Participants in the Illicit Tobacco Market
Understanding the complexities of the illicit tobacco market requires understanding the major participants, on both the supply side and the demand side, whose behaviors shape and drive the illicit trade. Supply-side actors obtain cigarettes that are cheaper than their legal alternatives, undermining the effect of tax measures on the prices and use of tobacco products, which results in greater accessibility and consumption of cigarettes. Users of illicit tobacco products, often enabled in their addiction to nicotine by the availability of cheap cigarettes, prolong tobacco use and, thus, are likely to suffer the adverse health consequences of addiction and tobacco-related diseases. This chapter explores what is known about the key participants in the illicit tobacco market, including the major supply-side actors in the illicit trade, the characteristics of users of illicit tobacco, and youth with access to illicit tobacco. The chapter also provides recommendations for research and data.
The major participants in the global illicit tobacco trade include criminal networks and the tobacco industry. In the United States and Canada, cigarette wholesale and retail dealers on sovereign territories of Native American tribes have also played an important role. Though terrorist organizations are commonly portrayed as active in the illicit tobacco trade, the committee found no evidence of substantial links between the illicit tobacco trade and the financing of terrorist activity.
Native American Tribes
The Native American tribal lands that are scattered throughout the United States have played an important and complicating role in the illicit cigarette trade. There are numerous examples of non-Native American consumers purchasing tax-free cigarettes from Native American tribal lands.1 The purchase of cheap cigarettes from Native American tribal lands was originally a problem for states in the western part of the country; the center of the tribal cigarette business shifted over the course of the 1980s and 1990s to reservations located in New York State (von Lampe et al., 2014).
The question that has long been debated is whether or not Native American tribes can legally sell tax-free cigarettes to non-Native Americans. State and federal governments legally recognize that Native American tribes are sovereign nations. That is, each tribe has an inherent right to govern itself. However, there are limits to this sovereignty. According to the U.S. Constitution, Congress can regulate commerce between the states, with foreign nations, and with Native American tribes. In addition, the Supreme Court has ruled that states may impose sales taxes on goods sold by Native Americans on tribal land to purchasers who are non-Native Americans. Federal law prohibits states from taxing cigarettes that are purchased by tribal members on tribal lands for personal use.
New York: An Example Involving Tribal Lands
This tension between tribal sovereignty and cigarette excise taxes has played out in New York State for decades. There are eight federally recognized tribes in New York State: Cayuga, Mohawk, Onandaga, Oneida, Seneca, Shinnecock, Tonawanda Band of Seneca, and Tuscarora. As cigarette taxes in New York State increased from $0.56 in 2000 to $4.35 per pack beginning in 2010 (and $5.85 in New York City), the incentive for non-tribal members to purchase tax-free cigarettes from tribal lands has increased. Data on tax avoidance by smokers in New York from 2007 to 2010 (see RTI International, 2011, Fig. 21) show slight increases in the percentage of adults who purchased from low-tax or untaxed sources (e.g., from 48.3 to 53.8 percent for any low-tax location). Although the data suggest that tax avoidance and evasion may have increased as the tax rate went up, it does not allow one to distinguish an actual change in behavior from variation due to random statistical chance.
In 1988, the New York Department of Taxation and Finance created regulations that established an annual quota for tax-free sales. The quota
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1 In addition to such direct sales, many Internet cigarette vendors are located on tribal lands. In January 2005, an estimated 63.4 percent of domestic vendors had a Native American affiliation (Ribisl et al., 2007, p. M-3).
was determined by either “multiplying the ‘New York average consumption per capita’ by the number of enrolled members of the affected tribe,” or by analyzing data submitted by the tribe (Center for Public Health and Tobacco Policy, 2011, p. 10). Before the 1988 regulations were implemented, they were challenged in court by cigarette wholesalers who did business with Native American retailers. The wholesalers argued that federal laws governing trade with Native Americans preempted state law and, therefore that states could not collect taxes on cigarettes sold by wholesalers to Native American tribes. The case worked its way up to the U.S. Supreme Court, which ultimately affirmed that “States have a valid interest in ensuring compliance with lawful taxes that might easily be evaded through purchases of tax-exempt cigarettes on reservations,” and that the state’s interest in collecting lawfully owed taxes “outweighs tribes’ modest interest in offering a tax exemption to customers who would ordinarily shop elsewhere.”2 The court approved the state’s quota scheme, although it noted that it could be challenged in the future if the quota system proved to be inadequate or unnecessarily burdensome.
However, the 1988 law was never enforced and, prior to 2011, smokers in New York could travel to tribal lands (especially in western New York, home to several Native American reservations) and purchase cigarettes free of both state and local taxes and, in some instances, free of federal taxes. In addition to selling major cigarette brands to non-tribal members, some tribes produce their own cigarettes as a way to control their supply chain. For example, in 1994, Smokin Joe was the first Native American-owned and -operated producer to receive a tobacco manufacturer’s license. In 2008, the Oneida purchased Sovereign Tobacco and moved the operation to tribal lands in an attempt to avoid paying state cigarette excise taxes. The Seneca Nation also produces several unique brand cigarettes.
The lack of enforcement of the 1988 law resulted in high volumes of bootlegging from Native American reservations to other parts of New York State, as well as throughout the country through reservation-based smoke shop sales, online sales, and van networks. According to data from the New York Department of Finance, 200 million untaxed cigarettes were delivered to Native American reservations in 1984; by 2005, the number had grown to 9.5 billion untaxed cigarettes (von Lampe et al., 2014, p. 276). In order to curtail these tax-free sales, New York State joined with other states in an agreement with the major credit card companies and PayPal to stop processing payments for online cigarette sales and with the major delivery services to stop deliveries of cigarettes sold online (see Box 5-3, in Chapter 5). In addition, in 2010, the New York tax code was amended in an attempt to
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2Department of Taxation and Finance of New York v. Milhelm Attea & Bros., Inc. 512 U.S. 61, 65 (1994).
bolster the collection of revenue by the state. As with the 1988 law, this law was challenged, but it was upheld and went into effect in June 2011. One month later, Governor Andrew Cuomo announced that his administration would step up efforts to enforce state laws that limit cigarette sales (through quotas) from wholesalers to Native American tribes.
