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Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences (2015)

Chapter: 7 Interventions in the Illicit Tobacco Market: International Case Studies

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Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
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7

Interventions in the Illicit Tobacco Market: International Case Studies

As discussed above and in this chapter, international experiences with the illicit tobacco trade highlight two key characteristics of that trade. One is the dynamic nature of illicit markets and the ways in which participants react to changes in policy and enforcement practices. The other is the challenge of controlling smuggling and illegal production beyond national borders. Despite these challenges, a brief examination of experiences in Spain, the United Kingdom, Canada, and the European Union provides clear examples of success in reducing the size of illicit tobacco markets.

SPAIN

Spain’s experience in the 1990s exemplifies how collaboration and the dedication of tobacco-specific resources can lead to effective enforcement. In 1995, contraband cigarettes accounted for nearly 15 percent of the Spanish market despite the fact that the country had some of the lowest cigarette prices in Europe. The illicit cigarettes entered the country through Andorra with the complicity of the tobacco industry (Joossens and Raw, 2000).

In order to stem the supply of illicit cigarettes entering Spain and the rest of the European Union (EU) from Andorra, the Spanish authorities increased the resources dedicated to combating the problem by a factor of 10, allocating nearly e40 million to anti-smuggling efforts from 1996 to 2000 (Joossens and Raw, 2008). They developed international partnerships and engaged authorities from Andorra, Britain, France, Ireland, and the European Anti-Fraud Office in collaborative actions, including preventing container smuggling, sealing the Andorran border, patrolling the region

Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
×

in order to make undetected smuggling more difficult, and introducing tougher anti-smuggling laws in Andorra (Joossens and Raw, 2000). As a result, by mid-1999 illicit tobacco amounted to only 5 percent of the total market, a two-thirds reduction. By 2001, the share had declined even further, to 2 percent (Joossens, 2003a).

A 2014 report from the European Anti-Fraud Office suggests that the illicit tobacco market has reemerged in Spain—fueled by contraband entering the country from Gibraltar—and calls on the two countries to work together to reduce smuggling across the border.1 Despite this recent development, Spain’s success in reducing participation in the illicit tobacco market from the early 1990s to 2000 is noteworthy.

UNITED KINGDOM

In the United Kingdom, authorities estimated that in 2000 one of every five cigarettes smoked was illicit, including those made with hand-rolled tobacco, amounting to £3 billion a year in lost revenue (All Party Parliamentary Group on Smoking and Health, 2013). In response to the magnitude of those losses, law enforcement authorities implemented a tobacco-specific intervention strategy. The tobacco action plan, first implemented in 2000 and subsequently updated in 2006 and 2011, seems to have been successful, as the illicit market share in the United Kingdom fell by 12 percentage points from 2000 to 2013. An official with Her Majesty’s Revenue and Customs (HMRC) told the committee that what has been clearly important to the strategy’s success to date has been the development of local and regional partnerships and the ability of the law enforcement community to alter its practices in response to changing market characteristics, as exhibited by the periodic renewal and revision of the tobacco action plan.

The United Kingdom implemented an anti-smuggling action plan for enhanced enforcement in 2000 and coupled it with stamping and marking requirements2 and with nonbinding agreements with tobacco manufacturers. The focus of the effort was to combat the large-scale smuggling of legal products, namely, container fraud and exports reentering the country (Joossens and Raw, 2000, 2008). A representative from HMRC informed the committee that £209 million was invested over 3 years in resources and technology to detect contraband, such as X-ray scanners for freight. Additional staff were hired to strengthen detention, investigation, and

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1 See http://www.theguardian.com/world/2014/aug/11/eu-crackdown-tobacco-smuggling-spain-gibraltar [January 2015].

2 Pack marks take the form of a prominent statement “UKDUTYPAID” printed on cigarette packets and pouches of hand-rolling tobacco (Her Majesty’s Custom and Excise, 2000, p. 16).

Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
×

intelligence efforts, and tougher penalties for smugglers and sellers of illicit goods were implemented. Furthermore, a fiscal marking system was put into place so that illicit goods could be easily identified.

