Supplementary memorandum submitted by
HM Customs & Excise
TOBACCO SMUGGLING
BACKGROUND
1. During the mid 1990s, the problem of
cigarette smuggling was growing rapidly. By March 2000, cigarette
smuggling was draining an estimated £2 billion a year from
public funds and it was estimated that if no additional action
were taken to tackle the problem it would account for a quarter
of the market by 2001 and more than a third by 2003.
2. The Tackling Tobacco Smuggling strategy
was designed to slow and stop the growth of tobacco smuggling
and then to reduce it. To measure delivery of this outcome, the
Government has set Customs PSA targets for year-on-year reductions
in cigarette smuggling until 2007-08. The following table shows
illicit market share performance to date.
Table 1
MARKET SHARE OF SMUGGLED CIGARETTES (PER
CENT)
| | 2000-01
| 2001-02 | 2002-03
| 2003-04 |
| Illicit Market Share | 21
| 20 | 15 | 15 |
| Cross-Border Shopping* |
6 | 8 | 9 | 9
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| *Includes duty free as well as EU duty paid. A definitional change was made to the distinction between cross-border shopping and smuggling during 2002. Estimated using Omnibus data and may be subject to revision when GHS data becomes available.
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3. In the first two years of the Tackling Tobacco Smuggling
strategy Customs seized over 5 billion cigarettes, either in,
or en route to the UK. At the time, the majority of these cigarettes
were originally manufactured in, and exported from, the UK. So,
although the vast majority of UK exports did not feed the UK smuggled
market, most smuggled cigarettes were UK manufactured UK brands.
This was not surprising as UK smokers are predisposed to purchase
cigarette brands they are familiar with, hence these brands were
the most popular with smugglers.
4. A key element of Customs' strategy is to reduce the
supply of cigarettes available to smugglers. In respect of genuine
product we aim to work closely with all the major tobacco manufacturers
in order to tackle the smuggling problem and they have all publicly
stated a wish to see an orderly market in the UK for their products
and to co-operate with Customs.
5. In order to formalise this co-operation, Customs have
entered into Memoranda of Understanding with all three major UK
manufacturers. These agreements are designed to reinforce co-operation
in tackling tobacco smuggling into the UK, particularly the large-scale
organised freight smuggling that dominates the illicit supply.
Customs signed a Memorandum of Understanding with Gallaher in
April 2002, with British American Tobacco in October 2002 and
with Imperial in June 2003.
6. Within these agreements Customs look to the manufacturers
to ensure that they supply product only where there is a legitimate
demand for it in the intended final market, sharing their understanding
of that demand with Customs as necessary.
7. Customs also look to the manufacturers to help identify
the supply routes of any suspect export trade and to refuse sales
where the end-sale (consumption) destination is in doubt. Where
it is discovered that any particular distributor has been shown
to be behaving improperly, Customs expect that manufacturer to
re-visit the trading relationship in question with a view to discontinuing
it.
8. Within this control context, but not as part of the
Memoranda of Understanding, Customs introduced a voluntary system
to raise concerns about particular customers of tobacco manufacturers.
This involved Customs notifying the manufacturers of cases where
repeated seizures were made of stock originally supplied to specific
distributors and which appeared disproportionate. This process
and the resultant requests that manufacturers take action to address
those particular supplies by either restricting or ceasing future
supply was known as the yellow and red card system.
9. Cards have been issued where Customs believe that
there is a serious risk of a high proportion of further supplies
to a specific customer illegally re-entering the UK market. Customs
expect manufacturers to take action against such customers and
would fully expect customers who are given a yellow card to be
the subject of enquiries by the manufacturer. Customs has not
issued any red or yellow cards in the last two years.
THE LICIT
UK TOBACCO MARKET
10. Two tobacco manufacturers, Imperial Tobacco and Gallaher,
dominate the UK tobacco industry. Together they hold more than
80% by value of the UK tobacco market share.
Licit UK Market Share 2003
IMPERIAL TOBACCO
LTD
11. Imperial brand cigarettes have taken a steadily declining
share of Customs seizures over the past three years. It is already
a matter of public record following an earlier enquiry by the
Public Accounts Committee that in 2001-02, prior to agreeing an
MoU with Imperial, Customs had serious concerns about the percentage
share of the smuggled market made up by their product. In 2001
this exceeded 50%. Analysis at the time showed that the return
rate for Regal and Superking cigarettes, manufactured by Imperial,
was something in the order of 65%, as opposed to an overall return
rate for all brands of 16%.
12. Very large volumes of Regal and Superking cigarettes
were being exported to countries such as Latvia, Afghanistan,
Moldova and Andorra. Customs had serious concerns about the ability
of these economies to support the purchase of the more expensive
UK brands, and believed the domestic market for those brands was
limited.
13. Since 2002 there has been a consistent and sustained
downward trend in seizures of smuggled cigarettes across key Imperial
brands and their share of the smuggled market has fallen considerably.
