Home Affairs Committee - Minutes of EvidenceHC 200

Back to Report

Oral Evidence

Taken before Home Affairs Committee

on Tuesday 5 November 2013

Members present:

Keith Vaz (Chair)

Ian Austin

Nicola Blackwood

Mr James Clappison

Michael Ellis

Dr Julian Huppert

Mark Reckless

Mr David Winnick


Examination of Witnesses

Witnesses: Paul Williams, Head of Corporate Affairs UK, Japan Tobacco International, and Steve Payne, Anti-Illicit Trade, Government Relations & Communications, Japan Tobacco International, gave evidence.

Q1 Chair: Mr Williams, Mr Payne, thank you for coming today to give evidence to this Committee. This concerns our inquiry into tobacco smuggling. You are our first oral witnesses. We will be hearing further evidence from other witnesses as we proceed with this inquiry.

Can I begin by asking a question about the extent of tobacco smuggling? How big is it, Mr Williams?

Paul Williams: The estimates that we have seen from HMRC in the latest set of statistics for 2012 and 2013 would suggest, at their upper estimate, that it is 16% of cigarettes and some 48% of hand-rolling tobacco that is consumed in the UK. 1

Q2 Chair: Is this a UK problem? Or is smuggling a worldwide problem?

Paul Williams: It is certainly driven by differentials cross-border, between many countries within the EU. Generally, you would tend to find that it is driven from east to west in terms of the very low prices of product in the eastern side of Europe, and certainly in the former Soviet Union countries, and ever-increasing prices as you move further west, with the UK and Ireland being two of those countries with the highest prices within the EU for tobacco products.

Q3 Chair: At the moment, as I understand it, there are allegations of complicity by tobacco companies in illegal smuggling.

Have you heard of these allegations, that it is the tobacco companies who are complaining of smuggling who have ended up being part of the whole process of smuggling cigarettes into this country?

Paul Williams: Clearly, I have heard of the allegations.

As far as JTI is concerned, if we look at the seizures over the last few years, JTI has been responsible for the manufacturing of less than 1% of the seizures made by HMRC in the UK of hand-rolling tobacco and similarly around 1% of any seizures of ready-made cigarettes.2 So, a very small proportion of anything that is coming into this market is legitimate product as it were.

Q4 Chair: So you can tell us unequivocally today that there is no question that any tobacco companies are involved in the illicit smuggling of tobacco.

Paul Williams: We certainly work very closely with Her Majesty’s Revenue and Customs and the Border Agency in ensuring that our supply chain is secure. We have a very strict code of conduct in supplying our direct distributors: people who purchase product direct from our factories.3 We have put in place stringent controls of those particular customers to make sure that our supply chain is secure.

Q5 Chair: So what would you say to the Royal College of Physicians who have told us that the credibility of the tobacco industry in debates on the illegal tobacco trade is highly suspect?

Paul Williams: I have read their submission. Clearly, they have made a statement regarding an investigation by OLAF, which started some two years ago. We have seen nothing that has come out of that investigation to infer that JTI has any case to answer.

Q6 Chair: Thank you for reminding the Committee; you are currently under investigation by OLAF, the European anti-fraud agency, in respect of JTI’s involvement in the illicit tobacco trade. You are telling us that after four years no evidence has been produced against you.

Paul Williams: I would say that it was alleged involvement and obviously the allegation has been and is being investigated. We can only assume OLAF investigates all allegations of any duty fraud, regardless of the category. As far as JTI is concerned, there is no case to answer.

Q7 Chair: In respect of allegations that you all supplied the Assad regime with tobacco products while that regime is under sanctions, is there no truth in that?

Paul Williams: Again, this would refer I assume to when sanctions came into play in May 2011. To date, we have had no response in respect of those allegations as far as JTI is concerned.

Q8 Mr Winnick: As I understand the arguments of your industry, you say in effect that the affordability gap between cigarette prices in the UK and overseas is the main driver for the illegal trade. Is that the argument?