As a result of this zero-tolerance policy against smuggling, HMRC reported that from 2000 to 2001 customs officials seized 2.8 billion cigarettes—an increase of nearly 1 billion from the previous year. Cross-channel smuggling fell by 76 percent, X-ray scanners detected approximately 80 million cigarettes and 4.5 tons of hand-rolling tobacco, and customs seized 10,200 transport vehicles as part of its zero-tolerance policy against smugglers. The effects of the increase in resources and the zero-tolerance policy (which included allowing for the seizure of vans and cars used to transport illicit tobacco) increased the risks associated with the trade, and many smugglers left the cross-border market (Sweeting et al., 2009).

During this period, the United Kingdom also entered into memorandum of understanding (MOU) agreements with three of the major cigarette manufacturers in the country. The MOUs were signed with Gallaher, British American Tobacco, and Imperial Tobacco in 2002 and 2003. Though not legally binding, the MOUs were designed to enlist the support of the tobacco manufacturers in controlling the supply of cigarettes to the illicit market (Sweeting et al., 2009); the MOUs could be regarded as a threat-based restorative justice policy, with the risk that the manufacturers would be prosecuted if they did not cooperate. It is believed that nearly half of the contraband cigarettes on the market in 2000 were brands of Imperial Tobacco marked for export and smuggled back into the United Kingdom (Joossens and Raw, 2008). Following the MOU and public pressure in response to parliamentary hearings, Imperial Tobacco exports to places like Andorra—believed to be a major transit point for cigarettes bound for smuggled reentry into the United Kingdom—declined sharply. Enactment of duty-free marking requirements and the MOUs reduced the share of illicit cigarettes on the market from 21 percent in 2000 to 15 percent in 2004 (Her Majesty’s Customs and Excise, 2004).

However, as with other countries, the illicit market in the United Kingdom proved to be dynamic and, by 2006, counterfeit cigarettes had reemerged as a major problem. To address the new problem of counterfeits, HMRC reviewed its strategy and issued an updated action plan, “New Responses to New Challenges: Reinforcing the Tackling Tobacco Smuggling Strategy.” The plan included supply-chain legislation that required manufacturers to ensure that their products were not smuggled or face a fine of up to £5 million, and in October 2007 an agreement was reached with the Tobacco Manufacturers’ Association in which manufacturers voluntarily agreed to add covert anti-counterfeit markings on cigarette packs (Sweeting et al., 2009; All Party Parliamentary Group on Smoking and Health, 2013). An official from HMRC, in a presentation to the committee, credited the

Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
×

strategy of targeting counterfeits with reducing the size of the illicit market in the United Kingdom: in 2011, the illicit tobacco market was estimated to account for 11 percent of the total tobacco market, down from 15 percent in 2004; 2 years later it was estimated to be 9 percent.

Because the illicit tobacco market persists—now dominated by illicit whites—the HMRC and UK Border Agency again revised and renewed the tobacco action plan in 2011. The 2011 update included a substantial investment of resources, an additional £917 million, aimed at organized crime and tax evasion and avoidance. As part of the strategy, an expansion of the Fiscal Crime Liaison Officer (FCLO) Network was undertaken. The FCLO Network works to intercept contraband “upstream”—that is, FCLO officers coordinate with their local partners overseas to facilitate seizures before the contraband goods enter the United Kingdom (Her Majesty’s Revenue and Customs, 2011).

The United Kingdom’s decade-long experience demonstrates that as specific problems emerge in an anti-smuggling program, they can be counteracted by specific measures. By and large, these measures seem to be successful, as the illicit market share was reduced from 21 percent in 2000 to 9 percent in 2013. However, illicit markets are dynamic, and the problems may change—as they did from cross-border smuggling and involvement of licit producers to the emergence of illicit whites. If so, it is likely that the local and regional partnerships as well as the ability of the law enforcement community to alter its practices in response to changing characteristics will again be called on.

CANADA

The Canadian experience demonstrates the necessity and potential effectiveness of implementing a comprehensive intervention strategy to tackle the illicit tobacco market. The Canadian government has enacted a number of regulations and enforcement measures to control the supply of illicit cigarettes in the country and to increase the costs associated with participation in this trade.

