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Serious business

| May 1, 2014

The illicit cigarette trade isn’t just about lost profits and unpaid taxes; it provides seed money for other crimes, including terrorism and human trafficking.

By Timothy S. Donahue

Tobacco companies are sometimes criticized for overstating the seriousness of the impact the illicit cigarette trade has on society. Anti-smoking groups contend that stories of smuggled smokes funding crimes such as terrorism and human trafficking are exaggerated and the problem is more about lost profits than lost lives. A look at the facts, however, suggests the link between the illegal tobacco trade and serious crime is all too real.

Examples of such connections are disturbingly easy to come by. The notorious terrorist Maokhtar Belmokhtar, for instance, is frequently referred to as “Mr. Marlboro” for financing his jihadist activities through cigarette smuggling across the Sahel. Income from the illicit tobacco trade allowed him to finance spectacular operations such as the 2013 gas field hostage drama in In Amenas, Algeria, during which 40 people died.

Louise Shelley, director of the Terrorism, Transnational Crime and Corruption Center and a professor with the School of Public Policy at George Mason University, in Fairfax County, Virginia, USA, says cigarettes are just one part of Belmokhtar’s criminal panoply, which also includes kidnapping, extortion, arms dealing and drug smuggling.

Because of its role in funding terrorist organizations, the illicit cigarette trade can be blamed for the deaths of military personnel from numerous countries, says Doug daCosta, president of Elite Security Services International and a former agent with the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF). While there are a number of steps between cigarette smuggling and terror, daCosta insists the link is clear.

“There is no argument about the fact that money made from illicit trade that is funneled to these terrorists groups can either barter or buy guns, ammunition and explosives that are used by al-Qaida, Hezbollah, Hamas and numerous other terrorist groups,” he says.

Criminal networks in the 21st century are vast, operating across both geographic and functional borders, says Brendan Lemoult, anti-illicit trade vice president at Japan Tobacco International (JTI). “We know that criminals and terrorists traffic illegal tobacco just like they traffic humans, drugs and weapons. It’s the same gangs using the same smuggling routes,” he says. “This is not a victimless crime.”

The Irish Republican Army (IRA) was one of the first groups to use cigarettes to fund its activities, according to Interpol. Police estimate that the IRA, in its various incarnations, made $100 million in just five years (1999–2004) from trafficking illicit cigarettes. In September 2013, a rocket fired by al-Qaida at a massive container ship blew the lid off a multimillion-euro illegal cigarette operation run by a millionaire businessman with links to former IRA leader Thomas “Slab” Murphy.

But criminals need not always cross national borders to profit. On May 15, 2013, law enforcement officials in New York City took down a Palestinian cigarette smuggling ring that bought $55 million worth of cigarettes in Virginia and sold them at a hefty profit in New York City. Virginia’s cigarette tax is $0.30, compared with $4.35 in New York City.

Day after day, truckloads of illicit cigarettes continue to be purchased from southeastern U.S. states, which levy comparatively low tobacco taxes, and then shipped to and sold in the Northeast, where taxes are higher. “We refer to the Interstate 95 corridor as ‘the new tobacco road,’” says David Howard, senior director of communications for R.J. Reynolds. “It’s estimated that more than 60 percent of the cigarettes sold in New York are illicit, which is significant because New York collects more than a billion dollars a year in tobacco taxes sold through legitimate markets.” In a recent study conducted by the city of New York,  more than 40 percent of the 1,700-plus stores surveyed sold illicit cigarettes.

One of those arrested in the New York City operation, appropriately dubbed “Tobacco Road,” was Youssef Odeh, a vocal supporter of Omar Abdel-Rahman, the blind sheik now serving a life sentence for his role in a foiled 1993 plot to blow up New York City’s World Trade Center. The ring was run by brothers Basel and Samir Ramadan of Ocean City, Maryland, USA, who are believed to have ties to Hamas and Hezbollah.