Paul Williams: I think affordability clearly does play a huge part. It is not the only component in all of this.

Mr Winnick: But in your view, it is an important one.

Paul Williams: It is an important one.

Q9 Mr Winnick: So the implication therefore is that the UK Government, whichever Government happens to be in power at any given time, should reduce the price of cigarettes.

Paul Williams: To be pragmatic, I do not see that happening. However our view-

Mr Winnick: No, you are quite right: you do not see it happening. The likelihood is very remote, but your industry would like to see that.

Paul Williams: I think if the Government are intent on having very high levels of duty that apply to our particular products, then clearly enforcement becomes a critical component in that. If you are going to heavily tax a product, then you clearly need to enforce your borders to make sure that the product is not smuggled back in to the UK market, therefore denuding the Government of up to £3 billion in duty at their higher revenue limits4.

Q10 Mr Winnick: Mr Williams, Mr Payne, I wonder if I can give you a statistic and whether you are aware of it.

In England in 2011-apparently the information has not yet become available for 2012-it is officially stated that around 75,100 deaths were as a result of smoking. Are you familiar with that statistic?

Paul Williams: I am not familiar with the specific statistic. Clearly, there are risks associated with smoking.5

Q11 Mr Winnick: If I have just heard you correctly, you accept that smoking does cause deaths.

Paul Williams: No. What I have said is that there are risks associated with smoking. When the first health warnings were put on packs in 1971, it clearly stated on the front the health risks associated with smoking. Consumers were first made aware of those risks 42 years ago.6 At the end of the day, smoking is an adult choice. People should be aware of the risks and they should not take those risks unless they are aware.

Q12 Mr Winnick: To the best of my knowledge, no one has suggested that smoking should be banned. We know what happens when, for instance, drugs are banned, and all the criminal activity and the rest of it that is involved.

But the question I would ask you-I am sure you have been asked this on previous occasion-is, do you not sometimes feel you are involved in a death trade?

Paul Williams: I am not quite sure what this has to do with the Committee.

Mr Winnick: You are trading in a commodity that from every form of notable evidence undoubtedly causes death.

Paul Williams: We are trading a commodity on which the Government received £12 billion in duty and £3 billion of that is avoided as a result of the illicit trade. We came here today to assist the Committee in addressing what we believe is that duty loss and how we believe that could be better handled. Part of that issue, of course, is that it also undermines the legitimate business within the UK.

Q13 Mark Reckless: Did you say that you do not think that cigarettes cause deaths?

Paul Williams: I am saying there are risks associated.

Mark Reckless: I heard that but I am not sure if I misheard. I know that is the line you had, but is it your position that cigarettes cause deaths? Or are you denying that?

Paul Williams: I am not a medical professional.

Mark Reckless: You do not know?

Paul Williams: I am not a medical professional.

Mark Reckless: I am aware of that.

Paul Williams: All I can say is that there are 14 different health warnings on the packs.

Mark Reckless: I thought the tobacco industry had abandoned this many years ago, the suggestion that cigarettes did not cause deaths. It seems that you are repeating that today.

Paul Williams: It says on the front of the pack that smoking kills.

Mark Reckless: Do you accept that?

Paul Williams: Yes.

Mark Reckless: So cigarettes cause deaths.

Paul Williams: Cigarettes can, in certain circumstances, cause deaths.

Q14 Mark Reckless: In principle, do you believe the Government is right to pursue policies to make smoking less attractive and less affordable?

Paul Williams: I think the policies that the Government chooses to adopt very often have unintended consequences. I think they are done with the best intentions. However, as we have said, smoking is an adult choice and people are aware of the risks and have been for a number of years. It is our view that clearly affordability may be a part and parcel of why some people may decide not to smoke but also that the increased cost of product and the lack of affordability drives people to make other decisions, which moves them into an illegal channel where clearly the product is unregulated.