In the late 1980s and early 1990s, Canada’s illicit tobacco market was supplied by legally manufactured Canadian cigarettes exported to the United States and illegally smuggled back into Canada. This large-scale smuggling was estimated to account for 30 percent of the total market (Stephens, 1995). To combat this smuggling route, the Canadian government enacted an export tax on cigarettes and negotiated settlements with the tobacco industry, which was largely complicit in the illicit activity (Cunningham, 1996).

Driven by those taxation and regulatory changes, the illicit tobacco market shifted from large-scale smuggling to its current form, which is

Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
×

principally that of cigarettes manufactured on Native reserves and sold tax-free to non-Native reserve members and, to a lesser extent, counterfeit cigarettes from abroad. In an attempt to control the supply of cigarettes diverted to the illicit market by tax-exempt sales to noneligible consumers, some provinces in Canada have placed control measures on distributors and retailers on Native reserves. For example, a number of Canadian provinces have implemented either quota or refund systems to limit tax-exempt distribution of cigarettes on Native reserves to non-Natives. Under the quota systems, a predetermined number of tobacco products are allocated to Native reserve retailers, usually based on estimated consumption levels and the reserve population.3 The refund policies in Alberta, Quebec, and Saskatchewan require that tobacco products be sold to Native reserve retailers with all federal and provincial taxes paid. The products can then be sold to Natives on a tax-free basis, and the retailers apply for a refund. Retailers therefore have a financial incentive to ensure that tax-exempt tobacco products are not sold to non-Natives so that they can recover the taxes paid to the distributor.

Manitoba and New Brunswick implemented both a quota system and a refund policy. In these provinces, controls are placed on both the distribution phase of the supply chain (through the allocation of tax-exempt products) and the retail phase of the supply chain (through the refund). British Columbia also places an additional control on the supply chain through its requirement that tax-exempt retailers apply for an Exempt Sale Retail Dealer Permit by indicating that a demand exists that is not currently met by an existing retailer. This policy limits the number of retailers on each Native reserve, preventing customers from shopping at numerous stores and circumventing regulations (Sweeting et al., 2009).

In addition to controlling the on-reserve sales of tax-exempt tobacco products to ineligible purchasers, the Canadian government also works to control the off-reserve sale of cigarettes manufactured on Native reserves without licenses (Sweeting et al., 2009; Daudelin et al., 2013; Royal Canadian Mounted Police, 2013). The Canadian example presents a complex circumstance—that of Native manufacturers operating without a license on reserves, arguing that they are not bound by Canadian laws: see Box 7-1.

Because of sovereignty issues, Canadian enforcement is heavily concentrated on sales outside the Native reserves rather than specifically targeting on-reserve manufacturing. The proportion of illicit tobacco cartons seized in the areas bordering Native reserves varied between 26 and 53 percent

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3 According to information from Ontario authorities documented by Sweeting and colleagues (2009), these quota policies can be ineffective as they do not control to whom the allocated tobacco is sold (i.e., Native or non-Native), and, in practice, the quantity of tobacco products shipped to the reserves is often in excess of their allocated quotas.

Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
×

BOX 7-1
The Akwesasne-St. Regis Mohawk Reserve

The AkwesasneSt. Regis Mohawk Reserve illustrates some of the major issues and challenges and differences between the U.S. and Canadian illicit markets. A large proportion of Canadian illicit sales, originating from unlicensed manufacturing and taxfree sales to ineligible consumers, are centered on the AkwesaneSt. Regis Mohawk Reserve, which occupies land across the U.S.Canadian border. According to a Royal Canadian Mounted Police (RCMP) representative, in May 2008 the agency identified 13 illicit manufacturers on the New York side of the Akwesasne reserve, 11 illicit manufacturers in Quebec, and 7 in Ontario (Schwartz and Johnson, 2010; Daudelin et al., 2013). Taxfree sales to nonNative members are estimated to account for 10 to 12 percent of illicit tobacco sales in Canada (Daudelin et al., 2013).

The AkwesasneSt. Regis Mohawk Reserve is a major source of contraband cigarettes because of its unique geography, its status as a contested border community, specific cultural and economic processes that have led to contested definitions of the crossborder trade, and the tolerance of U.S. and Canadian authorities for the unlicensed manufacture and sale of tobacco products in the territory (Jamieson, 1999; Daudelin et al., 2013). The Akwesasne is located astride the U.S. and Canadian border, marked by the St. Lawrence Seaway. Unlike other Native reserves close to the border, the Akwesasne is located near large markets: it is less than a 2hour drive away from the nearly 8 million Canadians living near Montreal and Toronto (Daudelin et al., 2013). It is also a rural and sparsely populated area, making its border inviting to smugglers as it is easily crossed by boat or allterrain vehicles at many unmonitored points.

