The taxman has come under fire in the past week, thanks to a new report from the National Audit Office that brands HM Revenue and Customs’ efforts to curb tobacco smuggling as “disappointing” and “too weak”.
The media spotlight fell – perhaps unfortunately – on the fact that the HMRC is ‘missing cigarette smuggling targets‘.
Unfortunate because, for us, the real headline – and indeed, the other significant focus of the report – is the tobacco industry’s continuing role in tobacco smuggling, which hinders efforts to tackle the illicit trade.
Helping people quit smoking, or not start, is a cornerstone of our work on cancer prevention. The reason is simple: tobacco is by far the UK’s single greatest cause of preventable illness and early death and causes a staggering one in four cancer deaths.
And as well as cheating the UK of tax revenue, tobacco smuggling undermines tax and pricing strategies that are an important part of the country’s strategy for reducing tobacco’s deadly toll.
In this post, we’ll look at recent trends and developments in tobacco smuggling, and see how industry’s claims about illicit trade should be taken with a very large pinch of salt.
A history of smuggling
As the graph shows, cigarette smuggling hit its peak in 2000-2001, when it made up 21 per cent of the total UK market (and 61 per cent of hand-rolling tobacco).
When HMRC launched its first Tackling Tobacco Smuggling strategy in 2000, most large cigarette seizures consisted of genuine UK brands that had been exported by tobacco companies to overseas markets but subsequently smuggled back into the UK with no tax paid.
Following court cases and reports by the Health Select Committee and the Public Account Committee major UK tobacco manufacturers agreed in 2002 to do more to tackle smuggling, by each signing up to a ‘Memorandum of Understanding’ with the HMRC.
Crucially, they agreed to do more to control the ‘oversupply’ of cigarettes to certain countries, which had been fuelling the illicit trade. For example, in 1997, Andorra was supplied with 3.1 billion cigarettes – equivalent to every Andorran smoking seven packets a day – most of these were then smuggled back to the UK.
Four years later, these ‘Memorandums’ were then reinforced by new laws (as part of the Finance Act, 2006), which put legal provisions in place, including fines of £5m, for tobacco manufacturers who failed to clamp down on smuggling.
National Audit Office findings
But despite these promises and regulations, today’s National Audit Office report criticises the tobacco industry for continuing to oversupply markets with large quantities of tobacco:
HMRC’s latest estimate, for 2011, is that the aggregate actual supply … of hand-rolling tobacco to some countries exceeded legitimate demand by 240 per cent. Supply of genuine products to high-risk markets remains higher than HMRC’s analysis of local demand, particularly for certain brands of hand-rolling tobacco, although manufacturers dispute this.
If the tobacco industry continues to have such a laissez faire attitude to the oversupply of its products, enforcement officials are faced with the archetypal Sisyphean task.
We’re also concerned with the methodology, data collection and reporting practice used in tobacco industry-funded or commissioned reports about the illicit trade. They often infer that the illicit market is much bigger than the evidence from HMRC shows.
Declining market share
But the official figures clearly show that the illicit tobacco market has in fact decreased substantially between 2001 and 2011 – from 21 per cent to 9 per cent for cigarettes, and from 61 per cent to 38 per cent for hand-rolled tobacco – an irrefutable downward trend.
As a result, the Advertising Standards Authority recently ruled that a series of advertisements from Japan Tobacco International which claimed that: “The black market in tobacco is booming” breached the advertising code on misleading advertising and substantiation.
But tobacco industry claims have not only fallen foul of this country’s regulators. Internationally, they continue to fall foul of the rules too.
In 2012, Japan Tobacco International was accused of smuggling activities in the Middle East, and is now under official investigation by the European Anti-Fraud Office, OLAF. The investigation has focused on cigarettes that were allegedly sold to a black-listed associate of the brother of Syrian President Bashar al-Assad. It is suspected that these cigarettes are either being used to pay military salaries or being sold at a higher price, thereby generating profit used to fund al-Assad’s regime.
And just last week The Times reported that British American Tobacco’s (BAT’s) agent for cigarette sales in the Horn of Africa of almost 25 years is being pursued by officials in Djibouti, having been accused of clandestinely shipping BAT’s Benson & Hedges cigarettes into the country from Somalia without paying duty. The same individual was issued with a ‘red notice’ by Interpol, in response to accusations of involvement in a terrorist attack.
The Times reports that BAT is understood to have refused to cut its connection to the individual and still uses him as an agent in other countries.
Standardised packaging and the illicit trade have no relationship
The tobacco industry has continued to advance a myth, attempting to link tobacco smuggling with plans for plain, standardised packaging (something Cancer Research UK has been campaigning for), by committing millions of pounds to adverts which have repeatedly breached advertising codes, and funding front groups, who have come under fire for failing to declare their vested interests to parliament.
In reality, the halving of illicit tobacco’s share of the market has coincided with a decade of progress in implementing more comprehensive tobacco control measures including tax increases. The idea that measures designed to reduce smoking will increase the illicit trade simply doesn’t add up.
The Trading Standards Institute, a representative from the EU anti-fraud office, and police involved in combating tobacco smuggling in the North of England say that the introduction of standardised packaging is likely to have little or no significant impact on the level of illicit trade.
Richard Ferry, a trading standards officer who works on the ground in the North East, wrote on this blog that arguments that link standard packs with an increase in the illicit market simply don’t make sense.
The Police and Crime Commissioner in Greater Manchester has also publicly dismissed claims that standardised packs would increase the illicit trade and has urged their introduction to protect children from the harms of tobacco.
The Government should follow Australia and echo the ambitions of The Republic of Ireland, Scotland and New Zealand by committing to legislation for standardised packaging in the UK, and give parliament the chance to vote on the issue.
Standard packs can be a public health success for the UK, which builds both on progress in tobacco control legislation and in driving down the illicit market over the last decade.
The tobacco industry would be wise to focus more time on controlling its supply channels – which are fuelling the illicit trade – and less time on over-supplying media channels with myths intended to discourage measures that will reduce smoking rates, and in doing so, save lives.
The UK should sign and ratify the Protocol to Eliminate Illicit Trade in Tobacco Products at the next opportunity. It aims at eliminating all forms of illicit trade in tobacco products by requiring Parties to take measures to control the supply chain of tobacco products effectively and to co-operate internationally on a wide range of related matters.