAN MEDIAN ST. DEV. MIN MAX N

Maseru

Beer 2,00 2,05 0,39 1,26 2,97 100

Cider 2,74 2,82 0,49 1,60 3,95 67

Spirits 15,42 15,54 7,96 4,97 41,43 63

Spirit Cooler 3,50 3,39 0,52 3,03 5,18 17

Ladybrand

Beer 2,40 2,47 0,58 1,04 4,71 45

Cider 3,49 3,53 0,73 1,88 5,27 51

Spirits 21,19 22,78 5,90 11,39 31,07 26

Spirit Cooler 4,59 4,45 0,67 3,53 5,88 19

Notes: All prices displayed are in USD, per litre of beverage.
“Other” is excluded from the analysis.
For each alcohol category, the difference in mean price in Maseru and Ladybrand is statistically significant at
the 1% level.

Overall, following the alcohol levy in Botswana, alcohol prices are significantly higher in
Gaborone than in nearby South African towns. We also did not observe any very cheap
alcohol products in Gaborone, which we might have expected as an outcome of bootleg-
ging. For Lesotho, alcohol prices are significantly higher in Ladybrand than in Maseru for
each product category, so from the outset there is no significant motivation for bootlegging
to Lesotho. Thus, an alcohol levy of approximately 20 percent will equalize the difference
in prices between Maseru and nearby South Africa; this will simply “straighten out” the price
differences that already exist.

7. Locals’ Perceptions about Cross-Border Trade of
Alcohol and Cigarettes
Besides collecting price data for the four regions, we conducted informal interviews with locals
about their perceptions regarding cross-border trade between South Africa and Botswana,
as well as between South Africa and Lesotho. These locals included shop managers/owners,
street vendors, cigarette/alcohol consumers, and border post officials. Among other things,
fieldworkers asked questions regarding the participants’ opinions about the difference in price
across the border; the presence of cross-border shopping; and the main products involved in
cross-border shopping. This section summarizes the findings of these interviews.

565
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Perceptions about Cross-Border Trade near the
Gaborone Border
In total, the fieldworkers in Gaborone interviewed 22 participants, while fieldworkers on the
South African side of the border interviewed 20 people, including street vendors, shopkeep-
ers, consumers, and a border-post official.

From the interviews in Gaborone, respondents agree that prices of both cigarettes and
alcohol in Botswana are higher than those in South Africa, and believe that the levies on
these products are a cause of this difference. A general perception is that border controls are
strong and that border officials will confiscate goods that are being brought into the country
illegally. This, combined with the cost of transport, seems to be a deterrent for small scale
cross-border shopping from South Africa. The shop keepers and street vendors interviewed
report sourcing their products from wholesalers in Botswana, such as Trans Africa, Jumbo,
and Trade World. One respondent stated that it has become harder to move goods across
the border in recent years. He recalls previously smuggling goods secretly, hiding alcohol “in
certain compartments of their cars” in the “early years.” It was also noted that South Africa
has a larger variety of alcohol products than Botswana, and a few consumers indicated that
they would cross the border to buy alcohol products that are not available in Botswana,
although on a small scale, and for personal use.

People interviewed on the South African side of the border agree that prices of cigarettes
and alcohol are higher in Botswana than in South Africa. Most respondents commented
that people travel from Botswana to South Africa to “party” in the evenings. This is appar-
ently because Botswana has strict laws around the operating hours of bars, and relatively
early closing hours. For this reason, consumers travel to South Africa to consume alcohol
once the bars in Botswana are closed, or choose to visit South Africa with the purpose of
drinking (one manager indicated that he hosts bachelor parties, weddings, etc. for people
from Botswana). Although some vendors indicated that they were not aware of any of their
products being purchased to be taken to Botswana, a number of shop owners and manag-
ers agreed that Botswana residents do purchase alcohol and cigarettes to take back home,
but that this happens on a very small scale. All shopkeepers who report knowledge of their
products being taken to Botswana indicate that consumers buy just a few packs or a carton
or two of cigarettes, and small quantities of alcohol, and that this is for personal use. One
shopkeeper reported that some customers have asked for small alcohol bottles so that they
are compliant with the customs limit on alcohol (between one and two liters per traveler).
Another shopkeeper recalls Botswanan customers purchasing alcohol products that are not
available in Botswana, for example Hennessy VSOP Cognac.

One respondent indicated that cigarettes come into South Africa from Botswana. The bar
owner recalled large trucks travelling from Botswana to South Africa carrying cigarettes
from Zimbabwe and Nigeria. He believes that these trucks carry large quantities of cigarettes
hidden in petrol tanks. This respondent also stated that the border is porous, and smugglers

566 // Botswana-Lesotho: An Analysis of Alcohol and Cigarette Prices in Maseru, Gaborone, and
Neighboring South African Towns
can enter the country via small dirt roads, rather than coming through the border crossing.
He also recalled police visiting his bar and telling him that there were investigations into
smuggling into South Africa.

From the Gaborone and Mafikeng/Zeerust interviews, we find that the general perception
is that, although there may have been bootlegging of cigarettes and alcohol into Botswana
in the past, strict border controls have limited this activity in recent years. Where alcohol
and cigarettes travel from the Mafikeng area into Botswana, this is believed to be on a small
scale, no more than a few packs of cigarettes and small quantities of alcohol, and this is
generally for personal consumption. There is an overall perception that people travel to
South Africa from Botswana to continue their nights’ entertainment after the bars close in
Botswana and to enjoy the cheaper alcohol.

Perceptions about Cross-Border Trade near the
Maseru Border
In total, fieldworkers in Maseru interviewed 30 participants, while those in Ladybrand inter-
viewed 8 people, including street vendors, shopkeepers, consumers, and a border-post official.

Among the respondents in Ladybrand there is a general perception that the price of alco-
hol and cigarettes is similar in Maseru and Ladybrand, and thus they are not involved in
cross-border trade because transport costs would make it relatively more expensive. There
was some indication that individuals might travel to Lesotho to buy a locally produced beer
called Maluti. This beer is rarely available on the South African side of the border and is a
favorite among respondents. It was also noted by a number of Ladybrand respondents that
locals rarely have passports (three of the eight respondents themselves did not possess a
passport), and for this reason many residents of Ladybrand have never crossed the border,
despite its close proximity.

Most respondents in Maseru held the belief that the price of alcohol and cigarettes is similar
across the border, and that transport costs and taxes at the border make it impractical to buy
goods from South Africa for resale, especially on a small scale. One shopkeeper indicated
that, besides taxes and transport costs, there are many and long queues at the border, so
she avoids buying products in South Africa. Most formal retail shop managers and owners
indicated that they purchase bulk alcohol products from South Africa, specifically wine and
beverages that are not available in Lesotho. However, others indicated that they did not have
the required licenses to buy alcohol from South Africa, but would do so if they did. There
is also a general opinion that there is a larger variety of alcoholic beverages in South Africa,
and a few consumers reported travelling to South Africa to buy spirits that are not available
locally, although only for personal consumption. In terms of beer, a number of consumers
and shopkeepers indicated that there is a general preference for the local beer, Maluti, and
so they would not bother buying beer from South Africa.

567
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Most retail outlet managers reported sourcing cigarettes from local wholesalers. One vendor
indicated that he would not buy cigarettes from across the border because it is difficult to
distinguish legal from illegal cigarettes, and he did not want to be caught with illegal ciga-
rettes at the border. One shop owner admitted to illegally bringing goods across the border.
In particular, she smuggles in beer products that are no longer allowed to cross the border
(one-liter Castle and Black Label bottles), as well as cigarettes, which she claims can easily
be hidden in a loaded truck.

Overall, there is a general perception from locals that the price of alcohol and cigarettes is
similar on either side of the border, thus there is little incentive to transport goods across
the border for resale. Some products that were reported to move across the border were
the varieties of alcohol that are not available in Lesotho; alternatively, alcohol is imported
from South Africa in bulk. However, one retail owner did admit to smuggling products into
Lesotho, specifically alcohol products that have recently been banned from crossing the
border, and cigarettes, as these are easy to hide.

8. Conclusion
This study has investigated the possibility of bootlegging between South Africa and
Botswana and Lesotho. To do this, we estimated the difference in cigarette and alcohol
prices between Gaborone and nearby South African towns, as well as between Maseru and
nearby Ladybrand. We also summarized the perceptions of locals about cross-border trade
of alcohol and cigarettes.

The study's data and analysis show that despite levies of, respectively, 30 and 40 percent on
tobacco and alcohol products in Botswana, smuggling is limited and has not come even
close to equalizing prices between South Africa and Botswana. The interviews with locals
in the area also produce little evidence of bootlegging. This indicates effective measures by
customs and border control in Botswana, which limit the illegal movement of these goods.
There have also been significant proceeds from the levies, which the government has ear-
marked to anti-tobacco and anti-alcohol initiatives.

The analysis indicated that, although there is a difference in prices between South Africa and
Lesotho, it is much smaller than the price difference between Botswana and South Africa.
Cigarettes are slightly more expensive in Maseru than in Ladybrand, while the average price
of alcohol is higher in Ladybrand. Interviews with locals indicate that because prices are sim-
ilar in the two countries, there is little incentive to engage in cross-border trade, specifically
because of the costs of transport and taxes.

Since Lesotho scores above the African region in terms of public management, it is likely
that smuggling—other than small amounts for personal consumption—from South Africa to
Lesotho would be limited and that Lesotho could achieve substantial revenues from such
levies. However, is it vital that Lesotho, like other countries planning significant increases in

568 // Botswana-Lesotho: An Analysis of Alcohol and Cigarette Prices in Maseru, Gaborone, and
Neighboring South African Towns
excises for high-value, low-volume products like tobacco and alcohol, take complementary
steps to strengthen customs administration. This is more important in the case of tobacco,
where prices in Maseru are already above those in Ladybrand, than in the case of alcohol,
where prices in Maseru are lower.

In addition, while this study has focused on the impact of smuggling on tax revenues, the
main purpose of raising tobacco and alcohol taxes is to achieve the health benefits that
follow from reducing consumption of these products. Increased revenues are an important
positive externality. But uncertainty about their magnitude is not a reason to prevent the
large increases in taxes needed to get smokers and those who abuse alcohol to stop or
sharply reduce their consumption.

References
Botswana Unified Revenue Service (BURS). 2016. Celebrating Progress, Gearing for Growth. Annual
Report. http://www.burs.org.bw/index.php/legal-year-reports?download=447:2016-burs-annual-report.

Google Maps. 2018. https://www.google.co.za/maps/@-25.2269628,26.1036569,8.96z.

Google Maps. 2018. https://www.google.co.za/maps/@-29.2689704,27.461395,11.5z.

IIAG. 2017. Ibrahim Index of African Governance. Overall Governance Index.

Lesotho Demographic Survey 2011. Lesotho Bureau of Statistics. http://www.bos.gov.ls/nada/index.php/
catalog/6/study-description

National Treasury. 2017. Budget Review 2017. http://www.treasury.gov.za/documents/national%20
budget/2017/review/FullBR.pdf

Population and Housing Census 2011. Statistics Botswana.

SACU. 1969. Southern African Customs Union (SACU) Agreement, 1969.

569
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Annexes

Annex 1

Table 9. Detailed Cigarette Price Summary, Gaborone and Mafikeng/Zeerust

MAFIKENG/
PRODUCT GABORONE BOTSWANA
GABORONE ZEERUST MAFIKENG/
(BRAND; PACK MEAN PREMIUM
N MEAN ZEERUST N
SIZE) USD/PACK (%)
USD/PACK
Camel; 20 4,61 23 2,74 46 68,4

Kent; 20 4,63 29 2,96 11 56,5

Winston; 20 3,39 7 2,20 20 54,0
Peter Stuyvesant;
4,19 77 2,77 35 51,4
20

LD; 20 2,68 9 1,84 6 45,7

Marlboro; 20 4,26 33 2,96 17 44,0

Vogue; 20 4,66 11 3,25 3 43,4

Rothmans; 20 4,24 9 3,00 7 41,6
Peter Stuyvesant;
4,46 29 3,15 12 41,6
10
Craven A; 10 4,39 12 3,11 4 41,5

Kent; 200 3,92 2 2,84 1 37,9

Pacific; 20 2,67 8 1,94 2 37,7

Forum; 20 2,08 2 1,55 4 34,1

Dunhill; 20 4,52 98 3,41 34 32,5

Dunhill; 10 4,39 4 3,31 6 32,5

Craven A; 20 4,04 21 3,06 12 32,0

Chesterfield; 20 3,53 23 2,70 16 30,6

Glamour; 20 3,26 2 2,60 3 25,6

Peter Stuyvesant; 1 4,98 68 4,14 3 20,1

Dunhill; 1 5,47 3 4,66 4 17,3
Peter Stuyvesant;
3,58 18 3,10 11 15,6
30

570 // Botswana-Lesotho: An Analysis of Alcohol and Cigarette Prices in Maseru, Gaborone, and
Neighboring South African Towns
2020
Kent;
Kent;
Kent;20 4,63
4,63
4,63 2929
29 2,96
2,96
2,96 1111
11 56,5
56,5
56,5
2020
Winston;
Winston;
Winston; 20 3,39
3,39
3,39 77 7 2,20
2,20
2,20 2020
20 54,0
54,0
54,0
Peter
Peter
Peter Stuyvesant;
Stuyvesant; 20
Stuyvesant; 2020 4,19
4,19
4,19 7777
77 2,77
2,77
2,77 3535
35 51,4
51,4
51,4
LD;
LD; 2020
LD;
20 2,68
2,68
2,68 99 9 1,84
1,84
1,84 66 6 45,7
45,7
45,7
Marlboro;
Marlboro;
Marlboro; 202020 4,26
4,26
4,26 3333
33 2,96
2,96
2,96 1717
17 44,0
44,0
44,0
Vogue;
Vogue;
Vogue; 202020 4,66
4,66
4,66 1111
11 3,25
3,25
3,25 33 3 43,4
43,4
43,4
Rothmans;
Rothmans;
Rothmans; 2020
20 4,24
4,24
4,24 99 9 3,00
3,00
3,00 77 7 41,6
41,6
41,6
Peter
Peter
Peter 1010
Stuyvesant;
Stuyvesant;
Stuyvesant;10 4,46
4,46
4,46 2929
29 3,15
3,15
3,15 1212
12 41,6
41,6
41,6
Craven
Craven
Craven A; 10
A; 1010
A; 4,39
4,39
4,39 1212
12 3,11
3,11
3,11 44 4 41,5
41,5
41,5
Kent;
Kent;
Kent;200 200
200 3,92
3,92
3,92 22 2 2,84
2,84
2,84 11 1 37,9
37,9
37,9
Pacific;
Pacific; 2020
Pacific; 20 2,67
2,67
2,67 88 8 1,94
1,94
1,94 22 2 37,7
37,7
37,7
Forum;
Forum;
Forum;202020 2,08
2,08
2,08 22 2 1,55
1,55
1,55 44 4 34,134,1
34,1
Dunhill;
Dunhill; 20
Dunhill; 20 20 4,52
4,52
4,52 98
9898 3,41
3,41
3,41 34
34 34
Table 9. Detailed Cigarette Price Summary, Gaborone and Mafikeng/Zeerust, Cont. 32,532,5
32,5
Dunhill;
Dunhill; 10
Dunhill; 1010 4,39
4,39
4,39 44 4 3,31
3,31
3,31 66 6 32,532,5
32,5
Craven
Craven
CravenA;A; A;
202020 4,04
4,04
4,04 21
21MAFIKENG/
21 3,06
3,06
3,06 12
12 12 32,032,0
32,0
PRODUCT GABORONE BOTSWANA
Chesterfield; 20 GABORONE
3,53 ZEERUST
23 MAFIKENG/
2,70 16 30,6
(BRAND;Chesterfield;
Chesterfield;
PACK 20
20
MEAN 3,53
3,53 23
23 2,70
2,70 16
16 PREMIUM 30,6
30,6
Glamour;
Glamour;
Glamour; 2020 20 N
3,26
3,26
3,26 MEAN
22 2 2,60
2,60
2,60 ZEERUST N
33 3 (%) 25,625,6
25,6
SIZE) USD/PACK
Peter Stuyvesant;
11 1 4,98 USD/PACK4,14
Peter Stuyvesant;
Peter Stuyvesant; 4,98
4,98 6868
68 4,14
4,14 33 3 20,120,1
20,1
11 1
Dunhill;
Craven A; Dunhill;
1 Dunhill; 4,90 5,47
5,47
5,47
22 3
334,27 4,66
4,66
4,66 2 44 4 14,7 17,317,3
17,3
Benson & PeterPeter
Stuyvesant;
Peter
Hedges; Stuyvesant;
Stuyvesant; 303030 3,58
3,58
3,58 18
1818 3,10
3,10
3,10 11
11 11 15,615,6
15,6
2,36 4 2,19 16 7,8
20 Craven
Craven A; 1
Craven A; 1A; 1 4,90
4,90
4,90 22
2222 4,27
4,27
4,27 2 2 2 14,714,7
14,7
Benson
Benson
Benson && & Hedges;
Hedges;
Hedges;202020 2,36
2,36
2,36 44 4 2,19
2,19
2,19 1616
16 7,8 7,8
7,8
Notes: All prices displayed are in USD, per 20 cigarettes.
Notes:
Notes:
Notes: All All prices
prices
All prices displayed
displayed
displayed are
areare
in in
USD,
in USD,USD,
per
perper
2020 20 cigarettes.
cigarettes.
cigarettes.
The “Botswana Premium” indicates the percentage difference between the average price in Gaborone and the
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indicates
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Table
Table
Table10:
10:10: Detailed
Detailed
Detailed Cigarette
Cigarette Price
Price
Cigarette Summary,
Summary,
Price Summary, Maseru
Maseru and
Maseru and
and Ladybrand
Ladybrand
Ladybrand

Lesotho
Lesotho
Lesotho
Table 10. Detailed Cigarette Price Ladybrand
Ladybrand
Summary, MaseruLadybrand
and Ladybrand
Product
Product
Product Maseru
Maseru
Maseru Mean
Mean
Mean Premium
Premium
Premium (+)
(+)(+)
/ / /
Maseru
Maseru
MaseruNN N MeanMean
Mean Ladybrand
Ladybrand
Ladybrand NN N
(Brand;
(Brand;
(Brand; Package)
Package)
Package) USD/Pack
USD/Pack
USD/Pack Discount
Discount
Discount (-)
(-)(-)
PRODUCT MASERU USD/Pack
LADYBRAND USD/Pack
USD/Pack LESOTHO
LADYBRAND (%)
(%)(%)
MEAN
(BRAND; PACK Savannah;
Savannah;
Savannah; 11 1 MASERU 3,11
3,11
3,11N MEAN11 1 1,55
1,55
1,55 PREMIUM
5 5 5 (+) 100,1
/100,1
100,1
N
SIZE) PallPall
PallUSD/PACK
Mall;
Mall;
Mall;11 1 3,11
3,11
3,11 USD/PACK
11 1 2,38
2,38
2,38 DISCOUNT
1717
17 (%)
(-)30,830,8
30,8
Savannah; 1 Craven
Craven
CravenA;
3,11 A;
1A;
11 1 4,05
4,05
4,05 5858
1,55 58 3,11
5 3,11
3,11 77 7
100,1 30,2
30,2
30,2
Rothmans;
Rothmans; 1 1
Rothmans; 1 4,01
4,01
4,01 66 6 3,11
3,11
3,11 33 3 29,2
29,2
29,2
Pall Mall; 1 3,11 1 2,38 17 30,8
Chesterfield;
Chesterfield;
Chesterfield;11 1 3,11
3,11
3,11 22 2 2,44
2,44
2,44 77 7 27,3
27,3
27,3
Craven A; 1 4,05 58 3,11 7 30,2
18
1818
Rothmans; 1 4,01 6 3,11 3 29,2

Chesterfield; 1 3,11 2 2,44 7 27,3

Kent; 1 3,89 1 3,11 3 25,0

Camel; 1 4,18 109 3,50 2 19,7

Peter Stuyvesant; 10 3,42 1 2,95 6 15,8

Peter Stuyvesant; 1 4,10 418 3,69 45 11,0

Camel; 20 2,80 2 2,59 20 8,1

Kent; 20 2,95 2 2,84 3 4,1

Pall Mall; 20 2,14 1 2,06 6 3,8

Dunhill; 1 4,29 509 4,19 47 2,4

Dunhill; 10 3,22 4 3,16 3 2,1

Peter Stuyvesant; 20 2,79 12 2,74 15 1,5

Mills; 20 3,03 1 3,07 1 -1,2

571
USD/Pack USD/Pack
Camel; 20 4,61 23 2,74 46 68,4
Kent; 20 4,63 29 2,96 11 56,5
Winston; 20 3,39 7 2,20 20 54,0
Peter Stuyvesant; 20 4,19 77 2,77 35 51,4
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences
LD; 20 2,68 9 1,84 6 45,7
Marlboro; 20 4,26 33 2,96 17 44,0
Vogue; 20 4,66 11 3,25 3 43,4
Rothmans; 20 4,24 9 3,00 7 41,6
Kent; 1 3,89
10
Peter Stuyvesant; 3,89 4,46 1 1 29 3,113,11 3,15 3 3 1225,025,0 41,6
Kent; 1
Camel; 1 Craven A; 10 4,18 4,39 109 12 3,50 3,11 2 4 19,7 41,5
Camel; 1 4,18 109 3,50 2 19,7
Peter Stuyvesant;
Kent; 10
200 3,42 3,92 1 2 2,95 2,84 6 1 15,8 37,9
Peter Stuyvesant; 10 3,42 1 2,95 6 15,8
Peter Stuyvesant; 1
Pacific;
Peter Stuyvesant; 1 20 4,10
4,10 2,67 418
418 8 3,69
3,69 1,9445 45 2 11,011,0 37,7
Camel; 20
Camel; 20 Forum; 20
Table 10. Detailed Cigarette 2,80
2,80 Price 2,08 2
Summary,2 2 2,59
Maseru 2,59
and 1,5520
Ladybrand,20 Cont. 4 8,1 8,1 34,1
20 Dunhill; 20
Kent;20
Kent; 2,95
2,95 4,52 2 2 98 2,842,84 3,41 3 3 34 4,1 4,1 32,5
PRODUCT
Mall;
PallMall; 20
MASERU 2,14
LADYBRAND LESOTHO
Pall 20 Dunhill; 10 2,14 4,39 1 1 4 2,062,06 3,31 6 6
LADYBRAND 6 3,8 3,8 32,5
(BRAND; PACK MEAN MASERU N MEAN PREMIUM (+) /
Dunhill;
Dunhill; 1 1 Craven A; 20 4,29
4,29 4,04 509
509 21 4,19
4,19 3,06 N
47 47 12 2,4 32,0
2,4 DISCOUNT
SIZE) USD/PACK USD/PACK (-) (%)
Dunhill;
Dunhill; 1010 Chesterfield; 20 3,22
3,22 3,53 4 4 23 3,16
3,16 2,70 3 3 16 2,1 2,1 30,6
Peter
PeterStuyvesant;
Stuyvesant; 30
20 20 2,75 2,79 1 2,86 3 -3,9
Peter Glamour;
Stuyvesant; 20 2,79 3,26 1212 2 2,742,74 2,6015 15 3 1,5 1,5 25,6
Mills;20
Mills;
Dunhill;20
20 Peter Stuyvesant; 13,03
3,02 3,03 4,98
12 11 68 3,07
3,143,07 11 1
4,14 1 3 -1,2-1,2
-4,0 20,1
Stuyvesant;
PeterStuyvesant;
Peter 30
Dunhill;
30 1 2,75
2,75 5,47 11 3 2,862,86 4,66 3 3 4 -3,9-3,9 17,3
Rothmans; 20 2,77 7 2,91 3 -4,8
Dunhill;20
Dunhill; 303,02
20 Peter Stuyvesant; 3,02 3,58 1212 3,14
18 3,14 3,1011 11 11-4,0-4,0 15,6
Rothmans;
Craven A; 20
Rothmans; Craven A; 12,77 2,77
20
20 2,77 4,90
7 77 222,942,91
2,91 4,27 3
3 3 2 -4,8-4,8
-5,6 14,7
CravenA;
Craven A; 20
20 Benson & Hedges; 20
2,77
2,77 2,36 77 4 2,942,94 2,19 3 3 16-5,6-5,6 7,8
Notes: All prices Notes: displayed All prices are in USD, are
displayed perin liter
USD, ofper beverage.
20 cigarettes.
Notes:
Notes: AllAll prices
prices displayed
displayed are are in in
USD, USD, per per liter
liter of of beverage.
beverage.
The “Lesotho The Premium “Botswana / Discount” Premium” indicates
indicates the percentage
the percentage difference
difference between
between thethe average
average price in Maseru
The
The“Lesotho
“Lesotho Premium
Premium // Discount”
Discount” indicates
indicates the thepercentage
percentage difference
difference between between thethe average
averageprice in price
priceMaseru in Gaborone
in Maseru and and
the the and the average
and the average price price in Ladybrand, for
in Mafikeng/Zeerust, for good
good i i(brand
(brand and
and packpack size).
size).
average
average price
price in in Ladybrand,
Ladybrand, for for good good i (brand
i (brand and and pack pack size).
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Table11:
Table Table Alcohol
11:Detailed
Detailed10: Price
Detailed
Alcohol Summary,
Cigarette
Price Summary, Gaborone
Price and
Summary,
Gaborone Mafikeng/Zeerust
andMaseru and Ladybrand
Mafikeng/Zeerust
Table 11. Detailed Alcohol Price Summary, Gaborone and Mafikeng/Zeerust
Mafikeng/
Product Gaborone Mafikeng/ Botswana Lesotho
Product Product Gaborone Gaborone Ladybrand
Zeerust Mafikeng/ Botswana
(Brand; No. Items; Bottle/Can; Mls Maseru
Mean Mean Gaborone Zeerust Mafikeng/ Premium Premium (+) /
(Brand; No.(Brand;
Items; Bottle/Can; Maseru N Mean MeanZeerust NLadybrand N
Package) Mls Mean
USD/Pack NN MAFIKENG
Mean
Premium
(%) (%) Discount (-)
per
peritem)
PRODUCT
item) USD/L
GABORONE
USD/L USD/LUSD/Pack Zeerust N BOTSWANA
GABORONEUSD/L / ZEERUST MAFIKENG/ (%)
(BRAND;
Beer NO. ITEMS; BOTTLE/ MEAN PREMIUM
Beer Savannah; 1 3,11 N 1 1,55
MEAN 5
ZEERUST N 100,1
CAN; MLS
Amstel 6; Can;PER440ITEM) USD/L
2,85 1 1 1,74USD/L 3 (%)
Pall
Amstel 6; Can; Mall; 1
440 3,11
2,85 1 1,742,38 3 17 64,464,4 30,8
Amstel; 1; Can; 440 A; 1
Craven 3,43
4,05 2 58 2,12 3,11 1 7 62,1 30,2
Amstel;
Beer 1; Can; 440 3,43 2 2,12 1 62,1
Heineken; 1; Bottle; 650 3,67 2 2,31 3 58,8
Rothmans;
Heineken; 1; Bottle; 650 1 4,01
3,67 2 6 2,313,11 3 3 58,8 29,2
1; Bottle;
Hansa; 6;
Amstel Can; 440750 2,14
2,85 12 1,451,74 3 3 47,8 64,4
Chesterfield;
Hansa; 1; Bottle; 750 1 3,11
2,14 22 1,452,44 3 7 47,8 27,3
Carling Black
Amstel; Label 6; Can; 500 2,71 1 1,852,12 2 1 46,6
Carling1; Can;
Black 440
Label 6; Can; 500 3,43 2,71 2 1 1,85 2 46,6 62,1
Castle; 1; Bottle; 660 2,71 3 1,88 1 43,9 18
Castle; 1; 1;
Heineken; Bottle; 660
Bottle; 650 3,67 2,71 2 3 1,88 1 43,9
Carling Black Label; 1; Bottle; 750 2,31 3 1,662,31 2 3 39,5 58,8
Carling Black Label; 1; Bottle; 750 2,31 3 1,66 2 39,5
1; Bottle;
Castle; 1;
Hansa; Bottle; 750
750 2,15
2,14 23 1,551,45 4 3 38,3 47,8
Castle; 1; Bottle; 750 2,15 3 1,55 4 38,3
Windhoek; 1; Bottle; 330 3,54 3 2,7 1 31
Windhoek;
Carling Black 1; 6;330
Bottle;
Label Can; 500 2,71 3,54 1 3 2,7
1,85 12 31 46,6
Windhoek; 1; Can; 440 2,99 2 2,3 2 30,2
Windhoek; 1; Can; 440 2,99 2 2,3 2 30,2
Amstel;
Castle; Bottle; 660
1;Bottle;
1; 440 2,97
2,71 31 2,3 1,88 1 1 29,4 43,9
Amstel; 1; Bottle; 440 2,97 1 2,3 1 29,4
Heineken 6; Can; 440 3,27 2 2,53 1 29,1
Carling Black
Heineken Label;
6; Can; 4401; Bottle; 750 2,31 3,27 3 2 1,66
2,53 12 29,1 39,5
Castle; 1; Can; 500 2,73 1 2,12 3 28,8
Castle;
Castle;
Windhoek 1;
1; Can;
Bottle;
24; 500
750 440
Bottle; 2,15 2,73
2,47 31 1 2,12
1,98 1,55 2 34 25 28,8 38,3
Windhoek 24;
Castle 6; Bottle; Bottle;
340 330 440 2,47
2,69 2 1 1,98
2,262,7 3 21 18,9 25
Windhoek; 1; Bottle; 3,54 3 31
Castle 6; Bottle; 340
Carling Black Label 6; Bottle; 340 2,69
2,92 1 2 2,26
2,48 1 3 18 18,9
CarlingBlack
Windhoek;
Carling Black Label440
1; Can;
Label; 6;Can;
1; Bottle;
500340
2,992,92
2,42
2 1
2 2,48
2,06
2,3
2 1
2
17,4 18
30,2
Black
Carling1;
Amstel; Label;
Bottle; 4401; Can; 500 2,97 2,42 1 2 2,06
2,3 21 17,4 29,4

Heineken 6; Can; 440 3,27 2 2,53 1 19 29,1
19
Castle; 1; Can; 500 2,73 1 2,12 3 28,8

Windhoek 24; Bottle; 440 2,47 1 1,98 2 25

572 // Botswana-Lesotho: An Analysis of Alcohol and Cigarette Prices in Maseru, Gaborone, and
Neighboring South African Towns
Table 11. Detailed Alcohol Price Summary, Gaborone and Mafikeng/Zeerust, Cont.

