APPENDIX 3
Supplementary memorandum submitted by
HM Customs and Excise
THE SMUGGLING
OF UK MANUFACTURED
CIGARETTES
1. Customs estimate that in 2000-01 around
17 billion cigarettes were successfully smuggled into the UK.
In addition Customs seized 2.77 billion cigarettes in the process
of being smuggled.
2. Overwhelmingly cigarettes are smuggled
in maritime freight on routes originating outside the EU. Customs
estimate that 70-80% of cigarettes are smuggled in this way and
have therefore not borne any tax anywhere in the EU.
COUNTERFEIT CIGARETTES
3. Customs estimate that between 11-17%
of all cigarettes seized in 2000-01 were counterfeit. The most
popular brand to be counterfeited is Benson & Hedges (manufactured
by Gallaher Ltd for the UK and European market, and BAT for other
global markets). Customs believe this is because B&H is a
popular premium price brand in the UK and also has a significant
global presence.
EXPORTS OF
UK MANUFACTURED CIGARETTES
4. The vast majority of UK exports do not
feed the UK smuggled market although most smuggled cigarettes
are UK manufactured UK brands. This is not particularly surprising
since UK smokers are most predisposed to purchase cigarette brands
with which they are familiar and hence these brands are most popular
with smugglers.
5. In 2001, approximately 100 billion cigarettes
were exported from the UK . In the financial year 2000-01 Customs
estimate that, of the total number of cigarettes smuggled into
the UK, around 16 billion were originally exported from the UK,
giving an overall return rate of 16%. The return rate for Regal
and Superking cigarettes, manufactured by Imperial Tobacco Limited,
is far higher and Customs believe it may be as high as 65% Customs
base this estimate on Imperial's sales data for the two brands,
during their financial year October 1999 to September 2000, of
12.2 billion cigarette exports, compared to Customs estimate of
their 50% share of the illicit market of around eight billion
cigarettes. The estimated smuggled return rate for all other UK
cigarette exports is around 10%.
6. Very large volumes of Regal and Superking
cigarettes are exported to parts of the world outside the EU where,
in Customs understanding (for example because the economy is weak
with low personal incomes and would therefore not appear to be
able to support the purchase of more expensive UK brands), the
domestic market for these brands is limited.
CUSTOMS' SEIZURES
OF SMUGGLED
CIGARETTES
7. The share of Customs' seizures accounted
for by Regal and Superking cigarettes has over several years been
consistently much greater than their share of the legitimate market
by a factor of around four to five (see the analysis of the licit
and illicit UK tobacco at Table 2 below).
8. Of non-counterfeit product seized by
Customs in 2000-01 the breakdown of the principal brands involved
was published in the November 2001 Pre-Budget Report document
Tackling Indirect Tax Fraud and is as follows:
Table 1: CIGARETTE
SEIZURES BY
BRAND (2000-01)
| Brand | % of total Seizures
|
| Regal | 25 |
| Superking/Superking Blue | 24
|
| Benson & Hedges | 16 |
| All others * | 35 |
It is estimated that between 11-17% of all cigarettes seized
were counterfeit and this table shows estimates of the principal
seized brands amongst the remainder. Seized Benson & Hedges
include packets manufactured by both BAT and Gallaher.
* Includes all other brands as well as seizures below de
minimis levels in which brands are not recorded.
9. Customs data for calendar year 2001 (Table 2) shows
50% of Customs seizures were Regal and Superkings manufactured
by Imperial. Customs have no reason to believe that their seizures
of Imperial product are unrepresentative of the share these brands
have of overall smuggled volumes.
Table 2: ANALYSIS
OF THE
LICIT AND
ILLICIT UK TOBACCO
MARKET
UK Market Share 2001 (Brands with over 3% of licit market
share only)
| Brand | Manufacturer
| Market of Market | per cent of
Licit Market
| Approx per
cent Illicit |
| Rothmans | BAT | Premium
| 4.5 | 0.3 |
Benson & Hedges
(All types) | Gallaher—UK and
European markets
BAT—other Markets
| Premium | 9.3 | 15.5
|
| Sovereign | Gallaher | Economy
| 3.2 | 15.4 |
| Mayfair | Gallaher | Economy
| 5.7 | 0.6 |
| Silk Cut | Gallaher | Premium
| 4.4 | 0.0 |
| Superkings | Imperial | Mid-Price
| 5.3 | 30.1 |
| Regal | Imperial | Premium
| 3.9 | 20.1 |
| Embassy No. 1 | Imperial |
Premium | 3.1 | 4.8
|
| Lambert & Butler | Imperial
| Economy | 11.6 | 0.6
|
| Marlboro Lights | Imperial |
Premium | 4.0 | 0.1
|
Licit Market Share—taken from Tobacco Manufacturers
Association Data 2001.
Illicit Market Share—taken from seizures in excess
of 250,000 (2001-02) (ie: per cent of seizures by Brand). There
are no other significant seizures (over 1% of the total) of UK
brands represented in the illicit market.
