Illicit Trade in Tobacco

1. Illicit Trade in Tobacco Ayda A. Yurekli, PhD Research for International Tobacco Control International Development Research Center

2. Section A Introduction to Illicit Trade

3. Background • Smuggling is not a new phenomenon; almost all countries experience some degree of smuggling around the world through: • Bootlegging • Individuals try to avoid taxes in their jurisdiction • Often involves individual activities for personal consumption • Small-scale smuggling • Often involves unorganized small-scale activities between one or two countries or states • Cigarettes are purchased in low-price countries and sold for profit in high-price countries

4. Background • Smuggling is not a new phenomenon; almost all countries experience some degree of smuggling around the world through: • Large-scale smuggling (organized activities targeting multi-countries) • Occurs through international trade • Targets exported cigarettes • Often orchestrated by organized crime groups

5. Illicit Trade • A complex issue • Evolves over the years • Involves many players • Smuggled cigarettes have no boundaries

6. Large Scale Organized Smuggling • This type of smuggling targets not only international markets, but also countries where cigarettes are exported • Example: Brazil • In the 1990s, Brazil experienced huge smuggling activities • Brazil‘s export of cigarettes to neighboring countries ended up back in Brazil illegally • Grey market smuggling (re-exporting)

7. Measuring the Level of Smuggling • Smuggling levels have been studied in the U.S. and western countries, but not in developing countries due to lack of technical skills and funding • Smuggling information often comes from the tobacco industry • Industry hires companies to do market surveys to assess smuggling levels and carry information to policy makers • Industry associates smuggling activities with the level of taxes in the country • As a result, smuggling levels are often exaggerated to manipulate tax policy

8. Assessing Illicit Market: Uzbek Evidence • Lack of country-level research to assess level of illicit trade • Governments often receive this information by the industry (e.g., Kyrgyzstan, Uzbekistan, Moldova, Georgia) • Consequently, the level of smuggling can be exaggerated to manipulate tax policy • In 2004, the tobacco industry in Uzbekistan estimated that 30% of the legitimate market was illicit cigarettes • In 2006, independent research in Uzbekistan estimated that around 22% of the legitimate market consists of illicit cigarettes

9. Assessing Illicit Market: Uzbek Evidence Source: adapted by CTLT from Estimated 2006 Uzbek Household Data.

10. Measuring Size and Impact of Worldwide Smuggling • Most estimates are based on expert opinion due to complex smuggling activities and limited data • Expert opinions • Joosens and Row (1998) • Mackay and Ericson (2002) • United States Department of Agriculture (USDA) (152 countries, 1999)

11. Assessing Global Illicit Trade Level • Licit trade difference: 400 billion pieces in the mid-1990s Source: adapted by CTLT from ECOSOC Trade Database: calculated by the author.

12. Assessing Global Illicit Trade • Econometric analysis in 1999 by 110 countries Source: adapted by CTLT from Yurekli and Sayginsoy. (2006).

13. Vast Interest Groups and Potential Winners and Losers

14. Costs of Smuggling to Major Players in the Economy • For government • Evasion of tax revenues—excise, import duties, income taxes • Increasing costs of fighting organized crime • Higher allocation of tax payers’ money to finance public health expenditures for tobacco-associated diseases • Stagnant development due to premature tobacco-associated deaths and diseases • For public health • Available, accessible, and affordable cigarettes, especially for the youth • Undermining the impact of tobacco control measures to prevent children from taking up the behavior • Increasing premature tobacco-associated deaths and diseases

15. Costs of Smuggling to Major Players in the Economy • For families/society • Increasing organized crime, which reduces economic welfare • Penalizing poor and old street sellers for smuggled cigarettes • Creating high opportunity cost of tobacco expenditures to families • Contributing to a vicious cycle of poverty • For economy • Loss of investment opportunities—loss of revenue for legitimate producers • Unemployment in legitimate production • Lower economic growth due to lower productivity of sick tobacco workers

16. Routes for Organized Smuggling • Evidence shows that worldwide smuggling routes are many and complex • Various documents were used in 1999 to identify major smuggling routes, including USDA attaché reports, the WHO Tobacco Atlas, the Market File Database, and other research

17. Organized Illicit Cigarette Trade Routes Source: adapted by CTLT from Yurekli and Sayginsoy. (2006).

18. Major Route for Counterfeit Cigarettes to EU To the European region From the Asian region Source: adapted by CTLT from WCO Customs and Tobacco Report. (2004).