MAFIKENG
PRODUCT GABORONE BOTSWANA
GABORONE / ZEERUST MAFIKENG/
(BRAND; NO. ITEMS; BOTTLE/ MEAN PREMIUM
N MEAN ZEERUST N
CAN; MLS PER ITEM) USD/L (%)
USD/L
Castle 6; Bottle; 340 2,69 2 2,26 3 18,9

Carling Black Label 6; Bottle; 340 2,92 1 2,48 1 18

Carling Black Label; 1; Can; 500 2,42 2 2,06 2 17,4

Windhoek 6; Can; 440 2,58 4 2,21 2 17,1

Castle; 1; Bottle; 340 2,9 4 2,51 5 15,5

Carling Black Label; 1; Bottle; 340 2,93 4 2,63 2 11,4

Carling Black Label; 1; Can; 330 2,97 2 2,82 1 5,4

Spirits

Chivas Regal; 1; Bottle; 750 92,17 11 27,96 1 229,6

Gilbey's; 1; Bottle; 750 14,89 9 5,18 6 187,6

Wellington; 1; Bottle; 750 26,57 2 11,29 1 135,3

Johnnie Walker; 1; Bottle; 750 155,76 32 70,62 7 120,5

Ciroc; 1; Bottle; 750 84,91 4 39,25 1 116,3

First Watch; 1; Bottle; 1000 23,15 1 10,87 1 112,9

Viceroy; 1; Bottle; 750 23,6 5 11,91 2 98,1

Bell's; 1; Bottle; 750 40,96 4 21,31 5 92,2

Olmeca; 1; Bottle; 750 42,45 11 22,27 2 90,6

KWV; 1; Bottle; 750 23,89 8 12,57 3 90,1

First Watch; 1; Bottle; 750 23,94 5 12,69 2 88,7

Wellington; 1; Bottle; 200 32,13 3 17,09 1 88,1

Mainstay; 1; Bottle; 750 24,08 2 13,26 1 81,6

Three Ships; 1; Bottle; 750 27,28 9 15,02 1 81,6

Cape To Rio; 1; Bottle; 750 21,62 3 11,91 1 81,5

Smirnoff; 1; Bottle; 750 24,3 14 13,46 4 80,5

Scottish Leader; 1; Bottle; 750 28,87 9 16,05 1 79,8

J&B; 1; Bottle; 750 32,27 6 17,98 7 79,5

Captain Morgan; 1; Bottle; 750 28,99 12 16,21 6 78,8

Black & White; 1; Bottle; 750 26,22 5 14,71 4 78,3

Gordon's; 1; Bottle; 1000 26,32 1 14,84 1 77,4

573
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table 11. Detailed Alcohol Price Summary, Gaborone and Mafikeng/Zeerust, Cont.

MAFIKENG
PRODUCT GABORONE BOTSWANA
GABORONE / ZEERUST MAFIKENG/
(BRAND; NO. ITEMS; BOTTLE/ MEAN PREMIUM
N MEAN ZEERUST N
CAN; MLS PER ITEM) USD/L (%)
USD/L
First Watch; 1; Bottle; 200 32,26 4 18,26 2 76,7

White Horse; 1; Bottle; 750 28,34 3 16,31 4 73,7

Count Pushkin; 1; Bottle; 750 20,56 5 12,01 1 71,1

Harrier; 1; Bottle; 750 19,98 5 11,91 1 67,7

Vat 691; Bottle; 750 22,21 6 13,26 3 67,6

First Watch; 1; Bottle; 375 31 2 18,64 1 66,3

Stroh; 1; Bottle; 500 64,49 1 38,84 1 66

Saluta; 1; Bottle; 200 15,98 1 9,71 1 64,5

Vat 691; Bottle; 375 26,96 3 16,57 2 62,7

Gilbey's; 1; Bottle; 200 14,21 10 8,79 7 61,6

Grey Goose; 1; Bottle; 750 81,75 1 51,79 2 57,9

Bain's; 1; Bottle; 750 38,33 4 24,34 1 57,5

Stretton's; 1; Bottle; 375 21,47 2 13,67 1 57,1

Richelieu; 1; Bottle; 750 29,71 7 19,2 3 54,7

Count Pushkin; 1; Bottle; 375 20,59 4 13,36 1 54,1

Patron; 1; Bottle; 750 115,83 3 75,61 1 53,2

Bell's; 1; Bottle; 200 39,06 2 25,54 4 53

Viceroy; 1; Bottle; 200 26,7 2 17,48 1 52,7

Bell's; 1; Bottle; 375 39,52 4 25,89 2 52,6

Romanoff; 1; Bottle; 750 18,89 3 12,43 1 52

Klip Drift; 1; Bottle; 750 28,56 12 18,88 4 51,3

Gordon's; 1; Bottle; 750 19,32 4 12,84 2 50,5

J&B; 1; Bottle; 375 37,3 4 24,86 1 50,1

Two Keys; 1; Bottle; 375 24,12 2 16,36 1 47,4

J&B; 1; Bottle; 200 36,63 3 24,97 3 46,7

Romanoff; 1; Bottle; 200 21,03 4 14,37 1 46,4

Mellow-Wood; 1; Bottle; 375 24,34 5 16,68 2 46

Johnnie Walker; 1; Bottle; 200 44,56 2 30,68 1 45,2

Bertrams; 1; Bottle; 750 26,3 4 18,13 1 45,1

574 // Botswana-Lesotho: An Analysis of Alcohol and Cigarette Prices in Maseru, Gaborone, and
Neighboring South African Towns
Table 11. Detailed Alcohol Price Summary, Gaborone and Mafikeng/Zeerust, Cont.

MAFIKENG
PRODUCT GABORONE BOTSWANA
GABORONE / ZEERUST MAFIKENG/
(BRAND; NO. ITEMS; BOTTLE/ MEAN PREMIUM
N MEAN ZEERUST N
CAN; MLS PER ITEM) USD/L (%)
USD/L
Smirnoff; 1; Bottle; 200 22,99 8 16 5 43,6

White Horse; 1; Bottle; 375 26,86 1 18,85 2 42,5

Viceroy; 1; Bottle; 375 23,85 5 16,99 1 40,4

Stretton's; 1; Bottle; 750 23,18 5 16,57 1 39,9

Jameson; 1; Bottle; 375 58,72 2 42,05 1 39,6

Mainstay; 1; Bottle; 200 22,64 3 16,31 1 38,8

Klip Drift; 1; Bottle; 375 23,24 6 16,99 2 36,8

Oude Meester; 1; Bottle; 375 26,35 3 19,26 1 36,8

Copperband; 1; Bottle; 375 8,07 5 5,9 1 36,6

Clubman; 1; Bottle; 375 8,04 2 5,9 1 36,1

Zorba; 1; Bottle; 375 8,02 5 5,9 1 35,8

Vin Coco; 1; Bottle; 375 8 4 5,9 1 35,5

Russian Bear; 1; Bottle; 750 23,38 15 17,3 2 35,2

Castle Brand; 1; Bottle; 375 7,98 4 5,9 1 35,1

Knights; 1; Bottle; 750 20,74 1 15,54 1 33,5

Clubman; 1; Bottle; 200 9,5 2 7,19 1 32,3

Copperband; 1; Bottle; 200 9,5 2 7,19 1 32,3

Clubman; 1; Bottle; 750 7,5 2 5,7 1 31,7

Mellow-Wood; 1; Bottle; 200 24,55 4 18,64 2 31,7

Copperband; 1; Bottle; 750 7,5 5 5,7 1 31,6

Castle Brand; 1; Bottle; 200 9,44 1 7,19 1 31,4

Castle Brand; 1; Bottle; 750 7,48 5 5,7 1 31,4

Vin Coco; 1; Bottle; 200 9,44 1 7,19 1 31,4

Klip Drift; 1; Bottle; 200 29,01 9 22,14 2 31

Black & White; 1; Bottle; 200 26,81 1 20,49 4 30,9

Romanoff; 1; Bottle; 375 17,62 2 13,46 2 30,9

Knights; 1; Bottle; 200 24,61 2 19,03 1 29,3

Harrier; 1; Bottle; 200 22,5 4 17,48 1 28,8

Captain Morgan; 1; Bottle; 200 26,91 3 20,91 3 28,7

575
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table 11. Detailed Alcohol Price Summary, Gaborone and Mafikeng/Zeerust, Cont.

MAFIKENG
PRODUCT GABORONE BOTSWANA
GABORONE / ZEERUST MAFIKENG/
(BRAND; NO. ITEMS; BOTTLE/ MEAN PREMIUM
N MEAN ZEERUST N
CAN; MLS PER ITEM) USD/L (%)
USD/L

Annex 1
Zorba; 1; Bottle; 750 7,28 4 5,7 1 27,9

Richelieu; 1; Bottle; 200 25,74 3 20,2 1 27,4
Table 9: Detailed Cigarette Price Summary, Gaborone and Mafikeng/Zeerust
Vin Coco; 1; Bottle; 750 7,25 4 5,7 1 27,2
Gaborone Mafikeng/
Product Mafikeng/ Botswana
Zorba; 1; Bottle; Mean 9,07 Gaborone 1 N Zeerust Mean
(Brand; Pack200
Size) 7,19 1
Zeerust N 26,2
Premium (%)
USD/Pack USD/Pack
Brandyale;
Camel;1; 20Bottle; 750 4,61 7,16 4 Mafikeng/
5,7 46 1 68,4 25,8
Product Gaborone 23 2,74
Mafikeng/ Botswana
Product Gaborone Gaborone Zeerust Mafikeng/ Botswana
(Brand;
SevenKent; No.
201;
Seas; Items; Bottle/Can;
Bottle; 750 Mls Mean 29Gaborone
4,63 16,79 1 N 2,96
Zeerust13,46 11 1
Mafikeng/ Premium
56,5 24,7
(Brand; No. Items; Bottle/Can; Mls Mean Mean Zeerust N Premium
item)
perWinston; 20 3,39 USD/L 7 N Mean
2,20 20 N
Zeerust (%)
54,0
per item) 1; Bottle; 200
Gordon's; USD/L
22,76 4
USD/L
18,35 2 (%) 24
Peter Stuyvesant; 20 4,19 USD/L
Richelieu; 1; Bottle; 200 25,74 77 3 2,77 20,2 35 1 51,4
27,4
Richelieu;1;1; 200
Bottle;375 25,74 3 20,217,61 1 1 27,4
Vin LD;
Limosin;
Coco;20 Bottle;
1; Bottle; 750 2,68 21,297,25 9 4 4 1,84 5,7 61 45,7 20,9
27,2
Vin Coco; 1; Bottle; 750 7,25 4 5,7 1 27,2
Marlboro;
Zorba;
Gordon's; 20200
1; Bottle;
1; Bottle; 4,26 21,069,07 33 4 1 2,96 7,19 17 1 2 44,0 20,3
26,2
Zorba; 1; Bottle; 200 375 9,07 1 7,1917,5 1 26,2
Vogue; 20
Brandyale; 1; Bottle; 750 4,66 7,16 11 4 3,25 5,7 31 43,4
25,8
Brandyale;
Amarula; 1; 1; Bottle;
Bottle; 750
750 7,16
17,87 24 5,7 15,02 1 1 25,8 19
Rothmans;
Seven 20
Seas; 1; Bottle; 750 4,24 16,79 9 1 3,0013,46 71 41,6
24,7
Seven Seas; 1; Bottle; 750 16,79 1 13,46 1 24,7
Peter
Gordon's;
Oude Stuyvesant;
1; Bottle;
Meester; 10 200 4,46 26,26
200
1; Bottle; 22,76 29 2 4 3,1518,35
22,14 12 2 1 41,6 18,6
24
Gordon's; 1; Bottle; 200 22,76 4 18,35 2 24
Craven
Limosin; 1; A; 10
1; Bottle;
Bottle; 375 4,39 21,29 12 4 3,11 17,61 41 41,5
20,9
Limosin; 1;
Chateau; Bottle; 375
750 21,29
18,41 14 17,61 15,8 1 2 20,9 16,6
Kent; 200
Gordon's; 1; Bottle; 375 3,92 21,06 2 4 2,84 17,5 12 37,9
20,3
Gordon's; 1; Bottle; 375 21,06 4 17,5 2 20,3
Johnnie Walker;
Pacific;
Amarula; 1;20 1; Bottle;
Bottle; 750 375 2,67 48,5 17,87 8 9 2 43,5
1,9415,02 211 37,7 11,5
19
Amarula; 1; Bottle; 750 17,87 2 15,02 1 19
OudeForum; 1; 20
Meester; Bottle;
1;Bottle; 200 2,08 19,526,26 2 22 2 1,5522,14 4 34,1 7
Chateau;
Oude Bottle;
Meester; 1; 375 200 26,26 22,14 18,23 1 11 18,618,6
Dunhill;
Chateau;1; 20
Bottle;750
1;Bottle; 750 4,52 18,41 98 1 3,41 15,8 34 2 32,5
16,6
Chateau;
Mokador; 1; Bottle; 375 18,41
8,18 21 15,8 10,25 2 1 16,6 -20,3
Dunhill;
Johnnie
Johnnie
10 1;
Walker;
Walker; 1;Bottle; 375 4,39
Bottle;375 48,5
48,5
4 99
3,31 43,5
43,5
6
1 1 11,5
32,5
11,5
OtherCraven
Chateau;
Chateau; 1;A;
1; 20 375
Bottle;
Bottle; 375 4,04 19,5 21
19,5 22 3,06 18,23
18,23 12
1 1 7 32,0
7
Chesterfield;
Mokador; 1;Bottle;
Sedgewick's
Mokador; 1; 20
Bottle;
Old 375 1; Bottle;
Brown;
375 3,53 8,18
8,18 23 2 2,7010,25 16
1 13 30,6
-20,3
5,58 32 10,25
3,97 -20,3 40,5
750 Glamour;
Other
Other 20 3,26 2 2,60 3 25,6
Sedgewick's
Peter Stuyvesant;
Sedgewick's
Sedgewick's Brown;
OldBrown;
Old
Old 1;
1 1;
Brown; 1;Bottle;
Bottle; 4,98
Bottle; 68 4,14 3 20,1
5,58
5,58
6,21 23 3 3,97
3,975,44 3 32 40,5 14,2
40,5
750
750
375 Dunhill; 1 5,47 3 4,66 4 17,3
Sedgewick's Old Brown; 1; Bottle;
Sedgewick's Old
Sedgewick's OldBrown;
Peter Stuyvesant; Bottle;
1;1;
30
Brown; 3,58
Bottle; 6,21
6,21 18 22 3,10 5,44
5,44 11
2 2 14,2
14,215,6
375
375 7,29 2 6,51 2 12,1
200 Craven A; 1 4,90 22 4,27 2 14,7
OldBrown;
Sedgewick'sOld
Sedgewick's 1;Bottle;
Brown;1; Bottle;
7,29
7,29 22 6,51
6,51 2 2 12,1
12,1
200Benson & Hedges; 20
200 2,36 4 2,19 16 7,8
Notes: Notes: All prices All prices displayed displayed are are in in
USD, USD, per
perliter20 of beverage.
cigarettes.
Notes:
Notes: Allprices
All prices displayed
displayed arearein in USD,
USD, perper liter
liter of of beverage.
beverage.
The “Botswana The “Botswana Premium” Premium” indicates
indicates the the percentage
percentage difference
difference between
between the
the average
average price
price in Gaborone
in Gaborone and and
the the
average
The “Botswana
The “BotswanaPremium” Premium”indicates indicates thethe percentage
percentage difference
difference between
between the the average
average price
price in in Gaborone
Gaborone and and
the the average
average
average price price in
in Mafikeng/Zeerust, Mafikeng/Zeerust, for good for good
i (brand i (brand
and and
pack size). packaging).
price
price inMafikeng/Zeerust,
in Mafikeng/Zeerust, for for good
good i (brand
i (brand and
and packaging).
packaging).
3333333333333333
(+,-./010
3333333333333333 3333333333333333333333
2 45,6-7 89:;<0
3333333333333333333333
3333333333333333333333 2)
Specifically,Specifically, ������������������������������������������������������������������������������������ 3333333333333333
(+,-./010
(+,-./010
= 2 45,6-7 89:;<0
2 45,6-7 89:;<0 2) 2)
where where
333333333333333 333333333333333
������������������������������������
333333333333333 ������������������������������������������������������������ the average
is average price for good Gaborone,
i inGaborone,
andand and
Specifically, ������������������������������������������������������������������������������������
Specifically, ������������������������������������������������������������ ������������������������ =
'' = ' 3333333333333333333> where
5,6-7 89:;<0
3333333333333333333
3333333333333333333
5,6-7 89:;<0
where ������������������������������������
is ������������������������������������������������������������
������������������������������������ ������������ ; is
������������������������������������������������; the
is the ; average
the averageprice for
price
price good
for
for i in
good
good iGaborone,
ini Gaborone,
in
5,6-7 89:;<0 > >
and 3333333333333333333
3333333333333333333
������������������������������������������������ℎ ������������������������������������������������
3333333333333333333 ������������������������ is the
is the average
average price price for good
for i
good in the
i inMafikeng/Zeerust
the Mafikeng/Zeerust area. A premium
area. A can
premium only be
can calculated
onlyfor for for
be
������������������������������������������������ℎ ������������������������������������������������������������
������������������������������������������������ℎ ������������������������������������������������ ������������
������������ ;;is
������������ isthe ; average
the averageprice price forfor good
good i in
i inthetheMafikeng/Zeerust
Mafikeng/Zeerust area. area. A premium
A premium can only
can be be
only calculated
calculated
calculated
products, products, i , for
where i , where
products,there there
is i ,
at is
where
leastat least
there
one one
price
products, i, where there is at least one price available in both Botswana and South Africa. Products for whichisprice
at
available available
least one
in both in
price both
Botswana Botswana
available and in and
both
South South
Botswana
Africa. Africa.
ProductsProducts
and forSouth
whichfor which
Africa.
a price a
a priceprice
hashas has
Products
not
not been not
been been
for
collected
collected collected
which inin a in either
price
either
either hasare
area
area area
not
are notare
been
not not
shown
shown shown
collected
here.
here.here.in either area are not shown here.

Table 12:Detailed
12:
Table
Table 10:
DetailedAlcohol
Detailed Price
Cigarette
Alcohol PriceSummary,
Price Summary,
Summary, Maseru
Maseruand
andLadybrand
Maseru and Ladybrand
Ladybrand
Lesotho
Lesotho
Lesotho
Product
Product Maseru
Maseru Ladybrand
Ladybrand Ladybrand Premium
Product Maseru Mean Ladybrand (+) / (+) /
Premium
(Brand;
(Brand; No.
No.Items;
Items;Bottle/Can;
Bottle/Can; Mean Maseru
Mean Maseru N NN
Maseru Mean
Mean Ladybrand
NN N Discount (-)(+) /
Premium
Mls (Brand; Package) USD/Pack Discount
Discount (-)
(-)
peritem)
Mls per item) USD/L
USD/L USD/L
USD/Pack
USD/L (%)(%)
(%)
Beer
BeerSavannah; 1 3,11 1 1,55 5 100,1
Flying Fish;
Pall
576Flying 1;
Mall; Bottle;
1
// Botswana-Lesotho: 660 3,11 2,00 1 2 1,88
2,38 1 17 6,25 30,8and
Fish; 1; Bottle; 660 An Analysis2,00 1,88
2 Cigarette
of Alcohol and 1
Prices in Maseru, 6,25
Gaborone,
Castle; 6;
Craven Bottle;
Neighboring 340
A; 1 340 South African 2,63
Towns
4,05 2,63 1
58 1 2,47
3,11 2 7 6,21 30,2
Castle; 6; Bottle; 2,47 2 6,21
Amstel; 1 330
6; Bottle;
Rothmans; 4,01 2,61 6 22 2,47
3,11 1 3 5,5929,2
Amstel; 6; Bottle; 330 2,61 2,47 1 5,59
Hansa; 1; Bottle; 750
Chesterfield; 3,11 1,54 2 44 1,55 1 7 -0,8327,3
Hansa; 1; Bottle; 1
750 1,54 2,44
1,55 1 -0,83
Castle; 1; Bottle; 660 1,94 2 2,00 1 -2,94
Table 12. Detailed Alcohol Price Summary, Maseru and Ladybrand

LESOTHO
PRODUCT (BRAND; NO. MASERU LADYBRAND PREMIUM
LADYBRAND
ITEMS; BOTTLE/CAN; MIs MEAN MASERU N MEAN (+) /
N
PER ITEM) USD/L USD/L DISCOUNT
(-) (%)
Beer

Flying Fish; 1; Bottle; 660 2,00 2 1,88 1 6,25

Castle; 6; Bottle; 340 2,63 1 2,47 2 6,21

Amstel; 6; Bottle; 330 2,61 2 2,47 1 5,59

Hansa; 1; Bottle; 750 1,54 4 1,55 1 -0,83

Castle; 1; Bottle; 660 1,94 2 2,00 1 -2,94

Castle; 1; Can; 440 2,30 1 2,43 4 -5,35

Castle; 1; Bottle; 750 1,64 7 1,76 3 -7,14

Carling Black Label; 1; Can; 330 2,59 1 2,82 1 -8,22
Carling Black Label; 1; Bottle;
1,69 3 1,86 1 -9,26
750
Amstel; 1; Can; 440 2,18 3 2,47 2 -11,81

Windhoek; 1; Can; 440 2,30 3 2,65 1 -13,24

Heineken; 1; Can; 440 2,30 1 2,82 1 -18,67

Cider

Redd's; 1; Can; 440 2,65 1 2,12 1 25,15

Bernini; 6; Bottle; 275 3,95 1 3,20 1 23,55

Savanna; 6; Bottle; 330 3,07 7 3,02 4 1,51

Redd's; 1; Bottle; 660 1,77 4 1,88 2 -6,25

Savanna; 1; Bottle; 500 3,16 3 3,42 1 -7,53

Hunter's; 1; Bottle; 660 2,69 5 2,94 2 -8,46

Hunter's; 1; Bottle; 330 2,98 3 3,61 6 -17,27

Savanna; 1; Bottle; 330 3,14 3 3,88 4 -19,13

Hunter's; 1; Can; 330 2,83 2 3,53 2 -19,92

Hunter's; 1; Can; 440 2,68 5 3,44 2 -21,99

Spirits

Russian Bear; 1; Bottle; 750 15,02 1 11,91 1 26,10

Skyy; 1; Bottle; 750 23,82 1 21,75 4 9,55

Smirnoff; 1; Bottle; 750 15,54 2 17,48 4 -11,11

577
Gaborone Mafikeng/
Product Mafikeng/ Botswana
Mean Gaborone N Zeerust Mean
(Brand; Pack Size) Zeerust N Premium (%)
USD/Pack USD/Pack
Camel; 20 4,61 23 2,74 46 68,4
Kent;1;
Amstel; 20Can; 440 4,63 2,18 29 3 2,96
2,47 11
2 56,5
-11,81
Amstel; 1; Can;
Confronting 440
Illicit Tobacco Trade: 2,18 Review of
A Global 2,47
3 Country Experiences 2 -11,81
Winston;
Windhoek; 1;20
Can; 440 3,39 2,30 7 3 2,20
2,65 20
1 54,0
-13,24
Windhoek; 1; Can; 440 2,30 3 2,65 1 -13,24
Peter Stuyvesant;
Heineken; 1; Can; 440 20 4,19 2,30 77 1 2,77
2,82 35
1 51,4
-18,67
Heineken; 1; Can; 440 2,30 1 2,82 1 -18,67
LD; 20
Cider 2,68 9 1,84 6 45,7
Cider
Marlboro;
Redd's; 1;Can;
Can;20440 4,26 2,65 33 1 2,96
2,12 17 44,0
Redd's; 1; 440 2,65 1 2,12 1 1 25,15
25,15
Vogue;
Bernini; 6; 20
Bottle; 275 4,66 3,95 11 1 3,25
3,20 3 43,4
Bernini; 6; Bottle; 275 3,95 1 3,20 1 1 23,55
23,55
Rothmans;
Savanna; 6; 20 330
Bottle; 4,24 3,07 9 7 3,00
3,02 7 41,6
Savanna; 6; Bottle; 330 3,07 7 3,02 4 4 1,511,51
Peter
Redd's;1;
Redd's; Stuyvesant;
1;Bottle;
Bottle;660
660 10 4,46 1,77
1,77 29 44 3,15
1,88
1,88 12
2 2 -6,25
-6,2541,6
Craven
Savanna; A;
1; 10
Bottle;
Savanna; 1; Bottle; 500500 4,39 3,16
3,16 12 3 3 3,11
3,42
3,42 14 1 -7,53
-7,5341,5
Kent;
Hunter's;
Hunter's;
12. 1;
Table 200
1; Bottle;
Bottle; 660
Detailed 660 3,92 2,69
Alcohol Price 2,69 2 5
Summary, Maseru5 2,84
Ladybrand 2 2
and2,942,94 1 -8,4637,9
-8,46
Pacific;
Hunter's; 1;20
Bottle; 330
Hunter's; 1; Bottle; 330 2,67 2,98
2,98 8 3 3 1,94
3,61
3,61 62 6 -17,27
-17,2737,7
Forum;
Savanna;
Savanna; 1;20
1; Bottle;330
Bottle; 330 2,08 3,14
3,14 2 33 1,55
3,88
3,88 44 4 34,1
-19,13
-19,13 LESOTHO
Dunhill;
PRODUCT
Hunter's;
Hunter's; 1; 20
(BRAND;
Can;
1;Can; 330 NO. 4,52
330 MASERU
2,83
2,83 98 2 2 3,41
LADYBRAND
3,53
3,53 2 34
2 32,5
-19,92
-19,92 PREMIUM
LADYBRAND
Dunhill;
ITEMS; BOTTLE/CAN;
Hunter's;
Hunter's; 10
Can;440
1;Can;
1; 440 MIs 4,39
MEAN
2,68
2,68 4MASERU
55 N 3,31
MEAN
3,44
3,44 26 2 N 32,5
-21,99
-21,99 (+) /
PER ITEM)
Craven
Spirits
Spirits A; 20 USD/L
4,04 21 USD/L
3,06 12 32,0 DISCOUNT
Chesterfield;
Russian
Russian Bear;1;
Bear; 20 750
Bottle;
1;Bottle; 750 3,53 15,02
15,02 23 11 2,70
11,91
11,91 1 16
1 26,10 (-) (%)
26,1030,6
Skyy;
SpiritGlamour;
1;
1;Bottle; 20
Bottle;750
Skyy;Cooler 750 3,26 23,82
23,82 2 11 2,60
21,75
21,75 43 4 9,55 25,6
9,55
Stuyvesant;
Peter 1;
Smirnoff;
Smirnoff; 1;Bottle;
Bottle;750
7501 4,98 15,54
15,54 68 22 4,14
17,48
17,48 434 3 -11,1120,1
-11,11
Smirnoff; 6; Can; 250 3,99 2 4,40 -9,34
Dunhill;
Spirit
Spirit Cooler
Cooler 1 5,47 3 4,66 4 17,3
Red Square;
Smirnoff;
Peter
Smirnoff; 6; 6;
6;Can;Bottle;
Stuyvesant;
Can; 250
250 30275 3,39
3,58 3,99
3,99 3
18 22 3,86
4,40
3,104,40 3 3
3 11 -9,3415,6 -12,14
-9,34
Red
Red
Klip Craven
Square;
Square;
Drift; A;
6;1
6; Bottle;
1; Can;Bottle; 275
440 275 4,90 3,39
3,183,39 22
1 33 4,27
3,86
3,86
3,88 32 3 2 -12,1414,7 -18,12
-12,14
KlipBenson
Klip Drift;
Drift;1;
1;& Hedges;
Can;
Can; 440 20
440 2,36 3,18
3,18 4 11 2,19
3,88
3,88 2 16
2 -18,12 7,8
-18,12
Notes:Notes: All prices All prices displayed displayed are are in in USD,USD, per
per liter
20 of beverage.
cigarettes.
Notes:
Notes: Allprices
All prices displayed
displayed are are in in USD,USD, perper liter
liter of ofbeverage.
beverage.
The “Lesotho
The “Botswana Premium Premium” / Discount” indicates indicates
the the
percentage percentage
difference difference
between the between
average the average
price in in priceand
Gaborone in Maseru
the and
average
The
The “Lesotho
“Lesotho Premium
Premium //Discount”
Discount” indicates
indicates the percentage difference between the average price Maseru andandthe
the average
price in price
Mafikeng/Zeerust, in Ladybrand, for forgood good i (brandi the
(brand percentage
and and size).
pack
difference
packaging). between the average price in Maseru the
average price in Ladybrand,
average price in Ladybrand, for good i (brand for good i (brand and packaging).
and packaging).
3333333333333333
(+,-./010 3333333333333333333333
333333333333 3333333333333333333
2 45,6-7 89:;<0
(NO.,-7, > 4 5,6-7 89:;<02) > ) ) 333333333333333
Specifically, where 33333333333
Specifically, ������������������������������������������������������������ ������������������������������������ = ������������������������������������ where
> ������������������������������������������������
is ℎ;������������is
������������������������������������������������ isthethe average
average price
price forgood
for good i iin
inGaborone,
iMaseru, and
������������������������������������������������������������ ������������
������������������������ 333333333333 3333333333333333333
' /������������������������ ' ������������ ������������ ' =
������������������������������������ 5,6-7 89:;<0 ������������������������������������������������������������
(NO.,-7, > 4 5,6-7 89:;<0 33333333333
Specifically,
Specifically, ������������������������������������������������������������ ������������ ' /������������������������ ������������������������������������ ' =
3333333333333333333
3333333333333333333
5,6-7 89:;<0
>
3333333333333333333
> where
where ������������������������������������������������������������ℎ; ������������ the
; isthe average
average price
price for
forgood
good ini Maseru,
in Maseru,
5,6-7 89:;<0
and 3333333333333333333
3333333333333333333 ;; is isis the
the average
average price
price forgood
for good i in
i in the
>
Ladybrand.Mafikeng/Zeerust
A premium canarea. A premium
only be can
beonly
calculated for be calculated
products, i, wherefor
and������������������������������������������������ℎ ������������������������������������������������ ������������
������������ ������������
������������
and 3333333333333333333 the average price for good i in Ladybrand. A premium can only calculated for products,
������������������������������������������������ℎ ������������������������������������������������������������������������ ; is the average price for good i in Ladybrand. A premium can only be calculated for products, i, where
i,there is at
products, least , one
iis where price there available is priceat least both
in available
one Maseru
price and Ladybrand.
inavailable in both Products
Botswana for which a price has
fornot been acollected in
Productsand South a price Products
Africa. for which a price
where there at least one both Maseru and Ladybrand. Products which price has not has
there is at least one price available in both Maseru and Ladybrand. for which has not been collected in
either
been not area
collected been are not
collected
in either shown in here. are
either
area area not are not
shown shown here. here.
either area are not shown here.