Examples of the illicit cigarette trade contributing to terrorism and organized crime appear in the news almost daily. The U.S. Congressional Research Service’s Report on Terrorism and Transnational Crime mentions that “cigarette smuggling schemes as a means for financing terrorists have been discovered in a range of countries and regions, including the United States, Europe, Turkey, the Middle East and North Africa, and Iraq.”

Murphy is said to have amassed a £40 million ($66.7 million) fortune through smuggling cigarettes and other goods. During a 2006 raid on his home, police officers  confiscated 30,000 cigarettes and $1.1 million in sterling bank notes. In March 2013, Murphy was tipped off four hours before he was again targeted in a major cross-border police raid. As of this writing, Murphy, in an Al Capone-like fashion, is being prosecuted on nine charges of failing to furnish tax returns from 1996 to 2004.

Money from illicit cigarette sales is often funneled to terrorist networks through a bartering system that operates outside of, or parallel to, traditional banking channels, according to daCosta. A hawala is an informal value transfer system based on the principle “honor among thieves,” which includes numerous cash brokers. Although they are primarily located in the Middle East, North Africa, the Horn of Africa and the Indian subcontinent, the reach of the hawala is global.

“It’s how money was given to some of the pilots for training for September 11,” says daCosta. “How it works is a guy in, let’s say, the Middle East, tells his associate, ‘I need you to send money over to this guy in California.’ Then contact is made to their guy in San Diego, they send him a message, and he pays the debt. Maybe later the guy in San Diego needs to pay a debt in the Middle East, and that cancels the first debt or increases what the other side owes. Once a year they may get together to level everyone’s balance sheet. It’s worldwide and nearly untraceable.”

The first case of documented links between a terrorist organization and cigarette smuggling in the U.S. was uncovered nearly 20 years ago. In 1996, ATF agents and other law enforcement agencies discovered that a group of men were purchasing large pallets of cigarettes from local distributors and paying for everything in cash. Their business model involved moving those cigarettes across state lines, where they would be sold for a substantial profit. According to court documents, “the conspiracy involved a quantity of cigarettes valued at roughly $7.5 million.”

In 1999, the Federal Bureau of Investigation notified the ATF that a Hezbollah cell was raising funds and procuring equipment in Charlotte, North Carolina, USA. Mohamad Hammoud led the fundraising efforts for the cell, and he was also a prime suspect in the cigarette smuggling ring identified by the ATF in 1996. Hammoud transferred his ill-gotten gains generated by the cigarette trafficking scheme, as well as money raised from other sources, back to Lebanon through a hawala and into the coffers of Hezbollah, which the U.S. government considers a terrorist organization.

Winning an unwinnable war

The main problem in combating the scourge of smuggling is the high profits, which rival those of narcotics, and the relative cheapness of conducting a terrorist operation. A shipping container holding 10 million cigarettes could cost as little as $100,000 to produce in Asia, says daCosta, but could bring in as much as $3 million to $4 million in the U.S. Contrast that against the estimated $400,000 to $500,000 it cost al-Qaida for the September 11 attacks, according to the final report of the National Commission on Terrorist Attacks Upon the United States.

Dismayed by the link between the illicit cigarette trade and serious crime (and, yes, also by their lost sales), tobacco companies are playing an active role in stopping smuggling. It is not uncommon for companies to hire private investigators to help law enforcement catch the crooks. Imperial Tobacco Group has gained years of experience in compiling intelligence, analyzing data and briefing law enforcement agencies on the findings of Imperial’s security team.

“We have been central to the breakup of several sophisticated criminal gangs, including those who operate on an international scale, during the past several years,” says Steve Smith, Imperial’s head of group security and risk management. “The largest by volume was in Hamburg in May 2013. We passed intelligence to OLAF [the European anti-fraud office] on a suspect shipping container; OLAF in turn notified German customs, and 53 million cigarettes were subsequently seized.”

Philip Morris International (PMI) has been working with private investigators in Singapore to identify smugglers’ distribution networks. After months of surveillance, the investigators managed to identify the supply chain routes used by smugglers and shared the results with Singapore customs. “As a result, two seizures were carried out by the customs authorities, with the latest, in December 2013, involving illegal cigarettes worth over sgd1.6 million ($1.26 million),” says Iro Antoniadou, manager, external communications, PMI.