As a result of these developments in recent years, tribes have to either pay all applicable state taxes or get cigarettes from low-tax states,3 and there has been a dramatic drop in sales of cigarettes to tribal stores in New York State. The share of wholesale cigarettes sales in New York State that was made to tribal stores dropped from around 35 percent in 2010 to 0.01 percent in 2012 (see von Lampe et al., 2014). Several other studies have also documented this shift in supply. Cigarette packs sold on many reservations do not have tax stamps, so the proportion of discarded cartons without stamps can serve as a proxy for the proportion of cigarette purchases coming from Native American reservations. According to a study done by Davis and colleagues (2013), there is evidence that cigarette trafficking sources are shifting away from reservations and toward long-distance low-tax states, such as Virginia. This shift is aligned with the implementation of the state’s regulations restricting wholesalers from selling untaxed cigarettes to reservations. Using data collected in December 2011, the authors found that the proportion of discarded cigarette packs without stamps in New York City (15.7 percent) was considerably lower than the proportion found by Chernick and Merriman (2013) in New York City using a similar method in 2008 (24.0 percent) and the proportion found by Kurti and colleagues (2012) in the South Bronx using data from March 2011 (42 percent). In addition, the authors found an increase in the proportion of cigarettes from Virginia compared with the proportion found by Chernick and Merriman (2013) prior to this regulation change, further explaining this shift in cigarette sourcing.
Criminal Networks
In the United States, members and associates of the New York mafia are said to have become involved with organized bootlegging in the mid-1960s (when cigarette taxes began to go up). However, mafia dominance over the cigarette black market does not appear to have lasted long. One reason may have been the Contraband Cigarette Trafficking Act (CCTA) of
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3 Since tribes are only allowed to acquire tax-free cigarettes for their tribal members, they needed new sources of supply—which could come from on-reservation production or by purchasing cigarettes from low-tax states. There is no system in place for tracking the tobacco trade to and from tribal lands. Although some states that have developed revenue-sharing agreements with tribes may have such accounting measures, they are not the states of major interest for policy and tax purposes.
1978, which increased the risk for large interstate bootlegging operations (von Lampe et al., 2014, pp. 274-275),4 or the broader federal crackdown on organized crime through enforcement of the Racketeer Influenced and Corrupt Organizations Act of 1970 (Jacobs and Gouldin, 1999).
Research on experiences in Europe also provides valuable information on the particular organizational and criminological contexts within which the trafficking of illicit tobacco takes place. In Germany, for example, the illicit tobacco market has not been subject to cartelization or monopolization, and most cigarette smugglers operate within self-sufficient, small-sized enterprise structures (von Lampe, 2002, 2005, 2007). The illicit tobacco market may not be unusual in this regard, since cartels and monopolies do not represent the majority of individuals and groups operating in illegal markets. Due to the constraints of illegality, many illegal markets tend to be rather fragmented and dominated by small and ephemeral criminal organizations (see Reuter, 1983; for a recent review, see Bouchard and Morselli, 2014).
In the Netherlands, van Duyne (2003) distinguished between local traders in the illicit tobacco market, with no or limited administrative skills and professional experience, and international traders, who had higher levels of skill and professional access. According to van Dijck (2009, p. 123),
[case files from the Netherlands] give the impression that networks are limited and that black market participants are not aware of each other beyond these limited networks of three layers, in which traffickers (middle layer) only know their (regular) suppliers (supply layer) and their (regular) buyers (demand layer).
Evidence from the United Kingdom similarly suggests that the methods involved in the illicit tobacco trade are not particularly complex. Because of the nature of the U.S. problem—primarily bootlegging—the barriers to entry into the illicit market and the skills needed are probably lower than those found in Europe, where the dominance of cross-border smuggling requires access to transportation and loads or companies involved in cigarette distribution. In the United States, circumventing border controls is not part of the logistical problem, and many more people are able—at least in principle—to buy cigarettes in a low-tax state and transport them to a higher-tax state.
Research into the relationship between tobacco smuggling and other kinds of criminal activity is scarce, but it appears that links between drug and cigarette smuggling may vary by country. Vander Beken and colleagues (2008) found few cigarette traffickers arrested in Belgium to have prior
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4The shift away from large-scale bootlegging operations in response to the CCTA is an example of the adaptive nature of the illicit trade.
criminal records, which was also the finding in a study of German cigarette traffickers by von Lampe (2005). According to van Duyne (2003), tobacco traffickers in the Netherlands do not have strong connections to drug markets, but they are involved in “adjacent markets” such as piracy of brand-name goods. Also in the Netherlands, van Dijck (2009, p. 122) found that “the case files show a broad spectrum of offender types, ranging from the more ‘experienced’ criminal shifting between drug trafficking and other illegal activities, to freelance truck drivers smuggling up to several hundreds of sleeves on their (licit) professional journeys throughout Europe.” A similar connection to drug markets may exist in the United Kingdom (Hornsby and Hobbs, 2007, p. 559):
Contraband cigarettes are increasingly supplied by coordinated criminal collaborations that often deploy “commodity hopping” techniques. This involves shifting the focus of importation of illicit goods (i.e., drugs), to other lesser-risk-associated commodities (for example, tobacco products) and vice versa.
One implication of this finding is that changes in enforcement against other crimes, such as intellectual property theft crimes and drug crimes, could affect the illicit trade in tobacco.
Although criminal behavior typically peaks when offenders are in their 20s and levels off as they grow older, data from Belgium and the Netherlands5 suggest that people involved in the illicit tobacco trade are considerably older, with an average age of close to 40 (van Duyne, 2003; Vander Beken et al., 2008; van Dijck, 2009). Evidence from Belgium, the Netherlands, and Germany also suggests that those involved in all segments of the distribution phase of the illicit tobacco trade generally do not have extensive criminal records (van Duyne, 2003; von Lampe, 2005; Vander Beken et al., 2008). In the Netherlands, Germany, and the United Kingdom, evidence suggests that the illicit tobacco trade is not much associated with violence (von Lampe, 2002; van Dijck, 2009; L’Hoiry, 2013).6 Although violence is rare in Greece, instances of violence have been noted in “open markets” that are on the street and in other public places (Antonopoulos, 2008).7 Violence appears to be more prevalent in the manufacture and trade of counterfeit cigarettes in China (Shen et al., 2010).