Table 10: Detailed Cigarette Price Summary, Maseru and Ladybrand

Lesotho
Ladybrand
Product Maseru Mean Premium (+) /
Maseru N Mean Ladybrand N
(Brand; Package) USD/Pack Discount (-)
USD/Pack
(%)
Savannah; 1 3,11 1 1,55 5 100,1
Pall Mall; 1 3,11 1 2,38 17 30,8
Craven A; 1 4,05 58 3,11 7 30,2
Rothmans; 1 4,01 6 3,11 3 29,2
Chesterfield; 1 3,11 2 2,44 7 27,3

23
23

578 // Botswana-Lesotho: An Analysis of Alcohol and Cigarette Prices in Maseru, Gaborone, and
Neighboring South African Towns
579
KENYA
20

KENYA:

Controlling Illicit
Cigarette Trade
Hana Ross1

Chapter Summary
In response to the presence of illicit cigarettes in the market in the early 2000s, Kenya imple-
mented and tested various measures to control tobacco tax evasion. These measures had
varying degrees of effectiveness, as documented in the literature (both published and unpub-
lished), conference proceedings and related materials, online searches, and analyses based
on data of the National Statistical Office of Kenya. The latest intervention, based on the
modern data-driven technology in track and trace systems (TTSs), combined with electronic
cargo monitoring of exports, seems to be the most effective, as it is more resistant to tam-
pering and reduces reliance on human capacity. The tracing solution implemented in Kenya
increased the size of the legitimate cigarette market, while being cheaper than the previous
piecemeal solutions. The positive experience with the system had good spillover effects,
allowing Kenya to expand the system to other excisable goods, as well as goods, from beer
to cosmetics, subject to counterfeiting.

Despite these successes, Kenya needs to stay vigilant because of the ever-adapting methods
of supplying the illicit cigarette market and because of the risks of lowering enforcement

1
University of Cape Town, South Africa
Note: The support of Caxton Ngeywo and Joseph Sirengo of the Kenya Revenue Authority is gratefully
acknowledged, in addition to support from Vincent Kimosop.

581
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

priorities in the tobacco market. Even though the new system brought in more tax revenue,
the increase has been modest relative to the growing size of the legitimate market. Therefore,
the current technological solution should be expanded to allow for proper tracking. In addi-
tion, the lack of an independent estimate of the size of the illicit tobacco market hinders the
proper assessment of efforts to control the market. The estimates provided by the tobacco
industry or commercial entities cannot be trusted for several reasons: lack of transparency in
their methodology; frequent massive, suspect updates in the estimates that cannot be justified;
and the well-documented efforts by the tobacco industry in a number of countries to exagger-
ate illicit trade to discourage tax increases. The government should therefore invest in regular
assessments of the situation, including estimates of the size of the illicit tobacco market.

The experience of Kenya in addressing the illicit trade highlights the feasibility and impor-
tance of strengthening both the system and enforcement, including the related penalties
and tobacco tax administration, although there are recommendations here for stronger
action on both counts. The efforts of the government are all the more impressive, given
Kenya’s broader difficulties in addressing accountability issues in public-sector management.
The improvement in the tobacco tax system and enforcement was not merely a technical
endeavor. It involved consensus building, the participation of key stakeholders, and consis-
tent and comprehensive approaches to address tax evasion, because piecemeal measures
have only short-term effects.

The government should consider ratifying the Protocol to Eliminate Illicit Trade in Tobacco
Products. This would contribute to sustained political commitment to a systematic effort to
combat the illicit trade within Kenya and help the government secure regional collaboration
that would reduce the illicit trade both domestically and in neighboring countries.

International evidence shows that tax administration is the main cause of illicit trade.
Tobacco tax rates play a relatively modest role. The government of Kenya, with its system
to control the illicit trade in place, should not allow the illicit trade to be used as an excuse
for not pursuing more vigorous tobacco tax reform. Moreover, the tax reform should draw
on the key reform elements recommended by the World Bank on the basis of evidence
from a broad range of low-, middle-, and high-income countries. These include policies that
are highlighted in catchwords and phrases, such as “go big, go fast”; “attack affordability”;
“change expectations”; and “tax by quantity.” The importance for the government of these
points should not be underestimated, given the two-tiered system and the extremely large
discrepancy between the rapid growth in the number of cigarettes sold and the slow growth
and recent declines in real tobacco-tax revenues. It is important that the tax per cigarette be
increased more quickly than inflation so that cigarettes become less, not more affordable
over time. This will also bring fiscal and health benefits to the country.

582 // Kenya: Controlling Illicit Cigarette Trade
1. Background
Globally, Kenya would be classified as a county with relatively low smoking prevalence.
However, in the African context, the prevalence puts Kenya at the top of the pile. In the early
2000s, approximately 21.3 percent of men and 1.0 percent of women smoked tobacco.2
The prevalence among youth was relatively low at that time (8.7 percent among boys and
4.7 percent among girls), but there were signs of a growing appeal of tobacco products to
the young generation.3

By 2007, prevalence had increased both among adults (26.0 percent of men and 2.0 per-
cent of women smoked4) and among youth (12.7 percent of boys and 6.5 percent of girls
smoked5). However, the government managed to reverse this trend among both adults and
young people by following some of the best tobacco control practices recommended in
the Framework Convention on Tobacco Control (FCTC), even though the real tax and real
price of cigarettes declined during this time. By 2014, 15.1 percent of men and 0.8 percent
of women smoked,6 while 9.6 percent of boys and 4.0 percent of girls reported they were
smokers. Measures adopted by the government to control the illicit trade in tobacco prod-
ucts also contributed to this positive trend.

2. Initial Assessment of the Illicit Cigarette Market
In the early 2000s, Kenya was perceived as an illicit cigarette transit point in East Africa, while
Tanzania was the main source of the contraband,7 8 and the Democratic Republic of Congo,
Sudan, and Uganda were the main target destinations.9 An increase in the availability and
quality of illicit cigarettes was reported between 2000 and 2002.10

This prompted a government audit in 2003. The audit revealed serious cigarette tax avoid-
ance and evasion schemes, such as the fraudulent declaration of cigarettes for export that
were then sold tax free domestically, undeclared domestic production to avoid paying
any tax, undeclared imports of raw tobacco and finished products to avoid import taxes,
under-declared values of products to evade higher tax rates, and supplying counterfeit ciga-
rettes to the domestic market.11 12

2
Tobacco Atlas, 2nd edition, 2006.
3
Global Youth Tobacco Survey, Kenya, 2001.
4
Atlas of Health Statistics of the African Region 2011. World Health Organization. Regional Oﬃce for Africa, 2011.
5
Global Youth Tobacco Survey, Kenya, 2007.
6
World Health Organization. 2014. Global Adults Tobacco Survey (GATS), Kenya Country Report.
7
ERC Group. World cigarettes. The 2009 Survey. Suffolk, ERC; 2009.
8
ERC Group. World cigarettes. The 2015 Survey. Suffolk, ERC; 2015.
9
Euromonitor. Illicit trade in tobacco products 2012; 2013.
10
ERC Group. World cigarettes. The 2015 Survey. Suffolk, ERC; 2015.
11
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.
12
ERC Group. World cigarettes. The 2009 Survey. Suffolk, ERC; 2009.

583
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table 1. Illicit Cigarette Trade in the Total Cigarette Market, Kenya, 2003–16
2003*

2014*
2010*
2004

2008
2006

2009
2005

2007

2016
2012

2013

2015
2011
ERC 2007 16.7

ERC 2010 12.0

ERC 2015 20.6 11.0

BAT 8.12 12.0 20.0 8.0

EM 2012 11.3 11.5 11.8 12.4 12.9 13.5

EM 2015 13.0 13.0 13.0 12.8 12.9 13.3 13.6 13.9 14.0 10.8 10.8 10.8

EM 2016 30.8 30.9 30.8 30.3 30.7 31.3 32.0 32.4 32.6 26.5 26.5 26.6 26.6 27.3

EM 2017 11.3 11.3 11.3 11.1 11.2 11.5 11.8 12.1 12.1 9.4 9.4 9.4 9.4 9.7

KRA 15.0 12.0 5.0 5.0 5.0

Sources: ERC Group 2007, 2010, 2015; Eriksen, Mackay, and Ross 2013; Euromonitor International 2012, 2015,
2016, 2017a, 2017b; Gachiri 2012; Muthaura 2013; Nargis 2012; Ngeywo 2017.
Note: BAT = British American Tobacco, EM = Euromonitor International. ERC = ERC Group. KRA = Kenya
Revenue Authority. Euromonitor estimates fluctuate tremendously and are not consistent across reports
published in different years. Similarly, the two estimates generated by ERC for 2007 are not consistent. This
casts a serious doubt on the reliability of these estimates.
* Indicates a significant change in policy to address illicit trade

The size of the problem was not clear (Table 1). Euromonitor International reported in
various publications that the illicit market in 2003 represented between 11 percent and 31
percent of the total market, while the ERC Group (ERC) put that estimate at 20 percent–26
percent in 2007.

The Kenya Revenue Authority (KRA) estimate that the illicit cigarette trade deprives the coun-
try of about K Sh 1 billion (US$11.3 million) in taxes annually.13 Another KRA estimate claimed
that the illicit cigarette trade cost the country more than K Sh 70 billion (US$790 million)
in jobs, tax revenues, and investment losses.14 The methodologies used to generate these
estimates are unknown.

13
Ngeywo CM. Senior Assistant Commissioner, Kenya Revenue Authority, Report of the meeting on the
economics of tobacco control in Southern Africa: the issues of taxation and smuggling. Gaborone, Botswana;
3-5 June 2012. The World Bank, 2012.
14
Muchangi J. Kenya: cigarette smuggling in country. Nairobi Star; 7 March 2012.

584 // Kenya: Controlling Illicit Cigarette Trade
3. First Measures to Address the Illicit
Cigarette Market
The results of the 2003 audit prompted the government to take several actions to address
cigarette tax avoidance and tax evasion. First, it changed the tax regime from an ad valorem
system using the ex-factory price to a specific tiered tax system using retail prices to define
the four progressive tax categories.15 This was supposed to eliminate tax evasion related to
the under-declaration of the value of cigarettes.

In addition to the change in tax structure, the government introduced paper tax stamps on
all cigarette packs sold in the domestic market. This measure was primarily aimed at local
producers and was supposed to eliminate the under-declaration of production destined for
the domestic market. Since a clear majority of cigarettes consumed in Kenya are domesti-
cally produced, only a small volume of imported products supplied by a few importers had
to affix tax stamps to cigarette packs before they entered the Kenya market.16

The stamps provided by the KRA were affixed at the premises of the manufacturers (either in
Kenya or abroad, in the case of imports) to serve as a proof of payment. Each stamp had a
serial number as well as a unique identifier for a particular type of cigarette: an orange stamp
was used for filter cigarettes, and a green stamp was used for nonfilter cigarettes. The manu-
facturers and importers were required to submit monthly reports on the usage and stocks
of these stamps.17 The new tax stamp program was accompanied by regular compliance
checks and audits by the Customs and Excise Department.18

Thanks to these measures, monthly excise tax revenue in 2003 increased from K Sh 230 mil-
lion to K Sh 350 million,19 and legal cigarette and cigar sales rose by 52 percent from 2003
to 2004 (Figure 19.1). The ERC also noted in a later report that these government efforts
reduced the illicit cigarette trade.20 In light of the positive experience with tax stamps on
cigarettes, the government extended the excise stamp regime to wines and spirits in 2007
and began to consider the use of the stamps on beer, water, and juices.21 The stamps were
initially supplied to the KRA by De La Rue of the United Kingdom and the Canadian Bank
Note Company and, since 2007, by an Indian security-printing firm, Madras, that charged K
Sh 2 (US$0.023) for the printing and the delivery of each stamp.22

15
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.
16
ERC Group. World cigarettes. The 2015 Survey. Suffolk, ERC; 2015.
17
Muthaura EK. Tobacco tax administration country experiences in Kenya. Workshop on Tobacco Tax
Administration and Collection in Benin and Togo; 06-07 August 2013.
18
Vincent Kimosop, information obtained from the KRA on August 8, 2018.
19
Ngeywo CM, Ministry of Finance. PowerPoint presentation to CTFK Uganda parliamentary partners held at
Serene Hotel, Kampala: 4 March 2013.
20
ERC Group. World cigarettes. The 2015 Survey. Suffolk, ERC; 2015.
21
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.
22
Taxman targets contraband traders with new duty stamps; https://www.businessdailyafrica.com/Taxman-
targets-contraband-traders-with-new-duty-stamps-/-/539546/1304018/-/14k7v9v/-/index.html, January 11, 2012.

585
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 1. Legal Cigarette Sales, Excise Revenue, Price, and Tax, Kenya, 2003–16

12,000
Sale and revenue

Price and tax per pack
110
10,000
90
8,000
70
6,000
50
4,000

2,000 30

0 10
2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016
Legal sales cigarettes & Real excise revenue
cigars (million sticks) (Ksh Million)

Real price (Sportsman, Real excise tax
pack, Ksh) (Sportsman, pack, Ksh)

Source: KNBS 2016, 2017.
Note: The base year is 2009.

4. Evaluation of the 2003 Measures and the
Decision to Upgrade to TTS
However, within a few years, the tax stamp regime revealed weaknesses. The tax stamps
were easy to counterfeit or steal; they could not be linked to a particular brand or quantity of
production; and they had to be counted manually, which led to inaccuracies. These short-
comings, together with the complex tiered tax structure, made the stamps inadequate for
tax accounting and for enforcement purposes.23 When the size of the legal market began to
shrink again in 2005 and then even further in 2006, it became obvious that the methods in
place were not adequate to control the illicit cigarette market (see Figure 19.1).24

After a long deliberation and site visits to places with advanced solutions for controlling
illicit trade, such as Brazil, the KRA proposed in 2008 to implement a track and trace system
(TTS) and issued a tender for the supply of such a system.25 26 In preparation for the tender,

23
Muthaura EK. Tobacco tax administration country experiences in Kenya. Workshop on Tobacco Tax
Administration and Collection in Benin and Togo; 06-07 August 2013.
24
Muthaura EK. Tobacco tax administration country experiences in Kenya. Workshop on Tobacco Tax
Administration and Collection in Benin and Togo; 06-07 August 2013.
25
Wahome M. Taxman targets contraband traders with new duty stamps. 11 January 2012. Available at: http://
www.businessdailyafrica.com/Taxman-targets-contraband-traders-with-new-duty-stamps-/-/539546/1304018/-
/14k7v9v/-/index.html.
26
Wahome M. New KRA unit sets sights on higher taxes from drinks. 13 January 2013. Available at: http://www.
businessdailyafrica.com/-New-KRA-unit-sets-sights-on-higher-taxes-from-drinks/-/539546/1664690/-/vhukr4/-/
index.html.

586 // Kenya: Controlling Illicit Cigarette Trade
the KRA wrote a concept paper that assessed the availability of various technical solutions
to address the system's loopholes and developed an effective technical specification, while
paying attention to costs.27

In the same year, excise tax rates were substantially increased in search of additional reve-
nue in the midst of a political and economic crisis. Specific tax rates were increased by 40
percent and 25 percent, depending on the type of cigarette.28 Even though the system still
relied on specific tiered taxes, the tiers were now based primarily on the physical features of a
pack and secondarily on price.29

5. Temporary Measures and Cargo Monitoring
When it became obvious that selecting a TTS provider would be a lengthy process, the KRA
decided to implement temporary measures. First, in 2010, it carried out a major review of
the effectiveness of tax stamps.30 The review strongly reaffirmed earlier concerns about
serious weaknesses in the system: the stamps and serial numbers were easy to counterfeit;
they were not useful for tax accounting because a stamp could not be related to a partic-
ular brand or quantity; they did not aid enforcement given the lack of universally available
verification tools; and they had to be counted manually, which led to the theft of stamps in
storage or in transit as well as ineffective stock management.

The KRA was ready to update the tax stamp system and was debating between the use
of paper and digital technology.31 In the end, the agency opted for paper stamps with
enhanced security features. The new stamps were serially numbered, had ultraviolet mark-
ings, the coat of arms, the KRA logo, Kenya Revenue Authority wording, and denoted the
package size or products. The stamps had to be clearly visible when the pack was displayed
for sale and placed on a pack in such a manner that the stamp was destroyed upon opening
a pack.32 The stamps had to be verified at four points in the supply chain.33

27
Ngeywo CM, Kenya Revenue Authority. Implementation of a Track and Trace System for Tobacco in Kenya.
PowerPoint presentation at the Multi-Sectorial Workshop on the adoption of the Protocol to eliminate illicit
trade in Tobacco Products for ASEAN Countries held in Naypyitaw: 9-11 December 2014.
28
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.
29
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.
30
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.
31
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.
32
Excise Duty. Kenya Revenue Authority. Downloaded from http://www.kra.go.ke/pdf/Excise_Duty.pdf 1/15/18
33
Nargis N. Report on the economics of tobacco and tobacco control in Kenya. World Health Organization; 29
October 2012, draft; and Euromonitor, 2012.

587
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

These measures increased the cost of the tax stamp by K Sh 0.124 each, from K Sh 2
(US$0.023) to K Sh 2.124 (US$0.024), or K Sh 66.5 million (US$750,000) a year.34 35 Thanks
to the updated tax stamp regime introduced in 2010 and vigorous enforcement, the KRA
closed three tobacco factories because of their failure to sell and distribute only duty-paid
products and recovered at least US$50 million in unpaid taxes.36 This demonstrated the cost
effectiveness of the newly adopted measures. Furthermore, the KRA closed 7 of 10 tobacco
importers because of their failure to sell and distribute only duty-paid products.37

The 2010 enhanced tax stamp regime was accompanied by a series of other measures
designed to reduce tobacco tax evasion. As of 2010, all local cigarette manufacturers
were required to be licensed, while all tobacco and cigarette importers were required to be
registered with the KRA. The licenses had to be renewed annually38 and required detailed
disclosure of the identities of directors, inventories of the production plant and equipment,
a list of all brands manufactured, information about input-output ratios, and details about
accounting systems.39 Failure to comply with the law was punishable by a fine of up to K Sh
1.5 million and a prison term not exceeding three years, as well as forfeiture of the goods in
question.40 In addition, the government overhauled its accounting system to track cigarette
production more accurately and launched an electronic cargo tracking system (ECTS).

Newly established tax enforcement units41 deployed resident tax officers to conduct periodic
checks of manufacturing facilities to determine how many production lines were active and
what raw materials were being used and to compare input material with the actual output.42
These units discovered, for example, that Mastermind, the company with the second-largest
market share in Kenya, engaged in brand misclassification to reduce tax liability. The KRA
charged Mastermind K Sh 1.7 billion (US$20 million) in outstanding taxes in August 2009.43

To prevent the fraudulent declaration of cigarettes for export, any production destined for
export was subject to a bond deposit in the amount of the excise tax and value added tax.

34
Nargis N. Report on the economics of tobacco and tobacco control in Kenya. World Health Organization; 29
October 2012, draft; and Euromonitor, 2012.
35
Wahome M. Taxman targets contraband traders with new duty stamps 11 January 2012 [14 October 2015].
Available from: http://www.businessdailyafrica.com/Taxman-targets-contraband-traders-with-new-duty-
stamps-/-/539546/1304018/-/14k7v9v/-/index.html.
36
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.
37
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.
38
Excise Duty. Kenya Revenue Authority. Downloaded from http://www.kra.go.ke/pdf/Excise_Duty.pdf 1/15/18
39
Muthaura EK. Tobacco tax administration country experiences in Kenya. Workshop on Tobacco Tax
Administration and Collection in Benin and Togo; 06-07 August 2013.
40
Excise Duty. Kenya Revenue Authority. Downloaded from http://www.kra.go.ke/pdf/Excise_Duty.pdf 1/15/18
41
Ngeywo CM, Kenya Revenue Authority. Kenya’s experience in implementing and financing a tracking and
tracing system. PowerPoint presentation at the World Conference on Tobacco Control or Health, Abu Dhabi. 17
March 2015.
42
Muthaura EK. Tobacco tax administration country experiences in Kenya. PowerPoint presentation. Workshop on
Tobacco Tax Administration and Collection in Benin and Togo,06-07 August 2013.
43
ERC Group. World cigarettes. The 2010 Survey. Suffolk, ERC; 2010

588 // Kenya: Controlling Illicit Cigarette Trade
The bond was only released once the goods had reached the intended destination and the
excise tax had been paid according to local laws. Such country-level bilateral cooperation
and information sharing also supported joint operations at the borders, including patrols.44

The ECTS monitors cigarettes produced for export and goods in transit, with the help of new
technologies. It involves oversight of the loading of all products, sealing the export vehicles
to ensure that items intended for export exit the country, and tracking the cargo on route
with the use of radio frequency identification to make sure that vehicles reach the intended
destination without deviating from the established route. The authorities of both Kenya and
the importing country jointly verify and clear all cargos at the border.45 The ECTS also provides
event information, including departure, long parking, arrival, and disarming of the seal.46
The Chinese company Ascend provided electronic seals for the ECTS to secure container
or truck doors.47 The ECTS relies on global positioning system/general packet radio service
technologies,48 which enable data about the location of the vehicle to be sent or received
at any time through digital cellular communication.49 This ensures that trucks keep to the
designated routes and reach the intended destination in a timely fashion. Any deviation in
excess of 50 meters on either side of the route or tampering with the seal generates an
alert sent directly to the revenue authorities.50 Before the truck leaves the loading facilities,
cargo dispatch information is sent to the relevant authority in the importing country. Any tax
remissions or refunds of the excise and value-added tax are granted only after confirmation
of imports is sent back by that authority to the KRA.51 The ECTS promotes intergovernmental
collaboration, including joint border patrols.52

44
Muthaura EK. Tobacco tax administration country experiences in Kenya. Workshop on Tobacco Tax
Administration and Collection in Benin and Togo; 06-07 August 2013.
45
Muthaura EK. Tobacco tax administration country experiences in Kenya. Workshop on Tobacco Tax
Administration and Collection in Benin and Togo; 06-07 August 2013..
46
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.
47
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.
48
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.
49
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.
50
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.
51
Ngeywo CM, Kenya Revenue Authority. Implementation of a Track and Trace System for Tobacco in Kenya.
PowerPoint presentation at the Multi-Sectorial Workshop on the adoption of the Protocol to eliminate illicit trade
in Tobacco Products for ASEAN Countries held in Naypyitaw: 9-11 December 2014.
52
Muthaura EK. Tobacco tax administration country experiences in Kenya. Workshop on Tobacco Tax
Administration and Collection in Benin and Togo; 06-07 August 2013.

589
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

6. Impact of Cargo Monitoring and
Temporary Measures
The ECTS reduces the number of checkpoints and the associated staffing needs, as well as
insurance costs, thanks to improved security.53 It generates an arrival report and allows revenue
authorities to screen out companies that claim abnormally high tax refunds on exports.54 55 As a
result of the ECTS, exports from Kenya to Côte d'Ivoire, Eritrea, Mali, and Sudan were discon-
tinued56 because some companies ceased to export cigarettes given their inability to provide
evidence that the imports were received.57 Additional evidence of the efficacy of the system
was a substantial increase—up to 30 percent—in legal cigarette sales near the western border
of Kenya, previously known for an illicit cigarette market supplied with products that had been
declared for export.58

The cargo monitoring system has become more important as Kenya has developed into a
regional manufacturing center supplying markets in Mauritius, Rwanda, and Uganda, where
British American Tobacco (BAT) had ceased local production in the 2000s. By 2013, about
26 percent of national production was being exported from Kenya.59

The new measures addressing the illicit cigarette trade and introduced in 2008–10 paid off,
as legal sales of cigarettes and cigars expanded by 67 percent in 2010 relative to 2009, and
tax revenue went up as well, even though at a slower pace due to the poor tax structure and
stagnating tax rates (Table 2; see Figure 1).

In July 2011, the government replaced the tiered specific tax regime with a single rate ad
valorem tax regime with a specific floor set at 35 percent of the retail selling price, or K
Sh 1,200 (about US$10) per thousand cigarettes, whichever is higher.60 The change was
designed to reduce both tax evasion (the false declaration of the number of cigarettes
produced in various tax categories) and tax avoidance (reducing the official retail selling

53
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.
54
Ngeywo CM. Senior Assistant Commissioner, Kenya Revenue Authority, Report of the meeting on the
economics of tobacco control in Southern Africa: the issues of taxation and smuggling. Gaborone, Botswana;
3-5 June 2012. The World Bank, 2012.
55
Ngeywo CM. Presentation to CTFK Uganda parliamentary partners, Ministry of Finance. Serene Hotel, Kampala;
04 March 2013.
56
United Nations. United Nations Comtrade Database 2015 [16 October 2015]. Available from: http://comtrade.
un.org/data/.
57
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.
58
Ngeywo CM, Kenya Revenue Authority. Control of supply chain, tax stamps and other tracking technology, and
enforcement: the experience of Kenya and relevance for SADC countries. PowerPoint presentation at the World
Bank meeting on the economics of tobacco control in Southern Africa: the issues of taxation and smuggling held
in Gaborone: 3-5 June 2012.
59
ERC Group. World cigarettes. The 2015 Survey. Suffolk, ERC; 2015
60
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.

