Monday, February 26, 2024

Taking on illicit trade

Taking on illicit trade. Trade in illicit tobacco is rising at an alarming rate in some European states, but declining in others, including in Greece, the Netherlands, Portugal and Romania. How can policy-makers learn from the approach taken in these member states to take on organised crime and tackle the problem?

KPMG’s latest report into illicit cigarette consumption in Europe presents a mixed picture across the continent. The report, commissioned by Philip Morris International, has been carried out on an annual basis since 2007, providing a longer view on how consumption is changing over time. It covers the EU, UK, Norway and Switzerland, and this year for the first time Ukraine and Moldova have been included in the analysis.

The overall figure for the consumption of contraband and counterfeit cigarettes has seen a relatively modest increase since 2019, 33.4 billion to 35.8 billion cigarettes in 2022; but this overall figure masks two developments. The first is the alarming growth in the counterfeit market, which has increased from 5.5 billion in 2019 to 13.1 billion in 2022, more than doubling its share of the illegal market. The other is the very uneven distribution, France alone accounts for 47% of the EU27’s illicit consumption, whereas 21 out of the EU-27 experienced stable or declining consumption.

“France’s consumption has more or less doubled in three years,” says Gregoire Verdeaux, senior vice president of External Affairs, PMI. “Illicit consumption is based on empty packet surveys, so if anything, these figures are under-estimates.”

Asked why France had particularly stark figures Verdeaux said that there were three elements that had created a perfect storm: “Do you have a high prevalence of smokers? Are these smokers sensitive to price changes? And, are people able to easily turn towards the illegal or black market?”

In general there is a much lower prevalence of smoking among professionals, but a much higher rate for the unemployed and those on lower incomes. The cost-of-living crisis has led to many smokers turning towards the illegal market, especially where there is high taxation and a lack of affordable alternatives.

By contrast, the KPMG study found that 21 countries had experienced a stable or declining share of illicit cigarette consumption. If France is taken out of the picture, overall illicit consumption declines by 7.5%. This is largely due to decreases in Greece, the Netherlands, Portugal and Romania. Remarkably, Poland and Romania have reduced their illicit consumption to its lowest since the studies started.

Asked how this has come about, Verdeaux says: “Countries like Poland and Greece still have a high prevalence of smokers, but the illicit market is in decline. Traditional tobacco control policies are simply not enough. Aggressive fiscal policies, prohibitionist approaches, and lack of deterrence in some countries are only benefitting criminals and pushing smokers toward the black market.” Taking on illicit trade

Lukasz Koslowski, Chief economist from the Federation of Polish Entrepreneurs, attributes Poland’s success to four factors: “In Poland, we have a tobacco taxation roadmap. It shows us the level of taxation on cigarettes and other tobacco products until the year 2027. So the market has a much greater opportunity to adapt. Secondly, Polish tax authorities have established partnerships with market partners, this has helped to clamp down on illicit activities. I also think that the fact that our tax policy includes differentiation of the level of taxation of tobacco products, is encouraging people to look for legal and cheaper alternatives to tobacco, such as, heated tobacco, e-cigarettes or nicotine pouches. Finally, the level of illegal traffic has been reduced by stricter border controls with Belarus. Today the trend in Europe is for illegal factories within a country.”

The failure to reduce the illicit market brings two heavy costs. Firstly, KPMG estimates that increasing taxes on legal cigarettes has the counterintuitive result of reducing tax revenue from cigarettes. KPMG estimates that this could be worth as much as €11.3 billion a year. This marks a significant increase of more than 8.5% on 2021.