Infestation of The Termite Brands

August 22, 2017

Last month, the U.S. Helsinki Commission brought together officials and representatives from industry and academia to debate the harmful effects on society of illegal tobacco trade and related crime.

There was a general call for greater resource, political will and action to combat the manufacturing and smuggling of illegal goods, which undermines legitimate business, negatively impacts society, and funds transnational criminal groups and possibly even terrorism.

You can read my post on the hearing here

Speaking at the hearing, PMI’s Senior Vice President and General Counsel, Marc Firestone spoke of a growing plague of ‘termite brands’. These are tobacco products that are generally produced legally in a market, but which are smuggled into another market where they have limited or no legal distribution.

Also known as ‘illicit whites’ or ‘cheap whites’ these products have emerged as a growing problem in several countries around the world. In the European Union alone, the share of illicit whites in relation to the total illicit tobacco trade jumped from 4.3% in 2007 to 33.9% in 2016, according to the KPMG Sun Report.

Trafficking termite brands is increasingly attractive for criminals as they can generally avoid the risks of prosecution for trademark infringements that counterfeiters face. As manufacturers of illicit whites are able to operate legally within a country, they have fairly sophisticated facilities where they are able to produce cigarettes of a higher quality than counterfeits.

INTERPOL has stated that termite brands are known to be manufactured in Belarus, Vietnam, Indonesia, Philippines, India, Cambodia, Paraguay, Ukraine, Russia, UAE, Kenya and a number of Free Trade Zones.

North America is not spared. In Canada, criminal networks have found a way to circumvent the lawful market using native reservations as manufacturing plants. The price gap created by the reserve hubs, which are benefited by tax breaks creates a tempting opportunity to smuggle termite brands into the Canadian domestic market. Under section 87 of the Indian Act the personal property of First Nation Status people living on First Nations reserves is exempt from certain taxation. As a result, they are exempt from all taxes on tobacco, apart from federal excise tax.

The Canadian authorities have stated that between August 2014 and March 2016, more than two million kilograms of tobacco was illegally imported into Canada, worth about $530 million. In March 2016, a mammoth cross-border operation called Project Mygale involving around 700 US and Canadian police and customs officials searched 70 businesses and homes in and around Montreal, the Laurentians, Lanaudière, the Montérégie and the Six Nations in Ontario. About 60 people were arrested and according to reports, officers found:

  • More than 52,800 kg of tobacco, valued at $13.5 million.
  • More than $1.5 million in cash from illicit transactions in Canada.
  • Almost US$3 million in cash.
  • 836 kg of cocaine.
  • 21 kg of methamphetamines.
  • 100 g of fentanyl.
  • 15 kg of cannabis.

There are multiple menaces associated with these termites. These products not only lead to tremendous tax revenue losses for governments, but they also pose a security risk. As seen from the results of Project Mygale, they are often smuggled via the same routes as other illegal goods, like weapons or drugs, and consequently benefit the same criminal organizations.

Youth is particularly vulnerable to this type of illicit trade when age verification controls are not observed. Speaking at the Helsinki Commission hearing, Marc Firestone reinforced this point stating: “Termite brands are a form of invasive species, and they make it easier for kids to buy cigarettes.”

Public-private partnerships are a solution to help stamp out these bugs. All legitimate stakeholders benefit from working together to implement measures on the ground to eradicate termite brands.

A strict regulatory framework that severely penalizes those involved, paired with well-funded and fully staffed law enforcement teams, must become a priority for governments. Many efforts and means have already been deployed, but we must not be complacent.

Make no mistake: this is an infestation that needs to be fumigated. The bugs must be exterminated for good.

Find out more about how PMI is tackling the problem of illicit trade here.

Alvise Giustiniani

Written by Alvise Giustiniani

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