Q15 Mark Reckless: When the Government drives up prices of cigarettes in the taxed and formal market, do you believe any reduction in demand that might constitute is partly offset by increased illegal smuggling? Or entirely offset? Or even more than offset by the consequences you cite?

Paul Williams: I think if you combine the illegal and the legal market- the UK duty-paying market-the size of it has changed very little. So clearly people do find alternative sources. I think price is one of those key drivers. There comes a tipping point.

Q16 Mark Reckless: So the size of the market has not changed: people are not giving up smoking in the way I thought they had been.

Paul Williams: According to the ONS statistics, there has been very little change over the last five years. We are still seeing that 20% of the adult population are smoking, so the rate of decline is very, very slow.

The number of cigarettes per day has declined somewhat and that is now sitting at around 12 cigarettes a day. I think it has dropped by about one cigarette over the last three to four years, so people are perhaps consuming slightly fewer and maybe the point you make about affordability is that that is what might encourage people to consume fewer.

Q17 Ian Austin: I think we could all agree that it would be quite a good thing to reduce the numbers of young people who start smoking. As I understand it, your argument is that the proposed EU ban on packets of 10 cigarettes would make cheap illicit tobacco more attractive.

What I want to ask is whether it would not also discourage young people from taking up smoking by raising the price that they would have to pay to start in the first place.

Paul Williams: The reason why I think 9 December is such a crucial date for the Committee is that on that date the EU Parliament will decide whether or not small pack sizes, 10s, and 12.5 grams of roll-your-own, will no longer be permissible in the UK market. If we look at the number of cigarettes that are sold in the UK market, 1.5 billion packs are sold in 20s and 1 billion packs are sold in 10s. From my perspective that is about adult choice. It is also about price. So the price of those 1 billion packs is about £4 a pack. If you ban those, you are overnight doubling the price of cigarettes in the UK market.7 I have to believe that that will have a significant impact on the tipping point as to whether or not people move into the illicit market.

As far as 12.5 grams roll-your-own tobacco is concerned-and that is now the product that is most smoked by adults in the UK-the minimum pack size now could be as high as 40 grams. So the price would quadruple from £4 to £16 per pack.

When one in every two packs in the UK is already illicit and two in every five packs are bought in the UK as a 10, that would seem an illogical step. I think that is what will encourage illicit trade.

When it comes to affordability, I think most experts would say that the reason children start smoking is peer-group pressure: family and social pressures. It is not about going out and buying a pack of cigarettes. That may come later. But we do not see a link between small pack sizes and children’s purchases. Children should not be able to buy cigarettes. The key is that children should not be able to buy cigarettes in the first place.

Q18 Ian Austin: They may start smoking or be interested in starting smoking for any of the reasons that you have just suggested but they then have to be able to go and buy the cigarettes, do they not, and the cheaper they are, the easier it would be for them to buy them?

Do you have any information about who buys packets of 10 as opposed to packets of 20? Are they predominantly bought by younger people?

Paul Williams: If you are under the age of 18, you are legally not permitted to be sold cigarettes. So if we address that and say that children should not have access to cigarettes, which is what we firmly believe, then clearly the argument does not take place.

Ian Austin: Yes, but do you know who is buying the packets of 10? Do you know anything about it? You must do. You spend a fortune on marketing and research and all the rest of it.

Paul Williams: Yes, I can give you prime example of a particular account in Canary Wharf in London. It has only six outlets in Canary Wharf-50% of his sales is in 10s. He has no children in Canary Wharf. Children do not purchase in Canary Wharf. This is about meeting adult demand. People in that particular area buy 10s.

Ian Austin: Set aside the six shops in Canary Wharf, generally, who is buying packets of 10s? You must know.

Paul Williams: It is about affordability. And you are right, the earlier question about-

Q19 Ian Austin: Let me ask you another way. Are they more likely to be bought by young people?

Paul Williams: There is no evidence to suggest they are more likely to be bought by young people.