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5 Belgium and the Netherlands are important transit countries for the supply of illegal cigarettes to Great Britain (Vander Beken et al., 2008; van Dijck, 2009).
6 Evidence from Germany and the United Kingdom also suggests that there is a limited relationship between the illicit tobacco trade and police and state corruption (von Lampe, 2002, 2005; L’Hoiry, 2013).
7 In Greece, there have also been systematic reports of bribes paid to customs officers, police officers, coast guard officials, and of cooperation by judges and prosecutors with cigarette smuggling networks (Antonopoulos, 2008).
Vander Beken and colleagues (2008), van Duyne (2003), and van Dijck (2009) suggest that the “moral threshold” for stepping into the world of illegal cigarette trafficking in Belgium and the Netherlands is rather low and that market participants tend to share in a “moral absent-mindedness” in which they regard their activities as illegal, but not criminal. Hornsby and Hobbs (2007, pp. 223-224) noted the existence in the United Kingdom of “almost unanimous support for the smugglers within the working-class communities that constituted not only the clientele, but also much of the smuggling operations workforce.” Similarly, research in two socially disadvantaged, lower-income urban settings, Nottingham, England (Stead et al., 2013), and central Harlem in New York (Shelley et al., 2007), shows that vendors of illicit tobacco have the respect of many in their communities. These local vendors were seen as providing a valuable service and economic benefit in response to an unpopular government action that was seen as disproportionally affecting less affluent people. One caveat, however, was that in Nottingham there appeared to be some ambivalence about potential links between illicit tobacco sales and organized crime and drug dealing and sales to children.
The research on the organizational and criminological contexts of the illicit tobacco trade in Europe has benefited from the use of a variety of information sources. For example, Vander Beken and colleagues (2008) analyzed customs and prosecution files and also conducted interviews with law enforcement officials and an industry representative. Hornsby and Hobbs (2007) interviewed members of a tobacco smuggling operation in the United Kingdom. L’Hoiry (2013) conducted a series of informal interviews with a bootlegger actively involved in a long-term tobacco bootlegging enterprise operating from the northeast of England and illegally importing tobacco from northern Europe. van Dijck (2009) analyzed files and data provided from Netherlands customs and also conducted interviews with law enforcement officials and an industry representative. van Duyne (2003) analyzed criminal investigation files from the Dutch Ministry of Finance. von Lampe (2002, 2005, 2007) used data from the German Customs Service database (INZOLL), samples of criminal files accessed through the Berlin public prosecution offices and investigations conducted by the Berlin branch of the customs service, media reports, and interviews conducted with law enforcement officials, informants, and a representative of the German association of cigarette manufacturers. Similar research approaches have not been undertaken in the United States.
One other aspect of the relationship of criminal networks to the illicit tobacco trade about which little in known, in either the United States or Europe, is the market mechanisms that affect the ease with which the illicit trade is financed. For example, is a significant amount of cash required upfront to purchase cigarettes? What kinds of volumes are usually purchased
at one time? A related question is how profits from illicit trade are laundered. These characteristics are relevant to the ease with which the market for illicit tobacco could be disrupted through financial control measures.
The Tobacco Industry8
Studies of internal industry documents, along with legal investigations and agreements, have shown that tobacco companies at a global level have promoted and facilitated the smuggling of legally manufactured cigarettes in order to circumvent import bans, high tax rates, and duty fees on legal imports; gain a competitive advantage over other cigarette companies; and create pressure on governments to reduce cigarette taxes and duty fees or to not increase them (Campaign for Tobacco-Free Kids, 2000, pp. 1-2). Evidence suggests that in the recent past the tobacco industry was complicit in the illicit trade in Asia (Campaign for Tobacco-Free Kids, 2000; Joossens, 2003; Collin et al., 2004; Lee and Collin, 2006), Eastern Europe and the former Soviet Union (Gilmore and McKee, 2004), Africa (Campaign for Tobacco-Free Kids, 2000; LeGresley et al., 2008), Canada (Campaign for Tobacco-Free Kids, 2000; International Agency for Research on Cancer, 2011, p. 308), Latin America (Campaign for Tobacco-Free Kids, 2000), and the European Union (Campaign for Tobacco-Free Kids, 2000). Recently, the UK government fined British American Tobacco for “oversupplying” cigarettes into the low-tax Belgium market—cigarettes that are at high risk of being subsequently smuggled back into the United Kingdom (Evans, 2014).
The tobacco industry’s role in facilitating the smuggling of legally manufactured cigarettes in Europe has also been brought to light through investigations conducted by the European Union. In November 2000, as a result of its investigations, the European Union sued Philip Morris International (PMI) and several other tobacco manufacturers, alleging that they were smuggling cigarettes into Europe. In exchange for dropping all charges, PMI and the European Union reached an agreement, in 2004, stipulating a $1 billion payout over 12 years and repayment of all duty required on seizures of PMI products. Additionally, PMI agreed to implement know-your-customer protocols and tracking and tracing mechanisms (see Chapter 5 for a discussion of industry-sponsored track-and-trace schemes). The European Union negotiated similar agreements with Japan Tobacco International, British American Tobacco, and Imperial Tobacco Limited in
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8 In this section, the discussion of the tobacco industry is limited to the role in the supply chain. Chapter 4 discusses tobacco industry-sponsored estimates of illicit market size. Chapter 5 discusses industry-sponsored track-and-trace schemes, and Chapter 7 discusses enforcement actions taken by the European Union against transnational tobacco companies.
2007 and 2010 (Sweeting et al., 2009). The agreements—reinforced by the threat of litigation—have been credited with cutting off the supply of illicit cigarettes in Spain and Italy and leading to a decrease in consumption of illegal tobacco products in those countries from 15 percent in the 1990s to 1-2 percent of consumption in 2006. In Italy, the volume of seized cigarettes decreased from 1,700 tons in 1998 to just 333 tons in 2002, indicating declining levels of smuggling; also, legal sales increased from 1998 to 2000 in Campania and Puglia by 121 percent and 55 percent, respectively (Joossens and Raw, 2008). It is the combination of these two trends that makes the effectiveness of these agreements apparent. The decline in the illicit market following litigation (or threats of litigation) underscores the industry’s role in facilitating the illicit trade.