590 // Kenya: Controlling Illicit Cigarette Trade
Table 2. Excise Duty Rates, Kenya, 2003–18

DECEMBER 2015–
NOVEMBER 2015

APRIL 2017–18
MARCH 2017
JULY 2011–
INDICATOR

2003–04

2008–10
2006
2005

2007
2,500 for
1,200 or 2,500
filtered;
Rates 450–1,400 495–1,540 495–1,650 500–2,000 700–2,500 35% of retail for
1,800 for
selling price filtered
nonfiltered
4 specific
progressive 2 specific
4 specific 4 specific 4 specific 4 specific Uniform
tiers based tiers
Tax progressive progressive progressive progressive specific with Uniform
on price based on
system tiers based tiers based tiers based tiers based minimum ad specific
and pack's a physical
on price on price on price on price valorem floor
physical feature
features

K Sh per 1,000
Sources: EM 2017a; ERC 2015; Government of Kenya 2015, 2017; Ngeywo 2013.
Note: July 2011: K Sh 1,200 per 1,000 or 35 percent of the retail selling price, whichever is higher (specific
system with minimum ad valorem floor); the minister had the power to adjust the rates for inflation without
parliamentary approval. The calculation of retail selling price has been legally challenged. December 2015: a
uniform specific tax of K Sh 2,500 per 1,000. The specific rate of excise duty is to be adjusted for inflation at the
beginning of every financial year. April 2017: reinstitution of the two-tiered system. The specific rate of excise
duty is to be adjusted for inflation every two years.

price to qualify for a lower tax rate), while having a neutral impact on tax revenue.61 62 63 64 The
change in the tax structure permitted a 45 percent drop in the excise tax rate on the popular
mid-price brands, such as Sportsman. This caused an 8.7 percent decline in real tax revenue
in 2011, while nominal revenue increased by only 4 percent. However, by 2012, revenue had
recovered—a 14.2 percent increase in real terms and a 24.9 percent increase in nominal terms
relative to 2011—because of reduced opportunities for tax avoidance. Legal sales rose by 0.7
percent and 3.0 percent in 2011 and 2012, respectively, while the tax yield per cigarette went
up (see Figure 1). In the end, the 2011 tax reform, together with the anti–tax evasion measures,
eliminated tax losses worth K Sh 1 billion (US$11.3 million) in excise tax revenue.65

61
Ngeywo CM, Kenya Revenue Authority. Control of supply chain, tax stamps and other tracking technology,
and enforcement: the experience of Kenya and relevance for SADC countries. PowerPoint presentation at
the World Bank meeting on the economics of tobacco control in Southern Africa: the issues of taxation and
smuggling held in Gaborone: 3-5 June 2012.
62
Nargis N, Stoklosa M, Ikamari L, et al. Cigarette Taxation in Kenya at the Crossroads: Evidence and Policy
Implications. Ontario, Canada: University of Waterloo, October 2015.
63
Ngeywo CM, Ministry of Finance. PowerPoint presentation to CTFK Uganda parliamentary partners held at
Serene Hotel, Kampala: 4 March 2013.
64
Muthaura EK. Tobacco tax administration country experiences in Kenya. Workshop on Tobacco Tax
Administration and Collection in Benin and Togo; 06-07 August 2013.
65
Ngeywo CM, Ministry of Finance. PowerPoint presentation to CTFK Uganda parliamentary partners held at
Serene Hotel, Kampala: 4 March 2013.

591
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

In early 2012, even a representative of BAT Kenya, the market-dominant company, acknowl-
edged a decline in the illicit cigarette market thanks to government efforts and placed the
estimate of the illicit market share at 8 percent of the total market.66 BAT particularly praised
the simplified ad valorem tax system that made tax calculations easier and raised compli-
ance.67 Both the ERC and Euromonitor reported a drop in the share of illegal cigarettes on the
market in 2012 relative to 2011. The ERC estimate was 12 percent of the total market, while
Euromonitor68 reported a range from 9 percent to 27 percent of the market (see Table 1).

7. Building up the Track and Trace System
By the end of 2012, the controls implemented by the KRA showed substantial progress in
moving toward a strong TTS.69 Excise stamps were now available in four colors to aid enforce-
ment: orange for cigarettes longer than 72 millimeters and filtered cigarettes; light green
for cigarettes equal or less than 72 millimeters and nonfiltered cigarettes; blue for imported
cigarettes; and maroon for cigarettes destined the for the Navy, Army, Air Force Institute, and
the Armed Forces. The stamps were premarked with a unique identifier reflecting a particular
type or brand of cigarettes.70 71 Cigarette seizures were declining, and tobacco excise revenue
was growing annually by about 20 percent.72 Nonetheless, integration into a single data-shar-
ing point was still missing. In December 2012, after being delayed by legal issues for about five
years, the KRA finally selected a provider of the TTS. A Swiss company, SICPA, won the tender
and, in April 2013, signed a five-year contract with the KRA to control tobacco and alcohol
products.73 The contract was worth close to K Sh 732 million (US$9.5 million) annually. Other
bidders included three Indian firms (Madras, Holistic, and Security Printing Press), De La Rue of
the United Kingdom, Authentecs Inc. of the United States, and EDAPS of Ukraine.74 75

66
BAT does not disclose their method of estimating the size of the illicit market.
67
Gachiri J. Agencies war on illicit cigarettes now gains ground. The Business Daily; 11 March 2012. Available at:
http://www.businessdailyafrica.com/-/539552/1363968/-/54i6pkz/-/index.html.
68
Euromonitor estimates fluctuate tremendously and are not consistent across reports published in different
years. This casts serious doubt on the reliability of the Euromonitor estimates. Neither Euromonitor nor ERC
discloses the method of estimating the size of the illicit market.
69
Ngeywo CM, Kenya Revenue Authority. Control of supply chain, tax stamps and other tracking technology,
and enforcement: the experience of Kenya and relevance for SADC countries. PowerPoint presentation at
the World Bank meeting on the economics of tobacco control in Southern Africa: the issues of taxation and
smuggling held in Gaborone: 3-5 June 2012.
70
Customs And Excise Act. Subsidiary Legislation. Chapter 472. Revised 2014.
71
Muthaura EK. Tobacco tax administration country experiences in Kenya. Workshop on Tobacco Tax
Administration and Collection in Benin and Togo; 06-07 August 2013.
72
Wahome M. New KRA unit sets sights on higher taxes from drinks. 13 January 2013. Available at: http://www.
businessdailyafrica.com/-New-KRA-unit-sets-sights-on-higher-taxes-from-drinks/-/539546/1664690/-/vhukr4/-/
index.html.
73
SICPA, personal communication with Pierre Viaud, Senior Director Public Affairs & Government Relations on
9/8/15.
74
Wahome M. Taxman targets contraband traders with new duty stamps. 11 January 2012. Available at: http://
www.businessdailyafrica.com/Taxman-targets-contraband-traders-with-new-duty-stamps-/-/539546/1304018/-
/14k7v9v/-/index.html.
75
Wahome M. New KRA unit sets sights on higher taxes from drinks. 13 January 2013. Available at: http://www.
businessdailyafrica.com/-New-KRA-unit-sets-sights-on-higher-taxes-from-drinks/-/539546/1664690/-/vhukr4/-/
index.html.

592 // Kenya: Controlling Illicit Cigarette Trade
SICPA set up the excisable goods management system (EGMS) for tobacco and alcohol
products (see Annex A). The EGMS allows for production counting, tracking and tracing
products, stock control, tax revenue forecasting, tax stamp forecasting and processing,
accounts management, and the collection of other business intelligence.76 77 This facilitates
the detection of counterfeit goods, prevents smuggling, and eliminates the falsification of
production volumes. The EGMS also reduces the cost of brand protection and aids produc-
tion monitoring among legitimate business.78

Implementing the EGMS requires minimum infrastructure, such as high-speed broadband
Internet and a reliable telecommunication network covering the areas of the country in
which TTS equipment is installed (for example, tax authority headquarters, factories, ware-
houses, and ports). It also needs a reliable power grid with uninterruptible power supply
equipment and backup power sources (generators and inverters) at each major site at which
system equipment is installed.79

The EGMS was implemented in three phases, relying on SICPA’s previous experience in
Brazil. The rollout of the system took approximately 11 months, up to March 2014.80 The first
phase involved the launch of electronic digital stamps in April 2013. Each stamp has a unique
identifier using a standard data matrix code, as well as multiple material security layers (see
Annex B), as follows: 81 82 83

»» Overt security features for authentication by the general public, such as holograms and
color shifting

»» Semicovert security features for authentication in the supply chain (retailers and
distributors)

»» Overt security features, such as fluorescent fibers and security ink, exclusively for the use
of the tax authority for authentication during random field verification and tracing

»» Forensic taggants for laboratory authentication to support prosecution

76
Ngeywo CM, Kenya Revenue Authority. Kenya’s experience in implementing and financing a tracking and
tracing system. PowerPoint presentation at the World Conference on Tobacco Control or Health, Abu Dhabi.
17 March 2015.
77
Muthaura EK. Tobacco tax administration country experiences in Kenya. PowerPoint presentation. Workshop
on Tobacco Tax Administration and Collection in Benin and Togo,06-07 August 2013.
78
Ngeywo CM, Kenya Revenue Authority. Implementation of a Track and Trace System for Tobacco in Kenya.
PowerPoint presentation at the Multi-Sectorial Workshop on the adoption of the Protocol to eliminate illicit
trade in Tobacco Products for ASEAN Countries held in Naypyitaw: 9-11 December 2014.
79
Ngeywo CM, Kenya Revenue Authority. Kenya’s experience in implementing and financing a tracking and
tracing system. PowerPoint presentation at the World Conference on Tobacco Control or Health, Abu Dhabi.
17 March 2015.
80
SICPA, personal communication with Pierre Viaud, Senior Director Public Affairs & Government Relations on
9/8/15.
81
Muthaura EK. Tobacco tax administration country experiences in Kenya. Workshop on Tobacco Tax
Administration and Collection in Benin and Togo; 06-07 August 2013.
82
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.
83
Contract between the KRA and SICPA, 2015.

593
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

»» Ultraviolet fluorescent features visible under ultraviolet light

»» Anti-Stokes fluorescent prints detectable by specialized devices

»» Minitext printing revealed with a magnifying glass

»» Ultraviolet fibers visible under ultraviolet light in dry paper stamps

»» Visible two-dimensional codes for product verification, activation, and traceability
by smartphones

»» Human readable codes for verification by short message service and the KRA web portal

»» Tamper-proof security cuts

This phase was completed in December 2013.84 Thanks to these features, the new tax stamp
is difficult to counterfeit or to sell to third parties.

A tax stamp that serves as proof of payment of both excise and the manufacturer val-
ue-added tax85 is permanently associated with the product and must be affixed to each
pack in such a manner that removal would make it unusable.86

The second phase involved the automation of the control and monitoring system.
Manufacturers were required to install photosensitive readers (flow meters) on manufac-
turing lines that automatically send detailed production data in real time to KRA servers.
Each individual tax stamp affixed on the production line is activated and associated with a
brand and a package size.87 A reader can electronically scan up to 200 containers of packs
on a packing line and send data on the quantity and type of products being manufactured
to the KRA every 15 minutes. Such automatic and detailed counting is designed to prevent
the common practice of fraudulently declaring the production of lower-taxed inexpensive
cigarettes, while manufacturing more expensive brands subject to a higher tax bracket.
Production line monitoring represents a game changer that shifts the burden of proof in tax
liability cases from the KRA to manufacturers. It also aids tax revenue forecasting and sup-
ports the ordering and delivery of stamps to manufacturers and importers. A lot of attention is
paid to data security to protect data in the central database.88 By the end of February 2014, 25
production lines were equipped with readers and monitored.89

84
Remarks at the Excisable Stakeholders Forum on Excisable Goods Management. March 14, 2014.
Downloaded from http://www.revenue.go.ke/index.php/notices/speeches 1/11/18
85
Vincent Kimosop, information obtained from the KRA on August 8, 2018.
86
Ngeywo CM, Kenya Revenue Authority. Implementation of a Track and Trace System for Tobacco in Kenya.
PowerPoint presentation at the Multi-Sectorial Workshop on the adoption of the Protocol to eliminate illicit
trade in Tobacco Products for ASEAN Countries held in Naypyitaw: 9-11 December 2014.
87
Muthaura EK. Tobacco tax administration country experiences in Kenya. Workshop on Tobacco Tax
Administration and Collection in Benin and Togo; 06-07 August 2013.
88
Ngeywo CM, Kenya Revenue Authority. Implementation of a Track and Trace System for Tobacco in Kenya.
PowerPoint presentation at the Multi-Sectorial Workshop on the adoption of the Protocol to eliminate illicit
trade in Tobacco Products for ASEAN Countries held in Naypyitaw: 9-11 December 2014.
89
Remarks at the Excisable Stakeholders Forum on Excisable Goods Management. March 14, 2014.
Downloaded from http://www.revenue.go.ke/index.php/notices/speeches 1/11/18

594 // Kenya: Controlling Illicit Cigarette Trade
The third phase consisted of setting up market surveillance. An enforcement unit with 300
members was supposed to be formed between 2013 and 2015.90 Instead, a market surveil-
lance unit consisting of 83 officers was formed, 59 of whom were employed permanently.
The unit focuses on all excisable goods and carries out inspections at any time and at any
place in the distribution channel; it has the power to seize illicit products and arrest the
offender on the spot.91 92 The unit is equipped with handheld devices that can swipe a hidden
photomagnetic line embedded in the stamp and transmit real-time data to the central KRA
server. The server checks the date of issue of the stamp, the producer’s name, the product
category, and the brand. Using this information, it automatically verifies the authenticity
of the product and the tax compliance status. This takes the human element of manual
checking out of the verification process, thus eliminating mistakes and enhancing speed and
integrity. The handheld device can also be used offline for the authentication of the stamp
and for tracking and tracing the stamp.93

8. Enforcing the New Control System
Cigarette distributors and retailers have a device that allows for the authentication of any
tobacco products before accepting them into their outlets.94 Even though distributors and
retailers are not licensed, they are criminally liable if they sell products without the appropriate
excise tax paid. They can be fined up to K Sh 5 million (US$48,000) and be imprisoned for up
to three years.95 All major supermarkets participate in the system and are connected to KRA
servers. The KRA also released an app in 2016 known as the KRA Stamp Checker, which allows
the public to verify the genuineness of cigarettes and alcohol using mobile phones.96

The Excise Duty Act and the Tax Procedures Act adopted in November 2015 clarified the
new obligations of the manufacturers, suppliers, and importers of excisable goods.97 All ciga-
rette manufacturers and importers must be licensed. Failure to obtain a license is punishable
by fines up to K Sh 5 million (US$48,000) or up to three times the excise duty on goods to
which the offense relates. Violators can also be imprisoned for up to three years.98 As of May

90
Remarks at the Excisable Stakeholders Forum on Excisable Goods Management. March 14, 2014.
Downloaded from http://www.revenue.go.ke/index.php/notices/speeches 1/11/18
91
Ngeywo CM, Kenya Revenue Authority. Kenya’s experience in implementing and financing a tracking and
tracing system. PowerPoint presentation at the World Conference on Tobacco Control or Health, Abu Dhabi.
17 March 2015.
92
The Excise Duty Act, 2015, Kenya Gazette Supplement No. 181 (Acts No. 23), Nairobi, 6th November, 2015.
93
Muthaura EK. Tobacco tax administration country experiences in Kenya. Workshop on Tobacco Tax
Administration and Collection in Benin and Togo; 06-07 August 2013.
94
Ngeywo CM, Kenya Revenue Authority. Kenya’s experience in implementing and financing a tracking and
tracing system. PowerPoint presentation at the World Conference on Tobacco Control or Health, Abu Dhabi.
17 March 2015.
95
The Excise Duty Act, 2015, Kenya Gazette Supplement No. 181 (Acts No. 23), Nairobi, 6th November, 2015.
96
Dennis. Hustle Yethu. How to Use KRA Stamp Checker To verify the Genuineness and Authenticity of a Product.
97
The Excise Duty Act, 2015, Kenya Gazette Supplement No. 181 (Acts No. 23), Nairobi, 6th November, 2015.
98
The Excise Duty Act, 2015, Kenya Gazette Supplement No. 181 (Acts No. 23), Nairobi, 6th November, 2015.

595
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

2018, only two cigarette manufacturers (BAT and Mastermind Tobacco) and 10 importers
(Bridge Motivation Travel, Brockley Investments, Gemini Mart, Ibinda, Kevin International, Leaf
Tobacco and Commodities, Nicentury Development Company, RG Tobacco, Simba Mbili,
and Sunova Enterprises) were licensed in Kenya.

The EGMS is used for both domestic and imported products. Cigarette importers purchase
electronic digital stamps in Kenya and send them to their facilities abroad, where they are
affixed to each pack destined for Kenya.99 All domestic producers and importers must
activate the excise stamps online.100 They become liable for excise duty at the moment of
removal of the goods from the factory or at the time of importation.101 Tobacco products
designated for export do not have tax stamps, but are marked according to the law of the
importing country.102 Packs that are falsely exported and reimported into Kenya can thus be
easily spotted in the Kenyan market. These goods are also subject to a tight electronic cargo
monitoring system introduced in 2010.

To implement the EGMS, the KRA assembled a multidisciplinary technical team consisting
of tax, information and communication technology, legal, and procurement experts.103
Before and during the EGMS implementation, the KRA carried out critical consultations with
the other two agencies that have a mandate to control the illicit tobacco trade—the Kenya
Bureau of Standards (KEBS) and the Anti-Counterfeit Agency—as well as the Kenya Private
Sector Alliance and other stakeholders to make sure they were kept informed and on board
with the project.104 This helped secure intergovernmental agency enforcement.105

In 2013, the KRA signed a memorandum of understanding with the Ethics and Anti-Corruption
Commission that expanded the scope of cooperation between the two agencies in com-
bating and preventing corruption and economic crime.106 In addition, the KRA developed an
evaluation plan to assess the performance of the new system and a rapid intervention plan in
case the rollout was not going as envisioned.107

99
Ngeywo CM, Kenya Revenue Authority. Kenya’s experience in implementing and financing a tracking and
tracing system. PowerPoint presentation at the World Conference on Tobacco Control or Health, Abu Dhabi.
17 March 2015.
100
African Tax Administration Forum. African Tax Outlook. Hatfield, South Africa: 2016.
101
The Excise Duty Act, 2015, Kenya Gazette Supplement No. 181 (Acts No. 23), Nairobi, 6th November, 2015.
102
The Excise Duty Act, 2015, Kenya Gazette Supplement No. 181 (Acts No. 23), Nairobi, 6th November, 2015.
103
Ngeywo CM, Kenya Revenue Authority. Kenya’s experience in implementing and financing a tracking and
tracing system. PowerPoint presentation at the World Conference on Tobacco Control or Health, Abu Dhabi.
17 March 2015.
104
Remarks at the Excisable Stakeholders Forum on Excisable Goods Management. March 14, 2014.
Downloaded from http://www.revenue.go.ke/index.php/notices/speeches 1/11/18
105
Ngeywo CM, Kenya Revenue Authority. Implementation of a Track and Trace System for Tobacco in Kenya.
PowerPoint presentation at the Multi-Sectorial Workshop on the adoption of the Protocol to eliminate illicit
trade in Tobacco Products for ASEAN Countries held in Naypyitaw: 9-11 December 2014.
106
Memorandum of Understanding Between the Kenya Revenue Authority (KRA) and the Ethics and Anti-
Corruption Commission (EACC) on Combating and Preventing Corruption, Economic Crime and Unethical
Practices at KRA. Downloaded from http://www.revenue.go.ke/index.php/notices/speeches 1/11/18
107
Ngeywo CM, Kenya Revenue Authority. Kenya’s experience in implementing and financing a tracking and
tracing system. PowerPoint presentation at the World Conference on Tobacco Control or Health, Abu Dhabi.
17 March 2015.

596 // Kenya: Controlling Illicit Cigarette Trade
9. Effectiveness of the EGMS
Implementing the EGMS turned out to be cheaper than the cost of the previous system,
which relied on tax stamps without the track and trace capabilities.108 109 The total cost of
printing and delivering the EGMS tax stamp was K Sh 1.50 per pack110 compared with K Sh
2.124 for the previous tax stamp.

The system is self-funding. Companies are paying for the photosensitive readers to be
placed on their manufacturing lines and are allowed to expense this cost, thus reducing
their tax liability.111 112

In December 2014, the KRA introduced a 2 percent fee (the Solatium Compensatory
Contribution) on the total prior year audited revenue of local manufacturers and import-
ers according to Tobacco Control Regulations.113 This fee is used to fund tobacco control
research and tobacco cessation and rehabilitation programs. BAT challenged the fee in
court, but the final court decision in February 2017 sided with the KRA and allowed the fee
to be levied on domestic manufacturers and importers.114

The EGMS was accompanied by the rollout of an iTax system, which facilitates online tax
payments and helps improve income tax compliance.115 This reduced the cost of tax compli-
ance and enhanced service delivery.116 Companies report better access to information and
more rapid delivery of tax stamps.117

The implementation of the EGMS has led to an increase in tobacco tax revenue. The largest
tax revenue rise was recorded in imported cigarettes, which increased by an incredible 4,728

108
Ngeywo CM, Kenya Revenue Authority. Implementation of a Track and Trace System for Tobacco in Kenya.
PowerPoint presentation at the Multi-Sectorial Workshop on the adoption of the Protocol to eliminate illicit
trade in Tobacco Products for ASEAN Countries held in Naypyitaw: 9-11 December 2014.
109
Ngeywo CM, Kenya Revenue Authority. Kenya’s experience in implementing and financing a tracking and
tracing system. PowerPoint presentation at the World Conference on Tobacco Control or Health, Abu Dhabi.
17 March 2015.
110
SICPA, personal communication with Jérôme Duperrut, Associate Director; Public Affairs & Government
Relations on 1/22/18.
111
Ngeywo CM, Kenya Revenue Authority. Implementation of a Track and Trace System for Tobacco in Kenya.
PowerPoint presentation at the Multi-Sectorial Workshop on the adoption of the Protocol to eliminate illicit
trade in Tobacco Products for ASEAN Countries held in Naypyitaw: 9-11 December 2014.
112
Ngeywo CM. Kenya Revenue Authority. Kenya’s experience in implementing and financing a tracking and
tracing system. Presentation at the WCTOH, Abu Dhabi. 17 March 2015.
113
Euromonitor International. Tobacco in Kenya. Euromonitor International, 2017.
114
Tobacco Control Fund to be set up. Feb. 24, 2017, By John Muchangi, http://www.the-star.co.ke/
news/2017/02/24/tobacco-control-fund-to-be-set-up_c1512630
115
Remarks at the Excisable Stakeholders Forum on Excisable Goods Management. March 14, 2014.
Downloaded from http://www.revenue.go.ke/index.php/notices/speeches 1/11/18
116
Ngeywo CM. Control of supply chain, tax stamps and other tracking technology, and enforcement: the
experience of Kenya and relevance for SADC countries. Kenya Revenue Authority. Gaborone; 3-5 June 2012.
117
Ngeywo CM, Kenya Revenue Authority. Kenya’s experience in implementing and financing a tracking and
tracing system. PowerPoint presentation at the World Conference on Tobacco Control or Health, Abu Dhabi.
17 March 2015

597
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

percent from July to December 2014.118 Overall, 2014 tax compliance expanded by 45 per-
cent,119 120 while costs went down.121

The new KRA enforcement units seized more than 300,000 illegal products from about 900
outlets and prosecuted more than 150 offenders between February and June 2014 alone.122
Overall, the KRA reported the seizure of 20 million cigarettes in 2014.123

The evaluation of the performance of the system over a longer period is complicated by
simultaneous changes in the tax rates and the overall economy (see Table 2).

The Kenya National Bureau of Statistics reported a 76 percent increase in legitimate cigarette
and cigar sales from 2013 to 2016 (see Figure 1), which is clearly a result of improved tax
administration, given the declining trend in smoking prevalence,124 125 126 the limited popula-
tion growth,127 and the relatively modest per capita growth in gross domestic product (GDP)
(3.2 percent a year during this period).128

However, the excise tax revenue from cigarettes and cigars rose only modestly during 2013–
16, 22 percent in nominal terms and by less than 1 percent in real terms despite a substantial
increase in the excise tax rate in 2016 (see Figure 1). Excise tax collection on beer rose by 16
percent (6 percent in real terms) and on wine and spirits by 103 percent (36 percent in real
terms) during the same period, with an unchanged tax rate during that time.129 130 131

In fiscal year 2016/17 (July 2016–June 2017), excise tax revenue on beer and tobacco grew
13.3 percent, while excise tax revenue on spirits grew by 22.7 percent. The KRA attributes this

118
Ngeywo CM, Kenya Revenue Authority. Kenya’s experience in implementing and financing a tracking and
tracing system. PowerPoint presentation at the World Conference on Tobacco Control or Health, Abu Dhabi.
17 March 2015.
119
Euromonitor International. Tobacco in Kenya. Euromonitor International, 2015.
120
African Tax Administration Forum. African Tax Outlook. Hatfield, South Africa: 2016.
121
Ngeywo CM, Kenya Revenue Authority. Kenya’s experience in implementing and financing a tracking and
tracing system. PowerPoint presentation at the World Conference on Tobacco Control or Health, Abu Dhabi.
17 March 2015.
122
World Health Organization (WHO). WHO Report on the Global Tobacco Epidemic, 2015: Raising Taxes on
Tobacco. Geneva: World Health Organization, 2015.
123
Ngeywo CM, Kenya Revenue Authority. Implementation of a Track and Trace System for Tobacco in Kenya.
PowerPoint presentation at the Multi-Sectorial Workshop on the adoption of the Protocol to eliminate illicit
trade in Tobacco Products for ASEAN Countries held in Naypyitaw: 9-11 December 2014.
124
Central Bureau of Statistics (CBS) [Kenya], Ministry of Health (MOH) [Kenya], Macro O, 2004. Kenya
Demographic and Health Survey 2003. CBS, MOH, and ORC Macro., Calverton, Maryland.
125
(KNBS) KNBoS, International I. Kenya Demographic and Health Survey 2014. Calverton, Maryland: KNBS and
ICF International. 2014.
126
WHO report on the global tobacco epidemic, 2017: monitoring tobacco use and prevention policies.
Geneva: World Health Organization; 2017.
127
Kenya National Bureau of Statistics, Ministry of State for Planning, National Development and Vision 2030.
2009 Kenya National Population and Housing Census: Population Dynamics. Nairobi, Kenya: KNBS, 2012.
128
Tradingeconomics. World Bank. Updated on June of 2018. https://tradingeconomics.com/kenya/gdp-per-capita.
129
Kenya National Bureau of Statistics (KNBS). Economic Survey 2016. In: Production Statistics, Macroeconomic
Statistics, Strategy and Development, Finance and Administration, Population and Social Statistics, Information
and Communication Technology, editors. Nairobi: KNBS; 2016. p. 123.
130
John M. Mutua. A citizen’s handbook on taxation in Kenya. Institute of Economic Affairs, 2012.
131
Alcoholic Drinks in Kenya. Euromonitor International. August 2017.

