1 of 2
Seized illicit cigarettes. Note that Ryston is a fictional (non-registered) brand, making this particular merchandise easily identifiable by law enforcement as being illegal.(Credit: JTI)
2 of 2
Informal street stores in South Africa are routinely selling illicit tobacco products(Note: note all cigarette brands depicted in this image are illegal).
By Thomas Schmid
The multinationals are not exactly what is colloquially described as “loving bedfellows”. Global competition is tough – and getting tougher – when it comes to securing and defending market shares. And, frankly, that is how it’s supposed to be. It’s what a free-market economy is all about. But, if there is one issue where they’re pulling on the same rope in unison, it surely is their fight against illicit tobacco in its many shapes and forms. While the uphill battle against illegal tobacco products has been going on in full swing for decades, 2020 turned out to be a particularly challenging year.
Lockdowns hamper illegal activities - initially
Interestingly, when Covid-19 started spreading in early 2020, it initially seemed to exert pronounced curb on the activities of criminal groups and gangs. As countries went into lockdown, travel restrictions were imposed and supply chains were severely hampered. It also affected manufacturers, distributors, and traders of illicit product.
“Our research across the globe, in 50 countries, indicates that restrictions imposed on populations by the pandemic may have hindered some aspects of illicit tobacco production and supply,” said Ian Monteith, global director of anti-illicit trade operations at Japan Tobacco International (JTI) in Geneva.
British American Tobacco (BAT) assessed the effect of the pandemic as “significant” for legal and illegal tobacco alike. “Many countries introduced controls and restricted the movement of goods and people across international borders as well as within their national boundaries. This had an impact on both legitimate and illicit tobacco supply chains,” explained John Flint, BAT’s group head of anti-illicit trade engagement in London. He added that tighter border controls, especially by countries where the influx of illicit products was particularly intense pre-Covid, led to a reduction in illicit inflows and, subsequently, increases in the sales of legal tobacco products. Law enforcement profited as well. According to the Brazilian Ministry of Justice and Public Security, cigarette seizures in Brazil increased by over 300% following the Covid-19 border closure with Paraguay.
Alas, these initial effects turned out to be only temporary. Or, as Monteith put it, “It far from halted [illicit tobacco] in its tracks altogether.” He said that seizures of counterfeit or smuggled tobacco brands by various law enforcement agencies continued across the globe as lockdowns eased. “In Asia and Europe, we witnessed the seizure of several illegal cigarette factories particularly since May 2020.” This observation was also corroborated by BAT. According to Flint, “legitimate supply chains were affected through shut-downs of factories, distribution networks and, in some cases, retail outlets, which in turn provided an opportunity for illicit operators to quickly ‘fill the gap’ and offer illicit tobacco through informal channels.”
South Africa: legacy of an ill-conceived tobacco ban
A prime example for this development is South Africa, which ordered a total ban of all legit tobacco sales as an ill-conceived measure to control the virus. It backfired spectacularly, of course. “The prolonged ban meant that the only tobacco products available on the market were illegal,” said Flint. Even though it was eventually lifted, its legacy is that criminal groups managed to gain an even stronger foothold in South Africa than they had held before Covid-19.
Yet, according to Bongani Mshibe, corporate affairs and communications director at JTI (South Africa), it was not only cross-border smugglers that took advantage of the ban. South Africa has had an unfortunate history of some local manufacturers swamping the market with tax-unpaid cigarettes not uncommonly retailing on the street for as little as ZAR10 (US$0.69). The extended tobacco ban gave them the perfect opportunity to further expand their market share. “As a result of the extended tobacco ban, locally manufactured brands that have always been suspected of flouting [excise] tax compliance remained readily available, gaining 63% market share during the ban,” Mshibe elaborated. “So, the country drifted into a situation where these suspect brands are factually dominating the market.”
However, South African authorities at last awakened from their slumber and finally took steps to reign in this incredible situation. In June 2020, a law that mandates the installation of digital counters in all cigarette factories came into effect. “What would be beneficial now is for the revenue authority to act immediately and ensure tax compliance, otherwise the legal industry will continue to see constrained growth and the state will continue to lose tobacco tax revenue,” appealed Mshibe.