One noteworthy and important characteristic of the U.S. domestic tobacco industry today is that it has become separated from international operations (although the transnational tobacco companies maintain a significant U.S. presence).9 Although there may be a lag in detection, there is no evidence that the tobacco industry presently contributes to the domestic illicit trade, and enforcement officials from Virginia and New York City told the committee that tobacco companies had been helpful in providing training and other assistance to combat the illicit trade.10 In the case of counterfeit products, cigarette companies lose financially and with respect to infringement of trademarks and other intellectual property, and major tobacco firms have taken direct legal action against U.S. sellers of counterfeit products (see, e.g., CSP Daily News, 2013).
Terrorist Organizations
Any high-profit criminal activity has the potential to be used to cross-fund ideologically motivated (rather than profit-motivated) crime, and many claims have been made that the illicit tobacco trade and terrorism
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9 PMI is incorporated as a publicly traded U.S. holding company in Virginia with its headquarters in New York City. PMI spun off from Altria in 2008, leaving Philip Morris USA as a wholly owned subsidiary of Altria that is responsible for producing and marketing the brands of Altria, formerly Philip Morris Companies. In a similar move, in 1999, R.J. Reynolds sold all non-U.S. operations to Japan Tobacco International, and in 2004, it merged with the U.S. operations of British American Tobacco, formerly held by Brown & Williamson, forming Reynolds American Inc. Two different companies are Lorillard, which exclusively markets inside the United States, having sold its cigarette trademarks outside of the United States in 1977 (Lorillard Inc., 2013), and Ligget-Vector, which also conducts all sales within the United States (Vector Group Ltd., 2012).
10 For example, a representative from the Northern Virginia Cigarette Tax Board informed the committee of an Altria-sponsored conference in 2013 on illicit tobacco trafficking and organized crime, of which one of the sessions involved training exercises in building a legal case following a presumed interstate intercept.
are linked. In the United States, however, only a few cases that have been prosecuted illustrate such a link, despite the fact that law enforcement authorities make cases with a terrorism connection a high priority.
Terrorist organizations may rely on “alternative financing mechanisms” by trading in such commodities as illicit drugs, weapons, contraband cigarettes, diamonds, and gold. However, the extent of terrorists’ use of such mechanisms is unknown because of their inherent low visibility to outsiders and the lack of systematic data collection and analysis of case information. The U.S. General Accounting Office (2003, highlights) recommended that “the Director of the FBI systematically collect and analyze data concerning terrorists’ use of alternative financing mechanisms” and that “the Secretary of the Treasury and the Attorney General produce the planned report [required under the 2002 National Money Laundering Strategy11] based on up-to-date law enforcement investigations on precious stones and commodities.”
The Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) initiated 138 tobacco investigations in fiscal 2002 and 153 in fiscal 2003. According to ATF, however, only eight of its investigations in those years were linked to terrorism (U.S. General Accounting Office, 2004, p. 20). One prominent case involved the trafficking of cigarettes, from 1996 to 2000, between North Carolina and Michigan with some of the proceeds being funneled back to the Islamist terrorist organization Hezbollah.12 The total value of assets seized (consisting of cigarettes, real property, and currency) was about $1.5 million, and the investigation resulted in two convictions (for cigarette trafficking, money laundering, and providing material support to a terrorist organization) and an additional 22 convictions by plea bargain on related charges (U.S. General Accounting Office, 2003, p. 12; see also Shelley and Melzer, 2008). Another commonly provided example of the relationship between the illicit tobacco trade and terrorism is that of the gas station owner in the Lackawanna area of New York who was convicted of cigarette smuggling in 2005 and is alleged to have provided $14,000 to the “Lackawanna Six” to travel to Al Qaeda’s Al Farooq Terrorist Training Camp in the summer of 2001 (Bureau of Alcohol, Tobacco, Firearms and Explosives, 2014; see also Virginia State Crime Commission, 2013a, p. 19). Overall, given the total number of terrorism-related tobacco investigations in the United States (keeping in mind that smuggling cases are likely to receive priority if they can be linked to terrorism), as well as
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11 The report required under the 2002 National Money Laundering Strategy “was to form the basis of a strategy to address how money is moved or value transferred via trade in precious stones and commodities” (U.S. General Accounting Office, 2003, highlights).
12The exact amount that was funneled to Hezbollah is unclear, at least in published accounts of the case.
the dollar amounts involved in those cases, the link between the U.S. illicit tobacco market and terrorism appears to be minor.
Outside of the United States, the illicit tobacco trade has been linked to terrorist and insurgent financing for the Irish Republican Army (Watt, 2002), Basque Fatherland and Liberty (Coker, 2003; Willson, 2009), the Kurdistan Worker’s Party (Coker, 2003; Willson, 2009), the Taliban, the Revolutionary Armed Forces of Colombia, and the National Congress for the Defence of the People in the Congo (Willson, 2009). However, these accounts do not provide systematic information regarding either the absolute or relative importance of the illicit tobacco trade for financing terrorist activity.
Knowing the characteristics of those who use illicit tobacco can help target policies to control the illicit trade. Unfortunately, the factors that make it difficult to measure the extent of illicit activity (see Chapter 4) also make it difficult to characterize the average user. In addition, most studies have focused on adults ages 18 and older (in some countries outside the United States, research has been conducted on people ages 15 and older), so it is difficult to draw strong conclusions about the purchase and use of illicit tobacco by youth. Most of what is known about adult users of illicit tobacco is based on self-reported information collected in a number of surveys within and across different countries, either through large population surveys with questions related to tobacco use or localized surveys of smokers in selected communities: see Box 3-1.
These surveys collect demographic information (location, age, gender, and race and ethnicity) and measures for levels of education, income, and tobacco use per day,13 in addition to inquiries about recent tobacco purchases. In some surveys, respondents have been asked about their intentions to quit smoking and their attitudes toward the purchase of illicit tobacco. Most surveys show that the majority of smokers report acquiring their cigarettes through legal means; therefore, users of illicit tobacco are often a small subset of smokers surveyed (Pesko et al., 2012; Nagelhout et al., 2013; Joossens et al., 2014a).
Understanding illicit tobacco use requires an understanding of tobacco consumption in general. Smoking has declined in the United States (and other nations) as tobacco control interventions (e.g., tax increases, smoke-free policies, and marketing restrictions) and public awareness of the dangers have increased. Perhaps equally important, smoking has been deglamorized. Smoking and tobacco use became increasingly stigmatized
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13Most surveys collect information on cigarette use and purchases of cigarette packs.