Ian Austin: None of your market research or anything at all?

Paul Williams: Not in the slightest, no. Definitely not.8 This is about adult choice and it is about people saying, "If I want to afford to smoke, and I normally smoke 10 to 12 cigarettes per day, then 10s is the appropriate pack for me". And it seems odd to me that we would want to encourage people to buy 20 when for every other product category, whether it be alcohol, calories, everybody is told to cut down. However, the EU is saying that you should double your purchase on your cigarettes and quadruple your purchase on roll-your-own tobacco. That does not make sense to us.

The change in the law will effectively take place in 2015. I was in Ireland from 2003 to 2008, and when 10s were banned in the Irish market in 2007, illicit trade went up by 5% that year from 23% to 28%.

Q20 Chair: You are a company that had, I think, sales of $11 billion. Is it sales or profits of $11 billion?

Paul Williams: No. In the UK market?

Chair: Globally.

Paul Williams: I could not tell you what our global sales are. I do apologise.9

Chair: But it is a lot.

Paul Williams: Yes. We sell a lot of cigarettes. We are the third biggest international tobacco company in the world.

Q21 Chair: What I am interested in is this: trying to find out who is peddling these illegal cigarettes. Where is it coming from?

You have given the Committee a number of very important theories but at the end of the day this is a problem that is bigger than Customs and Excise and Inland Revenue, is it not? They need a lot of help to track down these gangs. This is serious and organised crime, is it not?

Paul Williams: It is serious and organised crime.

Q22 Chair: What percentage of your profits or time is spent on trying to track down the Mr Bigs who are behind the illegal trafficking of cigarettes?

Steve Payne: That is unfortunately not something we can do. We are not law enforcement people. It is not our area where we can get involved in investigating people and who is behind it. That is not something we would get involved in. That has to be left to law enforcement agencies.10

Q23 Chair: When I came to Northern Ireland to look at your factory, you showed me a new mechanism for tracking the cigarettes that you produce, so you knew where these cigarettes were going to end up. Is this something that has been adopted by other people in the industry or is it just JTI that is doing it? There seems to be an attempt to try to find out who is behind it. We know you cannot turn detective, but this is a very important issue, is it not?

Steve Payne: Yes, you are correct. These are our cigarettes, which are the genuine product. What we cannot track is the illicit product that we do not make, which is the 16% HMRC are referring to or the 20% we think it is in the market.11 They are not made by us, so we have no mechanism to identify who is behind it and who is selling it. It is something that law enforcement have to take the lead on.

Q24 Chair: Of course, but you would have anecdotal evidence. You have views as to where this is coming from.

Paul Williams: Yes, we do, in terms of illicit whites manufacturers; certainly.

Q25 Chair: Yes. Who is it?

Paul Williams: It comes out of Jebel Ali-

Steve Payne: Yes, lots of locations. It is coming from many, many countries around the world, from small and medium-sized manufacturers who do not have strong due diligence processes on who their customers are.

Q26 Chair: Would you say that some countries may be complicit in what is going on with illegal trafficking of tobacco?

Steve Payne: It is hard to say a country is complicit. I would say that the organised- 

Q27 Chair: What about law enforcement agencies turning a blind eye?

Steve Payne: I would say the organised crime gangs are targeting certain jurisdictions where they know they can use the regulations to their benefit, for example, Jebel Ali, which is a free trade zone. They will purposely place their factories in that location because they know they can manufacture and export out of there without breaking any local laws. Therefore the local law enforcement cannot do anything because nothing wrong is being done.

Take the pack here. Do you have the Jin Ling?

Paul Williams: No.

Steve Payne: Jin Ling is a very popular pack that comes out of Russia and Ukraine. Many of you may have seen it. This particular product is made perfectly legitimately in Russia and Ukraine and the law enforcement agencies cannot do anything about it because it is made legitimately, taxes are paid and everything is done above board. But then when it is sold to the customer, they are the ones who smuggle it to another country. That is where the problems start.