Malaysia: Illicit product rules supreme
South Africa is not the only country where illicit tobacco products exert market domination. Let’s take a look at Malaysia. The Southeast Asian nation repeatedly made headlines for having the highest domestic consumption of illicit products in the world. Latest estimates are suggesting that it as much as 65% of all cigarettes consumed are contraband. But, Malaysia also earned the less-than-flattering distinction of being one of the main transit countries for contraband. JTI’s general manager for Malaysia until December 31, Cormac O’Rourke told Tobacco Asia that the problem was two-pronged. Steep excise tax hikes are responsible for the explosion of the domestic consumption rate of illicit product, while Malaysia’s long sea border makes it rather easy to bring in contraband. “Malaysia has a total coastline of 4,675 kilometers; most illegal products arrive on container ships through one of its numerous ports or through neighboring Singapore,” O’Rourke said.
BAT’s Flint shared some additional background regarding this situation: “The rate of illegal tobacco [in Malaysia] hovered at around 37% in 2015.” He added that “there was a large excise hike of 40% later that year. This distorted the market and created considerable affordability pressures for consumers.” As a result, the rate of illegal tobacco grew to 52% by the end of 2015 as more and more cigarette smokers abandoned legal brands and flocked to illicit merchandise. “Sudden large excise increases coupled with weak enforcement and low penalties are the perfect recipe for an explosion of illicit trade like the one we have witnessed in Malaysia,” he pointed out.
Singapore: An important transit point for contraband also
What also appears somewhat baffling is mentioning of Singapore both by JTI and BAT as a major transit country. Singapore is known for its tough general law enforcement as well as its extraordinarily strict anti-smoking regulations. But then again, the country operates one of the largest ports in all of Asia, so perhaps we shouldn’t be all too surprised. In this context, Malaysia is not the sole destination country for contrabands routed through Singapore, either. A large proportion of illicit products – often arriving from other ASEAN member countries such as Indonesia, Vietnam and the Philippines – supposedly goes to New Zealand and Australia.
Australia: Committing the same mistake of raising taxes…too high
Australia, unfortunately, committed pretty much the same mistake as Malaysia, but perhaps on an even grander scale. That error was the assumption that gigantic leaps in excise taxes would lead to a considerable decrease in smoking rates. However, it’s been well documented that instead of quitting tobacco the vast majority of smokers will simply look for cheaper alternatives; and these alternatives, alas, more often than not are illicit products. With Australia’s government following a policy of incrementally increasing tobacco excise tax at a staggering 12.5% every year, the country has now arrived at an untenable situation where a single standard pack of most cigarette brands retails at between AU$30-40 (US$23.00-35.50). It doesn’t take a genius to figure out that the vast majority of smokers can no longer afford legal merchandise. Hence, they are going for something else.
“Illicit tobacco is an enduring issue in Australia and is made up of smuggled contraband and illicit whites from Asia and the Middle East, as well as locally-grown tobacco referred to as ‘chop chop’,” explained Flint. “In our view, the high price of legal tobacco and [Australia’s] close proximity to low-priced markets is the key driver behind the illicit inflow and local production of tobacco leaf.” However, he also said that the Australian government had in the meantime came to “recognize this issue and has responded accordingly with the ‘Black Economy Package – Combatting Illicit Tobacco’, which was published as part of the 2018-19 budget review.” The package incorporates several key recommendations, including the establishment and funding of a new illicit tobacco taskforce, an increase in financial and custodial penalties for offenders, and earlier duty collection for imported tobacco products.
When legal is too costly, the choice is clear
But, until that package is eventually fully implemented and up and running, price is going to remain the main driver in consumer choice. According to a KPMG report, “if [Australian smokers] are to choose between two identical packs, they will select the cheapest – even if that cheaper option should happen to be illegal tobacco.” The report, published in May 2020, also noted that overall consumption of illicit tobacco products [in Australia] increased by 80% since plain packaging was introduced. “And with 21% of tobacco sales now illegal – a rise of almost 50% in the last two years alone and the highest level on record for the country – it’s no surprise the government is setting up a new taskforce,” the report concluded.