BOX 3-1
Tobacco Surveys
Research on tobacco use often relies on information collected through surveys designed to measure behaviors, knowledge, and attitudes of specific populations at the national, state, or community levels. These surveys usually collect individual responses on use of different tobacco products, quitting attempts, risk perception, social and health influences, media exposure, and other indicators useful for measuring progress on tobacco control. Some surveys have collected recently purchased cigarette packs from respondents as part of the data collection and analysis.
There are three basic dimensions along which surveys can be distinguished: (1) design, (2) goal, and (3) size of population of interest (local or community, state, national). The design of a survey is classified as crosssectional—either administered one time or repeated periodically (e.g., annually or biannually), but sampling different respondents each time—or as longitudinal cohort (also known as panel), conducted periodically with the intention of recontacting and resurveying the same respondents over time.
There are two distinct goals of surveys that have been used to study tobacco use and the impact of tobacco control policies, programs, and other interventions: surveillance and evaluation. Surveillance surveys are designed to gather data on key variables of interest so that the survey findings can be generalized to the population from which the survey respondents have been sampled (e.g., surveys that periodically gather data that are nationally representative for the purpose of using results to make inferences about behavioral trends: one example is the Tobacco Use Supplement to the Current Population Survey (TUSCPS) sponsored by the U.S. National Cancer Institute and administered as part of the U.S. Census Bureau’s Current Population Survey).
Evaluation surveys can have many of the features of surveillance surveys, including sampling methods and size of population surveyed, but their value lies in measuring the impact of some event (such as a policy intervention) by comparing patterns of responses to key questions before and after the event. Some evaluation surveys employ longitudinal cohort designs. An example is the International Tobacco Control Policy Evaluation Project (the ITC Project), an international research collaboration across 22 countries. In more than half of the countries, the population surveys are at the country or national level; in the other countries, the surveys are at the local/community level (e.g., seven cities in China). Many of the evaluation studies conducted with the ITC survey data use quasiexperimental methods to examine the effects of tobacco control policies by comparing the difference before and after a particular policy was implemented in a country that has implemented with a country or countries in which the policy did not change in the relevant time period.
by mainstream media and a wide range of the general population, with growing recognition of its harm to the user and others. Today, tobacco use is most prevalent in low-income, socially disadvantaged areas. U.S. adults living below the poverty line have higher smoking rates than more affluent adults (27.9 and 18.1 percent, respectively, in 2012) and are less likely to quit (Shelley et al., 2007; Agaku et al., 2014).
Research in socially disadvantaged, lower-income English and American urban settings—Nottingham (Stead et al., 2013) and central Harlem (Shelley et al., 2007), respectively—has clarified the factors that attract residents to tobacco. The social acceptability of smoking, a stressful socioeconomic environment, and the easy availability of cigarettes (legal or illegal) together reinforce smoking and undermine cessation in those areas. Specifically, the studies showed that people used tobacco to mitigate stresses associated with poverty, crime, unemployment, and discrimination. In both Harlem and Nottingham, the consumption of illicit tobacco was regarded as a normative rather than a marginal behavior—so much so that in Nottingham smokers who bought tobacco legally might be mocked for being deliberately extravagant, as trying to impress others with a show of wealth. Similarly, a study of socioeconomically deprived areas in Edinburgh, Scotland, found that most users of illicit tobacco believed that its purchase was rational in the face of material hardship and that the vendors of illicit tobacco (who were contacted by users through social networks, family, and friends, and whose identity and location were also often commonly known) provided a valuable service to the community (Wiltshire et al., 2001).
Nevertheless, there is a cost associated with buying illicit cigarettes, and there are varying motivation levels for consumers to pay that cost. Merriman (2002, p. 494) refers to an “inconvenience price”:
This is the time and discomfort consumers incur in order to engage in a transaction. A shop that is centrally located and which many consumers pass in the course of their daily affairs has a low inconvenience price. A shop located in a dark corner of the city and which requires a special trip to visit has a high inconvenience price. . . . The locations of street sellers who deal in smuggled cigarettes can be undependable, or there may be uncertainty about the authenticity of brand marking on the cigarettes. Consumers may even fear embarrassment or legal penalties if they are detected buying smuggled cigarettes.
The inconvenience price paid by consumers in Harlem and Nottingham will presumably be lower than the inconvenience price paid by consumers in higher-income communities.
In the studies of low-income communities discussed above, most current smokers were not only aware of a growing illegal cigarette market, but also admitted to buying illicit cigarettes to avoid higher prices. Consistent
with that finding, a survey of smokers in northeast England indicated that those who were young, male, and “struggling” financially were most likely to be approached by illicit sellers and to be illicit buyers (NEMS Market Research, 2013). A survey of smokers in Taiwan similarly found that smokers of smuggled cigarettes tended to be younger, male, with lower incomes, and less education than the general population (Chen et al., 2010).
In the United States, most national-level studies have focused on tax-avoidance strategies, including purchasing cigarettes in states with lower after-tax prices or on the Internet (Hrywna et al., 2004; Hyland et al., 2004; Pesko et al., 2012; Coady et al., 2013).14 U.S. data consistently show that approximately 25 percent of smokers use price-minimization strategies (Pesko et al., 2012; Coady et al., 2013), although some studies have found rates as high as 59 percent (Hyland et al., 2004). Price-minimization strategies include tax avoidance and evasion, but they also include such legal strategies as choosing a cheaper brand, buying cartons, and taking advantage of price promotions. Female smokers and smokers over the age of 65 are the most likely to engage in price-minimization strategies in the United States (Hyland et al., 2004; Pesko et al., 2012). Analysis of a large sample of nationally representative data from the 2006 to 2007 Tobacco Use Supplement of the Current Population Survey (TUS-CPS), which focused on purchases by the carton and from travel to low-tax states, found that racial and ethnic minorities, low-income individuals, and those who smoked less frequently were the least likely to use price-minimization strategies (Pesko et al., 2012).