Q28 Chair: I heard of an investigation that suggests that the product inside the illegal cigarettes in many cases could be extremely dangerous-obviously we take Mr Reckless’ point that smoking kills and indeed, Mr Williams, you supported that view because it is clearly on the packet. Are the substances that have been put into some of these rolled up cigarettes a concern to you?

Steve Payne: They are totally unregulated. Our product is very regulated and we have to follow very specific regulations.

I saw the piece on the television news this morning when you were on ITV, on Daybreak, and there was a technician on there saying that they had all sorts of things inside the cigarettes. We do not, as a course, test all the different cigarettes inside for the tobacco, but we have seen a number of reports over the years of all sorts of things inside, yes, because they are not regulated.

Q29 Mr Winnick: I wonder if I could ask you a personal question, which you are under no obligation to answer. Do either of you smoke?

Steve Payne: I do not.

Paul Williams: I do not.

Mr Winnick: You do not.

Q30 Mr Winnick: And if you have children, would you be encouraging them not to smoke?

Steve Payne: I would not encourage my children to smoke.

Paul Williams: No, as a father and a grandfather, definitely not.

Mr Winnick: Neither of you smoke.

Paul Williams: No.

Mr Winnick: Thank you very much.

Q31 Paul Flynn: Is there some suggestion that smuggled cigarettes are somehow more toxic than other cigarettes, that you get a better form of cancer by having your cigarettes rather than smuggled one?

Paul Williams: Smuggled cigarettes are obviously unregulated so they do not have to comply with any of the regulations that we would have to comply with as a legitimate manufacturer.

Q32 Paul Flynn: How does this affect the likelihood of their causing cancer?

Paul Williams: Again, we are not experts in what the components of illegal cigarettes are. We can only go on what we hear, as well, that they contain various other components that you would not find in our tobacco products.

Q33 Paul Flynn: So no reason why they might be more dangerous than cigarettes that are regulated.

Paul Williams: I think the comments from this morning were that people who have conducted evidential surveys on these particular brands have said they contain higher levels of tar and nicotine and so clearly they are not regulated as we are regulated.

Q34 Paul Flynn: You suggest the National Crime Agency could have a role to play in combating the illicit trade in tobacco, particularly given the involvement of organised criminal gangs. It is a pretty bleak picture of a deteriorating situation.

Do you think that they would be hampered by restrictions on their operations in Northern Ireland if your proposal were supported and put forward?

Paul Williams: If our proposal for, sorry-

Paul Flynn: For the National Crime agency to have a greater role.

Paul Williams: Our belief is that hopefully all of the enforcement agencies will work very closely together, including with us. For example, this year to date we have supplied HMRC with 83 pieces of intelligence relating to some 3 billion cigarettes that were suspect that were heading for the UK. We want to work in collaboration and we hope that the agencies will all work in collaboration.

Q35 Paul Flynn: What is your view of the reason why the number of arrests, prosecutions and convictions for tobacco smuggling has fallen over the past three years when apparently the activity continues, if not increases?

Paul Williams: We understand what a difficult job it is for HMRC. Clearly, very often you cannot get to the source. We would say that fake cover loads and various other documentation makes it exceedingly difficult if you are getting to the larger organised criminals. I think that is one of the issues. They are becoming more and more sophisticated.

Recent reports would suggest that the Border Force-certainly with seizures at major ports of product coming into the UK-have been fairly successful but that we are seeing significantly more issues inland and inland detection and the availability of product in communities is becoming more prevalent.

Q36 Paul Flynn: The maximum fine for breaking the tobacco display ban regulation is £5,000, significantly lower than many of the other fines issued for the evasion of excise duty. Is there a case for changing that sum of £5,000?

Paul Williams: Our view would be that the penalties, such as seven years’ imprisonment, are in place and that the fines are there to be applied. The issue of whether or not the courts apply them and whether prosecutions turn into convictions is probably more our concern. There are lots of prosecutions but few convictions.

