December 21, 2010

Illicit Trading of Tobacco Products

Illicit Trading of Tobacco Products

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Home Page > Education > International Studies > Illicit Trading of Tobacco Products

Illicit Trading of Tobacco Products

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Posted: Sep 18, 2008 |Comments: 0
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Combating Illicit Tobacco Products

Manjari Peiris

The Ministry of Health & Family Welfare, India, jointly organized a two-day Regional Workshop on Illicit Trade in Tobacco Products from 15-16 September 2008 in New Delhi. Delegates from SEARO countries attended this meeting and the Union Minister for Health and Family Welfare, India, Dr.Anbumani Ramadoss formally inaugurated this workshop and said that the Indian Government will make a blanket on smoking in government or private offices, public places from October 2nd this year. Mandatory pictorial warnings on tobacco products too will appear from November 30th this year.

He added that enough resources would be provided to control tobacco. “Money collected through surcharge on tobacco products is proposed to be used for tobacco control activities such as awareness campaigns, alternate cropping, establishment of labs, alternate employment for tobacco growers etc.” said Ramadoss.

Illicit trade in tobacco products not only undermines the government’s effort to raise taxes and investing the same in relevant social programmes, but also hampers the control of tobacco supply chain by making available cheaper tobacco products.

The two-day regional workshop was organized jointly by the World Health Organization, Framework Convention Alliance (FCA) and the Ministry of Health and Family Welfare. India is one among the foremost countries to sign and ratify the WHO-Framework Convention on Tobacco Control (FCTC) which enlists key strategies for reduction in demand and supply of tobacco products. Sri Lanka was the first Asian country and the fourth in the world to ratify the FCTC.

Death caused by the tobacco around the world has touched 5.4 million each year, and is projected to rise to eight million by 2030. If the current trends are not checked, tobacco will claim around one billion lives this century.

The specific objectives of holding this workshop were to review and assess countries capacity to control illicit trade in tobacco products, to identify key actions in the Region to support countries in their efforts to develop and implement measures to control illicit trade in tobacco products, including the role of WHO and other international organizations in this area and to review the text for the Draft Protocol to the Convention on Illicit Trade In Tobacco Products issued by the chairman of INB.

The Regional Workshop aimed to raise awareness regarding serious and adverse health consequences of illicit trade in tobacco products. Illicit trade includes smuggling, evasion of Central Excise duties/taxes and counterfeits. Each one of these undermines the efforts of Governments to collect taxes due on tobacco products. The lost taxes could have been used for national programmes including tobacco control initiatives. The illicit trade leads to availability of tobacco products at cheaper prices. Most countries in this region are grappling with the problem of illicit trade in tobacco products. There is also a realization that Governments need to work together to address this serious concern. The WHO – Framework Convention on Tobacco Control (FCTC) is the first global health treaty and it identifies key demand and key supply reduction strategies. The elimination of illicit trade is one such supply reduction strategy. However, the effective implementation of FCTC provisions will require binding obligations among countries as also a firm commitment for international cooperation.

Financial support to hold this Workshop was provided by the Framework Convention Alliance (FCA).

Dr. Vinayak M. Prasad, Director, Ministry of Health, Government of India, explained the Key Elements/Strategies to Control Illicit Trade, including importance of International Cooperation.

What is Illicit Trade?

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 will be illicit trade. The term “Illicit trade” is broad and it includes Illicit Manufacturing, Smuggling and Counterfeiting. Smuggling involves transaction across international border. Illicit manufacturing involves transaction within national boundaries and could include mis-declaration or evasion of duties/domestic taxes. Counterfeits may be both national/trans-national, with or without the involvement of manufacturers/ producers.

Article 15 of the Framework Convention on Tobacco Control (FCTC) recognizes elimination of illicit trade as essential to tobacco control and suggests legislative, executive, administrative and other measures e.g. Marks and Numbers, tracking and tracing, exchange of information etc. The FCTC recognizes the need for elimination of all forms of illicit trade, development / Implementation of national laws and sub-regional/regional/global agreements. The Conference of Parties to FCTC (COP1) identified control of illicit trade as one of the first areas for development of protocol.