Proximity to a state, Native American reservation, or country with lower cigarette excise taxes has been associated with higher rates of illicit tobacco use. One study (DeCicca et al., 2013) using data from the TUS-CPS found that the median distance for crossing a state border for cigarettes is 20 miles and that the probability of cross-border shopping increases with proximity to a state border. That same study found that the probability of cross-border shopping to avoid higher taxes increased slightly with income. Other studies have found that middle-aged and older smokers were also more likely than young adults under the age of 30 to cross a border to purchase cigarettes. For Internet sales, women, people ages 45-65, and non-Hispanic whites have been found the most likely to purchase cigarettes online (Hrywna et al., 2004; Hyland et al., 2004; Pesko et al., 2012).
A recent representative survey of European smokers in 18 countries found that smokers living in a country that bordered another country that was a known source of illegal cigarettes were more likely than smokers
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14 As discussed in Chapter 1, cross-border purchases would technically be tax evasion in most U.S. states where use taxes are supposed to be paid, although smokers themselves may not realize that they are breaking the law.
in other countries to be associated with an illicit purchase either through self-report or possession of an illicit pack (Joossens et al., 2014a). Another study, using data from the surveys of the International Tobacco Control (ITC) project in France, Germany, Ireland, the Netherlands, Scotland, and the rest of the United Kingdom, focused on cross-border purchases (Nagelhout et al., 2013). The percentage of smokers making cross-border purchases was higher in provinces or states of France and Germany that bordered other countries (24 and 13 percent, respectively) than nonborder regions (2 and 7 percent, respectively), and those smokers most likely to purchase cigarettes in another country tended to have higher levels of education or income and to be daily, heavier smokers than others in the survey.
The association between household income and education and the likelihood of engaging in tax avoidance or tax evasion varies both in direction and magnitude across countries. For example, Guindon and colleagues (2013) find that in the United States, individuals with higher levels of education have higher odds of engaging in avoidance/evasion, as do individuals in the United Kingdom with higher income. In Canada, however, the association between household income and avoidance/evasion is negative, while in France there is no statistically significant association between socioeconomic status and the odds of engaging in avoidance or evasion. The authors suggest (Guindon et al., 2013, p. 6) that “[t]hese results highlight the importance of taking into consideration country-specific contextual factors.” It is also possible the results are in part a function of conflating tax avoidance with tax evasion.
It is also important to pay careful attention to how illicit purchases are described in any survey. For example, the CPS-TUS asks customers about out-of-state purchases, Internet and reservation purchases, and the purchase of individual cigarettes. As a result, the CPS-TUS misses illegal purchases of packs of untaxed cigarettes on the local illicit market, which would be captured in litter collection or pack swap studies. Those purchases may make up a substantial portion of the illicit trade in some areas.
Microgeographic evidence based on studies of littered cigarette packages provides support for economic and proximity factors in the use of illicit tobacco, particularly tobacco purchased on the illicit market, although it does not provide individual-level information about purchasers. Merriman (2010) examined discarded cigarette packages throughout the city of Chicago and found that a 1-mile increase in proximity to a lower-state-tax border decreased the probability of a discarded pack having a local stamp by 1 percent. All else being equal, local stamps were more likely to be found in neighborhoods with higher household income, “perhaps because high income households are less likely to dedicate extra time and effort to circumventing cigarette taxes” (Merriman, 2010, p. 76). However, the probability of finding a local tax stamp also increased with the level
of poverty, “perhaps because households in poverty are less mobile than higher income households and find it difficult to travel to other tax zones and avoid the tax” (Merriman, 2010, p. 76).15 At the same time, having a higher share of non-white households was associated with a lower probability of finding a local tax stamp, “perhaps because neighborhoods with high proportions of minorities are more likely to have formal or informal networks that allow circumvention of the cigarette taxes” (Merriman, 2010, p. 76).
Chernick and Merriman (2013) conducted a similar litter pack analysis in New York City: they found that proximity to the nearest Native American reservation had a significant positive effect on the probability of finding cigarette packs without the appropriate tax stamps. However, in contrast to Merriman’s (2010) findings for Chicago, they found poverty rates to be positively associated with the share of no-tax-paid packs. Chernick and Merriman, 2013, pp. 655-656) hypothesized:
Because the poor are less likely to own a car, the marginal cost of traveling to border states to avoid cigarette taxes—the main source of avoidance in Chicago—is likely to be greater relative to income for poor smokers. By contrast, in NYC, untaxed or lower taxed cigarettes are more likely to be sold illegally by vendors who bring them to poor neighborhoods. This difference is related to the proximity of Native American reservations in NYC, and the greater density of population in NYC than Chicago. Proximity makes it cheaper for bootleggers to obtain untaxed cigarettes, while the higher density in NYC makes it more profitable to sell illegal cigarettes at street level.
On balance, the available research suggests that poor socioeconomic status and limited education, especially among younger smokers, are associated with the intention to purchase illegal cigarettes locally. That is, in areas where a supply of illicit products is available, lower-income smokers with less education are more likely than smokers with higher incomes and education to use illicit tobacco or smuggled cigarettes. In contrast, higher levels of income and education are associated with the willingness to travel to another location or to use other price minimization strategies (e.g., online purchases) to avoid high taxes on cigarette purchases. This highlights the importance of distinguishing between tax evasion, which tends to be tied to local purchases of illicit cigarettes, and tax avoidance, which typically involves travel and other related price minimization strategies.
A person’s level of addiction and intention to quit are also related to the
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15 Merriman (2010, p. 83) acknowledges the potential bias in his estimates: “Litterers may be disproportionately ‘scofflaws’ and those who consume cigarettes in their homes (and thus do not litter) may be disproportionately likely to comply. Creative methods for investigating these hypotheses may be worthwhile topics of future research.”
intent to purchase smuggled cigarettes. Taylor and colleagues (2005) found that heavy smokers with high levels of addiction living in a low-income area of Yorkshire, England, were most likely to seek out smuggled cigarettes. Guindon and colleagues (2013) found that heavier smokers tend to have higher odds of engaging in tax avoidance or evasion; however, this was only statistically significant in Canada and the United States, not France and the United Kingdom. They also found that smokers who intended to quit had lower odds of engaging in tax avoidance or evasion in France, the United Kingdom, and the United States. Other studies have not found a strong correlation between illicit tobacco use and weekly cigarette expenditures in Taiwan (Chen et al., 2010) or daily cigarette consumption in Europe (Joossens et al., 2014a). In socially disadvantaged areas in both England and the United States, research has shown that those who are most likely to buy illicit tobacco are heavier smokers with higher levels of addiction (Stead et al., 2013).