Our particular position would be that it is about going after the proceeds of crime as well. That is where it really starts to hurt, as long as the proceeds of crime are being followed through. I think that of those individuals who have tried to profit, 13 or so of HMRC’s top 30 most-wanted tax fugitives are involved in tobacco smuggling of some type. So clearly there are huge profits to go after.

Q37 Paul Flynn: What is the likely benefit, financially, now for a small trader for evading the rules, in relation to the £5,000 fine? Is it realistic? Or is it an advantage for them to take a risk?

Steve Payne: The display ban is not in practice for small retailers yet.

Paul Williams: No. There is no display ban for small retailers at this point in time. It does not come into play until 2015.

Q38 Paul Flynn: What would you see as the ideal situation for tackling this? What should the level of fine be? What should the penalty be, to discourage anyone from breaking the new rules?

Paul Williams: Inland is where HMRC and Trading Standards can work together very closely. We support them in identifying outlets where we believe there are issues in relation to illicit products. I think if they worked closely together, that would be a big help.

Q39 Paul Flynn: Can you say with absolute certainty that none of the smuggled tobacco product is manufactured by your company?

Paul Williams: I think as we mentioned only 1% of the seizures by HMRC related to JTI product. Clearly, we have our supply chain controls in place. We work very, very co-operatively and collaboratively with HMRC in all markets. Certainly, we believe that is why so little of the product that is seized is relevant to JTI.

Q40 Chair: In terms of jobs in your industry, what is the current level of employment?

Paul Williams: We currently employ 1,800 people within the United Kingdom. Most importantly, we employ 900 people at our factory in Northern Ireland. That is what we believe will potentially be at huge risk should, for example, 10s packs be banned and 12.5 grams. We invested significantly to meet the demand of adult smokers within the United Kingdom market and that factory is pretty much the sole producer of those. So on 9 December there could be serious consequences for employment in Northern Ireland.

Q41 Chair: Of course you have your own local Member of Parliament, Ian Paisley, who I know has raised this issue. It was also raised at Prime Minister’s questions and the Prime Minister said he would look at it.

But in respect of illicit whites, the Jin Ling, is that a Jin Ling you have in front of you?

Paul Williams: This is a Jin Ling.

Chair: They have 51% of the market. Is that right?

Paul Williams: Yes. Jin Ling is 51% of illicit whites within the United Kingdom.

Q42 Chair: How would a packet of Jin Ling, such as you have in front of you there, get to a place such as Leicester, if it is manufactured in Russia?

Steve Payne: The majority of them are manufactured in Russia and in Ukraine. But it is quite ironic that even this, because it has become so popular, is now being counterfeited. So even the illicit whites are being copied.

Chair: Illicit whites are being made illicitly. But how would that get to Leicester? How would that get to Birmingham? How would it get to the midlands?

Steve Payne: Well, what will happen is that Jin Ling, as I said, will not be doing too many careful checks on who the customer is and the customer will be saying, "I will be taking it out of the country".

Q43 Chair: So that bit is legal?

Steve Payne: So that bit is legal inside Russia so the Russian authorities cannot do anything about it.

Once it leaves the country, it never arrives anywhere else. It does not arrive in a second country. It just disappears. It is driven by truck, put on a ship, or whatever mode of transport they use, and taken into Europe and obviously some of it then ends up in the UK.

Q44 Chair: So the main method by which it comes to the UK is, you think, by truck, which means it goes through Dover. So in respect of the UK Border Force, who did not meet their targets, I think, last year for dealing with smuggling, what is the problem there? Do they need more resources to stop it coming into the country?

Steve Payne: Definitely.

Chair: Because once it is in, it is too late, is it not?

