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In January 2021, a joint government forces operation in Australiadiscovered and destroyed one hectare of immature tobacco seedlings.
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Australian government inspectors found twohectares of almost harvest-ready illicittobacco plants in January. Credit: abf.gov.au
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ABF agents seize 10 million cigarettes smuggled from Vietnam last May. Credit: abf.gov.au
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A large cache of 46,500 cigarette cases seized last May. Credit: abf.gov.au
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According to BAT Australia, contrabandcigarettes make up 52.8% of Australia’s illicittobacco market. Credit: abf.gov.au
In May 2020, agents of the Australian border force-led Illicit Tobacco Taskforce (ITTF) arrested two foreign males in connection with the seizure of almost 10 million smuggled cigarettes in Sydney. According to an Australian border force (ABF) report, the contraband, originating from Vietnam and packed in 47,500 cases, was concealed in a mis-declared container. According to the ABF, the illicit goods were worth more than A$9 million (US$6 million) in import and excise duties.
Then, in January 2021, another male was arrested by a joint force of ITTF and New South Wales Police after the execution of a search warrant led to the discovery of an astounding 50.3 metric tons of illicit lose tobacco with an estimated excise tax value exceeding A$9.9 million. The 33-year-old suspect reportedly had approximately two hectares of almost harvest-ready tobacco under cultivation on his property, plus an additional hectare of immature seedlings. All plants were destroyed.
Contraband cases highlight problem
The cases were two of the largest successes of ITTF since its establishment in July 2018. But, alas, they also highlighted the exacerbating illicit tobacco problem in the country. According to an infographic published on the website of the Australian Taxation Office (ATO), ITTF since its inauguration seized and destroyed more than 387 metric tons of illicit tobacco, representing an excise tax value of more than A$393 million.
The same ATO graphic also states that in the 2018-19 financial year an estimated A$822 million in evaded excise duties from illegal tobacco products went into the pockets of criminals instead of benefitting the community. Interestingly, British American Tobacco Australia pointed to a KPMG report suggesting much higher estimates for those years.
The company claimed in an interview with Tobacco Asia that excise tax losses in 2018 alone could have amounted to as much as A$2.02 billion, while in 2019 it was A$3.4 billion. Whichever figures one chooses to believe, it is rather obvious that Australian authorities so far only may have scratched the tip of a gigantic iceberg with their law enforcement efforts.
Government begins to acknowledge the issue
BAT Australia nevertheless noted that the government has begun to recognize and acknowledge the issue.
“We think there’s [now] far more political will to make the changes required to shut down Australia’s illicit tobacco market,” said the firm’s head of corporate and government affairs, Josh Fett. Yet, he also cautioned that there are certainly some big challenges ahead as “current tobacco control policies aren’t necessarily fit for purpose.”
The illicit market in Australia is primarily made up of domestically grown or imported leaf tobacco (locally known as “chop-chop”), at about 44.9%, and contraband tailor-made cigarettes (TMCs), which take another 52.8% share. “The remaining 2.3% percent comprise of other products such as molasses tobacco [shisha tobacco] or similar, as well as counterfeit products,” Fett said.
The unique case of chop-chop
The prominence of chop-chop is somewhat baffling, of course, and makes Australia a rather unique case. Pretty much everywhere else where illicit tobacco is an issue factory-made cigarettes seem to dominate the illicit market scape. One of the reasons for the large amount of chop-chop in the market might be Australia’s difficult-to-police, enormously vast expanses that make it relatively easy to hide illegal tobacco farms.
“In Australia, you must possess a license to grow tobacco,” explained Fett, but added that “the government has not issued any such licenses and, therefore, any tobacco grown in Australia is illicit, and there are no exemptions even if it’s just for personal use.”
This doesn’t seem to be enough of a deterrent, though. Despite the restrictions there continues to be evidence of large-scale illegal growing taking place up and down the country’s eastern seaboard. “In the 2019 to 2020 financial year, ATO seized more than A$171 million worth of illegally grown local crops, a record for the agency,” pointed out Fett.
Unaffordability drives illicit cigarette market
Meanwhile, contraband ready-made cigarettes constitute a little over half of the illicit pie. “When Australia’s illicit market jumped from 14.1% to 20.7% of [total] tobacco consumption in 2019, the majority of that growth came from increased consumption of contraband cigarettes at levels we had not previously seen,” Fett said. The economic incentive for organized crime is certainly there for smuggling contraband cigarettes into the country.
Depending on the brand, a single standard pack of legal cigarettes currently can cost up to A$45 making Australia one of the most expensive countries on earth for smokers to indulge in their habit. “But, a pack of cigarettes purchased for A$2 from any number of source markets across Asia could easily be sold in Australia for A$15 to A$20, which [for consumers] is still a significant discount versus what they would pay legally,” Fett elaborated. “Even the cheaper [legal] brands retail for close to A$30 here,” he added.
Multiple importation channels
Contraband reaches Australia through a number of streams: by sea and air cargo, international mail and – at least pre-Covid – brought in by individual incoming passengers. Fett told Tobacco Asia that “in relation to air and sea cargo, we know that sometimes [criminal organizations] use cover loads to try conceal the true contents of the shipment.” That is not always the case, though.
ABF also reported seizures of entire container loads of cigarettes where no attempt of concealment had been made at all. “It’s simply a numbers game for organized crime gangs,” explained Fett. “The profits from a single shipment can be so large that it can still be a very lucrative endeavor even if three out of five containers are discovered by ABF.”