YOUTH ACCESS TO ILLICIT TOBACCO
Transactions that supply cigarettes to people under the age of 18 from commercial sources are illegal in every state, and most but not all states also prohibit noncommercial transfers of cigarettes to youths. However, because the scope of this study is limited to instances where youths engage in the same sorts of illicit transactions as do adults, the provision of cigarettes to youths from social sources (friends, family) falls outside the scope of this study, as do minimum-age violations by vendors selling cigarettes that have been appropriately taxed.16
To document the sources of cigarettes to minors in the United States, the committee used data from the National Youth Tobacco Survey (NYTS), which is conducted by the Centers for Disease Control and Prevention. It was first conducted in 1999 and repeated in 2000, 2002, 2004, 2006, 2009, 2011, and 2012. The NYTS provides data that are representative of all middle school and high school students in the 50 states and the District of Columbia.17 (Students provide the data by filling out a questionnaire
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16 The much larger issue of illegal youth access to cigarettes is addressed by a companion study by the Committee on the Health Implications of Raising the Minimum Age for Purchasing Tobacco Products (Institute of Medicine, 2015).
17 The most recent NYTS used a stratified three-stage cluster sample design. The final sample from a three-stage sampling process consisted of 284 schools, of which 228 participated, for a school participation rate of 80.3 percent. The survey yielded 24,658 completed student questionnaires from the sample of 26,873 students, for a student participation rate of 91.7 percent. The overall participation rate, the product of the school-level and student-level participation rates, was 73.6 percent. For further details, see http://www.cdc.gov/tobacco/data_statistics/surveys/nyts/ [January 2015].
in class, which means that those who are absent or have dropped out of school are not included.) This survey, which is generally considered the best available source for information on youth use of tobacco, tracks the dramatic reductions in youth smoking since the Tobacco Master Settlement Agreement of 1998 (see Chapter 1) and subsequent implementation of more restrictive marketing practices and large increases in excise tax rates.
It is important to note that underage cigarette sales constitute only a small fraction of the overall illicit tobacco market. Under one set of reasonable assumptions about underreporting in the NYTS, that fraction amounts to about 1 percent: see Box 3-2. This share of the illicit market, while not known directly, is unlikely to be of much importance to the revenues or
BOX 3-2
Underage Cigarette Sales as a Share of the Overall Market
Based on selfreport data from the National Youth Tobacco Survey (NYTS), imputing the midpoint to ranges of reported consumption and assuming 25 cigarettes per day for those who smoked more than a pack, youths ages 1217 smoked 2,032 million cigarettes in 2012. Federal taxpaid sales data show that 293 billion cigarettes were sold in 2011, and assuming a similar number in 2012, smoking by youths accounts for 0.69 percent of sales. The figures for youths ages 1214 and 1517 are 0.10 percent and 0.59 percent, respectively.
One can consider three ways in which the above assumptions may not be correct, which leads to different numbers:
- Youths underreport their smoking so that 1 out of every 3 cigarettes smoked is not reported. With this change in the assumption, smoking by youths accounts for 1.04 percent of sales (0.16 percent and 0.88 percent for youths ages 1214 and 1517, respectively).
- Youths underreport their smoking so that 1 out of every 2 cigarette smoked is not reported. With this change in the assumption, smoking by youths accounts for 1.39 percent of sales (0.21 percent and 1.18 percent for youths ages 1214 and 1517, respectively).
- We restrict “youth share” to cigarettes smoked by individuals who say that at least some of their cigarettes were bought directly or bought on their behalf, and we exclude cigarettes smoked by individuals who only say that their cigarettes were gifts, bought from noncommercial sources or stolen. If there is no underreporting, smoking by youths ages 1217 accounts for 0.49 percent of sales (0.07 percent and 0.42 percent for youths ages 1214 and 1517, respectively). Assuming 50 percent underreporting, then 1 percent of cigarette sales are to underage youths.
Thus, even with a wide range of assumptions, the share of total illicit tobacco use attributed to youths under the age of 18 is very small.
profits for illicit sellers. However, the illicit market may increase underage smoking, and thus contribute to public health costs, through several mechanisms. First, since unlicensed sellers are operating outside the law, they are unlikely to be scrupulous about checking the identification of buyers, hence providing youths with a way around the minimum-age restrictions. Second, to the extent that the illicit trade creates low-price options for smokers, or lowers prices generally, youths (like adults) will smoke more (Carpenter and Cook, 2008). However, evidence as to what extent these mechanisms may be operating and their possible importance in the market is lacking. Third, since 88 percent of regular adult smokers began smoking before the age of 18 (U.S. Department of Health and Human Services, 2014), postponement of youths’ smoking might be sufficient to keep many people from ever developing an addiction. These transactions are therefore of particular public health concern.
Table 3-1 documents some well-established findings about youth access, using data from the 2012 NYTS. To create the table, we divided smokers in the 2012 NYTS into two groups according to whether they reported buying from a commercial source or obtaining their cigarettes in some other fashion (social sources, theft). The total number of cigarettes smoked for each group was estimated by multiplying the number of days smoked in the previous 30 days by the number of cigarettes smoked per smoking day.
TABLE 3-1 Likelihood that Smokers Ages 12-17 Purchased from Commercial Source, 2012
| Age and Source | Nondaily Smokers | Daily Smokers | All Smokers | |
| Ages 12-14 | ||||
| Number who reported purchasing cigarettes commercially | 104 | 36 | 143 | |
| Number of respondents | 389 | 47 | 436 | |
| Percentage | 26.7 | 77.0 | 32.7 | |
| Ages 15-17 | ||||
| Number who reported purchasing cigarettes commercially | 446 | 219 | 666 | |
| Number of respondents | 1,059 | 283 | 1,342 | |
| Percentage | 42.1 | 77.4 | 49.7 | |
NOTE: See text for details.
SOURCE: Data from the 2012 National Youth Tobacco Survey.
These numbers are reported in the form of ranges: we used the midpoint of each range; for the open-ended category of “more than 20 cigarettes,” we used 25. A total of 101,178 cigarettes were smoked in the previous 30 days by purchasers, while the total number of cigarettes smoked by respondents who obtained their cigarettes from social sources or theft was 44,900.
