In Focus: How Europol tackles the illicit cigarette industry

January 17, 2018
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Howard Pugh is a senior specialist at Europol in charge of fraud issues in the EU. Having worked as a criminal investigator for Her Majesty’s Revenue and Customs before joining Europol, Howard’s experience of illicit trade in Europe is considerable.

STOP: ILLEGAL met with Howard to discuss the role Europol plays in tackling illicit trade and the rising prevalence of illegal cigarette factories across the continent.

STOP: ILLEGAL:  Tell us about yourself and where you are currently based.

Howard Pugh:  I’m currently based in The Hague, in the Netherlands. I manage the fraud section at Europol, with five teams under me, one of which is the Analytical Project Smoke team. They are a team of analysts and specialists who help law enforcement to combat the illicit tobacco trade and all other types of excise fraud.

STOP: ILLEGAL:  What are the most prominent types of customs and excise frauds currently being seen across Europe?

Howard Pugh:  I would say there are three key types of fraud. Firstly, illicit production: organised crime groups setting up their own illegal cigarette factory and then counterfeiting various brands. It is a big phenomenon at the moment.

Another fraud involves cheap whites: these are cigarettes which are generally legally manufactured, both inside and outside of Europe, and have a local market, but are then smuggled across borders to places where they don’t have a license or a market themselves and are sold to undercut legitimate trade.

Lastly, abuse of excise duty schemes designed to facilitate legitimate trade and move cigarettes around Europe without paying the excise duty until it reaches the market. Criminals have infiltrated these to make sure the cigarettes do not reach the market or pay the excise duty.

STOP: ILLEGAL:  Would you say tobacco is the biggest excise fraud area in Europe at the moment?

Howard Pugh:  Yes, I would say that, and one of the reasons tobacco is more prominent, is that they have got a very interconnected supply network. It is one of the only areas of excise fraud that has a European-wide figure. One report estimated that it costs the EU governments €10.2 billion a year in lost tax revenue and there is no equivalent of that in either oils or alcohol.

STOP: ILLEGAL:  What is so attractive about the smuggling and fraud of tobacco?

Howard Pugh:  Organised crime groups look at this as an easy form of income. The profits from excise fraud are huge and can be used to fund other areas of crime and terrorism. We have seen career drug criminals moving into excise fraud, largely because it is considered a low risk and high profit, area of crime. One of the strictest areas would be the UK and if you can prove conspiracy to defraud, you are looking at a maximum sentence of seven years. If the crime is not considered criminal and is dealt with administratively, you are then looking at either a fine or a relatively small custodial sentence of a maximum of a few months.

STOP: ILLEGAL:  So, in many European countries, even if you are caught with a truckload of illicit cigarettes, you may escape with only a fine?

Howard Pugh:  Yes, you are generally looking at lower sentences, but if you are a repeat offender it is taken a little more seriously. Organised crime groups however, tend to use drivers who have never been caught before. You would have to be a repeat offender to face stringent custodial sentences.

STOP: ILLEGAL:  Given your time spent on excise fraud, does it frustrate you that the penalties are not as high as you would like them to be?

Howard Pugh:  It is frustrating that this area of crime is not seen as ‘serious’.  There’s no specific victim and it is quite difficult to then get people interested. If you’re then saying ‘I’ve got one over on the government’ and the person who’s losing out is the tax man, then you often lack sympathy with the general public. They don’t tend to see the links between organised crime and those buying cigarettes from the black market. This is basically funding serious criminals.

STOP: ILLEGAL:  Can you tell us more about the illicit cigarette factories that are being discovered within Western Europe?

Howard Pugh:  We’ve seen a definite rise in criminals setting up those types of factories. We’ve done some work under EMPACT (European Multi-Disciplinary Platform Against Crime Threats) which has collaboration between police, customs and border guards to target illicit production. We regularly see workers being arrested from many EU Member States, but also South America, Ukraine and Moldova. However, the nationalities of the organisers vary considerably, and involve both EU Member States and non-European nationalities.

Locating the factories is difficult because the organised crime groups who operate them are extremely sophisticated. They will set up a factory, sound proof the area and install jamming devices so that mobile phones cannot be used on the premises. They will also regularly move these factories and separate out their supply chain. In 2016, 37 factories were raided EU wide, 30 of which were in Poland. Organised crime groups have now been put under pressure in Poland and we are seeing them move to other countries, whether it be Czech Republic, Slovakia, Germany, or further afield to Netherlands and Spain. It is like a waterbed effect. You put pressure on one country and then there the problem rises in another. Europol also recently supported the Spanish Guardia Civil on an operation which helped to uncover an illegal factory in Granada, Spain. 

We are facing extremely professional groups who do this for a living. The setup of a factory would cost in the region of €600,000 – €700,000, but the first lorry that leaves that factory and is then sold on the black market would repay those costs. If they can keep it running for six months or longer, criminal proceeds would be in the millions.

STOP: ILLEGAL:  Do you collaborate with Phillip Morris International (PMI) to combat illicit trade?

Howard Pugh:  Yes, we regularly meet with them. We often send tobacco manufacturers samples to understand whether they are counterfeit or genuine.  These samples are seized by law enforcement and referred to PMI via Europol for analysis. They also give us information about supply chain control and how the legitimate market works. We can then begin to understand how the criminals are exploiting these legitimate markets for their own benefit. Operational intelligence is crucial, but that’s often the most highly prized, and the most difficult to get.

The key to combatting illicit trade is sharing information between different agencies, whether they be border guards, coast guards, police customs, security services or tobacco manufacturers.

STOP ILLEGAL

Written by STOP: ILLEGAL

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