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 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 pov- erty, and increase countries’ domestic resources for financing development. Higher tobacco taxes improve public health, increase tobacco tax revenue, and reduce the economic burden associated with tobacco use.6 Illicit trade in tobacco products undermines global tobacco prevention and control interventions, particularly with respect to tobacco tax policy. 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 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.9 There also are concerns about the relationship between illicit tobacco trade, public safety, and governance, since illegal net- works both thrive in and contribute to weak governance contexts. 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. »» 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 analyses13, 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 priorities supporting improved public health, tax administration, and governance. 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. »» 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). As an international treaty, the Protocol also can help generate domestic political support for implementing its measures. 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. 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. »» 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 the 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 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. »» 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 deterrents, as indicated in both the UK and the Colombia case studies »» 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. 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.13 In Malaysia, the average price of illegal cigarettes was about 55 percent lower compared to tax-paid cigarettes in 2011.14 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. »» 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. »» 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 analyses 16, the tobacco industry routinely 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. 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, 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. 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 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. 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 Protocol to Eliminate Illicit Trade in Tobacco Products, World Health Organization 2013. 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 
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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 10 5 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. References Australian Competition and Consumer Commissions. 2018. Tobacco health warnings. 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Tackling the Black Economy: Government response to the Black Economy taskforce final report. The Australian Government, The Treasury, Canberra 45 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 $1,026 million in 2013-2014 – a period during which the prevalence of tobacco use did not increase (Zhang & Schwartz 2015). The illicit market share decreased, according to the Quebec Ministry of Finance, from some 30 percent in 2009 55 Confronting Illicit Tobacco Trade: A Global Review of Country Experiences to less than 15 percent in 2012 (Figure 1). It has held steady or declined slightly more since 2012 despite three tax increases (Zhang & Schwartz 2015), providing strong evidence that efforts to improve tax administration and enforcement are much more important that taxes in determining the illicit market share. Figure 1. Change in the Rate of the Specific Tax on Tobacco Products and in the Market Share of Smuggled Tobacco Products, Quebec, 2002-2015 (dollars per carton of 200 cigarettes and per cent) 30 25 20 15 Specific tax on tobacco products 10 ($ 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). 61 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. 63 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 References Canadian Cancer Society et al. 1999. Surveying the Damage: Cut-Rate Tobacco Products and Public Health in the 1990s. 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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. 83 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. 85 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 87 Confronting Illicit Tobacco Trade: A Global Review of Country Experiences References 1. European Commission (2013). 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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. 89 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) 93 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. 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 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 95 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 46 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 12 10 8 6 4 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 6 5 4 3 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. 109 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/21 111 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). Bring government-tobacco industry relations in line with international norms. 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Retrieved from: https://www.panorama.am/en/news/2015/08/05/turkey-georgia/1212 Eurasianet 2014: https://eurasianet.org/node/68264 Revenue service of Georgia, MoF web site info updated in June 5. 2012: http://rs.ge/Default. aspx?sec_id=4816&lang=2 Revenue service of Georgia, MoF web site info updated in March 11. 2015: www.rs.ge/en/5253 Revenue service of Georgia, MoF web site info updated in 2018:http://www.rs.ge/Default. aspx?sec_id=5405&lang=2&catid=69 Scollo M. Bayly M and Wakefield M. 2014. Availability of illicit tobacco in small retail outlets before and after the implementation of Australian plain packaging. BMJ Vol. 24.e1. Scollo M., Zacher M., Coomber K., Wakefield M. 2015. Use of illicit tobacco following introduction of standardised packaging of tobacco products in Australia: results from a national cross-sectional survey. Tob Control. 24. suppl 2. Shalutashvili A. Ross H. Watt J. Hilborn S. Bakhturidze G. Kobeshavidze G. Grigalashvili Z. 2007. Tobacco Economic Study in Georgia since the fall of the Soviet Union. FCTC Implementation and Monitoring Center in Georgia. SICPA web site: https://www.sicpa.com/offices/georgia-tbilisi Sputnik-Georgia 2017. Retrieved from:https://sputnik-georgia.ru/incidents/20171031/237985553/ Sigarety-vmesto-kamnej-i-cvetovgrazhdane-Armenii-popalis-v-Gruzii.html State Department of Statistics. 