About half of underage youths who smoke do not buy cigarettes from a store or other commercial source, but rather obtain them, usually as a gift, from “social” sources: acquaintances (usually other teenagers) and family members. But as smokers grow older and especially as they start smoking more regularly, they are more likely to purchase cigarettes from commercial sources (White et al., 2005). The NYTS data document these patterns. Smokers (survey respondents who report having smoked at least once in the previous 30 days) are divided into four groups by frequency of smoking (less than daily and daily) and age group (12-14 and 15-17). As can be seen, the likelihood of smokers’ obtaining their cigarettes by buying them from a commercial outlet increases with both age and regularity of smoking.
The relative importance of commercial sources is significant for those who smoke more: only 46 percent of youths ages 12-17 who smoke report buying their cigarettes from a commercial source, but they account for 69 percent of all cigarettes smoked by youths.
Table 3-2 provides some detail on the types of commercial source for youth purchasers. Most buy from a store in face-to-face purchases. Relatively few purchased from vending machines (which by 1999 were restricted to adult-only establishments) or by mail. The NYTS data do not show the number of purchases from unlicensed dealers, such as street vendors, who are operating outside of the law. The “other” category in Table 3-2 may include most of such purchases, but it may also include some legitimate sellers. The increase in the prevalence of “other” sources is intriguing: illicit commercial vendors may be playing a growing role in supplying youths, but there are no systematic data on that possibility for the United States.18
In the United States, Native American reservations, along with low-tax states, have been a major source of bootlegged cigarettes. However, legal and regulatory changes have recently shifted the source away from reservations and toward bootlegging from low-tax states, such as Virginia.
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18 A national survey of high school students in Canada found that 7.9 percent of current smokers reported that they usually smoked contraband cigarettes, most of which came from tribal reserves (Leatherdale et al., 2011). For the most part, these cigarettes were provided by family and friends, rather than from illicit retailers.
TABLE 3-2 Commercial Sources for Buyers Ages 12-17 During Previous 30 Days, 1999 and 2012
| Source | Percentage (95% confidence interval) | |||
| 1999 | 2012 | |||
| Store: Convenience Store, Gas Station, Grocery Store, Drug Store | 83.8 (82.1-85.5) |
57.1 (54.6-59.6) |
||
| Vending Machine | 3.0 (2.2-3.8) |
4.6 (3.5-5.7) |
||
| Internet or Mail | 4.6 (3.6-5.6) |
2.7 (1.88-3.5) |
||
| Other Commercial Source | 1.9 (1.3-2.5) |
27.5 (24.2-29.8) |
||
| No Response | 6.7 (5.6-7.9) |
13.8 (12.0-15.6) |
||
| Sample Size for Purchasers | 1,818 | 1,495 | ||
NOTES: Entries are computed as percentage of the total number of respondents ages 12-17 who indicate that they had bought at least one pack of cigarettes during the previous 30 days. All computations are weighted. For 2012, some respondents indicated more than one of these sources.
SOURCE: Data from 1999 and 2012 National Youth Tobacco Survey.
Globally, the tobacco industry has been the source of some of the illicit trade. Although sales of counterfeit and illicit white cigarettes do not financially benefit the major tobacco companies, the tobacco industry benefits from other aspects of the illicit tobacco trade: the smuggling of legally manufactured cigarettes is a way of introducing the industry’s products into new markets or to lower the price, thus expanding its share in existing markets. Although the tobacco industry has been involved in the illicit trade at a global level, there is no evidence to date that the tobacco industry has been directly involved in the United States.
Evidence from Europe suggests that the structure of illicit tobacco networks and the methods involved in the illicit tobacco trade (especially bootlegging) appear to be relatively simple and that the people involved generally do not have extensive criminal records; the illicit tobacco market trade is also not associated with violence. Although many claims have been made regarding the relationship between the illicit tobacco trade and terrorism, the link between the U.S. illicit tobacco market and terrorism appears to be minor, and there is also no systematic evidence of sustained links between the global illicit tobacco trade and terrorism.
On the demand side, the consumption of illicit tobacco, compared with smoking in general, carries little additional social stigma, particularly in places where smoking is relatively socially acceptable. Individuals with
low socioeconomic status and limited education tend to purchase illegal cigarettes locally, while people with higher levels of income and education tend to purchase online or to travel to another location to avoid high taxes on cigarette purchases. This difference highlights the importance of distinguishing between tax evasion, which tends to be tied to local purchases of illicit cigarettes, and tax avoidance, which typically involves travel and other related price minimization strategies. On balance, the evidence also suggests that heavier smokers and those less interested in quitting are more likely to engage in tax avoidance/evasion.
Youth access to illicit tobacco in the United States represents a special situation, since the sale of tobacco to people under the age of 18 is illegal in every state. For this study, however, the only relevant circumstance is when youths engage in the same illicit transactions as do adults. In this context, a reasonable estimate is that youth purchases constitute about 1 percent of the illicit market. Although these transactions are a very small part of the illicit tobacco market, they represent a major concern for public health.
RECOMMENDATION 3-1 Research and data are needed about the individuals and criminal networks who traffic in illicit tobacco in the United States. A deeper understanding of these individuals and networks (criminal histories, motives, ties to organized crime, financing mechanisms, links to adjacent markets, etc.) would provide valuable knowledge about the supply chain and illicit procurement paths and the ways in which they may evolve in the future. Qualitative approaches should be complemented with quantitative approaches to measuring supply-side participation in illicit markets, such as surveys of retail store owners, wholesalers, and stamping agents; and systematic data collection (with the assistance of enforcement and regulatory agencies) on items such as the number of licensed and unlicensed sellers in a market, location of sellers, and numbers of violations. Specific questions could be asked about such topics as the nature of their sales and where, from whom, and for how much they purchase cigarettes for resale. Since sellers might be hesitant to reveal their participation in the illegal market, survey techniques aimed at soliciting true participation in stigmatized activities would need to be used.
RECOMMENDATION 3-2 Because youths under the age of 18 are of particular concern to policy makers, research is needed about the extent to which they purchase cigarettes in the illicit market and how easily they do so. The National Youth Tobacco Survey should add items that would clarify the nature of the “other commercial sources” that have become more prevalent in recent years.
