An illegal business that's smoking

By bne IntelliNews April 18, 2012

Phil Cain in Sculeni, Romania -

"You have to look people straight in the eye," says Vasile, a seasoned Romanian border guard. The driver of a pick-up truck crossing from Moldova has flunked the eye-balling test and stands watching a team of mechanics dismantle his vehicle. In the fuel tank is a vacuum-packed consignment of "Plugarul", a Moldovan cigarette brand.

Moldova - along with Belarus, Russia and Ukraine - is the origin of the largest number of illicit cigarettes entering the EU, according to expert Luk Joossens. Romania's long land borders with Moldova and Ukraine help explain why perhaps a third of cigarettes there are illicit in one way or another. All four smuggling centres are involved in smuggling the three main types of illicit cigarette: cigarettes manufactured in the EU which never arrive at their stated destination and so go untaxed; faked established brands; and, increasingly, "cheap whites", like Plugarul, local brands mainly produced for smuggling.

The success of campaigns to stop corruption among Romanian border guards has led to the rise of an alternative method of getting the product through, "ant-smuggling", where loads are broken up into smaller consignments to be taken over the border in little pieces. The man with the tank full of Plugarul was most likely one of a few hundred "ants" hired to move a truckload of cigarettes. Less covert methods of overwhelming the border operate elsewhere along Romania's border, with people simply lobbing bundles of cigarettes over a wire fence.

Taxing times

The European Commission puts EU tax revenue losses from illicit cigarettes at over €10bn a year, but no one really knows the real amount because the smugglers are averse to transparency. Those monitoring it have their own reasons either to exaggerate or diminish its significance. But the decline in cigarette smoking seen in many European countries could be being outweighed by an unrecorded rise in illicit cigarette smoking, according to Professor Ernesto Savona, director of TRANSCRIME, a joint research centre on transnational crime.

The business has changed over last decade or so. Back in 2000, the bulk of illicit cigarettes used to be legally produced within the EU only to "fall off the backs of lorries" during their tax-free transit through places like Montenegro, where they would be loaded onto speed boats bound for the coast of Italy. But these days Zelenika, once jostling with cigarette smugglers' boats, is tranquil once more. Andorra too has seen its once-thriving illicit cigarette trade dry up, partly because of political pressure on the political elites who prospered from smuggling and partly because big tobacco companies tightened up their supply chains.

Cheap whites, like Moldova's "Plugarul" and the much better-known "Jin Ling" from the Russian enclave of Kaliningrad, now account for around a fifth of seizures in the EU. This new manifestation of the trade may be more difficult to stamp out. "You are not confronting Andorra or Montenegro any more, you're confronting Russia, one of the superpowers," says Joossens.

The decision to establish their own illicit brand, rather than directly undermine the brand or reputation of a cigarette giant, may also help sidestep legal attention. "Cheap whites have filled a gap in the market. After you've filled a gap, you establish a market," says Professor Savona.

Counter-intuitively, illicit cigarettes have carved out a bigger share of the markets of poorer countries rather than in, say, Norway or the UK where the cost of a packet of cigarettes is sky high, according to Joossens. "The biggest smuggling in percentage terms in the EU is going on in the Baltic countries because they are squeezed between Russia, the Russian enclave of Kaliningrad and Belarus." A well-equipped factory can make a pack of cigarettes for just a few cents, so being able to sell them for just €1 across the border is already a highly attractive prospect. In some regions bordering one of the main illicit cigarette-exporting countries, the local people are thought to smoke 90% of the illicit cigarettes that arrive.

Selling them for perhaps €9 in the UK or Norway is more attractive still, but comes at substantially higher risk. Nevertheless, there will always be those prepared to take the extra risk and the phenomenal rate of return that might come with success. You might make a million on one container making it into the UK. Once you have managed to get cigarettes into a Schengen country where there are no further routine border checks - like one of the Baltic states, Poland, Czech Republic, Slovakia or Hungary - contraband can be moved with relative ease. "Law enforcement prefers to go after drugs because cigarette smuggling is not a sexy topic. It is more sexy to go after drugs or human trafficking," says Professor Savona, who argues that EU policy should be based on an assessment of its impact on crime as well as on public health.

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