Steve Payne: Yes. It is too late and they do need more resources and more ability to tackle all sorts of transportation. It will not be just trucks. There will be different methods of bringing it in. They will take some by ship and bring it in in containers. But our information in recent years has been that there is less and less in containers now. They are taking it in smaller loads because they realise that is a little safer because if the whole container is seized, they have lost a whole load, whereas if they break it down into smaller truck-sizes, and one or two get caught, some of it still gets through.

So yes, it is coming in. They use the ferries. It will not just be Dover. There are lots of ports all around the UK. We have even seen a lot of evidence of it going into southern Ireland by ferries and different ways and then driven into Northern Ireland and then coming from the Northern Ireland back into other parts of Scotland and...

Q45 Chair: What more can the UK Border Force do to stop this happening? What more needs to be done? They cannot check every single truck. If you check every single truck at Calais, this Committee would begin to be very concerned about other, legal goods.

Steve Payne: It is a problem that everybody has, not just here. If 1% or 2% of containers are checked at ports around the world, that would be unusual. It is very rare that it is more than that. That is the reality of the dilemma we have-98% of goods that go through will not be checked.

Q46 Chair: Mr Williams, is there anything else you want to say to the Committee about this trade?

Paul Williams: Yes. I think we are seeing significant emerging threats. Mr Payne has mentioned that clearly the Middle East is one. The Canaries is another, where there is again an enterprise zone where there are significant set-ups of manufacturing at this time with a vast array of products available now between €1 and €1.80 per pack covering every conceivable type of cigarette product. That I think is an emerging threat that needs to be considered.

The internet is another one. Just in advance of the Committee we asked one of our providers to see what he could acquire and he acquired a kilo of tobacco leaf.

Q47 Chair: Where from?

Paul Williams: Over the internet, for £30.

Q48 Chair: Is that legal or illegal?

Paul Williams: It is legal until you do something with it.

Chair: So to have it and wave it about at a Select Committee is perfectly legal?

Paul Williams: It is. Until you shred it or put it through a Moulinex blender and try to turn it into something you can smoke, it is legal.

Mr Winnick: At least we will not be reported today.

Q49 Chair: What else do you have in your bag? You are like Mary Poppins.

Paul Williams: This is interesting as well. Over the internet: 50 pouches of 50 gram Amber Leaf, all of which is counterfeit; all of which has tax stamps on it. In fact, we ordered 50 but only got 42 so that was amusing in itself.

Chair: So they are short-changing you.

Paul Williams: We have been scammed already and whether or not any of them weigh 50 grams of course is another matter. Again, this is the scale of what is available.

Q50 Chair: So that is illegal, what you have in your hands.

Paul Williams: That is illegal. This is both intellectual property fraud and also duty fraud.

Chair: Right. Maybe you could open the bag and hand them round-not for us to use, but to see. Oh, it cannot be opened? Do not worry. We will look at it later.

Steve Payne: We have one sample here.

Q51 Chair: Maybe you can pass that round. That is a legitimate stamp and a legitimate covering that has been illegally copied. Is that right?

Paul Williams: Yes. These are fake tax stamps.

Q52 Chair: They come with the tax stamp already stamped on it?

Paul Williams: No. Those come separate. These are the pouches.

Chair: They are separate. It is a do-it-yourself kit

Paul Williams: A do-it-yourself kit.

Q53 Chair: What is the value of this do-it-yourself kit nationally; not this little bag but generally? What do you put it at?

Paul Williams: This would be responsible for the largest percentage of all the non-UK-duty-paid.12

Chair: Which is how much?

Paul Williams: It is sitting currently at 48% of the market. The majority of that is counterfeit.13

Q54 Chair: You can order it on the internet.

Paul Williams: You can order that. We ordered that on the internet.

Q55 Chair: Has anyone informed the internet companies that this is happening and this needs to be stopped?

Paul Williams: Clearly, we will be passing this on to the authorities after this Committee meeting.

Q56 Chair: When you say the authorities, who is that?

Paul Williams: HMRC.

Chair: So, to Lin Homer, who will be giving evidence to us at some stage in the future.