Governance of the territory is complex: three nations claim rights (Canada, the United States, and the First Nations), three provinces and states also claim rights (Ontario, Quebec, and New York State), and three separate Native councils make jurisdictional claims; and, like Native Americans, the First Nations claim sovereignty over their land. This complex governance situation creates a unique enforcement environment. Akwesasne residents claim the right to cross the CanadianU.S. border uninhibited and to trade goods across the border without paying duties. The Mohawk community further contends that unregulated tobacco trade is an indigenous right and U.S. and Canadian tobacco laws are illegitimate (Schwartz and Johnson, 2010; Daudelin et al., 2013). They claim that profits from the tobacco market help to support the reserve community that was forced to give up its traditional economic activities due to environmental degradation and that has been beleaguered by years of poverty, illness, and political disempowerment (Jamieson, 1999; Schwartz and Johnson, 2010). Thus, the Mohawks see much of what Canadian and U.S. authorities would identify as illegal smuggling as routine trade and legitimate avenues for economic development. The result has been a modus vivendi in which police generally ignore unlicensed cigarette manufacture and trade on the reserve while focusing on seizing contraband at the border of the tribal lands (Jamieson, 1999; Daudelin et al., 2013).

Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
×

between 2004 and 2010. For larger operations derived from longer investigations, arrests and seizures occur anywhere offenders are located, including on reserves (Royal Canadian Mounted Police, 2014). The majority of these investigations are the product of collaboration between multiple agencies, often including the Akwesasne Mohawk Police (Public Safety Canada, 2012), making it easier to address any that facilitate jurisdictional or sovereignty issues that may arise.

Despite these constraints, the RCMP’s 2008 contraband tobacco enforcement strategy demonstrates the potential effectiveness of allocating tobacco-specific resources to coordinated enforcement measures. The 3-year strategy outlined 29 initiatives undertaken in eight priority areas aimed at reducing the supply and demand for contraband cigarettes by increasing the risks associated with participating in the illicit market. Those initiatives included dismantling illegal manufacturing facilities, disrupting supply lines, apprehending key figures, confiscating conveyances such as trucks and boats, and seizing proceeds of crime (Royal Canadian Mounted Police, 2013, p. 11). Because there has not been a systematic evaluation of the RCMP strategy by independent researchers, the impact has not been verified, but the number of detected cases and seizures certainly increased with the added resources. For example, from May 2008 to May 2011, there were 2,219 tobacco charges generated by Canadian federal prosecutors under the Excise Act (2001) (740 per year, an increase from the 749 tobacco charges generated from April 2006 to March 2008 [749 total, 375 per year]). There was also an increase in fine payments from Can $94,513 to Can $278,639 over the same period. However, both figures are tiny against any measure of the scale of the illicit trade.

RCMP cigarette seizures drastically increased in all regions upon implementation of the contraband tobacco enforcement strategy, although they have fallen in recent years. In 2008, the RCMP seized 966,000 cartons of cigarettes, compared with 626,000 the previous year, but the number of seized cartons decreased to 598,000 in 2011 (likely reflecting variations in enforcement rather than underlying violation levels). Legitimate cigarette sales in Canada increased after the implementation of the contraband tobacco enforcement strategy by approximately 4 billion cigarettes from 2008 to 2010, but it is not possible to determine whether, or by how much, the increase is attributable to the strategy.