598 // Kenya: Controlling Illicit Cigarette Trade
growth to enhanced compliance thanks to the EGMS.132 The International Monetary Fund
has also praised Kenya for the implementation of the EGMS and iTax, which contributed
significantly to a marked improvement in fiscal year 2016/17 revenue collection.133

Given this favorable performance, the EGMS was expanded on November 1, 2017, from
tobacco, wine, beer, and spirits to bottled water, juices, soda in PET containers, energy
drinks, other nonalcoholic beverages, food supplements, and cosmetics.134

In the context of the extension of EGMS to other excisable products, the cost of an EGMS
stamp charged by the system provider and collected from the tobacco industry increased
from K Sh 1.50 per pack to K Sh 2.80 per pack.135 However, this still represented only around
2 percent of the retail price of the most widely sold brand. The KRA continuously reviews the
performance of the EGMS, ensuring the robustness and stability of the system.136

In 2017, the KRA initiated the launch of a new state-of-the-art integrated customs man-
agement system. When fully implemented, the system will provide best-practice features,
including cargo value benchmarking to address undervaluation, the self-adjustment of
valuation, automatic stock management, the auto-upload of cargo import data from ship-
ping manifests to prevent import falsification, and the auto-exchange of information with
iTax to counter noncompliant traders. This will ensure that correct quantities are reported
and that tax liabilities are properly assessed by integrating the data provided by various tax
departments and the taxpayers.137 Before the system is fully functional, the Simba system,
supported by a few functions of the integrated customs management system, is handling
cargo transactions.138 These systems are helping the KRA to add a large number of new tax-
payers into the database and strengthening the collection of other taxes.139

The KRA has already deployed three more scanners to enhance the nonintrusive inspection
of cargos at the port of Mombasa. The personnel managing the scanning function are not
involved in the analysis and interpretation of the scanner images, to eliminate a motivation
for undue influence.140 The KRA plans to employ technology that both scans and objectively
interprets the images.141

132
Annual Revenue Performance FY 2016/2017. KRA Press release 20th July, 2017. Downloaded from http://
www.revenue.go.ke/index.php/notices/speeches 1/11/18
133
Kenya. IMF Country Report No. 17/25, International Monetary Fund. January 2017
134
Public Notice. Excise Stamps on Bottled Water, Juices, Soda, other Non-Alcoholic Beverages and Cosmetics.
Downloaded from http://www.revenue.go.ke/index.php/notices/speeches 1/11/18.
135
SICPA, personal communication with Jérôme Duperrut, Associate Director; Public Affairs & Government
Relations on 1/22/18.
136
Ngeywo CM, Kenya Revenue Authority. Implementation of a Track and Trace System for Tobacco in Kenya.
PowerPoint presentation at the Multi-Sectorial Workshop on the adoption of the Protocol to eliminate illicit
trade in Tobacco Products for ASEAN Countries held in Naypyitaw: 9-11 December 2014.
137
Annual Revenue Performance FY 2016/2017. KRA Press release 20th July, 2017. Downloaded from http://
www.revenue.go.ke/index.php/notices/speeches 1/11/18
138
Kenya Revenue Authority, communication with the World Bank, 6/08/18.
139
Kenya. IMF Country Report No. 17/25, International Monetary Fund. January 2017.
140
Kenya Revenue Authority, communication with the World Bank, 6/08/18.
141
Kenya Revenue Authority, communication with the World Bank, 6/08/18.

599
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Despite these efforts, the KRA reported a rise in illicit tobacco trade activities in April–
December 2017.142 The KRA attributes this increase to the prolonged election campaign
and related political tensions, coupled with an economic slowdown. During the election
campaign, the police were focusing on maintaining the overall peace, thereby paying
less attention to the enforcement of anti-illicit trade measures. As a result, excise revenue
declined by 9.9 percent in July–December 2017 compared with the same period in the
previous year.143 This points to the importance of constant vigilance and enforcement in the
fight against illicit trading.

10. Discussion
Even though the government faces public management challenges in general, it was able
to harness political support to adopt and implement the strengthening of tobacco tax
administration. Its approach to controlling illicit trade evolved from piecemeal measures to a
comprehensive system of controls. This was an important development because addressing
various aspects of the illicit market in isolation had only a short-term effect.144 In addition, the
costs of the EGMS were lower relative to the costs of the previous disjointed system.

The implementation of a comprehensive system required a systematic approach, stake-
holder participation, and an initial investment in infrastructure and enforcement.145 However,
the costs of the system, including the upfront costs, were covered by the tobacco industry.

It was important to communicate the benefits of the system to all stakeholders and to
demonstrate that the system protects various interests, including business interests, because
it aids brand protection and production monitoring for legitimate businesses.146

It was vital that the EGMS should create a permanent association between the product and
the code and the stamp and that this stamp should be unusable after first use. Expanding
enforcement beyond the KRA by facilitating the participation of the public and retailers and
distributors helped in monitoring the system's performance and reduced the opportunities
to distribute illicit products. Conducting frequent enforcement checks and the ability to
obtain evidence of violations on the spot without a requirement for additional authentication
promote efficient and cost-effective enforcement.

142
Kenya Revenue Authority, communication with the World Bank, 6/08/18.
143
Revenue data 2016 – 2017. Kenya Revenue Authority, communication with the World Bank, 6/08/18.
144
Muthaura EK. Tobacco tax administration country experiences in Kenya. Workshop on Tobacco Tax
Administration and Collection in Benin and Togo; 06-07 August 2013.
145
Ngeywo CM, Kenya Revenue Authority. Implementation of a Track and Trace System for Tobacco in Kenya.
PowerPoint presentation at the Multi-Sectorial Workshop on the adoption of the Protocol to eliminate illicit
trade in Tobacco Products for ASEAN Countries held in Naypyitaw: 9-11 December 2014.
146
Ngeywo CM, Kenya Revenue Authority. Implementation of a Track and Trace System for Tobacco in Kenya.
PowerPoint presentation at the Multi-Sectorial Workshop on the adoption of the Protocol to eliminate illicit
trade in Tobacco Products for ASEAN Countries held in Naypyitaw: 9-11 December 2014.

600 // Kenya: Controlling Illicit Cigarette Trade
Another important feature of the system is the limited human involvement in daily operations
and data security. For example, production data are gathered without any input from manufac-
turers, and the data collected during an inspection are automatically transmitted to the central
server once a product code is scanned. This prevents errors and system manipulation.

The system is continuously monitored and reviewed to ensure its robustness, stability, and
ability to deal with possible mutations in tax evasion schemes.147 It also provides input for future
system upgrades such as tracking and aggregation, which are not currently supported.148

The EGMS has limitations. It has a restricted capacity to check counterfeit cigarettes unless
they are distributed over official retail channels. This is exacerbated by the fact that the
Anti-Counterfeit Agency has sufficient resources to operate only in three cities: Kisumu,
Mombasa, and Nairobi.149 However, counterfeit products are responsible for only about 10
percent of the tax evasion in Kenya.150

To address this weakness, the KRA recommends that the track and trace solution be
extended to cover the whole cigarette supply chain up to retail. The KRA also wants to
explore the feasibility of using the TTS on individual cigarettes instead of packs.151 Such
measures should improve excise revenue growth, which seems to be lagging behind the
growing size of the legal market.

There is weak coordination and limited data sharing between the three government agen-
cies in charge that have overlapping mandates (the KRA, the Anti-Counterfeit Agency, and
the Kenya Bureau of Standards).152 These institutions should be allowed to prosecute on
behalf of each other given that they perform similar roles in dealing with the illicit tobacco
trade. They should also harmonize their penalties: they are currently applying different penal-
ties for similar offenses.153

The law does not allow for penalties that are sufficiently punitive to deter the illicit trade.
Most of the laws tie fines to the value of seizures or fail to define minimum fines. For exam-
ple, illicit traders engaging in small-quantity, but high-volume trade may receive only small
fines. This lack of punitive fines constrains efforts to curb the illicit cigarette trade in Kenya.154
To correct this, the law should be amended to follow the principles outlined in the Protocol
to Eliminate Illicit Trade in Tobacco Products.

147
Ngeywo CM, Kenya Revenue Authority. Kenya’s experience in implementing and financing a tracking and
tracing system. PowerPoint presentation at the World Conference on Tobacco Control or Health, Abu Dhabi.
17 March 2015.
148
Contract between KRA and SICPA, 2015.
149
Kenya Institute for Public Policy Research and Analysis. Factsheet: illicit trade in tobacco products in Kenya.
May 2014.
150
Ngeywo CM, Ministry of Finance. PowerPoint presentation on April 18th, 2017, Washington DC.
151
Kenya Revenue Authority, communication with the World Bank, 6/08/18.
152
Euromonitor International. Cigarettes in Kenya. Euromonitor International, 2016.
153
Kenya Revenue Authority, communication with the World Bank, 6/08/18.
154
Kenya Institute for Public Policy Research and Analysis. Factsheet: illicit trade in tobacco products in Kenya.
May 2014.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

The KRA should also receive more funding and other support in carrying out enforcement
operations. For example, the originally envisioned 300-member enforcement unit was
shrunk to 83 officers, and only 59 of these officers are employed permanently. These offi-
cers are in charge of all excisable goods, not only tobacco.

Kenya and its neighbors would clearly benefit from a region-wide solution. The KRA is
therefore engaging in a dialog on possible collaboration within the East African Community.
The KRA has proposed tax harmonization within the community that has both short-term and
long-term components, such as the harmonization of tax structures (that is, adopting specific
tax regimes and a single tax description for all types of cigarettes) and the harmonization of
rates to avoid disparities in tax incidence.155

Even though the KRA reports that the illicit cigarette market declined from 15 percent of the
total market in 2003–13 to 5 percent after the implementation of the EGMS,156 the method-
ology of generating these estimates is not publicly available. The KRA would benefit from the
regular generation of estimates of the size of the illicit cigarette market using a transparent
methodology. Because a pack of cigarettes in Kenya carries distinctive and secured features,
there are multiple methods available to study the size of and changes in the illicit cigarette
market.157 Such a study could be outsourced to an academic or interdisciplinary research
institution not associated with the tobacco industry. Given that each of the methods has
strengths and weaknesses, two or more methods should be simultaneously employed to
cross-verify the results. Estimating the size of the illicit cigarette market would enhance the
capacity of the government and others to evaluate the EGMS's performance.

TTSs such as the one adopted in Kenya are the key requirement of the World Health
Organization’s (WHO) FCTC Protocol to Eliminate Illicit Trade in Tobacco Products. Even
though Kenya is not a party to the Protocol (although the government signed the Protocol in
December 2013), its experience demonstrates that even a lower-middle-income country has
the capacity to implement such a system successfully. This can encourage other countries
to sign and ratify the Protocol, which came into force in September 2018 after being ratified
and acceded to by more than 40 states. The presence of TTSs in more countries will only
enhance the effectiveness of such systems.

The government of Kenya must remain vigilant to protect the country’s market from illicit
tobacco products and to continue to reduce smoking prevalence. Despite the recent
successes on both fronts, there is room for improvement. The excise tax structure and the
excise tax level still do not comply with the FCTC Article 6 guidelines. Given the system

155
Ngeywo CM, Ministry of Finance. PowerPoint presentation to CTFK Uganda parliamentary partners held at
Serene Hotel, Kampala: 4 March 2013.
156
Ngeywo CM, Ministry of Finance. PowerPoint presentation on April 18th, 2017, Washington DC.
157
Hana Ross. Understanding and measuring tax avoidance and evasion: A methodological guide.
Washington DC 2015. DOI: 10.13140/RG.2.1.3420.0486 http://www.tobaccoecon.uct.ac.za/sites/default/files/
image_tool/images/405/Publications/reports/Understanding-and-measuring-tax-avoidance-and-evasion-A-
methodological-guide1.pdf

602 // Kenya: Controlling Illicit Cigarette Trade
established to control the illicit trade, the government should not allow the existence of illicit
trade to be used as an excuse for not pursuing more vigorous tobacco tax reform. That tax
reform should draw on the key reform elements recommended by the World Bank on the
basis of evidence from a broad variety of low , middle-, and high-income countries. These
policies are highlighted in catchwords and phrases, such as go big, go fast; attack afford-
ability; change expectations; and tax by quantity.

If these principles are followed, the tobacco-related death toll will eventually start declin-
ing. Such statistics draw attention to the public-health aspects of tobacco control that
should not be neglected, despite the importance of the revenue-generating potential of
many tobacco control measures such as the fight against the illicit trade.

603
SENEGAL
21

SENEGAL:

Addressing Illicit
Tobacco Trade
Mayoro Diop and Aboubakry Gollock1

Chapter Summary
Senegal, like all member countries of the West African Economic and Monetary Union
(WAEMU), is a signatory to the Protocol to Eliminate Illicit Trade in Tobacco Products (the
Protocol). In recent years, Senegal has launched major legislative, regulatory, and tax reforms
to curb tobacco consumption. Senegal is often considered to be at the forefront of the fight
against tobacco and its illicit trade within WAEMU and the Economic Community of West
African States (ECOWAS). It is important to assess, however, whether Senegal is seizing all
opportunities at its disposal to combat illicit tobacco flows.

The analysis shows achievements but also insufficiencies in Senegal’s implementation of the
Protocol to date. A delay has occurred, notably, in implementing Law No. 2014-14, of March
28, 2014, on the manufacturing, packaging, labeling, sale, and use of tobacco.

On the one hand, for example, the indication "Sale in Senegal" must now appear on all
cigarette packages sold in the country, and the mandatory inclusion of health alerts on
packaging is already in force. On the other hand, the absence of a robust traceability system

1
M. Diop (Formerly with the National Agency for Statistics and Demography, and the National School of
Statistics and Economic Analysis, Senegal) & A. Gollock (Faculty of Economics and Management, Cheikh Anta
Diop University, Senegal).

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

constrains the fight against illicit tobacco. Stamps or vignettes are not yet used to facilitate
tracking and tracing. Nor is there a rigorous control system to monitor tobacco companies’
product inventories and exports.

Senegal’s Ministry of the Economy, Finance and Planning has set up a mixed enforcement
brigade to tackle illicit tobacco trade, bringing together the Directorate General of Customs
and the Directorate General of Taxes and Domains. However, substantial implementation
challenges remain. For example, there are as yet no specific data collection provisions
regarding seizures of illicit tobacco products. Accordingly, documentation of these opera-
tions is inconsistent.

Moreover, tobacco product seizures are perceived as unproductive by the customs and
tax-administration agents charged to carry them out. The seizures do not give rise to
incentive bonuses for enforcement personnel, leaving agents with little motivation to pursue
perpetrators. There is also no formal mechanism for inter-ministerial coordination in the
fight against illicit tobacco. Expertise and knowledge sharing for the implementation of the
Protocol are limited. Rigorous monitoring of the illicit tobacco trade using appropriate indi-
cators is lacking; strengthened monitoring is crucial to appreciate the problem’s magnitude
and track trends. At subregional and regional levels, joint initiatives to tackle illicit tobacco
remain rare. To effectively combat the illicit trade, rigorous control mechanisms across the
entire supply chain, international technical and judicial cooperation, and appropriate criminal
and civil sanctions should be put in place.

The recommendations of this analysis primarily focus on: effective application of the anti-to-
bacco laws currently in place in Senegal; further reform of existing legislation; development
of the tracking and tracing system for tobacco products; enhancement of governance as a
means to combat illicit trade in tobacco; data collection and research; and regional/subre-
gional coordination and cooperation on illicit trade. Specific recommendations include:

»» Accelerate full implementation of Law 2014-14 on the manufacture, packaging, labeling,
sale, and use of tobacco products.

»» Improve existing mechanisms for coordinating interventions, national players, and techni-
cal and financial partners on the basis of recognized best practices, some of which are set
forth in the Protocol.

»» Establish a robust tracking and tracing system to monitor all stages of the production,
distribution, sale, and use of tobacco products.

»» Prepare detailed estimates of the scope of illicit tobacco trade in Senegal, and its economic
and public-health impacts, to provide decision makers with reliable evidence for policy.

»» Advocate with WAEMU and ECOWAS Member States to promote regional cooperation in
the fight against illicit tobacco.

606 // Senegal: Addressing Illicit Tobacco Trade
Introduction
Illicit trade in tobacco products is a global problem. It threatens the health of populations,
promotes criminality, reduces tax revenues, increases health expenditures, and causes
other negative effects (WHO 2017). The fraudulent sale of tobacco products is estimated
to be equivalent to 10-12 percent of global cigarette consumption and costs some US$40
to 50 billion per year in lost revenues (WHO 2015). Illicit trade in tobacco products encom-
passes multiple challenges in the fields of public health, public finances, and national and
regional security.

In recent years, Senegal has undertaken a number of initiatives to reform its tobacco
taxation system. Specifically, Senegal, like all other West African Economic and Monetary
Union (WAEMU) member countries, is a signatory to the Protocol to Eliminate Illicit Trade
in Tobacco Products adopted at the fifth session of the Conference of the Parties to the
World Health Organization Framework Convention on Tobacco Control (WHO FCTC), on
November 12, 2012.

1. Methodology
1.2 Estimation of Illicit Trade
Measuring the scope of illicit trade in tobacco products in Senegal is a complex exercise
owing to the sensitivity of the data and data availability problems. For Ross (2015), two
aspects are particularly important: the research methods on the quantification of illicit trade
in tobacco and the criteria for assessing the reliability of articles on this subject.

This analysis uses a method of estimating illicit tobacco trade based on the Blecher approach
(2010). The data from the 2015 GATS survey were used to estimate the total consumption of
cigarettes in Senegal. The method calculates the total consumption of cigarettes and then
adjusts this data for the known legal market to estimate the unknown illicit market.

1.3 Assessment of Readiness to Implement the Protocol
To assess Senegal’s results (compliance, progress, innovations) in combating illicit trade in
tobacco, this analysis applied the self-assessment checklist of the Protocol to Eliminate Illicit
Trade in Tobacco Products to Senegal.

This checklist was supplemented by a questionnaire administered to the main entities
involved in combating tobacco in general, and illicit trade in particular, in Senegal.

This analysis also conducted audits and data collection and verification operations (data
triangulation and/or process analyses) with the following entities: the tobacco industry
(Manufacture of West African Tobacco and Philip Morris), the Ministry of Economy, Finance
and Planning (specifically the General Directorate of Customs and the General Directorate

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

of Taxes and Public Lands), the Ministry of Trade, the Ministry of Health, the Tobacco Control
Unit, and civil society organizations. This made it possible to verify whether, in its practices,
mechanisms, and existing laws, Senegal respects the measures recommended by the
Protocol to Eliminate Illicit Trade.

2. Results
2.1 Tobacco Use and Public Health in Senegal
Tobacco use is one of the main causes of avoidable death in the world. It is a major risk
factor for cancers; cardiovascular diseases such as hypertension, coronary heart disease,
myocardial infarction, and strokes; and many other diseases (WHO 2017).

Studies on the prevalence of tobacco in Senegal focus primarily on ad hoc surveys and
often a specific segment of the population.

The Global Adult Tobacco Survey (ANSD 2015), carried out among the adult population (15
years of age and over) using a random sample of 4,514 representative households, has pro-
vided the most reliable figures to date on the prevalence of tobacco use in Senegal. It shows
that 6.0 percent of the adult population consumes tobacco products, 11.0 percent of men
and 1.2 percent of women. 0.7 percent of the adult population uses smokeless tobacco, with
women constituting the largest proportion of this market at 1 percent, as against 0.3 percent
for men. Tobacco use is more prevalent among the most active and productive segment of
the population (25-64 age group), usually the parents of the youngest group (0-15 years).

Questions on tobacco use were included in the STEPwise survey (ANSD 2016) that was
conducted among the population aged 18 to 69 years across the entire country in order to
identify and monitor risk factors for non-communicable diseases. The survey was carried
out on the basis of a nationally representative three-tiered stratified random sample of 6,306
individuals and took account of respondents’ residential milieu (urban and rural). The results
generally confirm those obtained by the GATS (2015) on the prevalence of tobacco use in
Senegal. Overall tobacco consumption was found to be 5.9 percent, with 15.6 percent of
men and 0.4 percent of women reporting tobacco use.

The Global Youth Tobacco Surveys (GYTS 2002, 2007), carried out in schools across the
country, focused specifically on adolescents between the ages of 13 and 15. Although rela-
tively dated, these surveys provide information on broad trends in the prevalence of tobacco
use in this segment of the population, changing consumption patterns, and the issues and
challenges of combating tobacco consumption now and in the years ahead. The survey
shows that the proportion of children who smoked their first cigarette before the age of 10
increased from 19.3 percent in 2002 to 25.9 percent in 2007 (GYTS, 2002, 2007). In 2002,
13.2 percent of schoolchildren (boys: 20.2 percent, girls: 4.4 percent) smoked cigarettes
and 5.4 percent (boys: 7.3 percent, girls: 2.9 percent) consumed other tobacco products. In

608 // Senegal: Addressing Illicit Tobacco Trade
2007, 7.5 percent of schoolchildren (boys: 12.1 percent, girls: 2.7 percent) smoked cigarettes,
a decrease of about 6 percentage points compared to 2002. However, consumption of other
tobacco products, such as shisha, rose from 5.4 percent to 9.3 percent (boys: 11.7 percent,
girls: 7 percent). Since 2007, this trend seems to be confirmed among teenagers in Dakar.
Outings to smoke shisha are in fashion, and during social gatherings among young people in
the capital, shisha is widely consumed. The trend is so persistent and worrying that the authori-
ties have taken steps to restrict consumption in some places frequented by young people.

Of particular concern, comparing the results of the two surveys shows an upward trend in
the proportion of young people who wanted to begin smoking, rising from 15.6 percent in
2002 to 31 percent in 2007. This increase was significant both for girls (13.9 percent to 27.7
percent) and for boys (17.7 percent to 37.2 percent)

All surveys also indicate that exposure to tobacco smoke remains high in Senegal: 30.4
percent of adults are exposed in their workplace, 20.6 percent at home, and 20.8 percent
in restaurants (GATS 2015). The GYTS data (2002, 2007) show that at least one child in five
has at least one parent who smokes. In 2002, 45.8 percent of schoolchildren lived in houses
where other persons smoked in their presence, and more than six out of ten (62.6 percent)
were exposed to tobacco smoke outside their place of residence. In 2007, 47.6 percent
of GYTS respondents lived in a house where other persons smoked in their presence, an
increase of approximately two percentage points from the 2002 level.

Senegal, like most developing countries, has an epidemiological transition model charac-
terized by the coexistence of infectious diseases and non-communicable diseases (NCDs).
Some authors expect that 46 percent of deaths in sub-Saharan Africa will be linked to NCDs by
2030 (Gaylin et al. 1997; WHO 2004). The results of the STEP survey do not establish a direct
causal relationship between the current prevalence of smoking and that of NCDs in Senegal.
Nevertheless, it is amply demonstrated in the scientific literature that tobacco is a risk factor
that exacerbates major chronic NCDs. The results of the survey show that hypertension, which
can be related to or aggravated by smoking, affects 24 percent of Senegal’s population, with
women who smoke heavily being more affected. According to the cancer country profile pre-
pared by the WHO for Senegal (2004), smoking, physical inactivity, obesity, and household solid
fuel use constitute the main risk factors for cancer among adults in Senegal.

Beyond these chronic illnesses, the analysis of the effects of tobacco on public health in
countries such as Senegal must take into account other diseases such as tuberculosis, AIDS,
and maternal and infant health problems. These are public-health problems that have a dis-
proportionate impact on the countries of the subregion. The link between their progress and
tobacco consumption is well established today, but there are no specific studies on these
issues in Senegal. In terms of the relationship between tobacco and maternal and infant
health, it is established that smoking is the main factor in modifiable morbidity and mortality
risks associated with pregnancy (CalEPA 2005; Cnattingius 2004). The challenge for Senegal
is to reduce the passive smoking of women of childbearing age. Smoking prevalence among

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Senegalese women is very low. However, women are commonly exposed to second-
hand smoke in their families. This makes them vulnerable to the negative health effects of
tobacco during pregnancy and after childbirth. Infertility and ectopic pregnancies are more
frequent among women who smoke (Cnattingius 2004). A review of the work of Guérin
et al. (2006) indicates some effects of passive smoking on women and babies, including:
low birth weight, sudden infant death syndrome, and premature delivery. A meta-analysis
by Pattenden et al. (2006) indicates that prenatal exposure to tobacco smoke also results in
respiratory problems for the baby, regardless of postnatal exposure.

To date there have been no studies assessing the impact of illicit trade in tobacco on the
prevalence of smoking and the health of the population of Senegal.

2.2 Senegal Targeted by Tobacco Companies
Sub-Saharan Africa is increasingly targeted by tobacco producers and distributors in their
strategy to expand and penetrate developing-country markets. Conditions favorable to the
implantation of tobacco firms are present in these countries, including: rapid economic
growth, demographic expansion, young populations, weak anti-tobacco legislation, porous
borders, the existence of free-trade zones, and low tobacco risk aversion among govern-
ment authorities compared to those in industrialized countries.

Senegal’s geographic and strategic position make it a special target for tobacco industry
efforts to better penetrate the African market. An analysis of tobacco import and export
tables shows that Senegal plays a key role in the industry’s strategy for supplying the subre-
gional market and the continent as a whole with tobacco products (Annexes 1 and 4). The
culmination of the tobacco industry’s strategy for penetration into Senegal was the implan-
tation of the multinational firm Philip Morris in the country in 2007, with the support of the
Senegal Investment Promotion Agency (APIX). Since the arrival of Philip Morris, national
production of cigarettes has grown steadily. Its value rose from US$ 126 million in 2012
to US$ 172.4 million in 2015, a 36.8 percent increase. A similar trend has been seen in the
export of tobacco products from Senegal to other African countries following processing of
the imported raw tobacco (Annex 1).

Analysis of the changes in the prevalence of tobacco use and the strategies of the tobacco
companies in Senegal show disturbing trends. If not reversed, these patterns risk making the
country fertile ground for the expansion of domestic tobacco consumption and for rising
exports of tobacco products to the rest of continent.

2.3 Tobacco Control in Senegal
Tobacco control in Senegal is governed by national laws and subregional community pro-
visions (involving those of WAEMU and the Economic Community of West African States,
ECOWAS), as well as international treaties, including the Protocol to Eliminate Illicit Trade in
Tobacco Products.

610 // Senegal: Addressing Illicit Tobacco Trade
National measures. At the national level, Senegal has taken a number of recent anti-tobacco
measures (Annex 2). Law No. 12/2014 of March 14, 2014, on the manufacture, packaging,
labeling, sale, and use of tobacco has entered into effect. Likewise, the new General Tax
Code (2013) has made improvements to the country’s tobacco tax legislation with the
establishment of a higher ad valorem tax ceiling (45 percent), the elimination of the dis-
tinction between premium and economy brands, and the introduction of a minimum price
for the tobacco tax base. While these steps are important, Senegal’s policy of a 45 percent
ad valorem ceiling on tobacco taxes conflicts with more recent directives by other bodies
which draw on the FCTC. In practice, taxes on cigarettes and other tobacco products in
Senegal remain relatively low, at 38 percent of average retail price (WHO 2017:138). To date,
tax reforms and other tobacco control measures have not achieved the desired effects on
tobacco consumption in the country. This gives added importance to initiatives now being
undertaken by the subregional economic communities in which Senegal participates.

Subregional efforts. Overall, Senegalese law, except with respect to exemptions, is compli-
ant with WAEMU provisions on tobacco taxes, particularly Directive No. 03/98/CM/WAEMU
of December 22, 1998, harmonizing the excise tax laws of the Member States, as amended
by Directive No. 03/2009. However, it should be noted that, as of this writing, the tobacco
tax rates and structures operative in WAEMU and ECOWAS have remained suboptimal com-
pared to those applied in countries that have recorded the most significant results in their
anti-tobacco efforts, such as the United Kingdom, France, and Canada. Efforts are underway
to strengthen tobacco control within these subregional organizations.

In October 2017, regional experts validated the draft harmonization of laws establishing a
system for tracking, tracing, and tax audit of tobacco products manufactured or imported
in ECOWAS Member States. The draft directive aims to harmonize relevant laws and
regulations in the Member States to facilitate the smooth functioning of the internal tobac-
co-product market. The model calls for ECOWAS Member States to establish and maintain a
unified track-and-trace system for all tobacco products imported or produced in the territory
using a unique identifier. Once adopted, the directive will also oblige ECOWAS Member
States to ensure that all economic operators involved in the trade of tobacco products (from
the manufacturer to the last economic operator before the first point of sale) record the
entry of all unit packets in their possession, as well as all the intermediate movements and
the final output of unit packets from their possession. However, the project has not yet been
adopted by most of the organization’s Member States.

The Government of Senegal is among the parties to the draft ECOWAS directive that rec-
ommends the elimination of all tax exemptions on tobacco products and the mandatory
application of a combination of ad valorem taxes (50 percent minimum), price applied by the
manufacturers (price exit factory), and specific taxes (US$ 0.20 per package of 20 cigarettes).

Harmonizing ECOWAS and WAEMU approaches. An important challenge will be the adop-
tion and transposition of this draft ECOWAS directive into the national laws of the WAEMU

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

countries. The WAEMU countries (also members of ECOWAS) are generally more inclined
to transpose WAEMU directives into their national tax legislation than ECOWAS directives. A
second challenge is for Senegal, as a member of these two regional organizations, to assert
its right to apply the maximum ECOWAS rate, which is 100 percent of the price applied by
the manufacturers (price exit factory), and to induce other countries to align with it for the
upward harmonization of tobacco taxes toward the ECOWAS and WHO target rates. A third
ongoing challenge is the production of scientific evidence taking account of national and
regional socioeconomic and health realities to assess the real and potential impact of the
application of tobacco control policies in general, as well as policies to reduce the expan-
sion of illicit trade in tobacco. A fourth concern is the involvement of key stakeholders in the
production of this information and the establishment of sustainable cooperation mecha-
nisms, so that the evidence generated can continue to inform the choices of decision makers
and promote change.