Table 2
CIGARETTE SEIZURES* AND COMPONENT ELEMENTS
| | 2002-03
| 2003-04 |
| Counterfeit | 41%
| 54% |
| Genuine UK brands | 31%
| 28% |
| comprising: |
| |
| Sovereign (Gallaher)
| 40% | 58% |
| Superkings (Imperial)
| 24% | 9% |
| Regal (Imperial) |
10% | (negligible) |
| Dorchester (Gallaher)
| — | 16% |
| Other UK | 26%
| 16% |
| Non UK Brands |
16% | 18% ** |
| Other** | 12%
| — |
| *For 2002-03 Individual Seizures of over 500,000 sticks (76% of all seizures in the UK)
**Includes those seizures not identified as counterfeit or genuine, or those consisting of mixed brands not separately identified.
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GALLAHER
14. The pattern of smuggling Gallaher brands has also
changed considerably since the start of the Tobacco Strategy in
March 2000. Analysis of large seizures shows that in 2000-01,
of the Gallaher brands, Benson and Hedges[66]
accounted for 16% of seizures. In the following year, the position
was broadly unchanged with Benson and Hedges accounting for 19%
of seizures, but the majority of these were believed to be counterfeit.
Of the other Gallaher brands, Sovereign accounted for around 10%
of seizures with no other brand recording significant seizures.
15. In 2002-03 over 90% of seizures of Benson and Hedges
were counterfeit, but of the seizures of genuine product, 40%
were Sovereign. Customs and Gallaher met regularly to discuss
concerns about the levels of seizures being made in relation to
supplies to one distributor, and on 30 April 2002 Gallaher terminated
their distribution agreement with that distributor. During the
course of the year over two-thirds of Sovereign seizures eventually
related to product previously supplied to this distributor.
16. In 2003-04 Sovereign accounted for 58% of cigarettes
seized that were genuine. In addition, another Gallaher brand,
Dorchester, accounted for a further 19% of these seizures. Although
there were still seizures relating to the same distributor that
had ceased to be supplied in April 2002, there were increasingly
significant seizures arising from product supplied to the replacement
distributor. This replacement distributor was appointed at the
same time as the contract was terminated for the original distributor.
17. Despite the contractual measures and the steps taken
by Gallaher to tackle the problem, Customs raised concerns in
the early part of this year that the action was not proving to
be effective and in June 2004 asked that Gallaher take further
steps to minimise the smuggling risks. Gallaher decided to suspend
supply of Sovereign cigarettes to this distributor in June 2004.
WAY FORWARD
18. Customs' work with the tobacco manufacturers has
resulted in fewer exports of UK brand cigarettes to high-risk
destinations outside the EU, and all the evidence Customs have
shows that large seizures of almost all UK manufactured brands
are reducing in line with a falling market and a restricted supply
to smugglers.
19. Co-operation at present is generally good with seizures
of genuine cigarettes continuing to fall both in volume and as
a percentage of overall seizures. In 2000-01 genuine cigarettes
made up some 85% of seizures, falling to 28% in 2003-04 and at
the same time Customs estimate the overall size of the illicit
UK market has contracted from 16 billion to 10.5 billion cigarettes.
20. As a result of our work with the tobacco manufacturers
to reduce the availability of genuine products, large scale organised
smuggling gangs who supply most of the illicit market have increasingly
switched their attention to counterfeit product and as result
there has been a significant increase in the volume of counterfeit
cigarettes seized. In 2003-04, 54% of cigarettes seized were counterfeit.
This represents a more than three-fold increase over 2001-02.
21. Counterfeit cigarettes are completely untaxed and
unregulated. Research on these cigarettes indicate that counterfeit
cigarettes contain on average markedly higher concentrations of
arsenic (three times the level of their genuine counterparts),
cadmium (5 times) and lead (5.8 times)—all of which are
listed by the International Association for Research in Cancer
(IARC) as carcinogens—as well as increased levels of tar
and nicotine. This research has identified that habitual smoking
of counterfeit cigarettes has significant potential harm to human
health from these heavy metals and adds substantially to the considerable
risks already associated with smoking cigarettes.
22. Commercial smuggling continues to account for the
vast majority of our seizures (between 70% and 80% of the total),
but more loads are of mixed brands and are now often well concealed.
Air passenger seizures have grown as a proportion of all seizures
(to around 20%), increasing the incidence of EU duty-paid in the
illicit market.
23. Customs' initial target was to reduce the illicit
market to 17% by 2005-06 and in SR04 had that PSA target extended
to 2007-08 by when it is expected to further reduce the illicit
market share to 13%. Figures published at the time of the November
2004 Pre Budget Report show that Customs have already succeeded
in pushing the illicit cigarette market down below the 17% target.
In 2003-04 the illicit market share was down to 15% representing
a cut of almost a third in the illicit market share from its peak
and a reduction of more than 5 billion sticks in successfully
smuggled volumes.
17 December 2004
66
This is a brand manufactured by both Gallaher and BAT and is
also regularly counterfeited so we are not able to say how many
of these were actually manufactured by Gallaher. Back
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