As part of the contraband tobacco enforcement strategy, the RCMP has prioritized coordination with other law enforcement agencies, both in Canada and in the United States. For example, the Cornwall Regional Task Force was established in 2010 with a special unit (the Cornwall Combined Forces Special Enforcement Unit-Contraband Tobacco Initiative) targeting cigarette smuggling. The unit brings together officers from the RCMP, the Canadian Border Security Agency, the Ontario Provincial police, the

Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
×

Cornwall (New York) police, and Akwesasne Mohawk police. Joint U.S.Canada operations have been authorized under the Integrated Cross Border Law Enforcement Operations Act of 2012. These joint efforts have been successful in changing the pattern of smuggling in the southern Ontario region, as seizures have been displaced eastward and shipments are regularly confiscated. However, media reports suggest that the fines imposed on smugglers are rarely paid in full, and those caught are almost always just small-scale participants. Ultimately, although increased enforcement through effective coordination has affected the trade and created a more hazardous environment for smugglers, the illicit market persists in this region because the contraband originates on the Native reserves, on which neither Canadian nor U.S. authorities have jurisdiction (Daudelin et al., 2013).

As in the United States, sovereignty and political and economic considerations make enforcement on Native reserves difficult. However, it appears that the contraband tobacco enforcement strategy and other interventions in the illicit tobacco market in Canada, such as the Akwesasne Partnership Initiative, may have overcome some of these issues through effective cooperation among all of the law enforcement agencies involved in this area (Public Safety Canada, 2012). Furthermore, because the enforcement environment makes it difficult to distribute illicit products outside the reserves, sales on reserves are competitive, giving consumers leverage and driving prices down (Daudelin et al., 2013).4

In terms of law enforcement, one of the major differences between Canada and the United States is the way federal policing and provincial policing is structured. While Canadian policing is active in specific issues involving the country as a whole, such as the importation and exportation of illicit goods (like contraband cigarettes), the RCMP (the federal police) is also contracted by the majority of provinces to act as their provincial police. This arrangement means that a single agency could be involved in the investigation of tobacco cases, even for cases involving importation from another country followed by distribution to local retailers in a specific province. Issues of information sharing, coordination, and communication are therefore less of a problem in Canada than in the United States. Important exceptions are Quebec and Ontario, which have their own provincial police. Even there, however, the enforcement of tobacco laws in the Akwesasne region is a concern for both provincial police forces and the RCMP, and cooperation among them is common.

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4 Cigarettes manufactured on Native reserves is sold for as little as 3 cents per cigarette on the reserves and 7 cents per cigarette outside the reserves. Bags of 200 cigarettes are sold for as low as Can $6 on reserves and between Can $14 and Can $20 outside. These figures correspond with a tax differential of 80 cents per pack (Luk et al., 2009; Stinson, 2010; Royal Canadian Mounted Police, 2011).

Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
×

Another difference between Canada and the United States is that Canadian law enforcement agencies can typically concentrate their resources in a few active hot spots in the illicit tobacco trade, like the Akwesasne region, through a single task force. In contrast, the interstate bootlegging issue in the United States involves a significantly larger number of locations, participants, and law enforcement agencies. Interprovincial bootlegging has never been identified as an issue of concern in Canada but, even if it were, it is quite likely that the RCMP would be the only agency called on to tackle the problem.

EUROPEAN UNION

To bolster its enforcement activities against illicit tobacco, which in 2012 accounted for roughly 11 percent of the total tobacco market share in the region, the European Commission (EC) in 2013 adopted a four-pronged approach to tackling the trade throughout the region (Joossens et al., 2014b). The strategy included measures to decrease incentives for smuggling activities; improve the security of the supply chain; increase enforcement of tax, customs, police, and border authorities; and impose heavier sanctions for smuggling activities. The EC strategy included both measures to decrease incentives for smuggling and measures on the supply side.

On the demand side, the EC proposed to (1) examine how to simplify the application of excise rules; (2) explore limiting tax avoidance by introducing basic common rules on anti-forestalling (preventative measures); and (3) expand the already existing targeted actions in cooperation with the interested and willing member states in order to raise public awareness about the damage caused by and the specific risks associated with consumption of illicit tobacco products. On the supply side, the EC’s approach called for (1) ratification of the FCTC Protocol to Eliminate the Illicit Trade in Tobacco Products (of the Framework Convention on Tobacco Control [FCTC] of the World Health Organization); (2) compliance with the provisions of the FCTC’s protocol; and (3) implementation of tracking and tracing measures (European Commission, 2013). In an analysis of the strategy, Joossens and colleagues (2014b) noted that though illegal manufacturing is on the rise within the EU—from five known illegal manufacturers in 2010 to nine illegal production facilities in 2011—there are no specific provisions in the strategy aimed at addressing this source of the illicit market.