Penalties are another problem. “Since penalties and sentences for tobacco smuggling are frequently much lighter than those for smuggling drugs, criminals see it as a soft and easy option,” says a British American Tobacco representative. “They hedge their bets, and there is a lot less risk of being put out of business for extended periods when you sell illegal cigarettes.”

Howard and Smith believe that laws should be enacted to increase fines for illicit trade activity and impose penalties that treat such crimes as felonies where they are not already regarded as such. “Organized crime and terrorism has been involved in the illicit tobacco trade for many years, as it’s a very profitable practice for them, and, for those caught, the penalties are too often very light,” says Smith.

“Weak border controls in some regions also contribute to the problem. We believe that in order for anti-illicit trade measures to be practical and effective, responsibility for each of the key elements should be assigned clearly to the individual parties involved: a) tobacco companies, b) government authorities and international organizations, c) tobacco companies and/or government authorities and international organizations working together.”

Tobacco companies are often working together with law enforcement to combat the problem. One example of an industrywide effort is the Digital Coding & Tracking Association (DCTA), whose members include BAT, Imperial, JTI and PMI. DCTA members produce more than 75 percent of the world’s tobacco products (excluding China) and move billions of finished goods through international supply chains every year, undertaking millions of cross-border transactions in the process.

Codentify, the main product offered by the DCTA, offers quick and easy access through a mobile phone or computer terminal to all information concerning a case, carton and, recently, some packs of cigarettes. The coding on the packages verifies the legitimacy of shipments and meets future international regulatory methods, including the World Health Organization’s protocol to eliminate the illicit trade in tobacco.

The implementation of Codentify as JTI’s track-and-trace solution has been a valuable tool for its anti-illegal tobacco team, according to LeMoult. “Codentify has provided us with concrete information on illegal tobacco routes that we have passed on to law enforcement, at times stopping illegal supply chains in their tracks,” he says.

Agreeing with a recent report from the European Commission, LeMoult also noted that JTI’s implementation of Codentify, combined with its other anti-illegal tobacco and due diligence measures, explains why the company has been so successful in reducing the criminal diversion of genuine JTI products into the illegal market, even during a time when the commission warns that “overall, the illicit trade is increasing in the EU.”

Smith adds that tracking and breaking down the types of gangs that smuggle smokes is resource intensive, and Imperial is investing heavily in technology (e.g., Codentify). “Whilst not a silver bullet to illicit trade, technology is a key tool in securing the legal supply chain,” he says. “Consolidating intelligence builds a more complete picture of known criminal operations.”

Lemoult notes that if corporations work together alongside law enforcement to combat the illegal cigarette trade, together they can blaze a path forward. “Through concerted action by governments, the public and the industry, by taking a stand together, we can deliver considerable benefits for national economies, as well as local businesses and communities,” he says. And while cracking down on illicit trade will, by itself, not stop terrorism, it will at least make perpetrators’ lives more difficult by forcing them to find alternative sources of funding.



Bigger than Imperial

Due to its nature, illicit trade is notoriously difficult to measure. Philip Morris International (PMI) estimates that global non-tax-paid volume was around 570 billion units in 2012. “This represents between $40 billion–$45 billion in unpaid taxes and approximately $4 billion to $5 billion in lost margins for legitimate manufacturers,” says Iro Antoniadou, manager, external communications, PMI.

Steve Smith, head of group security and risk management with Imperial Tobacco, believes those numbers may be even higher, with revenue losses for the industry possibly reaching as high as double PMI’s estimates—about $10 billion annually. “This makes ‘Illicit Tobacco PLC’ bigger, in volume terms, than Imperial Tobacco,” he says.

British American Tobacco says organized crime holds 11.1 percent of the EU cigarette market and is selling 65.5 billion cigarettes a year, pulling in a profit of up to €5 billion ($6.87 billion).