Global initiatives. At the international level, Senegal is a signatory to the Protocol to
Eliminate Illicit Trade in Tobacco Products. This treaty was adopted in November 2012
in Seoul and then opened for signature on January 10, 2013, at WHO headquarters. The
Protocol implements Article 15 of the WHO FCTC, which sets out the main measures to
be implemented to effectively control illicit trade in tobacco products. The commitment to
adopt a more restrictive instrument in this area was raised at the first Conference of Parties
to the FCTC. It arose out of evidence of the scope of illicit traffic in tobacco products
(more than one cigarette in ten around the world) and the resulting particularly significant
challenges in terms of tax revenues, the effectiveness of public health policies, and the
effectiveness of policies to combat organized crime.

The Protocol aims to eliminate all forms of illicit trade in tobacco products by means of a
series of measures to be taken by countries individually or in cooperation with other coun-
tries. The prevention of illicit trade focuses on:

»» Securing the supply chain of tobacco products through a series of measures that form
the “heart” of the Protocol, such as the tracking and tracing regime for tobacco products;

»» Establishing a global tracking and tracing regime within five years of the Protocol’s entry
into force, comprising national and regional tracking and tracing systems and a global
information-sharing hub located within the Secretariat of the Convention;

»» Introducing other provisions to ensure control of the supply chain, including licensing and
record-keeping requirements, as well as the regulation of internet sales, duty-free sales,
and international transit.

Other significant parts of the Protocol deal with due diligence, international cooperation,
and enforcement. The Protocol sets out the general obligations of the Parties (Article 4),
measures on supply chain control (Articles 6 to 13), offenses (Articles 14 to 19), and interna-
tional cooperation (Articles 20 to 31).

612 // Senegal: Addressing Illicit Tobacco Trade
2.4 Public Health, Tax, and Security Challenges in the
Illicit Tobacco Trade in Senegal
Illicit trade in tobacco products entails a number of challenges, particularly relating to public
health, public finances, and national and regional security.

PUBLIC HEALTH CHALLENGES

In the area of public health, it must be stressed from the outset that the consumption of
tobacco products is dangerous for the population, whether these products are sold legally
or illegally, or whether they are genuine or counterfeit. Smoking kills more than half of
its confirmed users prematurely, by an average of over 10 years (Peto and Jha 2014). All
tobacco products are harmful to health.

However, smuggling, counterfeiting, and the illegal manufacture of tobacco products are
aggravating factors for public health and constitute additional obstacles to the achieve-
ment of tobacco control policy objectives. Illicit products, which are sold on formal and
informal markets, are offered at lower prices, making them more accessible to the popula-
tion. The development of illicit trade thus counteracts the impact of smoking disincentives
and anti-smoking campaigns, particularly those targeting the youngest and most vulnera-
ble populations. In addition, contraband tobacco products sold in Senegal do not typically
display the dissuasive health warnings introduced in the country following the enactment of
the new anti-tobacco law. This is the case, for example, with several cigarette brands sold in
Senegal’s border areas, which do not respect the prevailing laws on packaging. Distributors
of illicit tobacco products generally have a greater propensity to violate the restrictions on
the sale of tobacco to minors in comparison with licensed distributors, precisely because
of the informal nature of their marketing channels. The size of the informal sector tends to
exacerbate this situation in the WAEMU countries. Finally, illicit trade in tobacco products
is responsible for a shortfall in government revenues that could be used to finance public
policies, including health policies.

No study has yet evaluated the impact of eliminating illicit tobacco trade on public health
in Senegal. However, estimates indicate that the elimination of the global illicit trade in
cigarettes would save more than 160,000 lives each year worldwide, starting from 2030
(Joossens and Raw 2009).

TAX ISSUES

Although tobacco products are dangerous, their production and marketing bring in tax
revenues to the Government of Senegal. For example, in 2013, the Government collected
approximately US$ 26 million in excise taxes and US$ 15.2 million in VAT, for a total of about
US$ 40.3 million. In 2016, excise taxes totaled some US$ 28.4 million and VAT some US$
16 million, for a total of US$ 44.4 million (see Annex). The development of the illicit trade in

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

tobacco products reduces the Government’s ability to expand the tax base and collect taxes
on tobacco products. It blunts the expected boosting impact of higher taxes on tax revenues.

Another significant tax challenge related to illicit trade is the concern that smuggling has
been used by the tobacco industry to gain leverage with governments for access to their
markets under tax concessions (Legresley et al. 2008) or to limit proactive tax measures in
countries’ anti-tobacco efforts. The tobacco industry often uses the Senegalese press to
“warn” national authorities and the population of the supposed risks of rising illicit trade in
tobacco following tax increases. This strategy likely aims to delay decisions on major tax
reforms that could reduce tobacco consumption in the country. One solution is to enhance
controls and implement sufficiently dissuasive sanctions to discourage any inducement to
illicit trade.

SECURITY CHALLENGES

The Sahel zone, in which Senegal and the other WAEMU countries are located, faces sig-
nificant security challenges.2 These include inadequate surveillance of the cigarette supply
and distribution chains, but also a range of other worrying conditions: rampant terrorism,
regional vulnerability to war, widespread financial and political crime, porous borders,
ineffective law enforcement, insurrectionist movements in some areas, all complicated by
endemic poverty and corrosive corruption.

Illicit trade can flourish in this fertile ground through the operation of criminal networks and
potentially terrorist organizations that are harmful to public and international security. The
proceeds from the smuggling of cigarettes are laundered and used to finance the activi-
ties of such networks. Meanwhile, key tobacco control measures, notably including higher
excise taxes on legally traded tobacco products, create potential profit margins for tobacco
smugglers, alongside these measures’ powerful health and social benefits.

2.5 Estimate of the Scope of Illicit Trade in Tobacco
in Senegal
The calculations of this analysis, based on Senegalese data from the most recent GATS
survey, show that the illicit market totaled some 9 percent in 2015. This rate is quite close
to that for Africa as a whole (10.6 percent) and is generally in line with the estimated global
proportion of 9.9 percent (WHO 2017).

2
The Sahel refers to a band of Africa marking the ecological and climatic transition between the Saharan area in
the north and the savannahs to the south, where the rains are substantial. In the west-to-east direction, the Sahel
stretches from the Atlantic to the Red Sea. Different authors variably delimit the precise area covered. Thus, for
some, the Sahel includes all territories bordering the Sahara; there is therefore a northern Sahel and a southern
Sahel. In this report, it refer to the latter, when the term Sahel is used without a further qualifier. The Sahel zone
covers, in whole or in part, the following countries: Algeria (extreme south), Burkina Faso (north), Cape Verde,
Chad (center), Mauritania (south), Mali, Niger, Nigeria (far north), Senegal, Sudan (center, including Darfur and
Kordofan). The countries of the Horn of Africa are sometimes added: Djibouti, Ethiopia, Eritrea, and Somalia.

614 // Senegal: Addressing Illicit Tobacco Trade
2.6 Assessment of the Framework for Combating Illicit
Trade in Tobacco Products
Senegal signed the FCTC on June 19, 2003 and ratified it on January 27, 2005. The con-
vention entered into effect on April 27, 2005. Senegal has made significant progress in
combating tobacco, the culmination of which was the signing of Decree No. 2016-1008 on
July 26, 2016, implementing Law No. 2014-12 of March 28, 2014, on the manufacture, pack-
aging, labeling, sale, and use of tobacco. Senegal thus has a law that is basically in line with
the framework convention as regards the implementation of health warnings, for example.
The establishment of designated smoking areas is effective in some public and private insti-
tutions. Overall, however, the level of application of the law remains problematic.

Senegal acceded to the Protocol to Eliminate Illicit Trade in Tobacco Products on August 31,
2016. The fight against illicit trade requires a specific mechanism with well-defined proce-
dures, responsibilities, and resources. The involvement of a number of public agencies is
necessary to meet the obligations and achieve the objectives. The framework established by
the Government of Senegal to combat illicit trade in tobacco thus brings together a number
of ministries, agencies, and other entities.

STAKEHOLDERS IN THE FIGHT AGAINST ILLICIT TOBACCO TRADE

The Ministry of Economy, Finance and Planning’s (MEFP) joint team to combat illicit trade
in tobacco products includes the General Directorate of Customs (DGD) and the General
Directorate of Taxation and Public Lands (DGID). The joint team’s mission is to combat the
smuggling and counterfeiting of tobacco products and to conduct verifications through-
out the supply chain (e.g., routine unannounced inspections).3 The MEFP is responsible for
the team’s governance. The team and its member agencies have achieved some notable
successes. DGD actions at Dakar airport (Annex 3) and throughout the national territory have
resulted in large seizures of illicit tobacco products.

However, the seizures (Annex 3), which are generally destroyed at the end of the operations,
are considered unproductive by customs and tax administration agents. Because the products
are not subsequently sold, they bring in little in terms of customs and tax revenues. Moreover,
the agents conducting the seizures are not awarded bonuses, reducing their motivation to
hunt down perpetrators. The establishment of an incentive fund for combating illicit trade in
tobacco could increase the motivation of those involved in frontline enforcement operations.
It should be noted that the verification mechanism established by the joint team is not fully
in line with the requirements of the Protocol for effectively combating illicit trade, since the
mechanism currently in place does not allow for the tracing of tobacco products.

3
Important quantities of tobacco products have been seized by the DGD on Senegalese territory and in some
border regions, including recent seizures of cigarettes valued at 13 million FCFA in Saint-Louis (DGD 2017).

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Broadly speaking, Senegal needs to improve its legal framework to support and facilitate the
implementation of the Protocol. The analysis of the application of Protocol provisions does
show that Senegal has a legal framework in conformity with Protocol Article 6 (License,
equivalent system of homologation or control), according to which parties shall establish
a mandatory licensing system for anyone manufacturing, importing, or exporting tobacco
products or manufacturing equipment. Parties have the discretion to authorize other
activities, such as retailing tobacco products or growing tobacco. In Senegal’s case, Decree
2016-1008 of July 26, 2016, takes into account these requirements.

The Ministry of Trade, via the Domestic Trade Directorate, conducts control operations
throughout the national production and distribution chain. These controls and verifications
of the marketing chain often result in seizures of smuggled or counterfeit tobacco prod-
ucts. In border regions such as Saint-Louis, Kaolack, Ziguinchor, and Kolda, domestic trade
units cooperate with other entities including the police, the gendarmerie, and the customs
service to exchange information and carry out operations for the control and seizure of illicit
cigarettes. The Ministry of the Interior is also involved in combating illicit trade in tobacco
products. It cooperates with the MEFP in operations for the seizure of such products.

The Ministry of Health and Social Action focuses more on the establishment and imple-
mentation of anti-tobacco laws. It has created a National Anti-Tobacco Program (PNLT) that
reports to its Prevention Directorate. The Ministry also acts through regional and departmen-
tal committees, which are fora for dialogue and discussion of anti-tobacco measures aimed
at reducing the prevalence of smoking and protecting the population. These committees,
which are headed by governors (in the case of regions) and prefects (in the case of depart-
ments), bring together the main local stakeholders in anti-tobacco efforts in their areas.
They facilitate the mobilization of partner resources, support local players, and assist the
Anti-Tobacco Program in harmonizing its strategies and interventions. The committees also
conduct anti-smoking actions, monitor illicit trade in tobacco, and participate in activities to
promote the implementation of laws and regulations at the regional and departmental levels.
They may also provide input on the national anti-smoking policy, particularly on its instru-
ments, such as national plans.

Civil society partners include associations and entities that are active in anti-smoking efforts
in general and efforts to combat illicit trade in particular. These include the Senegalese
Anti-Tobacco League (LISTAB), created in 2011, which did a great deal of work toward the
approval of the anti-tobacco law. LISTAB’s mission is to help reduce the prevalence of
smoking and protect the population against exposure to tobacco smoke. The civil society
players working to combat illicit trade in tobacco include religious leaders, members of the
Association of Health, Population and Development Journalists (AJSPD), legal experts, econ-
omists, and consumers’ associations. These stakeholders intervene to increase awareness of
the harmful consequences of smoking and advocate with the population for the application of
laws combatting tobacco and illicit trade in tobacco.

616 // Senegal: Addressing Illicit Tobacco Trade
Clearly, many stakeholders are active in efforts to combat tobacco in Senegal. However, the
multi-player mechanism for combating illicit trade in tobacco does have limitations. There
is no formal framework for coordination among the entities involved, nor a clear and con-
sistent governance system to determine the roles and responsibilities of the various public
agencies. In addition, the DGD’s system for collecting data on illicit trade has not established
specific provisions concerning tobacco products to allow for monitoring of trends.

TOBACCO PRODUCT TRACKING AND TRACING SYSTEM

The status quo: important advances, but a system that remains incomplete. The current
arrangement for tracking trade in tobacco products between Senegal and other countries
is under the responsibility of the DGD. This system is not in compliance with Article 8 of the
Protocol, which discusses tracking systems. In particular, Senegal’s current approach does
not make it possible to trace the entire supply network. In addition to the DGD, other entities
representing the Ministries of Trade and Health and Social Action also monitor the supply
chain to prevent illicit trade in tobacco products. They conduct unannounced inspections
and verifications of distributors, merchants, and transporters operating on road corridors.

All cigarettes sold within the national territory are subject to labeling requirements. The words
“Vente au Sénégal” must appear on all packages. Since August 28, 2017, new cigarette
packages with color photos covering 70 percent of the front, back, and sides have been
in circulation. Posters at cigarette outlets warn consumers of the risk of imprisonment for
buyers and sellers of illicit cigarettes.

Different labels for exemptions and exports and multi-layered security mechanisms for
tracking and tracing (digital labeling, barcodes, holograms, chips, etc.) have not yet been
developed. Senegal does not yet have a system of stamps or stickers for use in tracking and
tracing tobacco products, as recommended by the Protocol and already practiced in coun-
tries such as Kenya.

Under the current system, Senegalese authorities experience difficulties controlling the
potential illegal sale of producers’ tobacco product stocks and monitoring informal channels
through which products officially destined for export may be diverted. The tax administra-
tion’s tracking of changes in tobacco company inventories is weak.

Inconsistencies in reported production for export. Senegal’s tobacco exports increased
40.5 percent between 2012 and 2013. However, there are differences in the amounts
declared for export by the tobacco industry and the quantities identified in data collected
by the National Agency of Statistics and Demography (ANSD). The amounts declared by the
tobacco industry are significantly lower than those identified by the ANSD. This discrepancy
surged from a value of around CFAF 8 billion in 2012 to approximately CFAF 27 billion in
2015, immediately following the implementation of the 2014 tax reform.

This gap between the export data provided by the ANSD and the declarations of the tobacco
industry to the DGID raises a number of questions. Which data are more reliable? If the

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Table 1. Value of Tobacco Product Exports, 2012-2015, Tobacco Firms’ Reports
versus National Agency of Statistics and Demography Calculations (CFAF)

2012 2013 2014 2015

Exports declared by
28,687,425,056 40,322,443,540 27,233,426,409 27,816,965,966
tobacco industry

Exports (ANSD statistics) 36,816,357,672 48,542,975,129 48,308,265,172 55,316,823,159

Difference 8,128,932,616 8,220,531,589 21,074,838,763 27,499,857,193

Source: ANSD and the tobacco industry (2017)

Figure 2. Cigarette Exports from Senegal, 2012-2015, Tobacco Industry Reports
versus National Agency of Statistics and Demography Calculations

6E+10

5E+10

4E+10

3E+10

2E+10

1E+10 Export Indust

0 Export ANSD
2012

2013

2014

2015

Sources: ANSD, tobacco companies (2017)

ANSD data are more reliable, the tobacco companies are presumably under-declaring.
This gap is connected with a major concern regarding the players behind the illicit trade in
tobacco products. According to some authors, in some countries, most cigarettes traded
illicitly are manufactured by the legal tobacco industry (Lalam 2012). Additional research
(beyond the scope of this study) would be necessary to confirm or refute this thesis in the
case of Senegal.

The tracking of tobacco products intended for export (and thus exempt from taxes) to their
declared destinations in foreign countries is deficient, under Senegal’s current system. The
specific characteristics of WAEMU and ECOWAS make the situation more worrisome, in
terms of the potential proliferation of illicit trade. Products nominally intended for export
may subsequently be brought back into Senegal via informal channels, if there is a significant
difference in prices between countries, and if customs controls at the border are inade-
quate. This promotes illicit trade in tobacco, increases the tax revenue shortfall owing to

618 // Senegal: Addressing Illicit Tobacco Trade
the non-payment of the VAT, and facilitates tax evasion. To tackle this deficiency, authorities
must systematically triangulate the data on exports declared by the tobacco industry and
those issued by the customs administrations and statistics institutes of the WAEMU countries
to verify whether the declared exports really leave the country, arrive at their destination, and
do not return to Senegal via informal channels. Clearly the tracking system now in place in
Senegal does not yet meet the necessary standards.

Moving toward a robust model of “track-and-trace.” As a signatory to the FCTC and the
Protocol, Senegal is required to comply with the global tracking and tracing regime within
five years following the Protocol’s entry into effect. When operational, the planned global
network should include national or regional tracking and tracing systems that are linked to
the “global information-sharing focal point” at the Convention Secretariat through national or
regional nodal points. “Unique identification markings” must be affixed to packages, cartons
and any outside packaging of cigarettes and, within ten years, to other tobacco products.

To finance improvements in Senegal’s tracking and tracing system, it has been decided to
proceed as stipulated in the Protocol, i.e., that the cost be covered by the tobacco industry.
However, the procedures for implementation of this option have not yet been clearly defined.
The tracing system implemented by Kenya, for example, may be used as a benchmark.

3. Public Policy Recommendations
The concluding recommendations focus primarily on: effective application of the anti-to-
bacco laws currently in effect; reform of existing legislation; development of the tracking
and tracing system for tobacco products; enhancement of governance as a means to
combat illicit trade in tobacco; data collection and research; and regional/subregional coor-
dination and cooperation on illicit trade.

3.1 Effective Application and Reform of the Laws Now
in Effect
»» Accelerate the application of Decree No. 2016-1008 of July 26, 2016, implementing Law
No. 2014-14 of March 28, 2014, on the manufacture, packaging, labeling, sale, and use of
tobacco products, so as to achieve effective implementation and enforcement of the law
throughout the national territory.

»» In the short term, establish a more suitable legal framework to facilitate application of the
Protocol to Eliminate Illicit Trade in Tobacco Products in Senegal. Senegal has made progress
in its anti-smoking efforts, but a key issue remains the extent to which current legislation
corresponds to the Protocol. The General Tax Code and Customs Code offer opportunities
for improvements that can lead to successful application of the Protocol’s provisions.

»» Significantly increase the fines and penalties applicable to offenders in order to discour-
age the illicit trade in tobacco products.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

3.2 Governance Mechanisms to Combat Illicit Trade
in Tobacco
»» Improve the existing mechanism for coordinating interventions, national players, and
technical and financial partners on the basis of best international practices, some of
which are mentioned in the Protocol. Successful practices involve, for example, mecha-
nisms to strengthen information sharing between the parties; assistance and cooperation
(training, technical assistance, and cooperation in scientific, technical, and technological
fields); investigation and prosecution of offenders; and other measures.

»» Create a multisectoral mechanism to fight illicit trade with a clear, consistent system of
governance. This will make it possible to better define the roles and responsibilities of the
various public agencies. The assignment of this task to the national coordinating mech-
anism created under Article 5(2)(a) of the FCTC could constitute an alternative solution
to the creation of a new structure and should be enacted by ministerial memorandum.
According to the report submitted to the Conference of Parties, a large number of coun-
tries have indicated that control of the supply chain is the responsibility of the finance,
customs, and/or trade sectors.

3.3 Tracking and Tracing
»» Establish a full-fledged tracking and tracing system to monitor production and supply
chains. The system should include tracking inventory changes at tobacco companies
to avoid the development of parallel production and distribution channels and, conse-
quently, tax revenue losses.

»» This system should be totally independent of the tobacco industry but financed by it, as
recommended by the Protocol.

»» Study the feasibility of establishing an x-ray control system under the authority of
Customs with the involvement of other partners in fighting illicit trade.

»» Better monitor exports and ensure that tobacco company declarations match the quanti-
ties of tobacco that leave the national territory.

3.4 Data Collection and Research on Illicit Trade
in Tobacco
»» Study and prepare detailed estimates of the scope of illicit trade in tobacco products
in Senegal, its impact on the economy and public health, and related issues to provide
decision makers with robust research that can inform anti-smoking policies.

»» Establish a sustainable centralized mechanism for collecting data on illicit trade in tobacco
products by establishing formal cooperation between the DGID, the DGD, the Domestic
Trade Directorate, ANSD, and the grassroots regional and departmental committees. This

620 // Senegal: Addressing Illicit Tobacco Trade
mechanism should promote data collection on illicit trade and allow for an analysis of the
characteristics of the tobacco products seized, including the type of product, the brand
name, the location of the seizure, the modus operandi, the planned destination, whether
counterfeits are involved, the quantity, and the weight. The starting point for the imple-
mentation of this recommendation is the preparation of memorandums asking the units
concerned to systematically collect data on any seizures they conduct.

»» Conduct investigations in selected border areas (Kaolack, Kaffrine, Ziguinchor and Saint-
Louis) to identify illicit tobacco products marketed in these areas.

»» Establish benchmarks based on countries that have successfully combated illicit trade in
tobacco products. Steps may include systematic reviews of best practices and field visits
to countries that have achieved notable success in combating illicit trade.

»» Build the capacities of the members of the national technical committee and regional and
departmental anti-smoking committees.

»» Establish a fund for combating illicit trade in tobacco products, a portion of which will be
used to motivate the participants involved.

3.5 Regional/Subregional Coordination on Illicit Trade
Successful implementation of the Protocol and achievement of results in the efforts to
combat illicit trade in the ECOWAS and WAEMU areas require:

»» Revision of the agreements between some countries and tobacco manufacturers in light
of the provisions of the Protocol;

»» Advocacy with WAEMU and ECOWAS Member States to promote international coopera-
tion in information-sharing;

»» Advocacy with WAEMU and ECOWAS Member States to raise the WAEMU maximum
tax rate to the WHO-recommended level of 75 percent of retail price, or at least to the
European Union minimum level of 60 percent.

4. Conclusion
Senegal has made progress in combating tobacco and implementing the Protocol to
Eliminate Illicit Trade in Tobacco Products. However, these efforts remain insufficient. They
must be enhanced to achieve additional tangible results, considering the issues and chal-
lenges involved in combating illicit trade at the national and regional level. Monitoring and
evaluating progress will require in-depth, independent research aimed to: more accurately
measure the volume of illicit trade; assess its characteristics; document the organization
of illicit markets and the players involved; measure illicit tobacco’s impact on public health
and the national and subregional economy; and evaluate the coordination and efficacy of
control interventions.

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

An analysis of links between illicit tobacco and broader covert financial flows will help clarify
relationships between illicit tobacco trade and the financing of terrorism or other criminal
activities. This is a concern because illicit trade in tobacco products is considered to be one
of the main sources of financing for terrorist activities in sub-Saharan Africa today, along-
side drug trafficking. This provides Senegal and other countries of the region with additional
incentives to track and combat illicit tobacco flows.

622 // Senegal: Addressing Illicit Tobacco Trade
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624 // Senegal: Addressing Illicit Tobacco Trade
Annexes

Annex 1: Summary of Tobacco-Product Exports
from Senegal

YEAR ZONE CIF VALUE (CFAF) NET WEIGHT (KG)

WAEMU 7,002,438,551 480,259

ECOWAS 13,991,793,657 1,198,096
2013
OTHER 11,219,390,263 931,285

Subtotal 1 32,213,622,471 2,609,640

WAEMU 6,055,623,680 391,739

ECOWAS 13,335,592,289 1,320,438
2014
OTHER 9,289,868,318 668,868

Subtotal 2 28,681,084,287 2,381,045

WAEMU 9,498,860,579 632,450

ECOWAS 19,007,190,764 1,679,390
2015
OTHER 9,957,818,015 767,939

Subtotal 3 38,463,869,358 3,079,779

WAEMU 18,079,399,275 1,151,056

ECOWAS 27,866,652,749 2,156,069
2016
OTHER 8,051,656,110 553,585

Subtotal 4 53,997,708,134 3,860,710

TOTAL 153,356,284,250 11,931,174

Source: DGD

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Annex 2: Main Tobacco Control Laws in Senegal,
1980-2016

LAW KEY PROVISIONS

Law No. 81-58 of November ›› Prohibition on tobacco advertising and its use in some public
9, 1981 places
Law No. 85-23 of February ›› Amendment of Law No. 81-58: criminal sanctions set out in
25, 1985 Article 13 and review of list of places where smoking is permitted
Law No. 92-40 of July
›› Uniform rate of 30% applicable to all products. No distinction
9, 1992 establishing the
between the different types of products.
General Tax Code
Law No. 2002-07 of ›› Differentiation of tax rates for economy cigarettes (50%) and
February 22, 2002 luxury cigarettes (30%).
›› Higher tax level: 16% excise tax for economy cigarettes and 40%
Law No. 2004-30 of August for premium cigarettes.
12, 2004 ›› Introduction of a new category of cigarettes called “standard
cigarettes” with a tax rate of 31%.
Law No. 2004-36 of ›› Ratification of the WHO Framework Convention on Tobacco
December 14, 2004 Control
›› Excise tax rate increased to 20% for economy cigarettes and 45%
Law No. 2009-19 of March for premium cigarettes
9, 2009 ›› Elimination of the standard category introduced into the
nomenclature in 2004
›› Maintenance of some cigarettes in the premium category
Order No. 14202 of (reaction to the declassification strategies adopted by tobacco
December 12, 2011 companies to pay lower taxes on so-called premium category
cigarettes)
Law No. 2012-31 of
›› Increase of tax rates: 40% for economy cigarettes and 45% for
December 31, 2012 (entry
premium cigarettes.
into force in January 2013)
›› Amendment of Article 434 of the General Tax Code (CGI)
Law No. 2014-29 of October ›› Introduction of a single rate of 45%
27, 2014 (entry into force in
›› Distinction between economy and premium cigarettes is
November 2014)
eliminated. Thus, an increase in the tax rate on economy
cigarettes of 5%.
Decree No. 2016-1008
›› Application of Law No. 2014-14 of 28 March 2014 on the
implementing Law No. 2014-
manufacture, packaging, labeling and use of tobacco.
14 of March 28, 2014

626 // Senegal: Addressing Illicit Tobacco Trade
Annex 3: Cigarette Seizures at the Dakar Airport
Customs Post, 2015-2017

CIGARETTE SEIZURES AT THE AIRPORT

2015 2016 2017*

Number of cartons 6,781 7,381 7,130

Value 40,686,000 43,986,000 43,780,000

Source: DGD,2017
*DGD estimations as of May 27, 2017

Annex 4: Summary of Tobacco-Product Imports to
Senegal, by Origin
TAXES
CIF VALUE NET WEIGHT
YEAR ZONE (ASSESSED)
(CFAF) (KG) (CFAF)
WAEMU 246,064 1 327,095

ECOWAS 1,733,795 257 3,677,887
2013
OTHER 89,564,111 9,472 155,981,248

Subtotal 1 91,543,970 9,730 159,986,230

WAEMU 0 0 0

ECOWAS 0 0 0
2014
OTHER 106,288,674 15,114 226,147,253

Subtotal 2 106,288,674 15,114 226,147,253

WAEMU 0 0 0

ECOWAS 0 0 0
2015
OTHER 75,327,110 5,839 133,144,655

Subtotal 3 75,327,110 5,839 133,144,655

WAEMU 171,060,403 18,453 122,308,189

ECOWAS 171,060,403 18,453 122,308,189
2016
OTHER 195,525,291 20,863 383,240,994

Subtotal 4 537,646,097 57,769 627,857,372

TOTAL 810,805,851 88,452 1,147,135,510

Source: DGD (2017)

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TOBACCO TAX
ADMINISTRATION
22
TOBACCO TAX
ADMINISTRATION

A Perspective from the IMF
Janos Nagy1

Chapter Summary
Illegal cultivation, production, and trade are a widespread problem associated with tobacco
products, given their easy portability and the high profit margins. A single container or truck-
load of illegal cigarettes can yield up to US$2 million in profits. The annual revenue loss in
tobacco taxation worldwide is estimated at roughly US$40 billion–US$50 billion, that is, the
equivalent of about 10 percent of global cigarette consumption.