The WHO-FCTC came into force in February 2005 (>3 years) with the recognition that the implementation of Article 15 will require more comprehensive and binding obligations. COP2 (June 2007) decided to establish INB for negotiating the 1st protocol under this treaty viz. Protocol on Illicit Trade in Tobacco.

Dr Douglas Bettcher, Director, Tobacco Free Initiative, World Health Organization, addressing this workshop said that from a public health perspective illicit trade in tobacco products is a major concern because it leads to increased availability, accessibility and affordability of cigarettes especially for youth and the poor. Illicit trade undermines the impact of tobacco control measures in general and any measures to prevent children to consume tobacco. Also it increases health inequalities among populations as cheaper products encourage tobacco use among low income groups.

Illicit tobacco products increase premature tobacco attributable deaths and diseases. The largest share of tobacco attributable disease burden is borne by low-income households and less-developed countries.

– highest prevalence rate

– highest proportion of family income spent on tobacco

– least amount of knowledge on risks borne by tobacco use

– worst access to smoking cessation help

By 2030, 83% of all tobacco attributable deaths will occur in developing countries (Mathers et al. 2006)

A 10% price increase reduces smoking as much as 8% in low or middle-income countries and 4% in high-income countries.

• Evidence from Thailand (Sartinsart, 2003) suggests that low-income groups can be 4 times more responsive to price changes than high income groups, particularly in urban areas.

• Illicit products are 25% to 30% cheaper than legally imported brands (Joossens, 1999)

• This will therefore increase smoking prevalence and consumption most among the price-sensitive poor, and low or middle-income countries.

• Misguided government policy responses to smuggling (e.g. reducing taxes) may contribute to health inequality.

• Tobacco use is a marker of social inequity.

• Tobacco use is unequally distributed in the population. Patterns of inequity of distribution of tobacco use have been seen across income, age, ethnic groups and by gender.

From a public health perspective illicit trade in tobacco products is a major concern, because it leads to:

• Increased availability, accessibility & affordability of cigarettes especially for youth and the poor

– Undermining the impact of tobacco control measures in general

– Undermining tobacco control measures to prevent children to consume tobacco

– Increasing health inequalities among populations as cheaper products encourage tobacco use among low-income groups

• Increased premature tobacco attributable deaths and diseases

• Evidence also shows differential health consequences of tobacco use across different groups of population.

• Progress in tobacco control is also disproportionately distributed, with the richest and most socially advantaged enjoying the most efficacious implementation of tobacco control interventions.

• Efforts to prevent and control tobacco consumption among disadvantaged groups are not likely to succeed outside of an integrated approach that seeks to reduce the underlying social inequities that predispose these groups to tobacco use and confer on them a relative disadvantage in accessing cessation services.

• To achieve the optimal impact from the WHO FCTC, it is critical to develop enforcement mechanisms for the key WHO FCTC elements that assure equitable coverage of the most disadvantaged sectors of society.

• In particular, with regards to taxation and illicit trade, action needs to be taken to reduce disparities.

Illicit tobacco and the young

• They are more sensitive to prices and a e 10% price increase may increase cessation by as much as 9% among young smokers (Chaloupka et al., 2003)

• The young are more brand conscious – most smuggled cigarettes are well-known brands (Joossens, 1999)

• Smuggled cigarettes are sold on the streets, near schools where underage have easier access (Joossens, 1999)

• Lesser developed countries tend to have larger young populations, and may be disproportionately affected by smuggling Industry myths about Illicit Trade.

• Price and tax increases are the main drive for large scale illicit trade in tobacco products

• 1- It has been long believed that tobacco control is a rich countries luxury. However, evidence has showed that a number of developing countries have successfully implemented strong tobacco control measures and reduced consumption. We will see later that tobacco control is actually relatively cheap to implement and usually cheaper in developing countries.

