What is it?
The illicit tobacco trade produces many problems for both consumers and those who try to completely avoid anything to do with smoking. It is commonly known that cigarettes are a detriment to health, but illicit tobacco is even more so. The unregulated nature of illicit tobacco means they can contain even more harmful substances while avoiding contributing to a countries tax revenue and fuelling organised crime at the same time.
Illicit trade in the tobacco industry is composed of four main forms:
- Contraband – legitimately produced cigarettes that are smuggled into another country or not declared domestically to avoid paying tax on them.
- Counterfeit – illegitimately produced cigarettes with no tax or duty paid on them.
- ‘Illicit whites’ – cigarettes produced legitimately for the sole purpose of being smuggled into another country.
- Unbranded tobacco – Tobacco sold in shredded leaf form or cigarettes in clear, unbranded packaging.
How does it happen?
The distribution of illicit tobacco happens in three main forms. Large quantities tend to be distributed through wholesale smuggling. The tobacco evades port authorities by being hidden in mislabelled or duplicate shipping containers. More than often cigarette cartons are also hidden within legitimate cargo. By making use of free zone ports where no custom duty applies, it is the most profitable method.
Bootlegging is similar to wholesale smuggling, but makes use of small vehicles or individuals who conceal it amongst themselves and cross over international borders. Although not as profitable as wholesale smuggling, the small quantities mean that these smugglers are not in possession of an amount that could cause them to face legal action or a significant fine, making it more popular.
Lastly there is internal production. This is where either licensed or unlicensed factories produce undeclared product. Countries which suffer excise corruption and have existing distribution channels tend to suffer from this more than others.
Why do people choose illicit tobacco?
One of the most obvious drivers for illicit tobacco is the price. Many people who are addicted to nicotine see cigarettes as a basic need. As the prices of cigarettes increase, nicotine addicts will attempt to cut back. Illicit tobacco at its significantly cheaper price allows them to return to their regular smoking habits. For example, when cigarette packs increased by nearly 50% in Israel due to an excise tax rise, illicit penetration increased to a record 12.3% in 2016.
Interestingly though, an increase in tax won’t necessarily result in an increase in illicit tobacco consumption. This can be due to cultural differences, and tax increases on cigarettes often coinciding with awareness campaigns to educate the public on the harm of smoking. Examples of this are Japan which have high tax burdens but low levels of illicit tobacco, and Columbia which is the polar opposite.
Independent of price, regulation of brands can turn consumers to look at the illicit market. It is highly likely that when the menthol cigarette ban is enforced in 2020, there will be a large boom in illicit activity.
Why do people supply illicit tobacco?
The difference in price between a taxed and non-taxed pack of cigarettes is huge. In the UK for example it is 16.5% of the retail price plus £4.34 on a pack of 20. This means there is huge profits to be made for illicit traders, even in other countries where the base pack price is significantly cheaper.
Transporting cigarettes is also relatively easy due to their low weight, and the fact that they can be kept in any orientation during transit without spoiling, unlike alcohols or exotic foods. As mentioned previously, those who transport in small ‘bootlegger’ amounts will also face little to no punishment due to avoiding the illegal limits. Some countries that do have severe penalties for smuggling cigarettes are often ineffective due to government stability, such as Iraq which is at the centre of illicit tobacco in the middle-east.
Government inaction is also to blame for making the smuggling of tobacco an attractive venture. Many see the illicit market as purely a consumer level problem, turning a blind eye to the organised criminal and even terrorist organisations that stand to benefit from it. Failing to properly criminalise the illicit tobacco market means that consumers will also fail to recognise that they are contributing to immoral organisations.
Learn more about the impact illicit tobacco and other contraband and counterfeit vice products pose to consumers health and government revenues in our latest white paper displayed below.