Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 340-359)



Mr Gibb

  340. Just following on from Mr Gardiner's last point, if you are taking action when you do spot the tracing of these sticks, why do you represent 50% of the illicit market in this country?
  (Mr Davis) As I say, this is a figure that Customs say and we have no argument with that number. We know a significant amount of our brands, Regal and Superkings, have figured very prominently in seizures and that is not a point of issue with us. The point is, as I say, we have taken action where those brands have come back prominently to cease supply to those distributors. It is an absolute trickle.

  341. Can I ask you about these other figures. You said you questioned Customs' figure of 43% of the illicit market and you say they have included Philip Morris and that brings it up to 50% and therefore your licit and illicit markets are consistent with the rest of the industry. Do you export Philip Morris cigarettes as well?
  (Mr Davis) No.

  342. Is it correct to include the extra 7%? Surely that is incorrect? If you are not dealing with the exports of Philip Morris you should only be looking at 43%, should you not?
  (Mr Dibble) We make profit in the United Kingdom on over 50% of brands on the market because we distribute and sell Philip Morris Marlboro in the UK. Customs' figures are attributing Marlboro and the Embassy Number One to us in the smuggled figures. Unfortunately they are not our brands outside of the EU and Marlboro outside of the UK so that is how the 50/50 arises.

  343. Thank you very much. Can I ask how much Regal King Size cigarettes retail for in some of these countries like Latvia? How much is the retail price in sterling in those countries?
  (Mr Dibble) It is about 50 pence.

  344. So what can you do to stop somebody going up to a kiosk in Latvia or Russia, buying the whole stock and bringing it back on a container ship? Is there anything you can do about that?
  (Mr Dibble) Very little I would suggest.

  345. Is that something you have raised with Customs that there is nothing you can do about this because people can go to kiosks and buy them.
  (Mr Dibble) What we can do is when we exchange information with Customs on where smuggled cigarettes are coming from in the world and they say they are coming through Latvia what we can do is assist Customs by ceasing supplies in total to Latvia and in that way no one can buy them for 50 pence and bring them back. That is the action we take.

  346. Then smugglers would move to jurisdictions where they are 75 pence.
  (Mr Dibble) Exactly.

  347. And then you would cease—
  (Mr Dibble) We would cease supplying there.

  348. Then they would go to where they retail at £1.54 and the smugglers would bring it back from there.
  (Mr Dibble) This is Gareth's double whammy. Our export drive and our export business is being sucked back because of high UK taxation and as a British company we are unable to export successfully.

  349. Can I ask Mr Wells to respond to that point. Can this vicious circle continue, they cease trading with countries which have no tax and are therefore selling them at 50 pence, then the smugglers move on to the next jurisdiction; what is your response to that?
  (Mr Wells) I think the issue, as far as we are concerned, is the wholesale supply of large volumes of cigarettes to organised criminal groups rather than the sort of situation which you describe of cigarettes being bought at a kiosk. If I were to give you one example from Latvia, for example. We made a seizure in Northern Ireland recently, last November, of around 40 million Regal cigarettes which had come from Riga in Latvia. It is unlikely those would have been bought at kiosks, they would probably have been purchased in large quantities from wholesale outlets. That is the sort of area in which we have particular concern. We quite recognise in the case of Imperial and all other manufacturers that there are limits to what they can do. We do not suggest it is possible for any manufacturer to prevent any of its supply coming back to the UK, but there are things that can be done to control the wholesale supply of product in such a way that it falls into the hands of organised criminals.

  350. Are you claiming that the tobacco companies know when they supply it to a wholesaler in Latvia that a huge quantity of those come back to Britain?
  (Mr Wells) I think that there are certain circumstances in which it may be that the quantities that were going to particular countries may have been greater than the market in those countries apparently could sustain.

  351. Aside from that point, how else would Imperial Tobacco know that a distributor further down the chain from their initial customer was going to sell large quantities to criminal gangs? Why do you expect Imperial Tobacco to know?
  (Mr Wells) In the sorts of circumstances in which product falls into the hands of organised criminals in large quantities, then there may be circumstances in which questions would be asked as to why distributors have supplied quantities in particular volumes. Indeed, as Mr Davis has said, about 30 distributors of Imperial have had their supplies discontinued for precisely this sort of reason over the last two years. So there are circumstances in which the lack of control that some distributors apply to the sales of the end product are such that both we and manufacturers would agree that those sales should discontinue.

  352. Do you have any of these customers at the moment?
  (Mr Davis) The situation of the sensitive territories where there has been a track record built up over time—and it is a relatively short time because cigarette smuggling really started in 1997—is that there are time lags and we are tending to find that stock of two years old comes back consolidated with stock of other manufacturers. It is consolidated sometimes with counterfeit product. It is quite a complex situation. In terms of the particularly sensitive markets, then I think it is fair to say that the 30 traders we have ceased dealing with pretty much cover those sensitive areas.

  353. Where is the other 50% of the illicit market you have? Where does that come from?
  (Mr Davis) With respect, again, a lot of this data as to where the 50% emanates from is pretty much historical, going back well into 2000 and 2001. As I say, the seizures of our products in this calendar year to date are 40% down on this time last year. I would expect that to continue falling because, as I say, we are not supplying the vast majority of these countries now.

  354. So what would you estimate is your share of the illicit market?
  (Mr Davis) It is very difficult for me to estimate that as things stand at the moment. I am prepared obviously to accept the Customs figures that were put forward.

  355. That is 50%.
  (Mr Davis) No. That was for 2000-01. I would have to say it will be substantially lower than that, but it is a very imprecise science by the nature of the smuggling market. It is imprecise, it is difficult to verify.

  356. Policy makers need to base it on something. Is it de minimis?
  (Mr Davis) It is becoming de minimis and over time it will become very de minimis because we are not supplying them any more.

  357. The problem is solved, is it?
  (Mr Davis) It is well on the way to being solved in the sense we would not, again, disagree with Customs' estimate that 21% of consumption in the UK 2000-01 was illicit product. The indication we have at the moment is that that number is falling very substantially.

  358. No one is going to these countries and buying either in kiosks or in larger shops large quantities of 75 pence packets and bringing them back to the UK and selling them from white vans then?
  (Mr Davis) I do not know. They may be bringing other products back, other brands which United Kingdom smokers might find attractive, but, as I say, we are not supplying the vast majority of those areas any more, so it is a very difficult one for me to answer. What I would say is that if all UK tobacco companies stopped exporting tomorrow it would not stop smuggled product coming into the UK.

  359. There is smuggled product. That is what I am trying to get at. You say on the one hand there is no smuggled product and on the other hand there are vast quantities of smuggled product. I want to know what it is.
  (Mr Davis) Clearly from what I said it had got to about 21%. I believe that number and I believe that Customs also feel that that number is coming down very significantly. It is in both our interests (Customs and ourselves) to co-operate as fully as possible otherwise it is only the smuggler that wins. Our aim must be to get it down to zero.

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