International mail likewise is abused for illegally importing contraband cigarettes in smaller but more frequently dispatched shipments. However, deploying this channel became a lot riskier since July 1, 2019, when tobacco was declared a prohibited import. “It is now illegal to mail tobacco products [of any type] to Australia, and ABF officers have the authority to seize and immediately destroy any tobacco products they do find” Fett said.
Individual smuggling lies dormant… for now
Meanwhile, individual travelers (either returning Australians or foreign visitors) smuggling in contraband beyond the duty-free allowance has been an issue in the not-too-distant past. But, the Covid-19 pandemic basically closed down that channel due to the travel restrictions that tagged along with it. This doesn’t mean that the problem is not likely to reappear once the pandemic is over.
However, Australia recently decreased the duty-free allowance to almost nil. While travelers in the past were permitted to bringing in the usual 250 sticks, the amount now allowed into the country duty-free has been reduced to 25 sticks. “This translates to one unopened packet of 25 cigarettes plus one open pack [that one individual traveler may have on their person],” explained Fett.
He said that pre-Covid there had been cases of travelers attempting to illegally import “anything from just a few extra packs to literally hundreds of cartons in their suitcases.” While there exist no exact figures as per the actual size of this channel, Fett nevertheless pointed out that there certainly existed an active market to sell duty-free cigarettes imported in that way.
A “victimless crime”
Contraband cigarettes in Australia often – but not always – are easily identifiable by the appearance of their outer packaging, which does not comply with the country’s plain packaging laws. Given that fact, it is surprising to learn that illegal cigarettes quite routinely retail openly across shop counters; and not clandestinely “under the table” as one might assume. “While it is hard to imagine, this is exactly what happens,” asserted Josh Fett.
“Perhaps it is regarded as a ‘victimless crime’, or perhaps many just don’t see it as a big issue, but there are estimated to be more than 600 retail outlets all around Australia that sell illegal cigarettes directly to the public, the majority of them suffering no consequences as a result of their actions,” elaborated Fett.
Acting in the retail sector imperative
Getting law enforcement to act in the retail sector remains one of the biggest challenges, according to Fett. On the federal level, he said, “there is a huge focus on stopping product at the border, and ABF is having great success in this space.” But, once the contraband had entered the country or the crops have been harvested, there unfortunately is not any particular agency that would “take ownership of policing the street level sales.”
According to the 2020 KPMG Illicit Tobacco in Australia report, Chinese-, South Korean-, and Indonesian-labeled packs constituted the largest non-domestic inflows, accounting for 25%, 24%, and 7% of illicit imports in 2019. “Cigarettes in these markets are cheap and easily available in large volumes,” Fett said. “And as I have mentioned earlier, the arbitrage opportunity for importing cigarettes from these markets and selling them on the streets here is enormous.” It explains the almost complete absence of counterfeit cigarettes, too. “With such a large supply of cheap, legitimate brands from overseas there’s simply no need for organized crime groups to produce counterfeits,” Fett said.
The perfect storm
Australia’s illicit tobacco problem is of course primarily home-grown thanks to exorbitant retail prices for legal products. BAT Australia believes that the high excise tax rate levied on tobacco “has been a huge contributing factor in driving people to the black market.”
When given the choice of paying up to A$45 for a packet of legal Dunhill, or only A$20 for a contraband version of the same brand, “it’s little wonder that consumers are tempted,” Fett pointed out. “You could say Australia’s excise tax policy on tobacco created a perfect storm for the illicit trade.”
Not even Covid-19 was able to put a longer-lasting curb on it. BAT Australia initially “noticed a reduction in the availability of contraband products in some cities at the start of the lockdowns,” with prices increasing by A$4 to A$5 per pack in a matter of months. But, illicit sellers adapted quickly and started to offer new formats of “chop-chop” as a substitute when TMC contraband became difficult to source.
And although the mandatory lockdowns forced some illegal traders into closure, others simply rebranded their stores or started selling essential items like bread and milk in order to skirt around restrictions and remain open as “essential businesses”.
Declining smoking rate … but not due to tax hikes
To be fair, smoking rates have been on a sustained downward trend in Australia for many years, with people having grown increasingly health-conscious. Yet on the other hand, the procession of excise tax hikes implemented by Australia since 2013 (see side box) did preciously little to aid that development in any meaningful way.
Fett cited a report by the Australian Institute of Health and Welfare (AIHW), a state agency nevertheless, which concluded that between 2013 and 2016 “the daily smoking rate [in the country] did not significantly decline”. It seems, thus, that the government’s excise tax policy on tobacco failed to achieve its objective.
Sensible recommendations
But, the battle continues. In December of 2020, the Parliamentary Joint Committee on Law Enforcement delivered its final report from its inquiry into illicit tobacco. The report made a number of very sensible recommendations to address the growing problem. They include:
• The transfer of all remaining responsibilities for illicit tobacco enforcement from the Department of Health to the Home Affairs portfolio on the understanding that illicit tobacco should be treated as a law and order issue, and not as a health issue;
• The development of a National Illicit Tobacco Strategy in order to improve co-ordination between federal, state and territory law enforcement agencies with clear roles and responsibilities for each agency;
• The use of Commonwealth funds obtained through proceeds of crime legislation to provide funding for state and territory government initiatives targeting illicit tobacco;
• The alignment of state and territory legislation with Commonwealth offences and enhanced penalties, as well as introducing infringement notices for point-of-sale enforcement;
• The introduction of a nationally consistent tobacco licensing system.