Tobacco products are susceptible to bootlegging, smuggling, and fraud, especially excise
fraud, which extends from standard customs and commercial fraud to undeclared activities
such as the diversion of legally produced cigarettes from international transit routes directly
to retail markets, the illegal domestic production and sale of cigarettes, and legal or illegal
production for export.

Illegal trade is a context-specific activity, and administrative and control measures need to be
tailored to this context. Understanding the size, characteristics, and patterns of illegal pro-
duction and trade is a prerequisite to developing effective antifraud strategies. Regional and
international coordination can substantially improve the efficiency of national efforts.

The central concern in the administration of value added taxes and excise taxes on tobacco
is to control the import, production, and distribution of taxed products tightly. This control

1
Fiscal Affairs Department, International Monetary Fund (IMF).

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

should be exercised at all points of the supply chain, from the fields where tobacco is grown
or the port of entry to the final purchase by the individual consumer. Excise stamps as well as
other markings affixed to the packs of cigarette can facilitate the collection of excise taxes, as
well as audits and enforcement actions at various stages of distribution. The stamps should be
furnished with strong security features similar to those used with banknotes and passports.

Legislation should define compulsory requirements, guarantees, and safeguards under
which tobacco products can be imported or produced and distributed. Only licensed eco-
nomic operators should be involved. Licenses should be issued based on concrete physical,
administrative, and financial conditions.

General Considerations
Given heightened incentives for fraud because of the higher tax rate and portability of
tobacco products, the central concern in the administration of tobacco taxes is to tightly
control the import/production and distribution of excised products. Although perfectly
controlling the supply chain cannot realistically be a pre-requisite to start increasing excises,
given that incentives to fraud are broadly related to the tax wedge, increasing taxes should go
hand in hand with tighter controls. This control should as much as possible be exercised at all
points of the supply chain, from the fields where tobacco leaves are grown or port of entry, to
the final purchase by the individual consumer of the product2. Such controls need a clear legal
framework and dedicated services or functions in the revenue administration.

The legal framework needs to contain some key elements. The categories and particu-
lar tobacco products subject to excise taxation must be clearly defined, keeping in mind
possible substitution patterns. Guiding taxation principles, the base, the rates, the method of
calculation, and the exact point of taxation in the production/supply and distribution chain3
also need to be clearly defined. The legislation must also serve as the basis for the special
excise administration and control measures designed to mitigate this increased risk of fraud.
Administrative and control measures need to be tailored to the specifics of the local context,
for each stage of the processing and distribution.

In most countries, excise taxes are due to central government, and a centrally organized
excise administration is responsible for the management and collection of excise taxes,

Note: Excerpted from IMF How To Note 16/03, “Fiscal Policy: How to Design and Enforce Tobacco Excises.”
© International Monetary Fund. Reprinted with permission. The views expressed in this paper belong solely to
the authors. Nothing contained in this paper should be reported as representing IMF policy or the views of the
IMF, its Executive Board, member governments, or any other entity mentioned herein.
2
Controls of cultivation are looser as illegal farming is more difficult to conceal than trade of final products.
3
Excises should be collected as early as possible in the distribution chain (for example, at the time of import
processing and at domestic tobacco factories) in order to keep the number of taxpayers as low as possible,
and therefore the controls simple, inexpensive, and effective.

630 // Tobacco Tax Administration: A Perspective from the IMF
including tobacco taxes4. Excise administrations are often part of the tax administration,
although the customs administration sometimes collects both import and domestic excise
taxes. In most countries, the customs administration collects excise taxes on imported
excisable goods together with customs duties. In rare cases, if excise revenue is high or the
taxation system is peculiar, countries might have an excise service separate from the tax and
customs administrations (as for example in the United States).

In low-compliance environments, more physical and onsite checks should be performed by
the excise administration (for example, inspection of inventories) and corresponding admin-
istrative capacity is required. In a highly compliant environment, company audit capacities
are often adequate.

Specific Administrative and Control Measures
Only licensed and strictly controlled economic operators should be involved at any stage of
import, production, and distribution (including retail). Legislation should define compulsory
requirements, guarantees, safeguards, and related controls, under which tobacco products
can be imported or produced and distributed. The license should include concrete physical,
administrative, and financial conditions, and adherence to these conditions must be regularly
controlled and non-compliance severely penalized, including by suspending or withdrawing
the license.

Clear and complete records should be kept, and information supplied seamlessly to the
excise administration. Operators need to keep up-to-date records of the flows of materials
used for production and of inventories. The content and the format of the records need to
be defined by law and in the license. These records should be reported at prescribed inter-
vals and/or kept available to the excise authority for remote and/or onsite control purposes.
The records should reflect and correspond with the actual physical status of inventories. It is
important that the records and the information supplied by the economic operator facilitate
the controls for both the operator and the authorities. If the concentration of the industry
allows or the fiscal risks justify, the production plant can be supervised on site by the excise
administration on a permanent basis.

Excise stamps as well as other markings affixed to the packs of cigarette can facilitate the
collection of excise taxes and controls, as well as audits and enforcement actions at various
stages of distribution. A tax stamp (or “banderole”) is issued by the excise authority at the
value of the excise tax. It is purchased by the producer or importer and applied on each
product sold as a proof of payment of the excise tax on that product (and the VAT in certain

4
In certain countries, in addition to federal or central government taxes, local governments (in the case of the
United States, both state and local governments) are also entitled to impose excise duties on tobacco products
using their own tax/excise services. Such arrangements require close coordination among the different levels
of government.

631
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

countries). For this reason, stamps should have strong security features similar to those used
for banknotes and passports. The high cost of such stamps and consequent use of low-qual-
ity stamps has often led to counterfeit stamps and fraud in many countries, hence a general
concern about the efficiency of stamps as a proof of payment for taxes. For these reasons,
many countries have replaced tax stamps by fiscal stickers that contain or give access to
product-specific useful information (often through bar codes). While fiscal stickers do not
aim to prove the payment of taxes (as stamps do), they are useful for taxation, control, and
auditing purposes5. Some countries require pre-printed indication of duty paid status of
tobacco for the specified markets (for example, the United Kingdom, France) on the pack
itself. The burden and cost of applying markings always rests with the producer/importer
except the cost of production and sale of the excise stamp. During periods of forestalling
(for example, prior to excise rate change) the quantity and therefore the costs of printing
and distributing tax stamps may significantly increase and governments should ensure that
the excise administration has sufficient funds to cover such extra costs, although forestalling
should altogether be prevented in the first place through appropriate regulation.

Sophisticated marking systems can go all the way to track and tracing. This process would
require producers to apply appropriate signs on packs and packages (master cartons) to
track every product along the distribution chain. The date, time, and place of production;
origin; intermediaries; intended destination; and taxation status can therefore be identified
and controlled to determine the genuineness and point of diversion of smuggled tobacco
products (basic information such as the taxation status should also be made easily under-
standable to consumers). Track and tracing systems require heavy infrastructure and must
be able to deal with complex transactions and distribution chains and are therefore costly.
Given the need to adapt to changing commercial practices, the system should be operated
by a dedicated organization in coordination with the industry, and all contained information
should remain accessible to the excise administration at all times.

The point of payment and related conditions must be clearly defined in the law. Points of pay-
ment and methods are established after consideration of risks, technology, liquidity, and costs.
Usually, the point of taxation is when the product leaves the factory premises (or customs/
tax warehouse in case of imports), before retail distribution. The number of such producers
and importers are typically limited and they are well known to the excise authorities. Usually,
the producers and importers file their declaration and pay the taxes periodically, on a monthly
basis on a pre-defined day of the month following the removal of tobacco products from the
warehouses. The excise legislation should prevent the excessive forestalling, accumulation,
and sale of stocks using earlier and lower-value tax stamps, and regulations should limit the

5
Tax stamps must include a maximum retail price if an ad valorem excise on the final price is applied, otherwise
the effective ad valorem rate would be lower than the statutory rate. This might in turn require additional legal and
regulatory guidelines on price controls, as well as the administrative means to implement the controls or at least
monitor the retail conditions. Fiscal stickers may also in these cases include a maximum price, but not necessarily.

632 // Tobacco Tax Administration: A Perspective from the IMF
quantities and/or time allowed for the sale of such stocks. Specific procedures should be
defined for damaged stocks, returns, and other special events.

Transit, warehouse, and free zone operations entail elevated risks of fraud and adequate
special measures should be applied. Financial guarantees commensurate with the amounts
of all duties and taxes due can be demanded. The quantities produced and transacted can
also be limited and special physical control measures applied, such as the separation of
processing operations from the sealed storage of taxed and untaxed products. Physical and
direct control by the officials of the excise authority during a part or the whole operation can
be applied (for example, physical escort of the transit consignment from border to border by
individual trucks or in a convoy, application of radio or satellite tracking systems to goods or
conveyances/vehicles/containers).

Authorities should impose severe restrictions on duty free and internet sales. In principle,
duty free shops exist to facilitate the sale of products for export at a low risk, and convenient
place and time. Therefore, it is recommended that duty free shops be licensed only at the
exit sides of airports and seaports and to sell tobacco only for outbound passengers6. Sales
of excisable products in duty free shops at land borders and inland within the country are
not recommended. Consideration should be given to reduce duty free allowances within
the limits of international standards if deemed necessary and practical. Sales of tobacco over
the internet and similar difficult-to-control channels should be subject to strict control, and
consideration given to prohibiting them7.

Due diligence, appropriate responsibility, and care should be legally mandated for the licensed
operators. This includes the design and operation of their own internal control systems to
prevent fraud and make their processes transparent. Operators should also be legally bound
to report any suspicious cases and cooperate fully with the authorities in the investigation of
fraud cases including sharing internal information on processes and business operations.

Fighting Tobacco-Related Excise Fraud
Given their light weight, small size, and high value, tobacco products are susceptible to fraud
through illegal trade, production, and cultivation. The latter is usually a small problem, and
significant clandestine factories are limited to countries where enforcement capabilities are
generally weak and/or corruption high. On the other hand, illegal trade and production of
final products is a widespread problem, given the high profit margins: a single container or
truckload of illegal cigarettes can yield up to US$2 million in profits. The consensus among
experts puts the annual revenue loss in tobacco taxation within the European Union at
roughly €10 billion, and worldwide at US$40–50 billion—that is, about 600 billion sticks, or

6
Duty free allowances should be limited by frequency, length of absence from the country, and quantity.
7
See article 11 of the Protocol to Eliminate Illicit Trade in Tobacco Products.

633
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

10 percent of global consumption (ITIC, 2013; Merriman, 2001; Joossens, 2011; European
Commission, 2013; Euromonitor, 2015).

Illegal trade is a context-specific activity that has various modus operandi and therefore
requires multi-dimensional context-specific solutions (Box 1). There are two types of such
trade. Bootlegging is the illegal resale outside the country of origin of legally purchased
duty-paid cigarettes. It is the textbook illegal trade of classical international trade theory, but
it is marginal for tobacco (although potentially a significant problem in Europe). Bootlegging
is generally caused by wide tax differences between neighboring countries with weak or no
border controls (for example, internal borders between member states in customs unions).
It can also be related to abuse of international travelers’ allowances, cross-border shopping,
and so forth. Smuggling is the cross-border trade in untaxed cigarettes. Smuggling is by far
the most significant type of illegal trade: up to 90 percent of the total. In general, excise
fraud extends from standard customs/commercial fraud (for example, mis-declaration of
quantities, values, origin, and classification) to undeclared activities such as (1) the diversion
of legally produced cigarettes from international transit routes directly to the retail market,
(2) illegal domestic production and sale of cigarettes, and (3) legal or illegal production for
export. In the last two cases, illegal production might also involve counterfeit cigarettes
(for example, branded cigarettes illegally produced by non-owners of the brand, abusers of
industrial and intellectual property rights)8. Tax exemptions are also often linked to smug-
gling (for example, loose transit and transshipment systems, free zones). Because smuggling
involves untaxed cigarettes, it generally remains largely unaffected by mild to moderate
decreases in taxes and responds more to controls and repression.

Bootlegging, and smuggling even more so, generally involves criminal networks. The com-
plexity of smuggling operations requires carefully designed and well-orchestrated plans that
only sophisticated criminal networks can undertake. For this reason, detection, seizure, and
elimination of illegal products must be accompanied by thorough and systematic inves-
tigations (often with undercover methods) and successful criminal prosecution including
forfeiture of proceeds from crime to uproot entire networks. Organized groups active in
these trades are often also active in other illegal activities—such as illegal migration or smug-
gling of arms, drugs, and illegal medicines—and can be very dangerous, hence the need for
an appropriate security apparatus.

Sound and coherent VAT, excise and criminal laws, and regional and international coordi-
nation are important first steps to minimize the incentives and opportunities for smuggling
and bootlegging. Clear policy rationales; well-defined administrative procedures; regional
coordination on matters of rates, base, and trade (for example, personal allowances);
comprehensive, stringent, and coherent excise regulations (as opposed to scattered cus-
toms and criminal procedures) with strict and direct/unconditional tax liability; and so forth

8
Illegal production can take place in illegal production facilities (often semi-mobile units), or in legal facilities,
with or without the knowledge of the facilities’ managers.

634 // Tobacco Tax Administration: A Perspective from the IMF
all contribute to fighting fraud. In addition, international coordination (notably through the
WHO Framework Convention on Tobacco Control and the related Protocol to Eliminate
Illicit Trade in Tobacco Products) can significantly improve the efficiency of national efforts.
Smuggling and in particular smuggling of tobacco products should notably be criminalized,
with adequate level of penalties and other sanctions including confiscation of proceeds of
tobacco-related crime.

It is essential to gather information on both legal and illegal trade and production, move-
ment, import, and export of tobacco products, including the raw materials and equipment/
material used in production9. This includes public information, industry, own data, and
informants, as well as the exchange of information with other government agencies and
with international partners (for example, regional organizations like the European Anti-Fraud
Office). Analyzing the information helps governments understand the situation and trends,
define the risks, and from there identify measures to tackle the problems. Standard control
measures can then be adjusted at every step, from pre-arrival controls to post-clearance
audits. The faster this process takes place, the greater the chances to minimize revenue loss.
At a broader level, understanding the size, characteristics, and patterns of the illegal pro-
duction and trade is a pre-requisite to developing effective anti-fraud strategies and actions;
strategies to fight smuggling in countries where it has a 2 percent share of the market will
not be the same as those used in countries where it has a 10 percent share (for example,
Europe) or a much larger share (for example, Brunei).

Border controls are a first line of action. Depending on the modus operandi, revenue risk,
and available human and material resources, officers with required qualifications and expe-
rience should be assigned to border controls. Front-line officers should be supported by
appropriate intelligence, background support and service, guidance and supervision from
management, and technical aids to enforcement. The format and the integrated control
technology as well as the cooperation with other agencies at the border station are import-
ant factors in effective controls.

Mobile excise control units stopping vehicles and verifying the legality of excisable goods
within the country are often useful. Inland mobile controls should be carried out along
important transport corridors, communication centers, and bottlenecks like bridges, fer-
ries, and passes. Such inland mobile controls can detect illegal imports and unauthorized
domestic products while they are transported inside the country. Support to these opera-
tions requires tight coordination among police, border guards, and other such services (for
example, joint patrols). Controls along the green borders (that is, between two official border
crossings) should be organized in coordination with border police and customs services of
neighboring countries.

9
For example, tobacco leaves, cut and fine-cut tobacco, cigarettes and other tobacco products, materials used
for producing cigarettes like paper and filters, and those used for packing.

635
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Investing in appropriate equipment is necessary. Most general anti-smuggling equipment
like X-ray scanners (including scanners for small parcels, containers, trucks, and trains),
endoscopes, mirrors, night vision equipment, cameras, automatic license plate readers,
and mobile offices can also be used to support the detection of illegal tobacco shipments.
In many low-income countries, basic equipment such as rifles, communication devices,
motorcycles, utility vehicles, and small speedboats might be prioritized. Specific tools
include tobacco detector equipment and tobacco scenting dogs. The same dogs can be
trained to detect both tobacco and narcotic drugs.

Excise administration staff will require dedicated training. Special emphasis should be given
to tobacco processing technologies, distribution methods, taxation principles, rules, prac-
tices, inward processing relief, and illegal trafficking patterns. Training staff to resist threats
and bribes from criminals is equally important and is most effective if pursued through the
implementation of a professional anti-corruption program supported by a code of con-
duct, disciplinary measures, and proper human resource management. Resource allocation
should take into account the revenue weight, revenue risks, and special requirements of
dealing with tobacco.

Seizure, storage, and destruction of illegal tobacco should be mandatory for excise and
customs authorities. This generally involves burning, grinding, and depositing at waste man-
agement plants. As for legitimate tobacco, the storage, transport, and destruction of seized
and confiscated goods require extra care and caution, as well as transparent and docu-
mented processes. This can also create significant and unexpected additional expenses, in
particular at times of massive and successful law enforcement operations, and authorities
should plan for the necessary budget resources.

BOX 1. REVENUE RAISING, INCREMENTAL TAX ADJUSTMENTS, AND ILLEGAL
TRADE: THE CANADIAN CASE

The Canadian federal and provincial governments gradually increased cigarette
taxes so as to almost triple the real (that is, inflation-adjusted) retail price between
1980 and 1992/1993. Federal nominal revenue surged from Can$0.7 billion to
Can$3.3 billion over this period (Figure 1). The increase did not result in smuggling
until the early 1990s, when previously almost non-existent untaxed exports of
Canadian cigarettes to the United States surged and re-entered Canada as duty not
paid (DNP) cigarettes (Figure 2.2). In 1993, it was estimated that roughly one-third
of the Canadian market consisted of DNP cigarettes.

Tough measures against tobacco manufacturers and their employees involved in
the scam (Austen, 2008; Canada Revenue Agency, 2008), significant but temporary
tax cuts, new export taxes, and tougher police controls allowed the government

636 // Tobacco Tax Administration: A Perspective from the IMF
to control the situation and paved the way for taxes to increase again. This time,
the tax increases took place at a much faster pace given the political acceptability
of the tax and a good understanding of the demand (Figure 2.1). Revenue surged
again to previous levels, despite a sharp decrease in the prevalence of smoking.
Large-scale illegal trade, however, came back after 2004 with actual production
of new brands on the same indigenous reservations that had been used in the
1990s by smugglers to re-import cigarettes, because of their peculiar legal and
geographical characteristics. This triggered a second wave of enforcement efforts
by Canadian authorities (including an enhanced stamping regime), and revenue
increased again from 2010.

No two countries are alike, but the Canadian case illustrates a few key points.
First, the revenue increase has been substantial despite smuggling. In Canada,
real (inflation-adjusted) tobacco-related revenue was roughly 50 percent higher
in 2011 than in 1980, despite a 50 percent lower prevalence rate and significant
illegal trade. However, the social cost of smuggling (for example, rising crime) can
be high, especially among communities closely affected by it, and the attitude
toward paying taxes more generally can also greatly suffer. Second, gradually
raising rates is an efficient way of understanding the demand and market reactions
to higher prices, as can be seen from the faster increases after 2000. Third, tight
control over the tax base is a key element of any revenue-raising strategy in any
country. Situations in which parts of the country come under a different legal
regime or are beyond the reach of the law make it difficult to enforce high excises,
whether this is related to jurisdictional peculiarities, political reasons, war, logistics,
and so forth. Fourth, once in place, criminal networks are hard to dismantle and
require a multi-pronged strategy that extends beyond simple repression (royal
Canadian Mounted Police, 2008). Many individuals involved in the mid-2000s
Canadian smuggling episode learned the trade in the early 1990s and took over old
distribution networks, to the dismay of tobacco manufacturers, whose activities
led to the initial growth in contraband (Canada Revenue Agency, 2008; Marsden,
2009; Imperial Tobacco Canada, 2009; Kemball, 2009). Finally, understanding the
nature of smuggling is crucial to fighting it: even in a single country, solutions that
worked once may not work twice.

637
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

Figure 1. Canada: Tobacco Price and Federal Excise Revenue
4.0 10.0

Billions
Index

Cigarette real price index
(1980=1.0; left scale) 9.0
3.5
Prevalence of tobacco use
(1985=1.0; left scale) 8.0
3.0
7.0
2.5 6.0

2.0 5.0

4.0
1.5 Federal nominal excise revenue
(right scale) 3.0
1.0
2.0
0.5 1.0

0.0 0.0
1980 1985 1990 1995 2000 2005 2010
Sources: Statistics, Canada, Health Canada.

Figure 2. Canada: Estimated Smuggling and Seizures
20.0 200
Millions of cigarettes
Billions of cigarettes

18.0

16.0 160

14.0 Seizures of cigarettes
(Phase II smuggling)
12.0 (right scale) 120
Exports of cigarettes
and fine-cut tobacco
10.0 (Phase I smuggling)
(left scale)
8.0 80

6.0

4.0 40

2.0

0.0 0
1980 1985 1990 1995 2000 2005 2010
Sources: Statistics Canada, Royal Canadian Mounted Police.

638 // Tobacco Tax Administration: A Perspective from the IMF
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Verguet, S., C. L. Gauvreau, S. Mishra, M. MacLennan, S. M. Murphy, E. D. Brouwer, R. A. Nugent, K. Zhao,
J. Prabhat, and D. T. Jamison. 2015. “The Consequences of Tobacco Tax on Household Health and
Finances in Rich and Poor Smokers in China: An Extended Cost-Effectiveness Analysis". The Lancet:
Global Health 3(4):e206–e216.

Warner, K. E., F. J. Chaloupka, P. J. Cook, W. G. Manning, J. P. Newhouse, T. E. Novotny, T. C.
Schelling, and J. Townsend. 1995. “Criteria for Determining an Optimal Cigarette Tax: The Economist’s
Perspective.” Tobacco Control 4(4):380–86.

Whitman, G. 2006. “Against the New Paternalism: Internalities and the Economics of Self-Control.”
Policy Analysis 563, Cato Institute, Washington, DC.

World Health Organization (WHO). 2008. WHO Report on the Global Tobacco Epidemic, 2008: The
MPOWER Package. Geneva.

———. 2010. WHO Technical Manual on Tobacco Tax Administration. Geneva.

———. 2016. “Fiscal Space, Public Financial Management and Health Financing: Sustaining
Progress towards UHC. Implementation of the Collaborative Agenda. 26–28 April 2016,
Montreux, Switzerland.” WHO/HIS/HGF/HFWorkingPaper/16.2; Health Financing Working Paper
No. 2, World Health Organization, Geneva. http://apps.who.int/iris/bitstream/10665/250127/1/
WHO-HIS-HGF-HFWorkingPaper-16.2.pdf.

Yach, D., and H. Wipfli. 2006. “A Century of Smoke.” Annals of Tropical Medicine and Parasitology
100(5–6):465–79.

641
CONCLUSION
Conclusion

I. Overview
The preceding chapters of this book have presented a series of case studies addressing
illicit trade in tobacco products in over 30 countries, including strategies and measures to
address it. The country case studies describe the impact of tax administration (including cus-
toms) and, in most cases, of price and tax differences on illicit trade. Collectively, these
case studies provide a strong platform for evaluating good and, in some cases, bad prac-
tices in addressing illicit trade in tobacco products. The chapters address both tax evasion
(i.e., illicit tobacco trade) and tax avoidance (i.e., legal loopholes to avoid tobacco taxes).
These studies demonstrate a wide variety in the salience of illicit tobacco trade, country
strategies, capacities, and degrees of success in confronting this challenge.

This concluding chapter summarizes good practices and recommendations that emerge
from the country cases. It also draws on guidance from the WHO Framework Convention
on Tobacco Control’s (FCTC) Protocol to Eliminate Illicit Trade in Tobacco Products (the
Protocol), from the IMF Chapter in this volume, and from the recent World Bank report,
Tobacco Tax Reform: At the Crossroads of Health and Development. The essence of these
good practices and recommendations, as discussed below, can be summarized in the fol-
lowing three points:

»» To reduce illicit trade in tobacco products, it is both crucial and feasible for all countries
to strengthen tax (including customs) administration and enforcement. There is growing
experience and agreement on the package of steps needed to do so, the main elements
of which are described in the Protocol.

»» Tobacco taxes play only a minor role in illicit trade, although several country cases found
that the tobacco industry used exaggerated estimates of illicit trade to argue against

643
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

tobacco tax increases. Significantly, in every case study where there was a significant tax
or price increase, there was a resultant increase in government revenue and (where data
was available) a decrease in smoking prevalence. As a result, countries should not hesitate
to increase tobacco taxes and improve their tax structures, even while at an early stage of
efforts to improve tax administration. Even at relatively high levels of tobacco illicit trade,
the overwhelming majority of smokers will still be buying on the official market and paying
full taxes, while some smokers will quit (or non-smokers will not initiate smoking) as a
result of a tobacco tax reform.

»» The strengthening of tax administration and tobacco tax reform – significant and sus-
tained increases and restructuring of tobacco taxes — should be viewed as complements
rather than substitutes. They reinforce each other in helping countries to reduce prevent-
able morbidity and mortality and in increasing public revenues.

II. The importance of reducing illicit trade in
tobacco products
The case studies make it clear that reducing illicit trade in tobacco products is important
whether viewed from the perspective of public health, public finance, the rule of law, gover-
nance, or equity. As previously noted, illicit trade in tobacco products contributes to numerous
health, economic, and governance challenges, of which the following are most salient:

»» Youth and the poor are most impacted. Illicit cigarettes generally sell for consider-
ably less than their tax-paid equivalents, as evidenced by the case studies presented in
this book. They inflict the greatest harm to the most price-sensitive population group,
reducing prices to and so encouraging consumption by, in particular, young people
and those with low incomes. The availability of inexpensive illicit cigarettes increases
the likelihood of young people developing addiction (particularly where illicit imports
ing through aspirational brands). It also encourages the poorest
"glamorize" smok
quintiles of the population to continue smoking, rather than choose to quit, even
when tobacco taxes and the price of legal cigarettes rise. The poor tend to have higher
tobacco consumption levels and consequently are disproportionately impacted by
tobacco-related diseases and premature deaths, placing them at higher risk of being
pushed into extreme poverty due to costs of treatment and/or loss of income when an

644 // Conclusion
co-related disease. As a result, illicit trade in
income-earning smoker develops a tobac
tobacco products exacerbates equity gaps.

»» Confronting illicit trade in tobacco products supports improved governance. Tobacco
illicit trade, by definition, reduces revenues that would otherwise be paid to government
that could be invested in tobacco control and other priority programs that benefit the
population. It also negatively impacts public welfare in other ways. For instance, illicit
trade in tobacco is not only inconsistent with the rule of law, but often depends on and
can contribute to weakened governance (e.g., through corruption and the presence of
organized criminal networks). In contrast, confronting this issue can yield broader benefits
for governance - tools and capacities developed to address illicit trade in tobacco prod-
ucts can strengthen overall tax administration, compliance, and enforcement (including
for other products subject to excise taxes, such as alcohol and fuel). This subject is
addressed in the Kenya, Georgia, and Ecuador chapters of this report. Controlling illicit
trade in tobacco products and enhanced overall governance are mutually reinforcing.

»» Uncontrolled illicit trade in tobacco provides opportunities for the tobacco industry
to misinform public opinion and unduly influence public policy. As emphasized in this
report’s country case studies and other recent analyses1, the tobacco industry routinely
uses inflated estimates of the impact of tobacco taxes on illicit trade to campaign against
tobacco tax increases and misinform public opinion. By accurately measuring and better
controlling illicit trade in tobacco, governments reduce industry’s ability to distort policy pri-
orities supporting improved public health, tax administration, and governance. For example,
as emphasized in the Colombia chapter, an initial study to quantify the true volume of illicit
cigarette trade in the country (notably, the first of its kind not to be sponsored by tobacco
companies) was essential to galvanizing support for increased tobacco taxation.

III. Strategic steps to reduce illicit trade in
tobacco products
How are countries effectively confronting tobacco illicit trade? The following strategic steps
emerge from the case studies, with respect to key lessons from countries that are success-
fully addressing illicit trade in tobacco products.

»» Diagnose the different forms of illicit trade in tobacco products: The cases studies show
that illicit trade overwhelmingly involves cigarettes, rather than other tobacco products.
Cigarette illicit trade takes variety of forms, varying in type and severity by country: smug-
gling across borders; declaring products as for export (and thus not subject to domestic
tax) and then selling them on the domestic market; using fake tax stamps; selling unde-
clared production (e.g. an undisclosed third production shift); producing counterfeits of
legitimate brands; producing low-cost unbranded cigarettes destined for illicit markets
(so called "illicit whites"); using Free Zones to leak cigarettes to the domestic market; and

645
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

selling tobacco products via Internet, phone, or mail2. Each form of tax evasion has some-
what different implications for needed improvements in tax administration and enforcement.

