The Problem

Consequences of illicit trade

Consequences of illicit trade

Everyone loses, except criminals

Among its many destructive consequences, the illicit tobacco trade:

  • Robs governments of tax revenues;
  • Exposes consumers to unregulated products often manufactured in unsanitary conditions;
  • Poses threats to security by providing a major source of illegal income for transnational organized criminal groups;
  • Encourages corruption and threatens the rule of law in countries where illicit trade is rampant;
  • Reduces the effectiveness of public health policies;
  • Makes it easier for minors to access tobacco products; and
  • Undermines the legitimate industry's business.


Threats to Security

The increasing threat to security was recently illustrated by the European Commission:

The illicit tobacco trade has long been recognized as a main source of revenue for organized crime, and, in some cases, terrorist groups. The new European Agenda on Security adopted by the European Commission on 28 April 2015 recognizes the importance of fighting cigarette smuggling as a means of cutting off criminal groups from this revenue source.

Illicit tobacco trade as a threat to the national security of the United States:

The past two decades have provided a number of cases demonstrating the direct link between cigarette smuggling and serious organized criminal and terrorist activity in the United States. Illicit cigarette tax stamps helped to fund one of the convicted bombers in the first World Trade Center bombing in 1993, and U.S. government reports have found that illegal cigarette smuggling networks in the U.S. are being used to fund terrorist networks in the Middle East like Hezbollah, Hamas, and al Qaeda.

Security threats in other parts of the world:

At the 2009 International Law Enforcement Intellectual Property Crime Conference, Ronald K. Noble, INTERPOL Secretary General, stated:

Paramilitary groups and organized crime rely on counterfeiting – especially of cigarettes – to reap huge profits and even to fund terrorist activities.

Experts have also said illegal cigarette trafficking is a source of funding for terrorist group Islamic State (ISIS). According to Dr. Louise Shelley:

Oil is not ISIS’ only source of revenue… Still more funding comes from the sale of counterfeit cigarettes, pharmaceuticals, cell phones, antiquities, and foreign passports.

Christian Eckert, France’s Minister of Budget, also recognized the link between terrorism and illicit trade in an interview in 2015, where he stated the following:

What is clearly evolving is to involve Customs in the fight against terrorism. It is demonstrated and known that many jihadists are involved in petty crime (counterfeit, contraband of tobacco, drugs).

Damage to legitimate business

A report conducted by Frontier Economics, a leading European economics consultancy, estimates that between 2 and 2.6 million jobs have been lost globally due to counterfeiting and piracy of a wide range of consumer products, including brand name luxury goods and tobacco.

In the legal tobacco supply chain, manufacturers, suppliers, wholesalers, distributors, and retailers are all affected by illicit trade. Manufacturers suffer considerable financial losses, and long-term damage to their brands, which they have invested time and money to build. Wholesalers, distributors, and retailers lose because reduced demand for legal products leads to fewer sales. Small retailers not only lose cigarette sales, but also the sale of other items adult smokers usually buy when in their shops. To illustrate, in the two Canadian provinces of Ontario and Quebec, 2,300 convenience stores closed down in 2009, largely because they are unable to compete with the low prices of contraband cigarette offerings.

 

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Billions in lost tax revenue

The World Health Organization (WHO) estimated in 2006 that global illicit trade costs governments USD 40-50 billion annually in lost tax revenues. These resources could have been used to fund other services such as public safety or education programs. The European Commission estimated that in 2015 the illicit trade in cigarettes resulted in tax loss of EUR 11.3 billion within the European Union.

 

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Source: PMI Estimates & Framework Convention Alliance

Minors have access to illegal tobacco

Children should not smoke or use products containing nicotine. However criminals who deal in and profit from the illicit trade do not differentiate between consumers on any basis. Independent experts and government authorities agree that the illicit tobacco trade—by operating outside lawful and regulated channels—provides easy access to tobacco products to youth.