• 2- TC reduces government revenues: if consumption reduces, government revenues from tobacco taxes should reduce as well. In reality, the price elasticity of demand is inelastic. This means that consumption will reduce to a lesser extent than the increase in prices; this leaves room for government revenues to increase even with a reduction in demand.

• 3- In the last decade or so, tobacco employment has been declining due to increase in efficiency and technology gains. This was not at all related with tobacco control.

• 4-TC increases smuggling: smuggling is a result of tax avoidance. A tax increase can encourage bootlegging, but not necessarily large scale illicit trade. Taxes are an incentive for illicit trade, but other factors are important such as corruption, ready supply, irresponsible exporting etc.

• 5- Taxes are regressive on the poor, because they are applied equally to all levels of the society. This may be true, but it is important to note that the poor are the ones who react the most to price increases by reducing their consumption. So a tax increase can actually be progressive on the poor.

Illicit tobacco’s bottom line

• Revenue loss leads to smaller budget for government programs (including public health)

• Higher costs of combating organized crime and corruption also squeezes budget (Joossens, 1999)

• Higher direct health costs from increased consumption (especially the poor and the young)

• Increasing health burden

Six proven policies to reverse the tobacco epidemic

To monitor tobacco use and prevention policies

To protect people from tobacco smoke:

To offer help to quit tobacco use

To warn about the dangers of tobacco

Enforce bans on tobacco advertising, promotion and sponsorship

Raise taxes on tobacco (including combating illicit trade)

Raising taxes and smuggling rates

• Increasing cigarette taxes and improving anti-smuggling law enforcement would significantly increase government revenues, while decreasing global cigarette consumption and smuggling activities.

• The enforcement level plays a significant role in controlling the worldwide smuggling activities, and also reduces global consumption.

– if a tax increase is not accompanied by an improvement in law enforcement, then the level of global smuggling would increase, but governments would still enjoy increased tax revenues (even with increased smuggling).

– Government commitment is the key for success

Parties to the Framework Convention are negotiating and drafting a new, legally binding protocol on illicit trade that will fight smuggling and counterfeiting as part of global efforts to reverse the tobacco epidemic. This protocol should markedly increase coordination at the international level to address this important issue.

• Smuggling – involves transaction across international border.

• Illicit manufacturing – involves transaction within national boundaries and could include mis-declaration or evasion of duties/domestic taxes.

• Counterfeit – may be both national/trans-national, with or without the involvement of manufacturers/ producers.

• Article 15 Recognizes elimination of illicit trade as essential to tobacco control.

• Suggests legislative, executive, administrative and other measures e.g. Marks and Numbers, tracking & tracing, etc. and it recognizes the need for elimination of all forms of illicit trade.

• Development / Implementation of national laws.

• Sub-regional/regional/global agreements.

The Conference of the Parties (COP1) identified control of illicit trade as one of the first areas for development of protocol exchange of information etc.

• WHO-FCTC came into force in February 2005 (>3 years) having had recognized that the implementation of Article 15 will require more comprehensive and binding obligations.

COP2 (June 2007) decided to establish INB for negotiating the 1st protocol under this treaty viz. Protocol on Illicit Trade in Tobacco Products.

Strategies to control Illicit Trade

It is NOT A CUSTOMS ISSUE. It needs diverse strategies/multi-sectoral issues such as Information/data from agriculture/industry/ revenue, Control of supply chain, sharing of intelligence/ Cooperation between agencies within the country/with other countries.

Rational Government policy

– Taxation & Trade:

WTO bound rate (150% and 100%)

– Imposition of tariff barriers /non tariff barriers ( contrary to WTO/GATT principles) e.g. control of supply chain through licensing

– Supply Chain Control

– License Enforcement, offences, Sanctions- penalty provisions, Search and seizure provisions, Seizure payments, Destruction, Special investigative techniques, Customer identification and verification, Tracking and Tracing, Record Keeping, Security and Preventive measures.

– International Cooperation

– Information sharing, Statistical data, Operational data, Assistance and cooperation, training, technical assistance, investigation and prosecution, Jurisdiction, Joint investigation, Law enforcement cooperation – MAA and MLA, Internet and other modes of sales.