Illicit trade breaks another EU record

| May 1, 2013

Boatloads of bootleg

The illegal cigarette trade in the EU reached a new record high for the sixth year in a row, according to a KPMG report commissioned by Philip Morris International. The study showed the illegal cigarette trade rising to 11.1 percent in 2012 from 10.4 percent in 2011.

At 31 percent of the national tobacco market, illicit cigarettes had the highest market share in Latvia. Latvia loses an estimated LVL60 million ($111.4 million) to LVL70 million  in annual tax revenue due to cigarette smuggling. KPMG Baltics representative Andris Purins said Latvia’s proximity to Belarus and Russia is exacerbating the black market problem.

Other strongly affected EU markets included Lithuania, where illicit cigarettes accounted for 27.5 percent of the market; Ireland (19.1 percent), Finland (16.9 percent), the United Kingdom (16.4 percent), France (15.7 percent), Greece (13.4 percent) and Poland (13 percent).

The U.K., Greece, Italy and Estonia recorded the steepest growth in the illegal cigarette market since 2011, according to the KMPG report.

Report dismisses industry claims about plain packaging

| November 29, 2012

A report commissioned by Cancer Research UK dismisses the tobacco industry’s claims that the U.K. government’s plans to introduce plain packaging for cigarettes will boost the trade in illegal cigarettes, reports HealthCanal.

According to the report, which was prepared by Luk Joossens, advisor to the World Bank, the European Commission and World Health Organization on illicit tobacco trade, producers of counterfeit cigarettes find all existing cigarette packaging easy to forge, and that introduction of plain packaging is unlikely to cause more counterfeiters to make more fake packs.

Noting that producers of counterfeit cigarettes are able to provide “top quality packaging at low prices in a short time,” Joossens said “plain packaging will not make any difference to the counterfeit business.”

Cancer Research UK’s director of tobacco control Jean King said the tobacco industry “has a track record of facilitating smuggling and often says policies that cut smoking will increase smuggling, even though smuggling has been falling for a decade.”

Parkside secure waste system guards against illicit trade

| November 8, 2012

Keen to improve its environmental credentials, Parkside Flexibles has invested in a secure waste management system. The investment will also help protect tobacco customers’ businesses from illicit trade by ensuring any sensitive waste generated is destroyed on site.

Roydon Group has installed and commissioned a shredding and compacting system at Parkside Flexibles Normanton, West Yorkshire, United Kingdom. As a result, all materials leave the company’s premises in a format that offers Parkside Flexible and its clients full security for all printed products.

The system is designed to handle the two types of material produced by Parkside—laminated plastic specifications and paper products. Once processed, both products are either sent for recycling or to a waste-to-energy plant to be used as a fuel in the production of renewable energy.

The system ensures that all waste is destroyed, with the residual products being either recycled or burnt for energy, providing a totally secure zero-to-landfill system.

Elephant in the room

| March 1, 2011

A recent conference on illicit cigarette trade dodges the real issue.

By George Gay

I’d like to start this piece by asking a question. Would you want to live in a country where the government encouraged people to break the law and then used the law to punish those people?

Probably most if not all of the people reading this story would answer “no” to this question but would then add that no government would do such a thing because it would be against its own interests.

OK, let me put the question another way. Would you want to live in a country where the price of an addictive but legal product was purposely raised by the government, through taxation, to a point at which the financially less well off users of that product could not afford it, were therefore forced to access illicit sources of supply of that product (they are addicted, remember), and were subsequently hunted down by a number of government agencies—perhaps after having been reported by informants—and then subjected to the full force of the law? (I don’t mean this to be taken as a rhetorical question. Please e-mail me at It’ll take only a minute. All you need to write is “yes” or “no.”)

The reason why I ask this question is that I am beginning to wonder whether I inhabit a universe parallel to the one inhabited by many other people. I certainly don’t want to live in the sort of society described above, and I would have assumed that most other people would not have wanted to do so, but I was recently at a conference that seemed to be devoted to maintaining such a society in the country where I live. The Anti Illicit Trade Summit was staged by the think tank Progressive Vision in association with the Tobacco Manufacturers’ Association on Jan. 31.

