4.4. The involvement of the tobacco industry in tobacco smuggling
The tobacco industry can benefit from smuggling in several ways. The illegal trade is very profitable because the companies are paid for cigarettes eventually smuggled. The availability of low-priced cigarettes via smuggling raises the overall consumption of cigarettes compared to consumption in the absence of smuggling, adding to the tobacco industry sales.
It is especially true for multi-national companies, even in cases of so-called Russian smuggling. The most popular non-filter smuggled cigarettes at the Kiev market are Prima, produced by the factory in Volgograd owned by a German company Reemtsma and by the Ligett-Ducat factory in Moscow owned by the British company Gallaher. Reemtsma owns a tobacco factory in Kiev and has recently sold a factory in Cherkassy to Gallaher. Kiev and Cherkassy factories in 1998-2001 produced about 50% of all non-filter cigarettes in Ukraine, mainly the same brand Prima. Recently, the design of Volgograd Prima was changed to be similar to the Kiev Prima, so that when street vendor show these two brands it is rather difficult to see the difference at first sight. For multinational companies, it is profitable to increase production at a factory in one country (Russia) and sell additional cigarettes there for smuggling to another country, even if it causes some decrease of production at its factory in this country (Ukraine).
The smuggling phenomenon was effective in encouraging the Ukrainian parliament to reduce excise taxes. The lower taxes keep prices lower and, consequently, tobacco industry sales are higher.
A number of recent criminal investigations and convictions in several countries provided evidence of tobacco companies’ complicity in cigarette smuggling. All multi-national tobacco companies that have tobacco factories in Ukraine are accused of smuggling. British American Tobacco (BAT) is currently under the UK Department of Trade and Industry investigation for allegedly encouraging smuggling following a House of Commons Health Select Committee report on the tobacco industry.
The EU is taking American firms Philip Morris and RJ Reynolds to court in New York, accusing them of smuggling cigarettes into Europe, money laundering, racketeering and organized crime. Japan Tobacco Inc. was also among companies sued by the European Commission for smuggling cigarettes into the European Union (in 1999 R.J. Reynolds sold its international unit to Japan Tobacco for $8 billion). The Gallaher firm is exporting huge amounts of cigarettes to countries they know have no sufficient market for them, and investigators allege that they not carrying out rigorous enough checks to prevent them being smuggled back into Britain. Recently, several high executives of the Reemtsma head-quarter in Germany were arrested on conviction of organizing smuggling of Reemtsma cigarettes back to Germany through some Eastern European countries. http://www.news2000.com.ua/kriminal.php?id=119
According to the “LASSO-2000” report “Review of cigarette smuggling in Europe”, the top brands by number of seizures in the year 2000 and 1999 were from transnational companies: West (Reemtsma), Regal, Superkings (British firm Imperial), Marlboro, Chesterfield (Philip Morris), Lucky Strike, Rothmans (BAT), Sovereign (Gallagher), Winston (JTI), etc.
The companies do not generally undertake smuggling with their own personnel. The evidence shows that companies treat smuggling as just another distribution channel and they manage it with third parties, which effectively act as their agents in these illegal markets. The evidence shows the illegal channels may be very convoluted, but there is evidence suggesting tobacco companies exert control over the price and availability of their products in the illegal markets. This means they know which wholesalers are selling to smugglers and which consignments will end up on the black market. In 1996, the tobacco importer firm «Duncan-Kiev» issued a report, which stated: «All smuggling to Ukraine is undertaken with full support of the 5 TTC (Philip Morris, Reynolds, Reemtsma, BAT, Rothmans). They could stop 90% of smuggling within 10 minutes if they wish to, because they know exactly their clients involved in smuggling». In those years, smuggled cigarettes came to Ukraine from Cyprus, Belgium, Holland, Turkey, and other countries. In the industry magazine «World Tobacco» (N1, 1997), they state: «Future US cigarettes export will rely heavily on sales of transit traders». Tobacco industry internal documents explain what transit really means: “transit… is essentially the illegal import of brands… upon which no duty has been paid.” (BAT doc. 302000021, 1989)
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