»» Understand the causes and drivers of illicit trade in tobacco products: The case studies
confirm findings from the literature that tobacco illicit trade stems from a wide range of
causes. These include weaknesses in governance and the regulatory framework, corrup-
tion, insufficient capacity of enforcement and judiciary systems, the existence of informal
distribution and of organized crime networks, having a border with another country suf-
fering from similar problems; and expected profitability of tobacco illicit trade. Tobacco
taxes are one of the factors affecting expected profitability, along with costs of procure-
ment, distribution and the chances and consequences of getting caught – which is largely
dependent on tax administration. However, the sub-regional case study on South Africa,
Lesotho and Botswana shows that price differences had little to no detectable impact on
illicit cross-border trade of tobacco products. In fact, countries or sub-regions with rela-
tively low tobacco prices such as Malaysia or the Caribbean tend to have higher, rather
than lower, shares of illicit trade.

The country cases strongly confirm that the most important determinant in illicit trade of
tobacco products is tax administration. Countries as different in levels of economic and
institutional development as the United Kingdom (UK), Kenya, and Georgia have all suc-
cessfully improved the effectiveness of their tobacco tax administration and, by doing so,
reduced tobacco illicit trade while increasing tobacco tax rates and tobacco tax revenues.
Addressing illicit trade and raising tobacco taxes should be viewed as mutually reinforcing
ng
and complementary actions. Even at relatively high levels of illicit trade, the overwhelmi
majority of consumers purchase on the official tax-paid market. Some of that overwhelming
majority of smokers will be reducing their consumption or quitting following a tax increase,
while wealthier and less price sensitive smokers will be contributing to increased govern-
ment revenues.

»» Strengthen country data, analysis, planning, and implementation oversight: Consistent
with Articles 7 and 9 of the Protocol, the UK, Australia, and Ireland case studies visibly
demonstrate the importance of reliable data. The process should start with mapping
of the supply and demand for tobacco products; what is known about illicit trade in
tobacco products; the modus operandi of actors involved in or facilitating illicit trade; the
capacity, commitment, and accountability (including corruption) of government agencies;
egies need
and resultant effectiveness of tax/customs administration. Anti-illicit trade strat
to be informed and when needed adjusted based on the ongoing data collection - as the
UK, Kenya, and Australia (with its Black Economy Taskforce), have done. Actors involved in
the illicit trade of tobacco products are continuously assessing their sales and profits and
adapting their tactics accordingly. Consequently, agencies responsible for controlling/pre-
venting tobacco illicit trade must take a similarly adaptable, rigorous, and focused approach.

646 // Conclusion
In addition, having access to high quality local market data, including smoking prevalence
and intensity, is essential. Countries that regularly generate their own reliable estimates
(e.g., UK, Australia, Ireland) use them also to fine-tune their strategies. Unfortunately,
independent estimates of the size of illicit markets are scarce, particularly in low- and
middle-income countries, and industry estimates (as discussed below) are unreliable. As a
result, it is important that countries develop independent estimates of tobacco illicit trade
using good-practice methods. These methods, described in a 2015 Guide3, if applied cor-
rectly and adjusted for the local circumstances, can generate reliable estimates of the size
of illicit markets relatively quickly and at reasonable costs. Developing such independent
estimates requires strengthening country capacity, which could be augmented by technical
assistance available, including from multilateral donors and other development partners.

Importantly, not having data regarding the size of the illicit market is not an excuse for
inaction. The absence of such a reliable estimate has not stopped Kenya, Georgia, or
the Philippines, for example, from moving ahead in controlling illicit trade in tobacco
products. In all countries, it is important to evaluate the measures already in place and
determine what works, what does not, and why. Country strategies to reduce illicit trade
in tobacco products should establish policies, legislation, and regulations appropriate for
specific country contexts.

It is critical to note that having a strong strategy on paper is important but not sufficient,
unless such plans can be operationalized. This includes the strengthening of capacity,
incentives, and accountability needed for effective implementation.4 The case studies of
Bangladesh, the Southern African Customs Union (SACU), and the UK, at quite different
levels of development, all emphasize the importance of capacity development. Similarly,
Colombia adopted an Anti-Smuggling Act that both provides the legal framework for con-
trolling illicit trade and the tools for implementing extended law enforcement activities in
border areas. Likewise, the Kenya case study highlights the fact that deterring tobacco illicit
trade requires not just setting, but enforcing criminal penalties, including incarceration and
severe financial penalties for correspondingly serious offenses.

»» Avoid reliance on the tobacco industry: The role of the tobacco industry poses a chal-
lenge to countries seeking to address illicit trade, since the tobacco industry is often linked
to illicit trade in tobacco products, either directly or indirectly.5 The UK and Ireland case
studies emphasize the need to fulfill obligations under Article 5.3 of the FCTC to prevent
the tobacco industry from influencing public policy.6 One approach, as described in the
UK case study, is to publicly expose the industry involvement in illicit trade. As the litera-
ture indicates, tobacco industry documents provide compelling evidence that the supply of
international brands via illegal channels has been an important component of their market
entry strategy in Africa, Latin America and in Asian countries.7,8 As the experience of SACU,
Chile, the Organization of Eastern Caribbean States (OECS) and South Africa illustrates,
the industry’s economic power provides them substantial influence in many countries. In
Colombia, for example, the main regulatory authority is required to report to the tobacco

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Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

industry, allowing it to influence budget allocations and decisions related to controlling
tobacco illicit trade in violation of Article 5.3 of the FCTC.

The case studies, including Colombia, Australia, Georgia, and Malaysia, also confirm prior
findings that the tobacco industry regularly overstates levels and changes in tobacco illicit
trade to oppose tobacco tax reforms. For example, in Colombia, an impartial estimate of
the market share of illicit trade was only 7 percent, while the tobacco industry estimated
that share at 18 percent.9 In Australia, an industry-funded study estimated the illicit market
at 14 percent10 of the total market, while the Australian Taxation Office calculated that
share to be only 5.6 percent.11 This issue of exaggerating the illicit market share applies
whether the tobacco industry is reporting data to governments or to firms that aggregate
and publish data.

The Georgia and Uruguay case studies show that when the government responds to
industry pressure and reduces taxes due to fears regarding tobacco illicit trade, the result
is a decline in revenues and an increase in consumption, while the true drivers of illicit
trade in tobacco products remain unaddressed. Canada had a similar, well-documented,
experience in the 1990s, when the government reduced tobacco tax in response to
tobacco illicit trade concerns12. This tax reduction led to lower cigarette prices, higher
smoking rates, especially among youth,13 and lower tax revenue. After assessing the impact
of its 1994 tobacco tax cut on prevalence and revenues, the Canadian government restored
taxes to their pre-1994 level.14 In addition, it sued the tobacco industry for manipulating illicit
trade to influence the lowering of the cigarette tax rate.15, 16

»» Build inclusive, political coalitions against illicit trade in tobacco products: Strong and
successfully implemented country strategies require enlisting support and finding champi-
ons at top levels of ministries and governments, as demonstrated in Georgia, the Philippines
and the UK. Another crucial element of gaining political support is to build alliances with
key stakeholders in civil society, including NGOs, think tanks, and the media, as empha-
sized in the Kenya and the UK case studies.

NGOs in Georgia, Turkey, Columbia, and Bangladesh also have played major roles in
support of addressing tobacco illicit trade and in implementing tobacco tax reforms,
including exposing efforts by the tobacco industry to counter tobacco control programs.
In Bangladesh, for example, young people have torn down billboards that were illegally
advertising tobacco. The Philippines and Kenya introduced apps for the public to verify
the authenticity of cigarette packs, while the UK ran a public awareness campaign explain-
ing how purchasing illegal cigarettes harms the country and local communities. Involving
the public in addressing illicit trade both supports enforcement and reduces the demand
for illegal products. Issues of political economy also affect enforcement – the Mexico and
Kenya case studies highlight the importance of the electoral cycle and the overall national
security context on the effectiveness of tax administration and enforcement.

648 // Conclusion
»» Work across sectoral silos: The Colombia, Chile and Kenya case studies identified lack
of integration across sectors at the national and subnational levels as the major obstacle
in controlling illicit trade of tobacco products. These analyses, in conjunction with the
Bangladesh, Australia and Mexico case studies, emphasize that success in adopting and
implementing strong programs to combat illicit trade and implement tobacco tax reform
requires active and coordinated support from numerous ministries/government agencies.
Coordination is particularly important in integrating tobacco illicit trade control into strate-
gies for tobacco tax reform and overall tobacco control programs.

Bangladesh, for example, closely coordinates its tobacco control efforts through five
ministries at both the national and the district levels: Health (the lead agency in the FCTC
and overall tobacco control); Finance (responsible for tax policy and administration);
Home Affairs (responsible for police and border control); Agriculture (regarding tobacco
cultivation); and the Cabinet Office (to provide high level political support). As detailed in
the Bangladesh case study, its national taskforce also includes, among others, the Ministry
of Commerce (on regulating trade and licensing); the Ministry of Justice (on enforcing the
law and prosecuting offenders); and the Ministry of Education (on convincing vulnerable
young people not to initiate smoking behavior /develop an addiction to tobacco).

»» Address illicit trade as an integral part of tobacco tax reform and overall tobacco
control: Country cases, including those of the Philippines, the UK and Ireland, clearly
demonstrate the complementary nature of addressing tobacco illicit trade and imple-
menting tobacco tax reform. The key elements of tobacco tax reform have recently been
summarized in the World Bank publication Tobacco Tax Reform: At the Crossroads of
Health and Development17 and are summarized below:

›› Go big, go fast. Tax strategies should focus on health gains first, then on fiscal benefits.
This means going for big tobacco excise tax rate increases starting early in the process.

›› Attack affordability (i.e., if tobacco taxes increase tobacco prices faster than
inflation and growth in per capita income). Tobacco taxes only reduce tobacco
consumption if they reduce cigarette affordability.

›› Change expectations. Communication with the public is also critical. Governments
must make sure consumers know that cigarette prices will keep going up.

›› Tax by quantity. Tobacco tax rates should be simplified and based on the quantity of
cigarettes, not their price.

649
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

›› Build broad alliances. Country leaders face sharp resistance to tax rate increases
and other tobacco control measures from the tobacco industry. Countering these
pressures requires reliable data and economic analysis, multi-sectoral policy devel-
opment, and strong partnerships among key stakeholders at the local, national, and
international levels.

The pace and phasing of these tax reform principles will, of course, depend on specific
country circumstances. Following these principles of tobacco tax reform, combined
with addressing tax avoidance and tax evasion, will improve public health, increase tax
revenues and support economic growth. The largest beneficiaries of health and income
gains will be former smokers and their families, as well as those who might otherwise
have initiated smoking.18

More broadly, confronting illicit trade in tobacco products should be an integral part of
a country’s overall approach to tobacco control, which includes the steps called for in
WHO’s “MPOWER” strategy (banning smoking in public places, banning advertising and
promotion of tobacco products, offering help to those who want to quit, as well as, of
course, tobacco tax reform). The UK and Ireland case studies illustrate the importance of
integrating tax and non-tax MPOWER steps in responding to tobacco illicit trade.

»» Encourage and draw on regional and global cooperation/partnerships: As recom-
mended in the Protocol (Articles 20 – 31) and the FCTC, countries also should support
and draw on regional and sub-regional, as well as global, partnership arrangements to
address illicit trade and to implement tobacco tax reform. This can help, for example, in
reducing substantial disparities in tobacco taxes in neighboring countries by pulling coun-
tries up to a common higher tax level. It also can improve coordination of cross-border
and regional efforts to reduce tobacco illicit trade.. As shown in the European Union (EU)
case study, the EU sets the gold standard in using regional agreements to establish high
minimum standards for tobacco taxes and to address illicit trade in tobacco products. Its
regulations have an impact not only on EU member states, but also on candidate countries
and on countries with Association Agreements such as Georgia. Georgia, for example, has
worked closely with Turkey to stop the use of its territory for transit of untaxed cigarettes.
In addition, Georgia has a memorandum of understanding with the UK Customs office to
share intelligence regarding large-scale smuggling operations.

However, it should be noted that not all regional agreements are uniformly positive. The
case study of the OECS countries and Trinidad and Tobago, for example, shows a negative
informal ‘neighborhood’ effect, where all countries have low tobacco taxes (except for
Barbados), lag behind the implementation of the MPOWER recommendations on tax
reforms, and have implemented very few measures to control tobacco illicit trade. Also,

650 // Conclusion
the Senegal case study points to the damaging impact on tobacco tax reform of the
maximum tobacco tax rate established by the West African Economic and Monetary Union
(WAEMU). In contrast, West Africa’s other regional economic grouping, the Economic
Community of West African States (ECOWAS), has recently drastically reformed its
tobacco tax directives by changing its "maximum" tax rule to a "minimum" one, so that,
like the EU, it does not restrain countries from implementing higher tax rates.

At the global level, the most effective way a country can benefit from and contribute to
promoting international collaboration is to join the Protocol, discussed below. Only four
of the countries covered by case studies have done so, as of yet - Ecuador, Senegal, the
UK and Uruguay. Ratifying the Protocol has advantages that go beyond information shar-
ing and coordination of enforcement efforts, including access to technical assistance in
implementing the Protocol and establishing track and trace systems.

»» Draw on the Protocol and Guidelines for implementing the FCTC: Authorities seeking
to strengthen tax administration can utilize two important sources of good practice that
derive from Section 15 of the FCTC, “Illicit Trade in Tobacco Products.” The first is the
WHO’s FCTC Protocol to Eliminate Illicit Trade in Tobacco Products (or the Protocol).
It is a new treaty derived from the FCTC that has been ratified by 46 countries and the
European Union and that entered into force on September 25, 2018, as detailed in the
chapter of this book. The case studies consistently refer to the Protocol, recommend-
ing adhering to its principles and citing specific Articles, even where countries have not
yet ratified it. As an international treaty, the Protocol also can help generate domestic
political support for implementing its measures. Additionally, countries that have ratified
the Protocol will have access to resources to help them assess their illicit markets and
develop their strategies to address illicit trade in tobacco products. The Protocol outlines
three main approaches to reduce and prevent tobacco illicit trade: (i) Controlling the
supply chain of tobacco products (Articles 6-13); (ii) Addressing unlawful conduct and
criminal offenses through enforcement (Articles 14-19); and (iii) Promoting international
cooperation through information sharing, mutual administrative and legal assistance, and
extradition (Articles 20-31).

The second key source of policy guidance and good practice is constituted by the
Guidelines for Implementation of Article 6, on Price and Tax Measures of the FCTC (issued
in 2014). These guidelines also cover Article 15, on Illicit Trade in Tobacco Products. One
of its guiding principles is the need for efficient and effective administration of tobacco tax
systems, including addressing illicit trade in tobacco products. Section 4 of the Guidelines,
which focuses specifically on tax administration, is closely aligned with the articles of the
Protocol. It addresses a common practice of tax avoidance called “forestalling” (i.e., stock-
ing up tax stamps or tax-paid excess inventories in the distribution system in advance of a
tax increase). Forestalling has been reported in several case studies (including Georgia and
the Philippines). Section 6 of the Guidelines is devoted to tax-free/duty-free sales - topics
raised, for example, in Uruguay, the Philippines, and Chile case studies as a potential

651
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

source of tax evasion or avoidance. Section 7 of the Guidelines emphasizes and provides
guidance on international cooperation.

Box 1 summarizes the above strategic steps to reduce illicit trade in tobacco products.

BOX 1: SUMMARY OF STRATEGIC STEPS TO REDUCE ILLICIT TRADE IN
TOBACCO PRODUCTS

»» Diagnose the different forms of illicit trade in tobacco products

»» Understand the causes and drivers of illicit trade in tobacco products

»» Strengthen country data, analysis, planning, and implementation processes

»» Avoid reliance on the tobacco industry

»» Build inclusive, political coalitions against illicit trade in tobacco products

»» Work across sectoral silos

»» Address illicit trade as an integral part of tobacco tax reform and overall
tobacco control

»» Encourage and draw on regional and global cooperation/partnerships

»» Draw on the Protocol and Guidelines for implementing the FCTC

IV. Specific actions to confront illicit trade in
tobacco products
The discussion above provided broad, strategic directions for enhancing progress in con-
trolling/preventing illicit trade in tobacco products. However, what specific actions can
decision makers prioritize to rapidly achieve gains? Findings from the country case studies
suggest the following specific actions (which are consistent with the IMF guidance pre-
sented in Chapter 22).

»» Require licensing for the full tobacco supply chain, as required by Article 6 of the
Protocol. At present there is licensing at least for all manufacturers, importers, exporters,
and distributors in almost all country cases. What is needed is for each country to assess its
capacity to require licensing for rest of the supply chain, particularly retail. As noted in the
Canada case study, the best example of using licensing to control the supply chain is in the
province of Quebec, where the entire supply chain is licensed including tobacco growers,
transporters, manufacturers, those who store raw tobacco and/or final products, importers,
wholesalers, retailers, as well as those in possession of manufacturing equipment. Tobacco
importers are licensed in Malaysia, and the Philippines requires suppliers of raw materials to
the production process, including those providing tobacco papers and filter components,

652 // Conclusion
to be licensed. The Australia case study highlights the importance of licensing tobacco
manufacturing equipment to prevent the use of second-hand equipment for unlicensed
and untaxed production. The UK has recently implemented a similar measure.

»» Require use of secure excise tax stamps and other product markings to facilitate enforce-
ment and tax collection, as required by Article 8 of Protocol. These markings should
possess multiple layers of security (as implemented in Kenya, Georgia, and the Philippines,
for example); they should not be removable (not the case in Indonesia where the stamps
are being reused illegally); and they should be destroyed when the pack is opened (also to
prevent reuse). The absence of secure excise marking in SACU countries, Chile or Mexico
weakens the ability of the tax authorities to collect taxes.

»» Establish effective track-and-trace systems to follow tobacco products through the
supply chain from production or import to sale to consumers (Article 8 of the Protocol).
Secure excise stamps are crucial but not sufficient to prevent tax evasion if there is no
downstream verification that cigarettes have tax stamps and that they are authentic.
Georgia, Kenya, and the Philippines, for example, already possess tight monitoring of
production and import using unique IDs and excise stamps. These efforts could be readily
developed into full-fledged track-and-trace systems throughout the supply chain with
relatively small investments. A track-and-trace system would help address, for example,
the challenge posed by under-declared domestic cigarette production or production
declared for export but then sold on the domestic market.

The Mexican and Chilean case studies identify the absence of a track-and-trace system as
the major obstacle to controlling illicit trade in tobacco products, as does the SACU study.
The Ecuador case study, documented how its Internal Revenue Service implemented
a tax track-and-trace system — “SIMAR” for domestically produced cigarettes, alco-
holic beverages, and beer. As the first track-and-trace to comply with the Protocol to
Eliminate Illicit Trade in Tobacco Products, SIMAR has become a benchmark for other
countries in the region as they begin to tackle these issues.

653
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

»» Set relatively low duty-free allowances (Article 13 of the Protocol and Article 6.2 of the
FCTC) for tobacco product purchases, both in terms of amounts (e.g. only two packs, as
in Australia) and frequency (e.g. only once every 30 days as in Georgia). Chile shows how
the lack of restrictions on frequency led to substantial but legal small-scale tax avoidance.

»» Set and enforce significant financial penalties and penal provisions for illicit trade in
tobacco products (Articles 15, 16 and 17 of the Protocol). Seizures, financial penalties, and
other punishment severe enough to be a deterrent (unlike some of those reported in the
Kenya case study) are important. Criminal prosecutions are particularly important as deter-
rents. The UK case study, for example, reported that in its successful efforts to sharply
reduce illicit trade, there were an average of about 250 criminal convictions per year from
2014-2016. Colombian officials also realized the importance of punishment as a deterrent
when Colombia substantially boosted penalties for those involved in smuggling.

»» Provide for secure and environmentally friendly destruction of seized cigarettes, car-
ried out by the regulatory authorities and not by the tobacco industry (Article 18 of the
Protocol). In Mexico, customs officials destroy seized cigarettes, while in the Philippines
approval and presence of a Bureau of Internal Revenue representative is required. In con-
trast to this guidance, in South Africa an industry-representative body is responsible for the
destruction of illicit goods.

The specific actions noted above do not cover Articles 7 (due diligence), 9 (record keep-
ing) and 15 (liability) of the Protocol, since the country case studies generally did not call
attention to these Articles. However, the Australia chapter stresses the importance of due dil-
igence and record keeping, and the Canada chapter addressed record keeping. Since these
Articles relate to the obligations of the industry, they are highly relevant to the implementa-
tion of the FCTC and the Protocol, in order to help create a strict regulatory environment
for the tobacco industry and to protect public policies from commercial and other vested

654 // Conclusion
interests of the tobacco industry (in accordance with national law as specified in Article 5.3
of the FCTC).

Box 2 summarizes the above strategic steps to reduce illicit trade in tobacco products.

BOX 2: SUMMARY OF SPECIFIC ACTIONS TO CONFRONT ILLICIT TRADE IN
TOBACCO PRODUCTS

»» Require licensing for the full tobacco supply chain, as required by Article 6 of
the Protocol.

»» Require use of secure excise tax stamps and other product markings to facilitate
enforcement and tax collection, as required by Article 8 of Protocol.

»» Establish effective track-and-trace systems to follow tobacco products through
the supply chain from production or import to sale to consumers (Article 8 of
the Protocol).

»» Establish effective enforcement teams equipped with automated reporting
devices, to reduce human discretion in tobacco tax administration (Articles 8
and 19 of the Protocol).

»» Obtain detection equipment and use it effectively at customs posts (Articles 14
and 19 of the Protocol).

»» Develop a risk profile to target inspections (Articles 10, 14 and 19 of the Protocol).

»» Set relatively low duty-free allowances (Article 13 of the Protocol and Article 6.2
of the FCTC) for tobacco product purchases, both in terms of amounts
and frequency.

»» Regulate or ban trade in tobacco products in free trade and other special
economic zones (Article 12 of the Protocol).

»» Set and enforce significant financial penalties and penal provisions for illicit trade
in tobacco products (Articles 15, 16 and 17 of the Protocol).

»» Provide for secure and environmentally friendly destruction of seized cigarettes,
carried out by the regulatory authorities and not by the tobacco industry (Article
18 of the Protocol).

»» Educate the public on the impact of tobacco illicit trade.

655
Confronting Illicit Tobacco Trade: A Global Review of Country Experiences

V. Final remarks
Complementing and supporting the WHO FCTC Protocol to Eliminate Illicit Trade in Tobacco
Products, the case studies presented in this book illustrate how countries have confronted
illicit trade in tobacco products, in addition to summarizing the progress achieved, and the
lessons learned. The case studies presented in this work demonstrate the importance - and
feasibility - of addressing illicit trade in tobacco products as an integral part of tobacco tax
reform and comprehensive tobacco control.

Endnotes
1
Gallagher AWA, Evans-Reeves KA, Hatchard JL, et al. Tobacco industry data on illicit tobacco trade: a
systematic review of existing assessments. Tobacco Control Published Online First: 22 August 2018. doi:
10.1136/tobaccocontrol-2018-054295
2
Addressed by Article 11 of the Illicit Trade Protocol.
3
Hana Ross. Understanding and measuring tax avoidance and evasion: A methodological guide.
Washington DC 2015. DOI: 10.13140/RG.2.1.3420.0486
4
On the importance of incentives and accountability as well as capacity in improving institutional effec-
tiveness, see World Development Report 2017, Governance and the Law, World Bank, 2017.
5
Gilmore AB, Gallagher AWA, Rowell A. Tobacco industry’s elaborate attempts to control a global track
and trace system and fundamentally undermine the Illicit Trade Protocol. Tobacco Control. 2018
6
Framework Convention on Tobacco Control, WHO, 2003
7
Collin J, Legresley E, MacKenzie R et al. (2004). Complicity in contraband: British American Tobacco
and cigarette smuggling in Asia. Tob Control, 13 Suppl 2;ii104–ii111.doi:10.1136/tc.2004.009357
PMID:15564212.
8
For a summary of the role of the tobacco industry see two recent WHO reviews, both based on
internal tobacco documents: http://www.who.int/tobacco/media/en/TobaccoExplained.pdf; and http://
www.who.int/tobacco/communications/TI_manual_content.pdf
9
Maldonado, Norman et al. (2018a). “Measuring illicit cigarette trade in Colombia”. Tobacco Control.
10
KPMG, Illicit Tobacco in Australia. 2018
11
Australian Taxation Office (2018) Tobacco tax gap.

656 // Conclusion
12
Eric Breton, Lucie Richard, France Gagnon, Marie Jacques And Pierre Bergero. Fighting a Tobacco-Tax
Rollback: A Political Analysis of the 1994 Cigarette Contraband Crisis in Canada. Journal of Public Health
Policy (2006) 27, 77–99.
13
Zhang B, Cohen J, Ferrence R, et al. The impact of tobacco tax cuts on smoking initiation among
Canadian young adults. Am J Prev Med 2006;30(6).
14
Royal Canadian Mounted Police. Contraband tobacco enforcement strategy. 2008.
15
Kelton and Givel. Public Policy Implications of Tobacco Industry Smuggling through Native American
Reservations into Canada. International Journal of Health Services. Vol 38, Issue 3, pp. 471 – 487. 2008
16
Daudelin J, Soiffer S, Willows J. Border integrity, illicit tobacco, and Canada’s security. Macdonald-
Laurier Institute; March 2013.
17
Tobacco Tax Reform: At the Crossroads of Health and Development, World Bank 2017
18
Ibid

657
COVER QUOTE SOURCES

i
WHO Framework Convention on Tobacco Control Press Release, June 28, 2018.
https://www.who.int/fctc/mediacentre/press-release/protocol-entering-into-force/en/

ii
World Health Organization Press Release, July 19, 2017.
https://www.who.int/en/news-room/detail/19-07-2017-who-report-finds-dramatic-increase
-in-life-saving-tobacco-control-policies-in-last-decade

Combatting illicit trade in tobacco products: Commissioner Andriukaitis’ Statement on the
iii

EU’s adoption of an EU-wide track and trace system. European Commission Press Release,
December 15, 2017.
http://europa.eu/rapid/press-release_STATEMENT-17-5269_en.htm

iv
How to design and enforce tobacco excises? International Monetary Fund, October 2016
https://www.imf.org/en/Publications/Fiscal-Affairs-Department-How-To-Notes/
Issues/2016/12/31/How-to-Design-and-Enforce-Tobacco-Excises-44352

v
World Bank Group: “Global Tobacco Control: A Development Priority for the World Bank
Group”, Preface of WHO Global Tobacco Report 2015.
http://www.who.int/tobacco/global_report/2015/timevansandworldbankforeword.pdf?ua=1
“To tackle illicit trade is to tackle accessibility and affordability of tobacco
products, to be more effective on the control of the packaging and to reduce
funding of transnational criminal activities whilst protecting the governmental
revenues from tobacco taxation.” i

– Dr. Vera Luiza da Costa e Silva
Head of the Secretariat of the WHO Framework Convention on Tobacco Control

“Governments around the world must waste no time in incorporating all the
provisions of the WHO Framework Convention on Tobacco Control into their
national tobacco control programmes and policies. They must also clamp
down on the illicit tobacco trade, which is exacerbating the global tobacco
epidemic and its related health and socio-economic consequences.” ii

– Dr. Tedros Adhanom Ghebreyesus, Director-General
World Health Organization

“Tobacco still remains the biggest avoidable cause of premature death in the EU,
and the illicit trade in tobacco facilitates access to cigarettes and other tobacco
products, including for children and young adults. In addition, millions of euros
in tax revenues are lost every year as a result of the illicit trade. iii

– Commissioner Vytenis Andriukaitis
Health and Food Safety / European Commission

“Given their light weight, small size, and high value, tobacco products are
susceptible to fraud through illegal trade, production, and cultivation. . . Illegal
trade is a context-specific activity that has various modus operandi and there-
fore requires multi-dimensional context-specific solutions.” vi
– Patrick Petit (Senior Economist) & Janos Nagy (Senior Economist)
Fiscal Affairs Department / International Monetary Fund

“Effective tobacco tax regimens that make tobacco products unaffordable
represent a 21st century intervention to tackle the growing burden of noncom-
municable diseases. We are convinced that, working together with WHO and
other partners in support of countries, we will be able to prevent the human
tragedy of tobacco-related illness and death, and save countless lives
each year.” v
–Dr. Tim Evans (Senior Director) & Patricio V Márquez (Lead Public Health Specialist)
Health, Nutrition and Population Global Practice / World Bank Group