It would have been easy to accept what went on at the conference if all of the participants had been unpleasant, but they weren’t. Everyone in attendance in the comfortable surroundings of the Liberal Club, just off Whitehall, London, was polite, intelligent and, as far as I could tell, well meaning.

Avoiding the real issue

But clearly, to my way of thinking, there was a problem here, and perhaps it resided in the fact that the besuited are unsuited to understanding the motivations of the impoverished consumers of illicit tobacco products, especially from the viewpoint of the Liberal Club.

But the disjoint went much deeper than this, I think. When Simon Clark, the director of Forest, stood up toward the end of the morning session of scheduled presentations and suggested, quite reasonably to my mind, that the event seemed to be avoiding the elephant in the room, taxation, it was as if he’d lit a cigarette before the loyal toast.

There was certainly a reluctance and, in part, a refusal to discuss taxation. Of course, this was understandable up to a point in respect of those working with government agencies, who, presumably, are bound not to criticise their employer’s policies, no matter how dotty they might be. But for the rest, it seemed rather lame.

Summing up at the end of the day, the chairman of the event, Jonathan Charles, a BBC presenter, made the point that the issue of illicit trade in tobacco had to be approached with realism because the government wasn’t going to backtrack on its taxation policies in respect of tobacco.

I was astounded. Charles’ realm of realism is not one I want to inhabit. Where is the ambition in this kingdom? Thank goodness we weren’t relying on Charles in 1215 or we’d not have got King John to put his seal on the Magna Carta. We’d still all be being bled dry with taxation as our leaders prosecuted expensive and largely unpopular overseas wars. Hmm … plus ça change.

Diverting attention

But in a way, Charles was right. He’d done his job and summed up the mood and the tone of the conference. Whatever you do, don’t mention the fact that the chancellor isn’t wearing any clothes. Let’s talk only about how bad are those who are trying to avoid paying unconscionable amounts of taxes and the people profiting from this activity.

Let’s talk about the pointless exercise of explaining to smokers the unsupportable idea that counterfeit cigarettes are more harmful than are other cigarettes. Let’s talk about how some illicit cigarettes contain rat droppings, whether there is any evidence to support such an idea or no.

Let’s talk about how a BBC crew recently came under attack from somebody allegedly involved in the illicit trade in tobacco as the members of that crew were doing their job in investigating this trade. Really? So what? This is a dog bites man story; it’s hardly a revelation. So the bad boys are violent. Well actually we knew that; it goes with the job. But they wouldn’t have that job—not the tobacco job at least—if the government hadn’t given it to them.

And it has to be borne in mind that the BBC would probably be attacked if it sent a crew to investigate why those at the treasury are applying tax levels of up to 90 percent on the retail price of a pack of cigarettes and then wondering why people thrown out of work by the government’s policies are trying to avoid those taxes. Of course, the BBC won’t be attacked by a treasury man wielding an iron bar, but it would do well to be on the defensive when its funding comes up for review.

From my observation—and I have to admit here that I attended only one of three breakout sessions during the afternoon segment of the one-day conference—there seemed to be little thought given to the idea that we could rise above coercion and retribution to extricate ourselves from the mess that we have got into over the illicit trade in tobacco. If we want to stop the illicit trade, why can’t we investigate taxing smokers rather than the products? Why can’t we consider the possibility of applying a sliding scale of tobacco taxes based on a person’s income, given that smoking is addictive? Why can’t we allow each smoker to buy 10 percent of her cigarettes from illicit sources, rather like we allow motorists to drive at 10 percent above the speed limit without being punished? Why can’t we look at making cigarettes expensive ex-factory by forcing up the price of tobacco?

Are we completely devoid of imagination? Do we not have the wit to look at these problems from other directions? Are we content to have our beards plucked off and blown in our faces by the men at the treasury? Are they not supposed to serve us?

Why do we have to bleed dry the already-financially poor so that we can keep our banks on drips? Where is the justice in that? Where is the quality of mercy?

