Illicit Cigarette Report Spells Bad News for France
KPMG has released the 2023 edition of its annual study, ‘Illicit Cigarette Consumption in the EU, UK, Norway, Switzerland, Moldova and Ukraine’, which reveals an overall increasing rate of illicit consumption in the region, especially in France.
KPMG has been producing an annual report on illicit tobacco trade in Europe for several years, commissioned by Philip Morris Products SA as part of its agreement with the European Commission. The contract between KPMG and Philip Morris is valued at €11 million a year 1.
Studying illicit trade in tobacco products is not a science, and various scholars and NGOs have raised criticisms on the data and methodology used in these reports, suggesting that they may be influenced by the tobacco industry in order to advocate against increases in taxation, and to exaggerate the role of counterfeiting as opposed to illicit trade in original products.
For instance, the French anti-tobacco association CNCT points out that in the preamble to each of its reports, KMPG states that it has not ‘sought to establish the reliability of the information sources’, while the Alliance Contre le Tabac considers the report as a ‘mere communication tool to nourish PMI’s lobbying actions’.
Nevertheless, it is the only study available on illicit tobacco trade at such a large scale, so it is interesting to review its main findings and compare them with those from previous years.
The study shows that, in 2022, 35.8 billion illicit cigarettes were consumed across the EU alone, causing governments to lose an estimated €11.3 billion in tax revenue – 8.5% more than in 2021.
While total cigarette consumption in the 27 countries of the EU has been declining since 2017, the illicit market grew by 0.7% in 2022, following a trend of continuously growing illicit trade that started in 2020 (+2% compared to 2019), and continued in 2021 (+3.9%).
It’s interesting to note that these three consecutive increases occurred in the years immediately following the implementation of the track and trace system required by the EU Tobacco Products Directive. Criticisms raised by the International Tax Stamp Association and by various NGOs and scholars with regard to this system have already been reported in this newsletter, arguing that it delegates key responsibilities to the tobacco industry and that it weakens the role played by tax stamps. These factors may have contributed to the disappointing results reported by KPMG.
The growth in the illicit market observed in 2022 was predominantly due to one country – France – which today accounts for almost half (47%) of EU27’s illegal total consumption. Growth was also observed in Spain, Italy, Belgium, and Ireland.
Outside of the EU, the 2022 findings placed Ukraine as the second largest market in Europe for illicit cigarette consumption, with 7.4 billion cigarettes – behind France’s 16.9 billion. The UK, which left the EU in 2020, was the third largest, with 5.9 billion cigarettes, an increase of 0.5 billion over 2021.
Different types of illicit
The report breaks down illicit cigarette consumption (or ‘counterfeit & contraband’ – C&C) into three constituent parts:
1. Counterfeit cigarette packs – consisting of packs identified as counterfeit by manufacturers participating in empty pack surveys conducted by third party research agencies (ie. British American Tobacco, Imperial Tobacco, Japan Tobacco International, and Philip Morris International).
2. Illicit whites – cigarettes usually manufactured legally in one country or market, but smuggled across borders to the destination market, where they have limited or no legal distribution and are sold without the payment of tax.
3. Other C&C – contraband cigarettes not falling within the illicit whites and counterfeit definitions.
Counterfeits are increasing… and moving closer to ‘home’
With regard to counterfeit cigarettes, the study found that these had increased by 6.2% in 2022, to 13.1 billion sticks, accounting for 36.5% of EU27 illicit consumption. This is the highest share so far recorded by the study (the 2021 share was 34.6%).
While France remains the most significant end-market for counterfeits (61.5% of all counterfeit consumption in the EU27), for the first time since 2019, counterfeit consumption was driven by countries other than France. Volume growth mainly came from Germany, Spain and several smaller markets. The fastest rates of growth were in Ireland, Belgium and Croatia.
One of the likely reasons for the surge in counterfeit products is that, according to law enforcement agencies mentioned in the KPMG study, the production and distribution of counterfeit cigarettes within EU borders are increasing, with criminal organisations centring their activities in closer proximity to their target markets, ie. higher taxed and higher priced EU member states.
Countries such as Belgium, Denmark, France, and Germany are witnessing a growth in cigarette seizures and raids on clandestine manufacturing operations. The increasing number of illicit factories in the EU is a rising concern, also noted by the World Customs Organisation in its recently released annual Illicit Trade Report 2022.
In his October 2022 article for Tax Stamp & Traceability News™, titled ‘Massive Seizures of Illicit Cigarettes in the Heart of Europe’, Sven Bergmann advised that this shift towards more localised illicit production models within the heart of the EU requires a concomitant shift in focus by law enforcement, involving actions that include:
Global track and trace of raw materials, including raw leaf tobacco, cellulose acetate (for filters) and cigarette paper. These are unique to cigarette production and should be globally monitored and tracked.
Comprehensive implementation of tobacco tax stamp programmes. While tax stamps themselves won’t stop illicit actors from producing illicit tobacco products, they will provide an important measure for the fast assessment of excise tax evasion.
Increased penalties and fines for tax fraud, tax evasion, stamp forgery and money laundering. Criminal tobacco operations will not be using genuine tax stamps for their illicit operations. As such, they will either not apply any tax stamps or apply counterfeit stamps. Increasing and escalating penalties for crimes related to these criminal acts will provide an important deterrent.
Illicit whites down
Unlike counterfeits, the KPMG study found that illicit white volumes continued to decline in 2022, a trend observed since 2019. The volumes decreased by 14.3%, to 7.4 billion sticks, representing 20.6% of EU27 illicit consumption.
This decline is, in part, attributed to increased controls at the EU27 border with Belarus, together with the war in Ukraine, which may have impacted historical illicit whites transit routes.
Other C&C stlll reigns
Despite the growth of counterfeits, it is the illicit volumes in the ‘other C&C’ category – ie. contraband excluding counterfeits and illicit whites – which retain the highest share of illicit consumption. This category increased by 5% in 2022, to 15.4 billion sticks, now representing 42.9% of EU27 illicit consumption.
One of the likely reasons why other C&C continues to hold the highest share is that, while illicit whites and counterfeits are typically seized in large volumes, other C&C is generally only available through legitimate sale locations, often with the relevant duty paid for the original country of purchase. This means it is usually not transported in high volumes, with illicit flows into countries being volumes over and above legal allowances.
This high frequency but low volume approach, sometimes referred to as ‘bootlegging’, or ‘ant smuggling’, makes detection more difficult, and seizures smaller. This is probably why such cross-border trafficking is increasingly being scrutinised by members of the European Parliament in the scope of the tobacco excise tax directive’s revision.
The complete report is available from www.pmi.com/resources/docs/default-source/itp/kpmg-report---illicit-cigarette-consumption-in-the-eu-uk-norway-switzerland-moldova-and-ukraine---2022-results.pdf.
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