ILLICIT TOBACCO TRADETHE BUSINESS PERSPECTIVE

Ec. PhD. MIHAI IVASCU

Member of the Various Interests Group

European Economic and Social Committee

WORLDWIDE STATUS

>480 billion cigarettes are

sold illegally worldwide

every year

Tax losses for governments

are estimated around $35

billion yearly*

* according to British American Tobacco (http://www.bat.com/theman)

ILLICIT TOBACCO TRADE IN THE EU*

Over 47 billion cigarettes in the EUcome from C&C (counterfeit &contraband) sources

Approximately 9% of the totalconsumption in the EU is illicit

Consumption of C&Cs tobaccoincreased in Poland, Romania,Slovakia, Slovenia, Croatia and Greece

*Data according to Project SUN (KPMG 2016)

TOP EU COUNTRIES BY C&C VOLUME

*Data according to Project SUN (KPMG 2016)

C&C CONSUMPTION IN EU MEMBER STATES (1)

9% of total consumption in the EU

Illicit cigarettes produced outside the

EU accounted for 86% of the C&Cs

Illicit whites (cigarettes manufactured

legally, but sold illegally) account for

97% of OLAF seizures

*Data according to Project SUN (KPMG 2016)

Types of C&Cs

C&C CONSUMPTION IN EU MEMBER STATES (2)

C&C consumption accounts for more than 10% of

total consumption in 11 EU Member States:

Latvia: over 20% of total consumption

Greece, Ireland, Lithuania, Malta, Poland and Romania:

between 15 and 20% of total consumption

Estonia, Finland, France and UK: between 10 and 15% of

total consumption

*Data according to Project SUN (KPMG 2016)

COUNTRIES OF ORIGIN AT EASTERN EU BORDER

Eastern neighboring countriesaccount for more than a half ofillicit tobacco consumption inthe EU

Ukraine

Belarus

Russia

Moldova

Huge legislative differences compared to EU

Eg. In Ukraine and Belarus cigarette smuggling is not a crime, it is consideredand administrative violation

AVERAGE PRICE OF CIGARETTES

Low taxation of local

producers mean very low

production costs for the non-

EU countries, encouraging

illicit trade

Price differences are the main

factor contributing to the

high traffic of cigarettes

average price in the four non-

EU eastern neighbours is €

0.70 Euro / 20 cigarettes

average price in EU is €4.64 !!!

Average price of 20 cigarettes, January 2017 (Project SUN)

IMPACT ON REVENUES

Estimated revenue loss, as

taxes, for national governments

at EU level

More than €10 billion/year

Estimated revenue loss for

businesses:

More than €3 billion/year

ILLICIT TOBACCO - CONSUMERS IMPACT

Health issues

Tobacco produced in unauthorized factories across andoutside the EU does not meet the minimum sanitarystandards imposed by EU regulations.

Incentive for tobacco consumption

Lower prices for tobacco products and the lack of conformitycontrol on sale points impacts EU and national authoritiesefforts in addressing tobacco consumption, especially amongyoung people.

ORGANISED CRIME GROUPS

C&Cs represent a major source of

financing for organized crime in the

EU and in neighboring areas.

OCGs face considerably lower risks

compared to other forms of crime

The profits achieved can be as much as

those attached to higher-risk crime

Groups involved in illicit cigarette

trade are very flexible using:

free trade zones (FTZ)

postal and courier services

Excisable goods transiting the EU etc.

Organized crime groups (OCGs) are usually behind the illicit cigarette trade and use all tools made available by technological advances (including

social media).

TERRORISM FINANCING

Conflicts in the Middle East and North

Africa are making smuggling a very

profitable source of income for terrorist

groups because of the penetrable

borders and lack of material and

manpower of the security forces in some

regions

*Data according to Project Sun (KPMG 2015, 2017) &The Global Initiative against transnational organized crime

At world level, tobacco smuggling is ranked third, after drugs and human

trafficking

More than three quarters of all cigarettes smoked in Libya are illicit

Illicit cigarette traffic in Maghreb represented over $565 million in lost tax

revenues in 2016.

CITIZENS PERSPECTIVE

74% of Europeans smoking C&Cs do it becausethey are cheaper

2016 Eurobarometer shows that lower pricesdetermine three quarters of C&Cs consumers topurchase illicit tobacco products!

Only 14% of Europeans see illicit tobacco tradeas a financing source for organized crime

Perceptions mainly point out to illegal drugs,prostitution and human trafficking as mainfunding sources for organized crime.

*Data according to Special Eurobarometer 443 (2016)

ADDRESSING ILICIT TOBACCO TRADE

CITIZENS’ PERSEPECTIVE

Better macroeconomic conditions favor decreases inconsumption of illegal tobacco products

Economic growth, reduced unemployment and the increase ofincome showed that fewer consumers turned to illegal tobaccoproducts in 25 EU Member States.

Better understanding of organized criminality could lowerEuropeans’ use illegal tobacco products

Increasing levels of association between illegal tobacco trade andorganized crime among Europeans could nudge consumers intoturning less towards illegal tobacco products.

*Data according to Project Sun (KPMG 2016)

ADDRESSING ILLEGAL TOBACCO TRADE

SOLUTIONS IDENTIFIED BY THE BUSINESSES

1. Better coordination among different authorities

National level: Customs authorities, tax authorities, localand national police forces need to enhance theircoordination in order to better address illegal trade.

EU level: national authorities and EU entities – Frontex,OLAF, Europol, police forces etc. – need to harmonizedatabases and have real time information on illicit tobaccotrade activities at EU borders.

ADDRESSING ILLEGAL TOBACCO TRADE

SOLUTIONS IDENTIFIED BY THE BUSINESSES

2. Better surveillance of EU’s

external borders

Investment in technological

equipment

Human Resources training and best

practice sharing

Canine squads – sniffer dogs

Common communication platform at

EU level

ADDRESSING ILLEGAL TOBACCO TRADE

SOLUTIONS IDENTIFIED BY THE BUSINESSES

3. Enforcement and ratification of WHO Framework

Convention of Tobacco Control (FCTC)

EU Member States need to ensure a full enforcement of the

FCTC protocol in order to provide more efficient means to address

illicit tobacco trade.

As a leverage in trade talks with Eastern neighbors, the EU

should require FCTC protocol enforcement as a means to tackle

supply chains outside the EU (especially Belarus!)

ADDRESSING ILLEGAL TOBACCO TRADE

SOLUTIONS IDENTIFIED BY THE BUSINESSES

5. Rapid adjustment to new technologies Organized crime uses new technologies (including drones) to

smuggle tobacco products into the EU

4. Implementation of theTobacco Products Directive– Track and Trace System

The correct and timelyimplementation of Art. 15 and 16 iscritically important

Ensures complete and clear alignmentwith the FCTC Protocol

ADDRESSING ILLEGAL TOBACCO TRADE

SOLUTIONS IDENTIFIED BY THE BUSINESSES

6. EU Strategy on Illicit Trade

The EU Commission presented in 2013 a communication ontackling illicit tobacco trade; in May 2017 a report on thiscommunication has been published

Efforts must be intensified, in particular related to cheap whites

Awareness must be raised among citizens, regarding the threatsposed by illegal tobacco

As illicit tobacco trade has become in the recent years animportant source for financing terrorist organisations, a coherentstrategy at EU level is paramount

Thank you for your attention!

Ec. PhD. MIHAI IVASCU

Member of the Group III, EESC