IMPERIAL TOBACCO
LTD
10. In 2001, the legitimate market share of Regal and
Superking cigarettes was 9.2%, representing about five billion
cigarettes out of total estimated UK consumption of 56 billion
cigarettes. Based on Customs' seizure data for 2001, the illicit
market share of these two brands was 50%, representing about eight
billion cigarettes out of the total estimate of 16 billion smuggled
UK manufactured cigarettes. Overall, Imperial's share of the legitimate
market is around 40% compared to their share of the smuggled market
of over 55%.
11. Customs dialogue with Imperial has been less co-operative
than with other manufacturers and as a consequence our view is
that controls over their exports are not yet at a level where
we could enter with Imperial into a Memorandum of Understanding.
At a meeting with Customs in April 2002, Imperial stated that
they had no interest in seeing smuggling into the UK and that
they wished to do everything they could to co-operate with Customs
to combat smuggling. Customs has agreed to review this in three
months to determine what progress has been made.
12. At the present time Customs are concerned that:
— Substantial exports take place where details are
not forthcoming as to the intended market of end consumption.
— Specific questions are either not answered or
answered selectively and after considerable delay.
— The speed and completeness of responses to tracking
and tracing requests in respect of seized goods is significantly
slower than other manufacturers and has the highest failure rate
in being unable to track and trace.
— Open access to sales and marketing staff involved
in exports to countries posing a high smuggling risk has not been
possible.
— Details of customers to whom supplies have been
discontinued because of smuggling concerns are not routinely supplied
and trade has continued with some customers even after Customs
have raised concerns.
13. Some examples of the areas in which Customs would
like to see increased co-operation from Imperial are:
— Clarifying and improving ITL's export policy,
including the factors taken into account by sales and marketing
staff to reduce the risks of return smuggling to the UK.
— sharing with Customs, data on ITL's understanding
of existing and prospective consumption in specific overseas markets.
— Providing Customs with direct access to Imperial
Tobacco International Limited sales and marketing staff to gain
a better understanding of overseas markets and of ways to identify
and prevent overseas diversion of UK exports into smuggling chains.
— Ways in which Customs and ITL can improve the
prompt exchange of information, including the handling of tracking
and tracing requests.
— Open discussion on ITL decisions to suspend, cease
or continue trading with overseas customers where there are indications
that the customer or trade related to a customer features in UK
smuggling.
EXPORT DESTINATIONS
14. Large volumes of Regal and Superking cigarettes are
exported to a number of destinations outside the EU where Customs
are unclear where the intended market of consumption is. It is
important to acknowledge that there are international hubs from
which cigarettes can be legitimately sold on for consumption in
a variety of other markets. That said in the period October 2000
to September 2001, it is Customs understanding that over a third
of all Regal and Superking cigarettes went to the following destinations
(in excess of three billion sticks, compared to total exports
in the same period of 9.1 billion sticks). The quantities exported
to these countries to date in the current Imperial accounting
year (since October 2001) have dropped significantly.
NUMBER OF REGAL AND SUPERKING CIGARETTE EXPORTS
| Destination | October 2000 to Sept. 2001
| October 2001 to April 2002 |
| Latvia | 1,363 million |
Nil |
| Russia incl. Kaliningrad | 835 million
| 99 million |
| Afghanistan | 325 million |
Nil |
| Moldova | 540 million | 36 million
|
| Andorra | 84 million | 0.2 million
|
15. Customs have been unable to establish why such large
quantities have been exported to such destinations. The quantities
exported to these five locations over the 12 month period in question
are equivalent to over half of all the Regals and Superkings legitimately
consumed in the UK during the same period.
VOLUNTARY RED
AND YELLOW
CARD SYSTEM
16. The red and yellow card system, introduced in early
2001, is the method adopted by Customs to flag up customers of
tobacco manufacturers about whom they have serious concerns. The
system is totally voluntary.
17. The concerns are generally based on seizures of cigarettes,
the proportion of a particular customer's total purchases that
appear to be finding their way back to the UK, and the profile
of their brand purchases. Customers of most serious concern are
red card customers. In these cases, Customs would expect a fully
co-operative tobacco manufacturer to take action against that
customer. When yellow cards are given against customers, Customs
would expect them to be the subject of enquiries by the tobacco
manufacturer.
18. In issuing a card Customs invite the manufacturer
to consider the following:
Red cards
— the cessation of supply to the highest risk customers
(this is viewed by Customs as the only action consistent with
a responsible export policy);
— restriction of certain brands supplied;
— the delivery of product directly into the market
for which it is intended;
— contractual provisions regarding the behaviour
of distributors in relation to the destination of product they
handle; and
— an agreed system under which customers feed into
the tracking system and report back any findings. This will protect
their interests and enable them to identify those of their customers
that are diverting product out of the market.
Yellow cards
— warn the distributor that product being supplied
to them is returning to the United Kingdom;
— draw attention to the distributor and remind them
of their obligations with reference to the manufacturers compliance
policy;
— contact the distributor to verify sales and report
any findings and action taken to Customs; and
— consider a contractual agreement with the distributor
if not already in place.
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