The conference was told by HM Revenue & Customs that, since the start of its anti-fraud campaign in 2000, 3,300 people had been “successfully prosecuted.” I don’t know how many of these people were master criminals and how many were ordinary folk, but if this is success, I don’t want to see what failure looks like. This is not a success; it is a social disaster.


Above, I opined that the U.K. had got itself into a mess over the taxation issue, but we are by no means alone. Writing in The Ottawa Citizen earlier this year, Don Butler reported on the findings of research commissioned last year by the Canada Revenue Agency that found that most young Canadian smokers are very familiar with black-market cigarettes and that many support their sale. And these young people are deeply skeptical of government assertions that contraband cigarettes are linked to organized crime.

And from what I heard at the conference, opinion in Britain is much the same. How proud can we be of this? We have overseen a situation that has led to many of our young people believing that breaking the law is OK and that the government lies to them.

This lack of trust is concerning, and concerning beyond tobacco. It is easy to laugh off such skepticism and say that nobody trusts politicians, but there needs to be some trust. In a report to the executive board of the World Health Organization earlier this year, the WHO’s director general, Dr. Margaret Chan, said that during this winter season in the northern hemisphere, some countries saw cases of severe H1N1 disease in a comparatively young age group. In some cases, she added, persuading the public to seek vaccination had become even more problematic than during the pandemic. The problem of public mistrust extended well beyond influenza vaccines.

Of course it does. And, in part, that mistrust is fed by misinformation put out by governments and their agencies. Often, I’m certain, this misinformation is put out with the best of intentions by people who genuinely feel that they have a mission to stop others from smoking at any cost, but such misinformation simply comes back to haunt them. And anyway, I don’t wish to be unkind, but I would suggest that these people need to give some thought as to whether they shouldn’t mind their own business.

We need to understand that people are not stupid. They just need to be told the truth so that they can make informed decisions. And for that to happen, those doing the telling need to be able to recognize the truth, which is not always easy.

At the end of the conference, the chairmen of one of the breakout sessions referred to the illicit trade problem as manifesting itself in Britain but arising overseas, which I took to mean that the illicit tobacco products were being manufactured largely overseas but sold in Britain. I’m willing to believe that the products are arriving from overseas, but “the problem” is not arising overseas. The problem is being manufactured at home—goodness knows, we even know the number of the street in central London where it occurs.

And take the often-used expression: nobody benefits from the illicit tobacco trade but the criminals. At first glance, this seems to be perfectly true, but you could just as easily argue that because of the situation we find ourselves in, everybody in the country benefits from this trade. It is the glue that holds everything together. If there were no illicit trade, those addicted smokers who could not afford licit cigarettes would have to break into shops or mug people on the streets for their smokes.

I know that some people argue that addicted smokers unable to afford cigarettes can avail themselves of help in curing their addiction. But there is a problem here—time. Taxes go up overnight, but, according to a recent survey carried out by the U.K.’s Lancaster University, it takes the average smoker five years and seven attempts to quit smoking.

The government of the U.K. is currently promoting a favorite idea of Prime Minister David Cameron, called the Big Society. Cameron has come in for a lot of criticism over this idea because it is seen as being not fully thought out. People are moaning because little detail has been given. But I’m a fan of the idea. And I think that many of the critics are missing the point. This is about the Big Society. It is an idea for us to pick up and run with. If Cameron provided the detail, it would be Big Government—more Big Government, and we have spadefuls of that already.

But the government has to help. We cannot create a Big Society in a country where we are more and more being subjected to Big Brother: a society with paid informants, infiltrators, undue surveillance and law enforcement agencies by the truckload. And especially we don’t need taxation policies that can lead only to law breaking. This is the road to the Broken Society, the ailment that Cameron says he wants to cure with the Big Society.

Toward the start of this piece I suggested that the Liberal Club might not have been the right venue to discuss the illicit trade in tobacco. It wasn’t. The next one should be held at Runnymede (which, for our non-U.K. readers, I should explain was where the Magna Carta was sealed).