An Introduction to the Illicit Tobacco Trade Adrian Welsh, Chief Legal and Compliance Officer

2

Illicit Trade

% M

ark

et S

ha

re

a global issue

600

BILLION

Non Duty

Paid

3

Measurement is not straightforward

Empty

Pack

Surveys

Market

Reports

Modelled, multi

data source

reports

Methods of measurement range from:

Robust Best estimate

Overall trend and direction of travel most informative

4

Duty Paid vs Non Duty Paid

Duty Paid

Non Duty Paid

5

Not all Non Duty Paid is illegal

NON DUTY PAID

DUTY FREE SALES

CROSS-BORDER SHOPPING

ILLEGAL / ILLICIT

COUNTERFEIT ILLICIT WHITES AND

UNBRANDED SMOKING TOBACCO

GENUINE CONTRABAND

LEGAL

6

Illicit Product

Unlawful movement of genuine tobacco products from one tax jurisdiction to

another without the payment of applicable taxes or in breach of laws prohibiting

its import or export.

genuine contraband

7

Illegal manufacturing where product bears a trademark without the owner’s

consent. Counterfeit products can be sold in the source country or smuggled into

another country.

Illicit Product counterfeit

8

These products are typically produced for the purposes of smuggling into

countries where there is no prior legal market for them. Legally produced in

source country but illegally sold at destination.

Illicit Product illicit whites

9

Illicit Whites

Graph source: Project Sun 2014

Quote source: Home Affairs Committee Tobacco Smuggling Report 2014

HMRC note that illicit

whites “represent the

most significant threat to

legitimate trade and

tobacco revenues in the

UK from large scale

organised criminality.”

a growing problem

0.2 0.5 1.2 1.5

2.1

0.7

2.6 2.7 2.2 2.0 1.5

1.7

0.4

1

1.9

0.9

1.5 1.6

1.5 0.5 0.5

1.0 0.9 0.8

0.9 0.2 0.7

0.9

0.2

0.2

0.1

0.7

0.4 0.8

0.8

0.2

0.1

0.7

0.2

0.4

0.8

1

0.8

0.2 0.3

0.6

0.9

0.7

0.1

1.2

1.2

2.3

4.8

6.7

7.7

8.7

0

5

10

15

20

2006 2007 2008 2009 2010 2011 2012 2013

Volu

me (

bn c

igare

ttes)