2004. Retrieved from: http://www.geostat.ge/index. php?action=search&lang=eng STEPS Survey for Georgia. 2016. Retrieved from: http://ncdc.ge/AttachedFiles/STEPS%20report%20full- final_51403d9f-eda5-4789-93e0-3466d2711e17.pdf Petraishvili V, Shamugia N, Bakhturidze G, Gvinianidze K, Goginashvi K, Archvadze I,Moroshkina N,Maglakelidze N, Tesche J, Wood L. 2016. Tobacco Products Taxation Policy (Georgia). National Center for Disease Control on Georgia. Ministry of Labor. Health and Social Affairs of Georgia. UNDP, National Center for Diseases Control and Public Health of Georgia (NCDC); RTI International, WHO FCTC Secretariat. 2018. The case for investing in WHO FCTC implementation in Georgia. See report at: http://www.ncdc.ge/Pages/User/News.aspx?ID=5aada9ce-57aa-4ec5-9d81-915d43c388e9 Wakefield M. Coomber K. Zacher M. et al. 2015. Australian adult smokers’ responses to plain packaging with larger graphic health warnings 1 year after implementation: results from a national cross-sectional tracking survey. Tob Control. 24. suppl 2. WHO (World Health Organization). 2012. The Protocol to Eliminate Illicit Trade in Tobacco Products. http://www.who.int/fctc/protocol/en/ WHO (World Health Organization). 2015. MPOWER: See information at: http://www.who.int/tobacco/ global_report/2015/en/ 116 // Georgia: Controlling Illicit Cigarette Trade WHO (World Health Organization). Framework Convention on Tobacco Control (FCTC) text: retrieved from: www.fctc.org.ge WHO Global Tobacco Control Report. 2017. Monitoring tobacco use and prevention. Retrieved from: http://apps.who.int/iris/bitstream/handle/10665/255874/9789241512824-eng. pdf;jsessionid=3CDB6F426A1DD0F8BBF0E05359E200F1?sequence=1 World Bank. 1996. “Reforms in Food and Agriculture in Georgia”. Washington, DC: World Bank. 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 119 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. 121 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 50 40 30 20 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 06 08 09 05 07 10 12 13 15 16 14 17 11 0 20 20 20 20 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 137 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 145 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 147 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/ 149 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 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 35 151 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 153 Confronting Illicit Tobacco Trade: A Global Review of Country Experiences 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. 155 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. 157 Confronting Illicit Tobacco Trade: A Global Review of Country Experiences 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 159 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). 163 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 165 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) 167 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 60 50 40 (%) 30 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 60 50 40 (%) 30 20 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, 169 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 80 60 40 20 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 173 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: 175 Confronting Illicit Tobacco Trade: A Global Review of Country Experiences ›› 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. 177 Confronting Illicit Tobacco Trade: A Global Review of Country Experiences 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 179 Confronting Illicit Tobacco Trade: A Global Review of Country Experiences 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) 181 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 COPYRIGHT 2016 TACKLING TOBACCO NORTH Source: Illicit Tobacco Partnership. 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) 187 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). 189 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 - 2016-17 191 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 193 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) 70 60 50 40 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 197 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 199 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 201 Confronting Illicit Tobacco Trade: A Global Review of Country Experiences 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. 203 Confronting Illicit Tobacco Trade: A Global Review of Country Experiences 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) 205 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. 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Available from: http://www.fctc.org/images/stories/INB-3/INB3_report_illegal_trade_in_MERCOSUR.pdf [Accessed 24 April 2018]. 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 *: 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, 2017.3 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 Female by tobacco; WHO Global Report 2016 2015 Male 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. 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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 93 87 40 80 74.2 69 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 45 40 35 30 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 80 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. 6 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 20 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. 273 Confronting Illicit Tobacco Trade: A Global Review of Country Experiences 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 15 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/. 283 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. 285 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. 287 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. 289 Confronting Illicit Tobacco Trade: A Global Review of Country Experiences References Alonso, Carlos. 2017. “Fisco deja de recibir US$1.000 mills. por retraso en trazabili- dad del tabaco.” La Tercera Pulso, June 12. http://www.pulso.cl/economia-dinero/ fisco-deja-recibir-us1-000-mills-retraso-trazabilidad-del-tabaco/. 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