In addition to these policies, the EC 2011 implemented an action plan to tackle smuggling at the EU’s eastern land border, where the illicit market share is higher than the EU average—upwards of 90 percent of consumption is illicit in some border regions. EU officials report that the main sources of illicit cigarettes entering the EU are Belarus, Moldova, Russia, and Ukraine (European Commission, 2011). For these reasons, the action

Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
×

plan attempts to address deficiencies in border protection infrastructure and equipment at the eastern border, operational cooperation among competent services and authorities, professionalism of border police and customs officials, and penalties and their application throughout various EU member states. The plan outlines a strategy to build enforcement capacity through technical assistance and training, financing of technical equipment, and awareness-raising efforts (European Commission, 2011).

In February 2014, the EU Parliament approved a revised Tobacco Products Directive in a continuing effort to prevent illicit whites from entering the market from its eastern border, and in acknowledgment of concerns about the levels of bootlegging within the EU from low-tax and low-price countries. The directive includes provisions for implementation of an EU-wide tracking and tracing system and anti-counterfeiting measures. After implementation in national legislation, the directive will go into effect in 2016 (Joossens et al., 2014b). The EC has also pledged resources to the FCTC secretariat and to non-EU countries dedicated to implementation of the FCTC protocol and its provisions for adoption of a global track-and-trace system, but it is unclear how many resources will be made available (Joossens et al., 2014b).

The EU’s effort to implement a comprehensive policy to combat the illicit tobacco trade acknowledges the transnational scale of the illicit market, and this multifaceted approach has seen its successes. Although the analogy between the EU and U.S. federalism is useful with regard to the combination of divergent local policies (taxes) combined with easy transportation and smuggling among states or borders, there are also limitations to this comparison. Particularly, international borders offer policing opportunities that are not available for interstate smuggling in the United States. Customs cooperation and cross-border, interagency information sharing are well-developed in Europe, and the EC’s European Anti-Fraud Office (OLAF, for Office de Lutte Antifraude) does have some administrative powers in relation to frauds against the European Community.5 However, the EU itself, although it uses Europol and Eurojust, does not have cross-border criminal enforcement powers. There is essentially no federal or overall EU enforcement agency, except by using noncriminal powers in relation to cartels and fraud against the EU budget.

EU policies can be enforced only if they are adopted by member states and implemented through joint intelligence gathering and actions, for example, by international joint investigation teams coordinated by

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5 For example, OLAF investigated claims that EC Commissioner John Dalli demanded bribes in exchange for influencing the EU’s prohibition of snus (an oral tobacco product). Dalli was subsequently forced to resign, the circumstances under which are (as of August 2014) being contested before the European Court of Justice (Callaghan and Johnson, 2014; Nielsen, 2014).

Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
×

Europol or Eurojust. Tobacco smuggling, though one of many priorities set out in OLAF’s performance program, does not have its own spending program, prosecutorial power, or even the power for administrative fines. Although there is currently an initiative to seek to introduce a European Public Prosecutor’s Office, the resources that such an office would command, if introduced, remain open to question, as does the importance of measures against tobacco smuggling in a context of scarce resources to reduce frauds against the EU, including customs duties (European Commission, 2014). Cigarette smuggling and counterfeiting are also not Europol priorities. Nevertheless, the EU still appears to be more active and proactive in encouraging coordination among its member states than is the U.S. federal government.

SUMMARY

International efforts to combat the illicit tobacco trade have focused on measures that target the problem of large-scale smuggling (crossing international borders). This form of the trade appears to be a relatively small problem in the United States (see Chapter 2). There also appears to have been greater involvement by the tobacco industry in the EU illicit market than there has been in the United States (see Chapter 3). Nevertheless, the broad-ranging interventions adopted by Spain, the United Kingdom, Canada, and the European Union are instructive for the United States insofar as they show that it is possible to reduce the size of the illicit tobacco market through the dedication of tobacco-specific enforcement resources, collaboration across jurisdictions, and comprehensive intervention strategies that encompass a variety of regulatory, enforcement, and policy approaches.

