Billions lost to cigarette smuggling

Customs investigators had observed the traffickers for a while and struck when they had enough evidence. More than 10,000 packs of cigarettes worth altogether around 50,000 were seized. They were meant for Saxony and Thuringia, two states in Eastern Germany.

That was a big haul, says Bianca Richter of the Customs Investigation Office Dresden – or rather, it was a lot of small hauls. Once, smugglers used to transport cigarettes in large trucks or cargo containers, but now they bring them in ordinary private cares in many small loads. “They even take the train,” says Richter, “so they smuggled part of the delivery into Germany in suitcases,” Richter says.

The investigators found more cigarettes and evidence of previous smuggling trips. In total, the criminal gang had caused the loss of 15 million euros in taxes. They had bought the cigarettes in Russia, Ukraine and Belarus.

EU strategy against cigarette smuggling

The EU member states are believed to lose 10 billion euros in taxes through cigarette smuggling each year. The figure is only an estimate; it could be 15 billion or 7 billion. Either way, it’s big. The EU Commission wants to introduce a new strategy: in addition to the existing cooperation between police in the different EU member states, it wants to involve producers and countries of origin.

The cigarette companies do lose some sales through smuggled cigarettes. But they often benefit financially. The brand-name cigarettes that flooded the European market came from Eastern Europe and Asia, taking a long route from factories owned by large European and US tobacco corporations.

Over the last three years, the EU Commission has been increasing the pressure on the cigarette producers. It has signed agreements in Brussels with the four largest corporations, which cover 80 percent of the world market, under which they have to join the battle against cigarette smuggling. Now they have to document exactly how many cigarettes they deliver where.

A developing business

Austin Rowan of the European Anti-Fraud Office OLAF praises the treaty as an important first step that needs to be followed by a second: “Other producers outside the EU manufacture a lot, and they sell vast, vast quantities when they know that the market in a particular country wouldn’t satisfy a quarter or even a tenth of what they are selling.” Rowan says that the producers know very well that their cigarettes are smuggled from these often very small countries to the European Union.

The problem at the core of the illegal cigarette trade is the large price difference, which attracts organized crime. A truck carrying 100,000 packs of cigarettes is transporting 30,000 euros worth of goods in Belarus. In Poland, that value is already up to 100,000 euros, and in Germany, the cigarettes are worth 250,000 euros. And if the truck continues to England or Scandinavia, the value of the cigarettes can rise to half a million euros.

With such profit margins, traffickers today not only constantly come up with new distribution channels, they also develop their business model. Twenty years ago, they mostly smuggled brand-name cigarettes from low-price to high-price countries. Then they began producing counterfeit brand cigarettes, and now they also deal in so-called Cheap White Brands, like Jin Ling from Kaliningrad.

Legal products for the illegal market

“Officially, Jin Ling cigarettes are produced for the Russian market,” Wolfgang Schmitz of the Customs Investigation Bureau in Cologne says. “But interestingly enough, you won’t find a single Jin Ling cigarette on the Russian market.” In other words, the cigarettes are specifically produced for smuggling. And very successfully so: in some parts of Berlin, Jin Ling is the most popular brand. The demand is so large, according to Schmitz, that the brand, which was produced for the black market, is now itself being counterfeited.

The EU Commission wants to target these cheap brands as well. It wants countries like Russia to sign trade agreements under which they would improve their control of manufacturers. But this is likely to be difficult to achieve, and so ports and free trade zones in the EU and elsewhere will also be monitored more thoroughly. “The free zones throughout the world are used as aircraft carriers for placing illegal cigarettes, particularly on to the EU market,” says Rowan.

For Schmitz, the battle against cigarette smuggling isn’t just a fight against tax fraud. Many of the cigarettes, and especially those from Asia, are dangerous to health: “The tobacco often comes from regions in which they still use pesticides and herbicides which were banned long ago in Europe.” Inspectors have also found shredded CDs, mouse droppings and even asbestos fibers.