– To control the supply chain licensing, facilitation of enforcement and provision of a database are required.

– Record keeping of tobacco farmers, tobacco products and key inputs or manufacturing equipment used for manufacture of tobacco products is required.

– Security and Preventive measures

– Measures to prevent diversion to illicit trade channels e.g. suspension or cancellation of license, prohibit intermingling of tobacco products with other products, reporting of cross border transfer of cash/negotiable instruments; payment only by wire/cheque etc. are needed.

– TRACKING & TRACING

– “Tracking “is ability to monitor tobacco products from place of manufacture, through distribution chain, to intended market of retail sale.

– “Tracing” is ability to recreate route (Post audit/seizure) from place of manufacture, through distribution chain.

– The First Protocol/treaty under the Convention is being negotiated to regulate/prohibit illicit trade in tobacco products. The Parties to FCTC are at present negotiating the Protocol – a number of key elements that are proposed to be discussed in the next round of negotiations scheduled in October in Geneva.

– It is expected that there will be greater awareness and experience, sharing of issues and challenges in the SEARO Region as also support for the Protocol on Illicit Trade in Tobacco Products.

At this workshop it was mentioned that cigarettes worth of 13.5 million have entered into the Sri Lankan market illicitly in 2005. The detections of illegal imports by Sri Lanka Customs in the recent past were reported to be;

n October 2007 – 21,704 Ctns

n December 2007 – 21,932 Ctns

n February 2008 – 6,764 Ctns

Also the following quantities of cigarettes have been destroyed;

n October 2007 – 4,340,920 sticks

n December 2007 – 4,386,560 sticks

n February 2008 – 1,356,800 sticks

The measures that Sri Lanka government has taken to control the Illicit Trade in Tobacco products are Education and Legislation.

The legislative measures are –

n involvement of governmental and National Authority on Tobacco and Alcohol Act, No.27 of 2006, Tobacco Tax Act, No. 8 of 1999, Customs Ordinance, Excise Ordinance on-governmental organizations.

There is considerable evidence that tobacco producers themselves assist wholesale smuggling in transporting tobacco products. Much of the organized criminal smuggling that accounts for the vast majority of cigarette smuggling worldwide has occurred with the knowledge of the major cigarette companies themselves and would not occur without their compliance. Cigarette company documents do not use the term “smuggling”, but instead use euphemisms or code words for the activities whose meaning is clear.

Smuggling has been an integral part of the business activities of global cigarette companies… these actions expand their markets and help them gain a competitive advantage over other cigarette companies. It has also been used by the cigarette companies to gain political leverage to persuade governments to reduce cigarette tax rates or duty fees. Recent data from tobacco industry documents show that roughly a third of all exported cigarettes worldwide continue to be diverted into smuggling supply lines with major international brands continuing to dominate.

There is a growing volume of evidence that the legal manufacturers of certain cigarettes have knowingly fostered and have consciously supported the illegal smuggling of their own brands. Although the major international cigarette companies make the same amount of profit on legal and illegal sales, they have several economic initiatives to smuggle. Through smuggling they can sell their brands in countries otherwise closed to them because of import bans or because tax rates and duty free make legal imports much more expensive than domestic brands. Smuggling expands the companies’ sales being much cheaper than all legally imported cigarettes sold in the country. By helping to keep overall cigarette prices down, smuggled cigarettes also help to increase overall sales.

Tobacco industry benefits from smuggling in several ways – smuggling stimulates consumption both directly and indirectly, threat of smuggling has been used to avoid trade barriers or force open new markets.

The international tobacco companies that incorporate smuggling penetrate the market through illegal imports, weaken the state monopoly by reducing the market share of domestic brands and legal role, convince the authorities to prioritize or open the market, authorize the legal import and or production of foreign brand and stop fuelling the illegal market and take over the market in a legal way.

Documents demonstrate that apparently legitimate duty free sales have provided an effective means of supplying smuggled cigarettes.

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Manjari Peiris

December 21, 2010

Illicit Trading of Tobacco Products

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