Paul Williams: Yes. We will pass that on.

Q57 Chair: Do you not feel this is just overwhelming: that there is nothing you can do to stop all this?

Paul Williams: I think it is the scope and scale. As well as already packed, we also have 1.5 million empty pouches, such as the one Mr Ellis is looking at at the moment. Those were seized. We know that tonnes and tonnes of loose tobacco are seized. They were being seized at Coventry in the postal depots.

Clearly, the empty pouches come in because that is not duty fraud: that is intellectual property fraud. The tobacco comes in separately and the two are put together. When you consider you pay £16 for this within the UK, but you can probably make this for somewhere under £1 and then sell it at £8 to £10 illegally, it is a huge, huge profit margin. That is really what is driving it.

Q58 Chair: We are coming to the end of this session. Finally, if you had a message to the public what would it be? What would you be saying to the public about reporting these kinds of activities?

Paul Williams: It is a message we are taking out into the local communities through media and saying, "Don’t be tempted. Please do not be tempted. These cigarettes contain components that clearly are very dangerous and realistically you must report it to the HMRC hotline". That is our message: do not be tempted.

Q59 Chair: Once they report it, it is then going to be acted upon. Hopefully.

Paul Williams: Absolutely. It must be acted upon. If it is cheap, it is too good to be true.

Q60 Chair: Mr Williams, Mr Payne, thank you very much for coming to give the first oral evidence of our inquiry session into tobacco smuggling. We are most grateful. We might write to you again. Before you leave, please would you collect all your legal and illegal substances so the Committee is not left in difficulties.

Thank you very much.

[1] Note by witness: These figures refer to total non-UK duty paid consumption in 2012/13, which includes illegally smuggled tobacco.

[2] Note by witness: This 1% is calculated by comparing all UK seizures of JTI product that JTI has become aware of, including information on seizures (both above and below the notifiable limits) reported by HMRC, the police, inquiries from Trading Standards, and UK seizures from OLAF, to the overall HMRC seizures. JTI has requested additional data from HMRC on all seizures below notifiable limits, but JTI understands that HMRC does not keep full records on these seizures, so no information has been provided.

[3] Note by witness: To clarify that JTI has a number of compliance programs see http://www.jti.com/how-we-do-business/anti-illicit-trade/our-programs/ .

[4] Note by witness: Based on HMRC’s upper estimates of non-UK duty paid product (up to 16% of cigarettes and up to 48% of RYO) the estimate loss of duty is £2.9 billion.

[5] Note by witness: For more complete details of JTI’s views on smoking and health please visit www.jti.com .

[6] Note by witness: To clarify that the 1971 introduction of health warnings was the first time UK cigarette packs expressly drew consumers’ attention to the risks of smoking .

[7] Note by witness: For example the RRP of Sterling King Size (a JTI product) 10s is £3.52 and the RRP of the same product in a 20s pack is £6.86.

[8] Note by witness: To clarify that JTI does not conduct market research on under 18s.

[9] Note by witness: To confirm that JTI’s global core revenue for 2012 was USD 11.8 billion Core Revenue (core revenue does not include revenue from distribution, contract manufacturing and other peripheral businesses ) .

[10] Note by witness: To clarify that JTI does have an AIT program, that it has spent $200 million internally on its AIT department and related initiatives since 2007 and has, through JTI’s EU agreement, committed to provide $400 million over a 15 year period to fight illicit trade in the European Union (For more information please visit http://www.jti.com/how-we-do-business/anti-illicit-trade/overview/ ) .

[11] Note by witness: To clarify these percentages refer to non-UK-duty-paid product, a proportion of which is illicit tobacco.

[12] Note by witness: To clarify RYO tobacco makes up the largest percentage of all non-UK-duty-paid tobacco products.

[13] Note by witness: To clarify that a proportion, not the majority, of the estimated 48% of non-UK-duty-paid RYO tobacco is counterfeit tobacco.

Prepared 16th June 2014