Other

Premier

Minsk

RGD

Raquel

NZ

Gold Mount

Ducal

American Legend

Jin Ling

Fest

Consumption of illicit white brands 2006 -2013

Sources and Destinations

Counterfeit

Illicit Whites

10

11

It’s all about the money

Industry and trade Government

(Tax incidence) ~83%

driven by high excise

12

HIGH

EXCISE

SUPPLY

Criminals able to

make money

£1,300 per

case

£65,000 per

white van

£6,500

per car

£1.1m per

container

DEMAND

Consumers want to

save money

£4.00

£9.03

£6.72

It’s all about the money demand vs supply driven

13 Social Acceptability

Weak Border Controls

Black Market Infrastructure

Lenient Penalties

Excise & Price Differentials

It’s all about the money facilitators

14

Follow the money……

Duty & price differential

creates opportunity for

arbitrage

15

Follow the money……

F iji A UD 9 . 2 9 A u st r a l i a

A UD 15 . 9 6

N e w Z e a l a n d A UD 15 . 2 8

V anua t u A UD 8 . 7 6

S a m o a A UD 5 . 6 5

T o ng a A UD 5 . 0 3

P apua N e w G u in e a A UD 5 . 3 7

J apa n A UD 4 . 8 3

Tai w a n A UD 3 . 1 0

S ou t h K o r e a A UD 2 . 6 9

P h i l ip p in e s A UD 1 . 2 6

I nd ia A UD 2 . 2 9

C h ina A U D 2 . 6 6

S r i Lan k a n / a

B ang la d e s h A UD 2 . 2 6

M y an m a r A UD 2 . 0 7 Lao s

A UD 1 . 8 2

Th a i l an d A UD 3 . 0 7

S in g apo r e A U D 10 . 2 9

M a la y s ia A UD 3 . 9 9

V ie t na m A UD 1 . 0 8

C a m bod ia A UD 1 . 1 2

I ndone s ia A UD 1 . 4 3

Duty & price differential

creates opportunity for

arbitrage

16

Undermines Public

Health Objectives

Deprives economy of excise revenue

Harms legitimate business

Funds organised crime & terrorism

Undermines public health objectives

The impact

17

Tackling the Problem

18

Role of Government

BALANCED

Excise Policy

Health

Revenue Combatting

Crime

Smart Regulation

Deterrent Penalties

Strong Enforcement

Improved Collaboration

19

Supporting treaty to the Framework Convention on

Tobacco Control – aims to curb illicit trade

Protocol contains potentially effective measures to address

transnational illicit trade:

licencing regime; reporting regime for duty suspended product;

T&T; control of manufacturing within Free Trade Zones;

regime of offences & sanctions

Must be implemented consistently to be effective

Role of Government

20

Corporate Position

The prevention and elimination of tobacco smuggling and counterfeiting is one of our

major business priorities. We must never engage in or facilitate illicit trade activities.

We must ensure that we only conduct business with companies and individuals that are

reputable. We must work with governments, regulators and law enforcement authorities

to prevent the illicit trade of our products.

The illicit trade of tobacco products has a damaging effect on our company. It is contrary

to our commercial interests and harms our business reputation. It materially diminishes

the legitimate markets in which we operate to compete for market share.

Role for Imperial Tobacco

21

Support Law Enforcement

Engage with Stakeholders

Supply Chain

Integrity

Imperial’s Anti Illicit Trade Strategy

22

Know your

Customer

Commensurate

Supply

Compliance

Checks Track & Trace

Anti Money

Laundering Staff Training

Supply Chain Integrity

23

EU Cooperation

Agreement

Supply Chain Integrity

24

Technical &

forensic support

Training on

industry matters

Practical assistance

(sniffer dogs)

Intelligence

Effective working

relationships

Support Law Enforcement

25

Partner with trade bodies

Provide views

to government Educate on T&T

Raise awareness

through media

Engaging Stakeholders

Strategy in Action

some success stories

27

Machine 18

May 2012 – Hungary Law Enforcement

Authorities make seizure

Cigarette making & packing machine

ITG confirmed as “Machine 18”

Counterfeit Regal, Superkings KS & Classic

2002-2012: UK 472m sticks or £145m loss

28

Destruction of Machine 18

29

ITG intel leads to largest EU seizure of product from China

160m sticks (incl. Marlboro, L&M and West)

Destined for France, Germany and Holland

Potential revenue loss c €26m

Loss in revenue to manufacturers of c €9m

Chinese counterfeit

30

Initial Investigations: China

31

Law Enforcement Co-ordination

32

Plain Packs….a Perfect Storm….

He punched the air as he mocked

PM Cameron, cheering: “Plain

packaging…I support the UK

Government”

They told our team how the switch

to plain packaging will make their

fraudulent trade easier, cheaper

and more difficult to detect.

failing to strike the balance

33

Moving forward

Suppliers – look to better control of leaf and non

tobacco materials

Consumers – look to improve awareness of

consequences i.e. social costs and criminality

Government – appreciation of the need to

administer balanced policy and effective regulation

International – effective, consistent and joined-up

approach

awareness and education key

34

Summary

Strong financial incentives create the market for illicit

Duty/price variance across borders drives the problem

Regulation can improve traction and tighten legitimate environment

BUT….the key is to tackle the illegal environment

A multi faceted, multi party approach is needed

Balanced approach from legislators is key

An issue that can be managed

Q&A

An Introduction to the Illicit Tobacco Trade Adrian Welsh, Chief Legal and Compliance Officer