Table 7-1 illustrates the multiple interventions implemented by various countries, as described above and in previous chapters. All the countries show marked reductions in the size of their illicit tobacco markets. Spain, for example, was able to reduce the share of its illicit market from 15 percent in 1995 to 2 percent in 2001 as the result of licensing and control measures, enforcement efforts, and legal agreements. The United Kingdom used stamping and marking requirements on cigarettes, agreements with tobacco manufacturers, enhanced enforcement efforts, and public education campaigns to reduce the share of its illicit market from 21 percent in 2000 to 9 percent in 2013. Canada reduced the illicit share of its market from nearly 30 percent in the early 1990s to between 7.6 percent and 14.7 percent in 2010 (according to the committee’s own estimates) through sweeping intervention efforts, including licensing, tax stamps, enforcement,

Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
×

TABLE 7-1 Interventions in the Illicit Tobacco Market, by Country

Intervention Spaina United Kingdom European Unionb Canada
Licensing and Control Measures X     X
Tax Stamps and Marking   X   X
Tracking and Tracing     X  
Enforcement X X X X
Tax Harmonization     X X
Tribal Tax Revenue Agreements       X
Memoranda of Understanding and Legal Agreements X X X X
Public Education Campaigns   X   X

aThe Spanish legal agreements refer to the European Union lawsuit filed in 2000 against tobacco manufacturers supplying contraband cigarettes to Spain and Andorra.

bIn February 2014, the EU Parliament approved provisions for implementation of an EU-wide track-and-trace system that is scheduled to go into effect in 2016.

SOURCES: Data from Joossens and Raw (2000, 2008); Joossens (2003a); Sweeting et al., (2009).

tax harmonization, tribal tax revenue agreements, legal agreements with tobacco manufacturers, and public education campaigns.6

Although international efforts to combat the illicit tobacco trade have focused on forms of the trade that are currently a relatively small problem in the United States, illicit markets adapt and reemerge, and product regulations in the United States could, in principle, increase the demand for cigarettes with prohibited features in ways that begin to integrate the domestic illicit tobacco market into the global illegal trade (see Chapter 8). If this occurs, interstate coordination may become less important than border and customs enforcement, and it would make aspects of international experiences more relevant to the United States.

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6 As detailed in Chapter 4, the committee estimated the percentage of the total market represented by illicit sales in the United States to be no lower than 8.5 percent and as high as 21 percent, which is slightly larger as a share of the total market than was the illicit market in Canada following the implementation of the country’s comprehensive intervention efforts.

Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
×
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Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
×
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Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
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Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
×
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Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
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Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
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Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
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Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
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Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
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Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
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Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
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Suggested Citation:"7 Interventions in the Illicit Tobacco Market: International Case Studies." National Research Council. 2015. Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences. Washington, DC: The National Academies Press. doi: 10.17226/19016.
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Tobacco use has declined because of measures such as high taxes on tobacco products and bans on advertising, but worldwide there are still more than one billion people who regularly use tobacco, including many who purchase products illicitly. By contrast to many other commodities, taxes comprise a substantial portion of the retail price of cigarettes in the United States and most other nations. Large tax differentials between jurisdictions increase incentives for participation in existing illicit tobacco markets. In the United States, the illicit tobacco market consists mostly of bootlegging from low-tax states to high-tax states and is less affected by large-scale smuggling or illegal production as in other countries. In the future, nonprice regulation of cigarettes - such as product design, formulation, and packaging - could in principle, contribute to the development of new types of illicit tobacco markets.

Understanding the U.S. Illicit Tobacco Market reviews the nature of illicit tobacco markets, evidence for policy effects, and variations among different countries with a focus on implications for the United States. This report estimates the portion of the total U.S. tobacco market represented by illicit sales has grown in recent years and is now between 8.5 percent and 21 percent. This represents between 1.24 to 2.91 billion packs of cigarettes annually and between $2.95 billion and $6.92 billion in lost gross state and local tax revenues.

Understanding the U.S. Illicit Tobacco Market describes the complex system associated with illicit tobacco use by exploring some of the key features of that market - the cigarette supply chain, illicit procurement schemes, the major actors in the illicit trade, and the characteristics of users of illicit tobacco. This report draws on domestic and international experiences with the illicit tobacco trade to identify a range of possible policy and enforcement interventions by the U.S. federal government and/or states and localities.

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