Illicit Tobacco Trade Alarmingly High, EU Consumes 53M

The latest cigarette trafficking reports have irked the tobacco industry further which has already been grappling with issues like dwindling volumes and high excise taxes.

As per a Klynveld Peat Marwick Goerdeler(KPMG) report published on Jun 8, 53 billion cigarettes were consumed in the European Union alone in 2015, which is an alarmingly high number. This accounts for 10% of the total tobacco market in the European Union (EU). The unlawful activities have dented tax revenues of the industry by as much as EUR 11.3 billion.

KPMG conducts a study every year across 28 European nations including Switzerland and Norway. The data also sheds light on Poland and France, which outdo other countries in illegal tobacco trading. White cigarettes are prohibitively sourced mainly from Belarus. Almost 1.3 billion White cigarettes originate from Jebel Ali Free Trade Zone in the United Arab Emirates. Meanwhile, 88% of the trafficked cigarettes are from non-EU countries.

However, the bright spot in the report is the reduction in illegal trade volumes from 2014 levels, thanks to joint efforts by governments, law enforcement agencies, manufacturers, and retailers.

Tobacco companies across the world have undertaken several measures to combat illicit tobacco trade. In May 2016, Tobacco major Philip Morris International Inc. (NYSE:PM) came up with a new initiative – PMI IMPACT – to stop such practices. PM IMPACT is headed by a seven member council of external independent experts. These members have extensive experience in the field of law, anti-corruption and law enforcement.

Again, a subsidiary of Reynolds American Inc. (NYSE:RAI) — RAI Services Company — has set up a website - www.thenewtobaccoroad.com, showing how cigarettes are smuggled from lower-tax states to higher-tax ones in the Northeast through I-95. The initiative aims to tackle the problem by raising awareness about the smuggling activities being carried out on the east coast along the highway Interstate 95 – the New Tobacco Road – which has turned into a key transit route for illegal activities.

Incidentally, in 2002, 10 government members of the EU accused Reynolds subsidiary, R.J. Reynolds of operating a decade-long scheme of smuggling illegal narcotics into Europe from the U.S. via Colombian and Russian crime groups.

Illicit trade of cigarettes has been on the rise over the past few years. Strict governmental actions in the form of higher excise taxes prompt tobacco players to raise prices. This, in turn, gives rise to smuggling of counterfeit cigarettes at much lower prices. As a result, tobacco players’ margins are impacted to a large extent. Moreover, these cigarettes are far more injurious to health than their counterparts, which again mar the reputation of tobacco majors.